--------------------------------------------------------------------------------
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

      (Mark One)
          [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                     THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2005

                                       OR

          [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
          For the transition period from _____________ to ____________.

Commission       Registrant; State of Incorporation;       IRS Employer
File Number      Address; and Telephone Number             Identification Number
-----------      -----------------------------             ---------------------

1-13739          UNISOURCE ENERGY CORPORATION              86-0786732
                 (An Arizona Corporation)
                 One South Church Avenue, Suite 100
                 Tucson, AZ  85701
                 (520) 571-4000

1-5924           TUCSON ELECTRIC POWER COMPANY             86-0062700
                 (An Arizona Corporation)
                 One South Church Avenue, Suite 100
                 Tucson, AZ  85701
                 (520) 571-4000


     Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X   No
                                              ---     ---

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

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

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).

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

     At November 2, 2005, 34,731,206 shares of UniSource Energy Corporation
Common Stock, no par value (the only class of Common Stock), were outstanding.

     At November 2, 2005, 32,139,555 shares of Tucson Electric Power Company's
common stock, no par value, were outstanding, of which 32,139,434 shares were
held by UniSource Energy Corporation.

--------------------------------------------------------------------------------

This combined Form 10-Q is separately filed by UniSource Energy Corporation and
Tucson Electric Power Company. Information contained in this document relating
to Tucson Electric Power Company is filed by UniSource Energy Corporation and
separately by Tucson Electric Power Company on its own behalf. Tucson Electric
Power Company makes no representation as to information relating to UniSource
Energy Corporation or its subsidiaries, except as it may relate to Tucson
Electric Power Company.


<PAGE>


TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                               <C>
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                          6
  Tucson Electric Power Company
      Comparative Condensed Consolidated Statements of Income                                      7
      Comparative Condensed Consolidated Statements of Cash Flows                                  8
      Comparative Condensed Consolidated Balance Sheets                                            9
      Condensed Consolidated Statement of Changes in Stockholders' Equity                         10
  Notes to Condensed Consolidated Financial Statements                                            11
  Note 1.  Nature of Operations, Basis of Accounting Presentation and Equity-Based Compensation   11
  Note 2.  Regulatory Matters                                                                     13
  Note 3.  Debt and Credit Facilities                                                             15
  Note 4.  Business Segments                                                                      18
  Note 5.  Accounting for Derivative Instruments and Trading Activities                           19
  Note 6.  Commitments and Contingencies                                                          21
  Note 7.  TEP Wholesale Accounts Receivable and Allowances                                       23
  Note 8.  UniSource Energy Earnings Per Share (EPS)                                              24
  Note 9.  Employee Benefits Plans                                                                24
  Note 10. Share-Based Compensation Plans                                                         25
  Note 11. Income and Other Taxes                                                                 27
  Note 12. New Accounting Pronouncements                                                          28
  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                                                            34
      Liquidity and Capital Resources                                                             34
  Tucson Electric Power Company                                                                   39
      Results of Operations                                                                       39
      Factors Affecting Results of Operations                                                     43
      Liquidity and Capital Resources                                                             48
  UNS Gas                                                                                         52
      Results of Operations                                                                       52
      Factors Affecting Results of Operations                                                     53
      Liquidity and Capital Resources                                                             54
  UNS Electric                                                                                    55
      Results of Operations                                                                       55
      Factors Affecting Results of Operations                                                     57
      Liquidity and Capital Resources                                                             57
  Global Solar Energy, Inc.                                                                       59
      Results of Operations                                                                       59
  Other                                                                                           59
      Results of Operations                                                                       59
  Critical Accounting Estimates                                                                   61


                                       ii
<PAGE>


  New Accounting Pronouncements                                                                   67
  Safe Harbor for Forward-Looking Statements                                                      68

Item 3. - Quantitative and Qualitative Disclosures about Market Risk                              69

Item 4. - Controls and Procedures                                                                 72

     PART II - OTHER INFORMATION

Item 1. - Legal Proceedings                                                                       72

Item 5. - Other Information                                                                       73
  Non-GAAP Measures                                                                               73
  Ratio of Earnings to Fixed Charges                                                              76
  SEC Reports Available on UniSource Energy's Website                                             76

Item 6. Exhibits                                                                                  76

Signatures                                                                                        77

Exhibit Index                                                                                     78
</TABLE>


                                       iii
<PAGE>


                                   DEFINITIONS

The abbreviations and acronyms used in the 2005 third quarter 10-Q are defined
below:

--------------------------------------------------------------------------------

1941 Mortgage................ TEP's Indenture, dated as of April 1, 1941, to
                                JPMorgan Chase Bank, successor trustee, as
                                supplemented and amended, which was satisfied
                                and discharged on June 10, 2005.
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.
ACC.......................... Arizona Corporation Commission.
ACC Holding Company Order.... The order approved by the ACC in November 1997
                                allowing TEP to form a holding company.
AHMSA........................ Altos Hornos de Mexico, S.A. de C.V. AHMSA owns
                                50% of Sabinas.
AMT.......................... Alternative Minimum Tax.
APS.......................... Arizona Public Service Company.
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.
CISO......................... California Independent System Operator.
Citizens..................... Citizens Communications Company.
Collateral Trust Bonds....... Bonds issued under the Indenture of Trust, dated
                                as of August 1, 1998, of TEP to The Bank of New
                                York, successor trustee.
Common Stock................. UniSource Energy's common stock, without par
                                value.
Company or UniSource Energy.. UniSource Energy Corporation.
Convertible Senior Notes..... UniSource Energy's 4.50% Convertible Senior Notes
                                due March 1, 2035.
Cooling Degree Days.......... An index used to measure the impact of weather on
                                energy usage calculated by subtracting 75 from
                                the average of the high and low daily
                                temperatures.
Emissions 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.
Express Line................. 345-kV circuit connecting Springerville Unit 2 to
                                the Tucson 138-kV system.
FAS 71....................... Statement of Financial Accounting Standards No.
                                71: Accounting for the Effects of Certain Types
                                of Regulation.
FAS 133...................... Statement of Financial Accounting Standards No.
                                133: Accounting for Derivative Instruments and
                                Hedging Activities, as amended.
FAS 143...................... Statement of Financial Accounting Standards No.
                                143: Accounting for Asset Retirement
                                Obligations.
FERC......................... Federal Energy Regulatory Commission.
Four Corners................. Four Corners Generating Station.
Global Solar................. Global Solar Energy, Inc., a company that develops
                                and manufactures thin-film photovoltaic cells.
                                Millennium owns 99% of Global Solar.
Haddington................... Haddington Energy Partners II, LP, a limited
                                partnership that funds energy-related
                                investments.
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.
IDBs......................... Industrial development revenue or pollution
                                control revenue bonds.
IPS.......................... Infinite Power Solutions, Inc., a company that
                                develops thin-film batteries.
IRS.......................... Internal Revenue Service.
ISO.......................... Independent System Operator.
ITC.......................... Investment Tax Credit.
kWh.......................... Kilowatt-hour(s).
kV........................... Kilovolt(s).


                                       iv
<PAGE>


LIBOR........................ London Interbank Offered Rate.
LOC.......................... Letter of Credit.
Luna......................... Luna Energy Facility.
MEG.......................... Millennium Environmental Group, Inc., a
                                wholly-owned subsidiary of Millennium, which
                                manages and trades emissions allowances and
                                related financial instruments.
MicroSat..................... MicroSat Systems, Inc., a company formed to
                                develop and commercialize small-scale
                                satellites. Millennium currently owns 35%.
Millennium................... Millennium Energy Holdings, Inc., a wholly-owned
                                subsidiary of UniSource Energy.
MMBtus....................... Million British Thermal Units.
MW........................... Megawatt(s).
MWh.......................... Megawatt-hour(s).
Navajo....................... Navajo Generating Station.
NOL.......................... Net Operating Loss carryback or carryforward for
                                income tax purposes.
PGA.......................... Purchased Gas Adjustor, a retail rate mechanism
                                designed to recover the cost of gas purchased
                                for retail gas customers.
PNM.......................... Public Service Company of New Mexico,
                                a subsidiary of PNMR.
PNMR......................... PNM Resources, Inc.
PPFAC........................ Purchased Power and Fuel Adjustment Clause.
PWCC......................... Pinnacle West Capital Corporation.
Repurchased Bonds............ $221 million of fixed-rate tax-exempt bonds that
                                TEP purchased from bondholders on May 11, 2005.
RTO.......................... Regional Transmission Organization.
Rules........................ Retail Electric Competition Rules.
Sabinas...................... Carboelectrica Sabinas, S. de R.L. de C.V., a
                                Mexican limited liability company. Millennium
                                owns 50% of Sabinas.
San Carlos................... San Carlos Resources Inc., a wholly-owned
                              subsidiary of TEP.
San Juan..................... San Juan Generating Station.
Sempra....................... Sempra Energy Trading Company.
SCE Exchange................. A power exchange agreement between TEP and
                                Southern California Edison Company (SCE).
Settlement Agreement......... TEP's Settlement Agreement approved by the ACC in
                                November 1999 that provided for electric retail
                                competition and transition asset recovery.
Springerville................ Springerville Generating Station.
Springerville Coal Handling
  Facilities Leases.......... Leveraged lease arrangements relating to the coal
                                handling facilities serving Springerville.
Springerville Common
  Facilities................. Facilities at Springerville used in common with
                                Springerville Unit 1 and Springerville Unit 2.
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 Lease... 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.
SRP.......................... Salt River Project Agricultural Improvement and
                                Power District.
Sundt........................ H. Wilson Sundt Generating Station (formerly known
                                as the Irvington Generating Station).
Sundt Lease.................. The leveraged lease arrangement relating to Sundt
                                Unit 4.
SWG.......................... Southwest Gas Corporation.
TEP.......................... Tucson Electric Power Company, the principal
                                subsidiary of UniSource Energy.
TEP Credit Agreement......... Credit Agreement between TEP and a syndicate of
                                banks, dated as of May 4, 2005.
TEP Revolving Credit
  Facility................... $60 million revolving credit facility entered into
                                under the TEP Credit Agreement, dated as of May
                                4, 2005, between a syndicate of banks and TEP.


                                       v
<PAGE>


Therm........................ A unit of heating value equivalent to 100,000 Btu.
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. UES is wholly owned by UniSource
                                Energy.
UES Settlement Agreement..... An agreement with the ACC Staff dated April 1,
                                2003, addressing rate case and financing issues
                                in the acquisition by UniSource Energy of
                                Citizens' Arizona gas and electric assets.
UniSource Credit Agreement... Credit Agreement between UniSource Energy and a
                                syndicate of banks, dated as of April 15, 2005.
UniSource Energy............. UniSource Energy Corporation.
UNS Electric................. UNS Electric, Inc., a wholly-owned subsidiary of
                                UES, which acquired the Citizens Arizona
                                electric utility assets.
UNS Gas...................... UNS Gas, Inc., a wholly-owned subsidiary of UES,
                                which acquired the Citizens Arizona gas utility
                                assets.
UNS Gas/UNS Electric
  Revolver................... A $40 million revolving credit facility entered
                                into by UNS Gas and UNS Electric on April 15,
                                2005.
Valencia..................... Valencia power plant owned by UNS Electric.
WestConnect.................. The proposed for-profit RTO in which TEP is a
                                participant.


                                       vi
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
UniSource Energy Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of
UniSource Energy Corporation and its subsidiaries (the Company) as of September
30, 2005, and the related condensed consolidated statements of income for each
of the three-month and nine-month periods ended September 30, 2005 and 2004 and
the condensed consolidated statements of cash flows for the nine-month periods
ended September 30, 2005 and 2004 and the condensed consolidated statement of
changes in stockholders' equity for the nine-month period ended September 30,
2005. These interim financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.

We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2004, and the related consolidated statements of
income, of cash flows and of changes in stockholders' equity for the year then
ended, management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 and the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004; and in our report dated March 16, 2005, we expressed unqualified opinions
thereon. The consolidated financial statements and management's assessment of
the effectiveness of internal control over financial reporting referred to above
are not presented herein. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of September 30, 2005, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
------------------------------

PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
November 4, 2005


                                       1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Tucson Electric Power Company:

We have reviewed the accompanying condensed consolidated balance sheet of Tucson
Electric Power Company (the Company) as of September 30, 2005, and the related
condensed consolidated statements of income for each of the three-month and
nine-month periods ended September 30, 2005 and 2004 and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 2005 and 2004 and the condensed consolidated statement of changes in
stockholders' equity for the nine-month period ended September 30, 2005. These
interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.

We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2004, and the related consolidated statements of income, of cash
flows, and of changes in stockholders' equity for the year then ended (not
presented herein), and in our report dated March 16, 2005 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet
information as of September 30, 2005, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
------------------------------

PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
November 4, 2005


                                       2
<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
  Three Months Ended                                                                   Nine Months Ended
      September 30,                                                                       September 30,
   2005        2004                                                                     2005        2004
      (UNAUDITED)                                                                          (UNAUDITED)
-----------------------------------------------------------------------------------------------------------
 -Thousands of Dollars-                                                              -Thousands of Dollars-
  <C>        <C>          <C>                                                          <C>        <C>
                          OPERATING REVENUES
  $296,003   $277,089      Electric Retail Sales                                       $699,378   $675,508
    30,830     37,310      Electric Wholesale Sales                                     107,881    121,199
    16,231     15,812      Gas Revenue                                                   88,838     84,825
     6,188      5,098      Other Revenues                                                14,676     13,942
-----------------------------------------------------------------------------------------------------------
   349,252    335,309        TOTAL OPERATING REVENUES                                   910,773    895,474
-----------------------------------------------------------------------------------------------------------

                          OPERATING EXPENSES
    66,510     63,514      Fuel                                                         169,664    166,303
   105,982     69,749      Purchased Energy                                             239,286    184,838
    52,827     58,332      Other Operations and Maintenance                             175,567    178,320
    33,878     36,372      Depreciation and Amortization                                102,046    108,068
    20,242     19,112      Amortization of Transition Recovery Asset                     43,865     39,712
    10,305     12,769      Taxes Other Than Income Taxes                                 36,314     38,491
-----------------------------------------------------------------------------------------------------------
   289,744    259,848        TOTAL OPERATING EXPENSES                                   766,742    715,732
-----------------------------------------------------------------------------------------------------------
    59,508     75,461          OPERATING INCOME                                         144,031    179,742
-----------------------------------------------------------------------------------------------------------

                          OTHER INCOME (DEDUCTIONS)
     4,657      5,006      Interest Income                                               14,694     14,888
     3,261      1,330      Other Income                                                   6,064      9,271
       (25)      (298)     Other Expense                                                 (2,267)    (2,900)
-----------------------------------------------------------------------------------------------------------
     7,893      6,038        TOTAL OTHER INCOME (DEDUCTIONS)                             18,491     21,259
-----------------------------------------------------------------------------------------------------------

                          INTEREST EXPENSE
    18,002     19,549      Long-Term Debt                                                58,098     61,064
    20,078     20,792      Interest on Capital Leases                                    59,225     60,901
         -        204      Loss on Reacquired Debt                                        5,261      1,839
       (12)        56      Other Interest Expense, Net of Amounts Capitalized              (732)      (487)
-----------------------------------------------------------------------------------------------------------
    38,068     40,601        TOTAL INTEREST EXPENSE                                     121,852    123,317
-----------------------------------------------------------------------------------------------------------

    29,333     40,898     INCOME BEFORE INCOME TAXES                                     40,670     77,684
    10,936     17,099      Income Tax Expense                                            16,588     34,663
-----------------------------------------------------------------------------------------------------------

  $ 18,397   $ 23,799     NET INCOME                                                   $ 24,082   $ 43,021
===========================================================================================================

    34,915     34,434     WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (000)      34,786     34,347
===========================================================================================================

     $0.53      $0.69     BASIC EARNINGS PER SHARE                                        $0.69      $1.25
===========================================================================================================

     $0.49      $0.68     DILUTED EARNINGS PER SHARE                                      $0.68      $1.23
===========================================================================================================

     $0.19      $0.16     DIVIDENDS DECLARED PER SHARE                                    $0.57      $0.48
===========================================================================================================
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       3
<PAGE>


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                          Nine Months Ended
                                                                            September 30,
                                                                         2005           2004
                                                                             (UNAUDITED)
----------------------------------------------------------------------------------------------
                                                                       -Thousands of Dollars-
<S>                                                                   <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Cash Receipts from Electric Retail Sales                           $ 730,791     $ 701,075
   Cash Receipts from Electric Wholesale Sales                          156,408       159,993
   Cash Receipts from Gas Sales                                         115,484       108,414
   MEG Cash Receipts from Trading Activity                               62,414       125,435
   Interest Received                                                     22,400        22,178
   Income Tax Refunds Received                                            1,484         5,427
   Performance Deposits                                                  14,506         4,954
   Deposit - Second Mortgage Indenture                                        -        17,040
   Other Cash Receipts                                                    8,244        12,848
   Fuel Costs Paid                                                     (172,852)     (158,976)
   Purchased Energy Costs Paid                                         (276,583)     (213,009)
   Wages Paid, Net of Amounts Capitalized                               (75,369)      (68,880)
   Payment of Other Operations and Maintenance Costs                   (101,911)      (95,482)
   MEG Cash Payments for Trading Activity                               (73,899)     (125,293)
   Capital Lease Interest Paid                                          (67,693)      (69,968)
   Taxes Paid, Net of Amounts Capitalized                               (94,592)      (93,613)
   Interest Paid, Net of Amounts Capitalized                            (62,833)      (68,169)
   Income Taxes Paid                                                     (6,227)       (9,452)
   Other Cash Payments                                                   (3,557)       (5,201)
----------------------------------------------------------------------------------------------
NET CASH FLOWS - OPERATING ACTIVITIES                                   176,215       249,321
----------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital Expenditures                                                (143,351)     (108,197)
   Proceeds from Investment in Springerville Lease Debt and Equity       13,646        11,590
   Return of Investment from Millennium Energy Business                   8,978         9,916
   Other Cash Receipts                                                    8,798           998
   Payments for Investment in Springerville Lease Debt and Equity             -        (4,499)
   Investment in and Loans to Equity Investees                           (4,270)       (3,395)
   Other Cash Payments                                                        -        (5,004)
----------------------------------------------------------------------------------------------
NET CASH FLOWS - INVESTING ACTIVITIES                                  (116,199)      (98,591)
----------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from Issuance of Long-Term Debt                             240,000             -
   Repayments of Long-Term Debt                                        (284,266)      (28,732)
   Payments on Capital Lease Obligations                                (52,665)      (49,377)
   Proceeds from Borrowings under Revolving Credit Facility              40,000        20,000
   Payments on Borrowings under Revolving Credit Facility               (40,000)      (20,000)
   Proceeds from Stock Options Exercised                                  7,286         6,480
   Other Cash Receipts                                                    8,982         5,858
   Payment of Debt Issue/Retirement Costs                               (10,702)       (9,241)
   Common Stock Dividends Paid                                          (14,823)      (10,909)
   Other Cash Payments                                                   (4,566)       (2,784)
----------------------------------------------------------------------------------------------
NET CASH FLOWS - FINANCING ACTIVITIES                                  (110,754)      (88,705)
----------------------------------------------------------------------------------------------

Net (Decrease) Increase in Cash and Cash Equivalents                    (50,738)       62,025
Cash and Cash Equivalents, Beginning of Year                            154,028       101,266
----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                              $ 103,290     $ 163,291
==============================================================================================
</TABLE>

See Note 13 for supplemental cash flow information.

See Notes to Condensed Consolidated Financial Statements.


                                       4
<PAGE>


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      September 30,     December 31,
                                                                          2005             2004
                                                                               (UNAUDITED)
----------------------------------------------------------------------------------------------------
                                                                          -Thousands of Dollars-
<S>                                                                    <C>              <C>
ASSETS
UTILITY PLANT
  Plant in Service                                                     $ 3,122,634      $ 3,033,405
  Utility Plant under Capital Leases                                       723,900          723,901
  Construction Work in Progress                                            133,708          116,161
----------------------------------------------------------------------------------------------------
    TOTAL UTILITY PLANT                                                  3,980,242        3,873,467
  Less Accumulated Depreciation and Amortization                        (1,389,975)      (1,348,017)
  Less Accumulated Amortization of Capital Lease Assets                   (465,350)        (444,313)
----------------------------------------------------------------------------------------------------
    TOTAL UTILITY PLANT - NET                                            2,124,917        2,081,137
----------------------------------------------------------------------------------------------------

INVESTMENTS AND OTHER PROPERTY
  Investments in Lease Debt and Equity                                     156,538          170,893
  Other                                                                     75,324           85,035
----------------------------------------------------------------------------------------------------
    TOTAL INVESTMENTS AND OTHER PROPERTY                                   231,862          255,928
----------------------------------------------------------------------------------------------------

CURRENT ASSETS
  Cash and Cash Equivalents                                                103,290          154,028
  Trade Accounts Receivable                                                115,634          107,694
  Unbilled Accounts Receivable                                              50,952           55,350
  Allowance for Doubtful Accounts                                          (16,981)         (16,492)
  Materials and Fuel Inventory                                              73,122           62,225
  Trading Assets                                                            11,552           70,958
  Current Regulatory Assets                                                  9,705            9,653
  Deferred Income Taxes - Current                                           12,218           24,055
  Interest Receivable - Current                                              5,190           10,475
  Other                                                                     18,485           26,751
----------------------------------------------------------------------------------------------------
    TOTAL CURRENT ASSETS                                                   383,167          504,697
----------------------------------------------------------------------------------------------------

REGULATORY AND OTHER ASSETS
  Transition Recovery Asset                                                180,163          224,029
  Income Taxes Recoverable Through Future Revenues                          41,108           44,624
  Other Regulatory Assets                                                   24,815           15,823
  Other Assets                                                              53,329           49,280
----------------------------------------------------------------------------------------------------
    TOTAL REGULATORY AND OTHER ASSETS                                      299,415          333,756
----------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                           $ 3,039,361      $ 3,175,518
====================================================================================================

CAPITALIZATION AND OTHER LIABILITIES
CAPITALIZATION
  Common Stock Equity                                                    $ 598,480        $ 580,718
  Capital Lease Obligations                                                663,719          701,931
  Long-Term Debt                                                         1,213,670        1,257,595
----------------------------------------------------------------------------------------------------
    TOTAL CAPITALIZATION                                                 2,475,869        2,540,244
----------------------------------------------------------------------------------------------------

CURRENT LIABILITIES
  Current Obligations under Capital Leases                                  49,017           53,694
  Current Maturities of Long-Term Debt                                       5,000            1,725
  Accounts Payable                                                          70,583           95,276
  Interest Accrued                                                          32,199           60,679
  Trading Liabilities                                                       12,420           65,022
  Taxes Accrued                                                             59,618           53,192
  Accrued Employee Expenses                                                 14,243           19,216
  Customer Deposits                                                         14,957           14,794
  Other                                                                     13,892            4,556
----------------------------------------------------------------------------------------------------
    TOTAL CURRENT LIABILITIES                                              271,929          368,154
----------------------------------------------------------------------------------------------------

DEFERRED CREDITS AND OTHER LIABILITIES
  Deferred Income Taxes - Noncurrent                                       106,404          101,753
  Regulatory Liability - Net Cost of Removal for Interim Retirements        77,690           69,585
  Other                                                                    107,469           95,782
----------------------------------------------------------------------------------------------------
    TOTAL DEFERRED CREDITS AND OTHER LIABILITIES                           291,563          267,120
----------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (NOTE 6)
----------------------------------------------------------------------------------------------------

TOTAL CAPITALIZATION AND OTHER LIABILITIES                             $ 3,039,361      $ 3,175,518
====================================================================================================
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       5
<PAGE>


UNISOURCE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                   Accumulated
                                                        Common                     Accumulated        Other          Total
                                                        Shares        Common       Earnings       Comprehensive   Stockholders'
                                                     Outstanding*      Stock        (Deficit)      Income (Loss)      Equity
-------------------------------------------------------------------------------------------------------------------------------
                                                                                  (UNAUDITED)
                                                                               - In Thousands -
<S>                                                      <C>        <C>           <C>             <C>              <C>
BALANCES AT DECEMBER 31, 2004                            34,255     $ 677,119     $ (85,666)      $ (10,735)       $ 580,718
-------------------------------------------------------------------------------------------------------------------------------

Comprehensive Income:
    2005 Year-to-Date Net Income                              -             -        24,082               -           24,082
    Unrealized Gain on Cash Flow Hedges
       (net of $5,967 income taxes)                           -             -             -           9,100            9,100
    Reclassification of Realized Gain on
       Cash Flow Hedges to Net Income
       (net of $2,646 income taxes)                           -             -             -          (4,036)          (4,036)
                                                                                                                  -------------
Total Comprehensive Income                                                                                            29,146
                                                                                                                  -------------
    Dividends Declared                                                      -       (19,704)              -          (19,704)
    Shares Issued under Stock Compensation Plans             37             -             -               -                -
    Shares Distributed by Deferred Compensation Trust         -             1             -               -                1
    Shares Issued for Exercised Stock Options               378         8,026             -               -            8,026
    Other                                                     -           293             -               -              293
-------------------------------------------------------------------------------------------------------------------------------

BALANCES AT SEPTEMBER 30, 2005                           34,670     $ 685,439     $ (81,288)       $ (5,671)       $ 598,480
===============================================================================================================================
<FN>
* UniSource Energy has 75 million authorized shares of common stock.
</FN>
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       6
<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
  Three Months Ended                                                                   Nine Months Ended
      September 30,                                                                      September 30,
   2005        2004                                                                     2005       2004
     (UNAUDITED)                                                                          (UNAUDITED)
------------------------------------------------------------------------------------------------------------
 -Thousands of Dollars-                                                              -Thousands of Dollars-
  <C>        <C>          <C>                                                          <C>        <C>
                          OPERATING REVENUES
  $248,454   $232,304      Electric Retail Sales                                       $584,130   $564,388
    30,771     37,248      Electric Wholesale Sales                                     107,701    121,018
     3,009      2,533      Other Revenues                                                 9,188      7,395
------------------------------------------------------------------------------------------------------------
   282,234    272,085        TOTAL OPERATING REVENUES                                   701,019    692,801
------------------------------------------------------------------------------------------------------------

                          OPERATING EXPENSES
    66,510     63,514      Fuel                                                         169,664    166,303
    63,293     29,529      Purchased Power                                              103,344     54,868
    35,629     43,319      Other Operations and Maintenance                             130,819    133,724
    28,949     31,597      Depreciation and Amortization                                 86,903     94,035
    20,242     19,112      Amortization of Transition Recovery Asset                     43,865     39,712
     8,737     10,483      Taxes Other Than Income Taxes                                 30,304     31,671
-----------------------------------------------------------------------------------------------------------
   223,360    197,554        TOTAL OPERATING EXPENSES                                   564,899    520,313
-----------------------------------------------------------------------------------------------------------
    58,874     74,531          OPERATING INCOME                                         136,120    172,488
-----------------------------------------------------------------------------------------------------------

                          OTHER INCOME (DEDUCTIONS)
     4,396      4,965      Interest Income                                               14,115     14,826
         -      2,345      Interest Income - Note Receivable from UniSource Energy        1,684      6,984
     1,729      1,137      Other Income                                                   3,527      3,531
      (339)      (826)     Other Expense                                                 (1,338)    (2,726)
-----------------------------------------------------------------------------------------------------------
     5,786      7,621        TOTAL OTHER INCOME (DEDUCTIONS)                             17,988     22,615
-----------------------------------------------------------------------------------------------------------

                          INTEREST EXPENSE
    12,128     16,773      Long-Term Debt                                                43,565     52,776
    20,070     20,787      Interest on Capital Leases                                    59,199     60,873
         -        204      Loss on Reacquired Debt                                        5,261      1,839
      (112)       (38)     Other Interest Expense, Net of Amounts Capitalized              (738)      (537)
-----------------------------------------------------------------------------------------------------------
    32,086     37,726        TOTAL INTEREST EXPENSE                                     107,287    114,951
-----------------------------------------------------------------------------------------------------------

    32,574     44,426     INCOME BEFORE INCOME TAXES                                     46,821     80,152
    12,210     18,204      Income Tax Expense                                            18,999     35,119
-----------------------------------------------------------------------------------------------------------

  $ 20,364   $ 26,222     NET INCOME                                                   $ 27,822   $ 45,033
===========================================================================================================
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       7
<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                         Nine Months Ended
                                                                           September 30,
                                                                        2005           2004
                                                                            (UNAUDITED)
----------------------------------------------------------------------------------------------
                                                                       -Thousands of Dollars-
<S>                                                                   <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Cash Receipts from Electric Retail Sales                           $ 610,581     $ 586,480
   Cash Receipts from Electric Wholesale Sales                          156,344       159,793
   Interest Received                                                     31,666        21,621
   Deposit - Second Mortgage Indenture                                        -        17,040
   Income Taxes Refunds Received                                            713           286
   Other Cash Receipts                                                    2,567         5,610
   Fuel Costs Paid                                                     (172,852)     (158,976)
   Purchased Power Costs Paid                                          (133,476)      (84,131)
   Wages Paid, Net of Amounts Capitalized                               (57,691)      (50,646)
   Payment of Other Operations and Maintenance Costs                    (82,204)      (74,323)
   Capital Lease Interest Paid                                          (67,667)      (69,964)
   Taxes Paid, Net of Amounts Capitalized                               (69,415)      (65,553)
   Interest Paid, Net of Amounts Capitalized                            (48,054)      (57,737)
   Income Taxes Paid                                                    (18,400)      (10,002)
   Other Cash Payments                                                   (2,648)       (3,812)
----------------------------------------------------------------------------------------------
NET CASH FLOWS - OPERATING ACTIVITIES                                   149,464       215,686
----------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital Expenditures                                                (107,775)      (81,544)
   Proceeds from Investment in Springerville Lease Debt and Equity       13,646        11,590
   Payments for Investment in Springerville Lease Debt and Equity             -        (4,499)
   Other Cash Receipts                                                    7,305             -
   Other Cash Payments                                                        -        (5,000)
----------------------------------------------------------------------------------------------
NET CASH FLOWS - INVESTING ACTIVITIES                                   (86,824)      (79,453)
----------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Equity Investment from UniSource Energy                              110,000             -
   Proceeds from Repayment of UniSource Energy Note                      95,393             -
   Repayments of Long-Term Debt                                        (281,766)      (28,725)
   Payments on Capital Lease Obligations                                (52,605)      (49,333)
   Proceeds from Borrowings under Revolving Credit Facility              40,000        20,000
   Payments on Borrowings under Revolving Credit Facility               (40,000)      (20,000)
   Other Cash Receipts                                                   15,128        10,293
   Payment of Debt Issue/Retirement Costs                                (5,233)       (8,865)
   Dividends Paid to UniSource Energy                                   (15,000)      (19,000)
   Other Cash Payments                                                   (7,864)       (3,209)
----------------------------------------------------------------------------------------------
NET CASH FLOWS - FINANCING ACTIVITIES                                  (141,947)      (98,839)
----------------------------------------------------------------------------------------------

Net (Decrease) Increase in Cash and Cash Equivalents                    (79,307)       37,394
Cash and Cash Equivalents, Beginning of Year                            113,207        65,262
----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                               $ 33,900     $ 102,656
==============================================================================================
</TABLE>

See Note 13 for supplemental cash flow information.

See Notes to Condensed Consolidated Financial Statements.


                                       8
<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      September 30,    December 31,
                                                                          2005            2004
                                                                              (UNAUDITED)
---------------------------------------------------------------------------------------------------
                                                                          -Thousands of Dollars-
<S>                                                                    <C>             <C>
ASSETS
UTILITY PLANT
  Plant in Service                                                     $ 2,825,329     $ 2,771,665
  Utility Plant under Capital Leases                                       723,195         723,195
  Construction Work in Progress                                            119,614          94,336
---------------------------------------------------------------------------------------------------
    TOTAL UTILITY PLANT                                                  3,668,138       3,589,196
  Less Accumulated Depreciation and Amortization                        (1,364,691)     (1,328,228)
  Less Accumulated Amortization of Capital Lease Assets                   (465,154)       (444,186)
---------------------------------------------------------------------------------------------------
    TOTAL UTILITY PLANT - NET                                            1,838,293       1,816,782
---------------------------------------------------------------------------------------------------

INVESTMENTS AND OTHER PROPERTY
  Investments in Lease Debt and Equity                                     156,537         170,893
  Other                                                                     24,218          23,393
---------------------------------------------------------------------------------------------------
    TOTAL INVESTMENTS AND OTHER PROPERTY                                   180,755         194,286
---------------------------------------------------------------------------------------------------

NOTE RECEIVABLE FROM UNISOURCE ENERGY                                            -          79,462
---------------------------------------------------------------------------------------------------

CURRENT ASSETS
  Cash and Cash Equivalents                                                 33,900         113,207
  Trade Accounts Receivable                                                 97,034          72,042
  Unbilled Accounts Receivable                                              38,149          33,179
  Allowance for Doubtful Accounts                                          (14,866)        (14,166)
  Intercompany Accounts Receivable                                           4,563          10,111
  Materials and Fuel Inventory                                              59,908          51,207
  Current Regulatory Assets                                                  9,704           9,653
  Deferred Income Taxes - Current                                           11,515          24,157
  Interest Receivable - Current                                              5,149          10,475
  Forward Sale and Purchase Contracts                                       11,233           2,300
  Other                                                                     11,183          16,030
---------------------------------------------------------------------------------------------------
    TOTAL CURRENT ASSETS                                                   267,472         328,195
---------------------------------------------------------------------------------------------------

REGULATORY AND OTHER ASSETS
  Transition Recovery Asset                                                180,163         224,029
  Income Taxes Recoverable Through Future Revenues                          41,108          44,624
  Other Regulatory Assets                                                   21,104          13,684
  Other Assets                                                              37,245          41,106
---------------------------------------------------------------------------------------------------
    TOTAL REGULATORY AND OTHER ASSETS                                      279,620         323,443
---------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                           $ 2,566,140     $ 2,742,168
===================================================================================================

CAPITALIZATION AND OTHER LIABILITIES
CAPITALIZATION
  Common Stock Equity                                                    $ 570,093       $ 414,510
  Capital Lease Obligations                                                663,258         701,405
  Long-Term Debt                                                           821,170       1,097,595
---------------------------------------------------------------------------------------------------
    TOTAL CAPITALIZATION                                                 2,054,521       2,213,510
---------------------------------------------------------------------------------------------------

CURRENT LIABILITIES
  Current Obligations under Capital Leases                                  48,931          53,611
  Current Maturities of Long-Term Debt                                           -           1,725
  Accounts Payable                                                          48,072          46,377
  Intercompany Accounts Payable                                              9,172          20,026
  Income Taxes Payable                                                       1,869          17,815
  Interest Accrued                                                          29,373          56,514
  Taxes Accrued                                                             40,105          27,123
  Accrued Employee Expenses                                                 12,338          17,594
  Derivative Liabilities                                                    12,420              79
  Other                                                                     11,177           9,513
---------------------------------------------------------------------------------------------------
    TOTAL CURRENT LIABILITIES                                              213,457         250,377
---------------------------------------------------------------------------------------------------

DEFERRED CREDITS AND OTHER LIABILITIES
  Deferred Income Taxes - Noncurrent                                       136,470         129,842
  Regulatory Liability - Net Cost of Removal for Interim Retirements        74,406          67,485
  Other                                                                     87,286          80,954
---------------------------------------------------------------------------------------------------
    TOTAL DEFERRED CREDITS AND OTHER LIABILITIES                           298,162         278,281
---------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (NOTE 6)
---------------------------------------------------------------------------------------------------

TOTAL CAPITALIZATION AND OTHER LIABILITIES                             $ 2,566,140     $ 2,742,168
===================================================================================================
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       9
<PAGE>


TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                   Accumulated
                                                                     Capital        Accumulated        Other          Total
                                                         Common       Stock         Earnings       Comprehensive  Stockholders'
                                                         Stock       Expense        (Deficit)      Income (Loss)     Equity
-------------------------------------------------------------------------------------------------------------------------------
                                                                                   (UNAUDITED)
                                                                             -Thousands of Dollars-
<S>                                                    <C>           <C>          <C>              <C>              <C>
BALANCES AT DECEMBER 31, 2004                          $ 658,254     $ (6,357)    $ (226,652)      $ (10,735)       $ 414,510
-------------------------------------------------------------------------------------------------------------------------------

Comprehensive Income:
    2005 Year-to-Date Net Income                               -            -         27,822               -           27,822
    Unrealized Gain on Cash Flow Hedges
       (net of $5,967 income taxes)                            -            -              -           9,100            9,100
    Reclassification of Realized Gain on
       Cash Flow Hedges to Net Income
       (net of $2,646 income taxes)                            -            -              -          (4,036)          (4,036)
                                                                                                                   ------------
Total Comprehensive Income                                                                                             32,886
                                                                                                                   ------------
    Dividends Paid                                                                   (15,000)                         (15,000)

    Equity Contribution from UniSource Energy             25,261            -              -               -           25,261
    Capital Contribution from UniSource Energy           112,436            -              -               -          112,436
-------------------------------------------------------------------------------------------------------------------------------

BALANCES AT SEPTEMBER 30, 2005                         $ 795,951     $ (6,357)    $ (213,830)       $ (5,671)       $ 570,093
===============================================================================================================================
</TABLE>

See Notes to Condensed Consolidated Financial Statements.


                                       10
<PAGE>


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF OPERATIONS, BASIS OF ACCOUNTING PRESENTATION AND EQUITY-BASED
-------------------------------------------------------------------------------
COMPENSATION
------------

     UniSource Energy Corporation (UniSource Energy) is an exempt holding
company under the Public Utility Holding Company Act of 1935. UniSource Energy
has no significant operations of its own, but owns substantially all of the
common stock of Tucson Electric Power Company (TEP) and all of the common stock
of UniSource Energy Services, Inc. (UES), Millennium Energy Holdings, Inc.
(Millennium) and UniSource Energy Development Company (UED).

     TEP, a regulated public utility incorporated in Arizona since 1963, is
UniSource Energy's largest operating subsidiary and represented approximately
85% of UniSource Energy's assets as of September 30, 2005. TEP generates,
transmits and distributes electricity. TEP serves 382,235 retail electric
customers in a 1,155 square mile area in Southern Arizona. TEP also sells
electricity to other utilities and power marketing entities primarily located in
the western U.S.

     UES holds the common stock of UNS Gas, Inc. (UNS Gas) and UNS Electric,
Inc. (UNS Electric). UES has no significant operations of its own. UNS Gas is a
gas distribution company serving 136,207 retail customers in Mohave, Yavapai,
Coconino, and Navajo Counties in northern Arizona, as well as Santa Cruz County
in southeast Arizona. UNS Electric is an electric transmission and distribution
company serving approximately 88,362 retail customers in Mohave and Santa Cruz
counties.

     Millennium invests in unregulated businesses, including Global Solar Energy
(Global Solar), a developer and manufacturer of thin-film photovoltaic cells and
modules. UED engages in developing generating resources and other project
development activities, including facilitating the expansion of the
Springerville Generating Station, but has no significant operations.

     We conduct our business in four primary business segments - TEP's Electric
Utility segment, UNS Gas, UNS Electric and Global Solar.

     References to "we" and "our" are to UniSource Energy and its subsidiaries,
collectively.

     The accompanying quarterly financial statements of UniSource Energy and TEP
are unaudited but reflect all normal recurring accruals and other adjustments
which we believe are necessary for a fair presentation of the results for the
interim periods presented. These financial statements are presented in
accordance with the Securities and Exchange Commission's (SEC) interim reporting
requirements which do not include all the disclosures required by accounting
principles generally accepted in the United States of America (GAAP) for audited
annual financial statements. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include disclosures
required by GAAP for audited annual financial statements. This quarterly report
should be reviewed in conjunction with UniSource Energy and TEP's 2004 Annual
Report on Form 10-K.

     Weather, among other factors, causes seasonal fluctuations in TEP, UNS Gas
and UNS Electric's sales; therefore, quarterly results are not indicative of
annual operating results. UniSource Energy and TEP have made minor
reclassifications to the prior year financial statements for comparative
purposes. These reclassifications had no effect on Net Income.

   DEPRECIATION

     During the second quarter 2005, a study requested by the participants in
the San Juan Generating Station (San Juan) was completed which indicated San
Juan's economic useful life had changed from previous estimates. As a result of
the study and other analysis performed, TEP lengthened the estimated useful life
of San Juan from 40 to 60 years beginning April 1, 2005. TEP's depreciation
expense for the three months ended September 30, 2005, decreased approximately
$2 million. Depreciation expense related to San Juan is expected to decrease by
$6 million annually or $2 million for the last quarter of 2005.

     During the second quarter of 2005, it was determined that depreciation of
certain UNS Gas and UNS Electric assets had been overstated in prior periods. An
adjustment was recorded in June 2005 which reduced UNS' Other Operations and
Maintenance Expense by $1 million.


                                       11
<PAGE>


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

   SHARE-BASED COMPENSATION

     UniSource Energy has two share-based compensation plans, the 1994 Outside
Director Stock Option Plan (Directors' Plan) and the 1994 Omnibus Stock and
Incentive Plan (Omnibus Plan). During 2005, stock options were granted outside
of these plans. See Note 10. We adopted Statement of Financial Accounting
Standards No. 123(R), Share Based Payment (FAS 123(R)) effective January 1,
2005. The adoption of FAS 123(R) did not have a significant impact on our
financial statements because stock options issued under UniSource Energy's
Omnibus Plan vested upon the shareholder vote to approve the proposed
acquisition of UniSource Energy, see UniSource Energy's 2004 Annual Report on
Form 10-K, Note 17 in Notes to Consolidated Financial Statements - Stock-Based
Compensation. After February 4, 2004, no new awards were granted under the
Omnibus Plan. Prior to January 1, 2005, we accounted for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations.

     Prior to January 1, 2005, all our stock options were granted with an
exercise price equal to the market value of the stock at the date of the grant.
Accordingly, under the provisions of APB 25, no compensation expense was
recorded for these awards. However, compensation expense was recognized for
restricted stock, stock unit and performance share awards over the
performance/vesting period. Beginning January 1, 2005, we also began recognizing
compensation expense for the fair value of stock options granted over the
vesting period.

     The following table illustrates the effect on UniSource Energy's Net Income
and earnings per share and TEP's Net Income as if we had applied the fair value
recognition provisions of FAS 123(R) to all share-based employee compensation
awards for the three and nine months ended September 30, 2004:

UNISOURCE ENERGY:
----------------

<TABLE>
<CAPTION>
                                                                   Three Months Ended         Nine Months Ended
                                                                      September 30,             September 30,
                                                                           2004                      2004
------------------------------------------------------------- --------------------------- ------------------------
                                                                            -Thousands of Dollars-
                                                                            (except per share data)
<S>                                                                    <C>                       <C>
Net Income - As Reported                                               $   23,799                $   43,021
Add: Share-based compensation expense included in reported
   Net Income, net of related tax effects                                      60                     1,369
Deduct: Total share-based employee compensation expense
   determined under fair value based method for all awards,
   net of related tax effects                                                 (68)                   (2,140)
------------------------------------------------------------- --------------------------- ------------------------
Pro Forma Net Income                                                   $   23,791                $   42,250
============================================================= =========================== ========================
Basic Earnings per Share:
  As Reported                                                               $0.69                     $1.25
  Pro Forma                                                                 $0.69                     $1.23
============================================================= =========================== ========================
Diluted Earnings per Share:
  As Reported                                                               $0.68                     $1.23
  Pro Forma                                                                 $0.68                     $1.21
============================================================= =========================== ========================
</TABLE>

TEP:
---

<TABLE>
<CAPTION>
                                                                   Three Months Ended         Nine Months Ended
                                                                      September 30,             September 30,
                                                                           2004                      2004
------------------------------------------------------------- --------------------------- ------------------------
                                                                               -Thousands of Dollars-
<S>                                                                    <C>                       <C>
Net Income - As Reported                                               $  26,222                 $    45,033
Add: Share-based compensation expense included in reported
  Net Income, net of related tax effects                                      44                       1,220
Deduct: Total share-based employee compensation expense
  determined under fair value based method for all awards,
  net of related tax effects                                                 (50)                     (1,975)
------------------------------------------------------------- --------------------------- ------------------------
Pro Forma Net Income                                                   $  26,216                 $    44,278
============================================================= =========================== ========================
</TABLE>


                                       12
<PAGE>


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

     The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. There were no stock options
granted during the nine months ended September 30, 2004. For the 21,222 options
granted under the Directors' Plan in 2003, the following weighted average
assumptions were used:

      Expected life (years)                                       6
      Interest rate                                               3.34%
      Volatility                                                 23.74%
      Dividend yield                                              3.55%
      Weighted-average grant-date fair value of options
        granted during the period                                $3.16
      -----------------------------------------------------------------

NOTE 2. REGULATORY MATTERS
--------------------------

   REGULATORY ACCOUNTING

     TEP, UNS Gas and UNS Electric generally use the same accounting policies
and practices used by unregulated companies for financial reporting under GAAP.
However, sometimes these principles, such as Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS
71), require special accounting treatment for regulated companies to show the
effect of regulation. For example, in setting TEP, UNS Gas and UNS Electric's
retail rates, the Arizona Corporation Commission (ACC) may not allow TEP, UNS
Gas or UNS Electric to currently charge their customers to recover certain
expenses, but instead may require that these expenses be charged to customers in
the future. In this situation, FAS 71 requires that TEP, UNS Gas and UNS
Electric defer these items and show them as regulatory assets on the balance
sheet until TEP, UNS Gas and UNS Electric are allowed to charge their customers.
TEP, UNS Gas and UNS Electric then amortize these items as expense to the income
statement as these charges are recovered from customers. Similarly, certain
revenue items may be deferred as regulatory liabilities, which are also
eventually amortized to the income statement as rates to customers are reduced.

     The conditions a regulated company must satisfy to apply the accounting
policies and practices of FAS 71 include:

     o    an independent regulator sets rates;
     o    the regulator sets the rates to recover specific costs of delivering
          service; and
     o    the service territory lacks competitive pressures to reduce rates
          below the rates set by the regulator.

   IMPLICATIONS OF DISCONTINUING APPLICATION OF FAS 71

     TEP

     Upon approval by the ACC of a settlement agreement (Settlement Agreement)
in November 1999, TEP discontinued application of FAS 71 for its generation
operations. TEP continues to apply FAS 71 to its cost-based rate regulated
operations, which include the transmission and distribution portions of its
business.

      TEP's transmission and distribution regulatory assets, net of regulatory
liabilities, totaled $178 million at September 30, 2005. Regulatory assets of
$31 million are not presently included in rate base and consequently are not
earning a return on investment. These regulatory assets are being recovered
through the cost of service or are authorized to be collected in future base
rates. TEP's transmission and distribution regulatory assets, net of regulatory
liabilities, totaled $225 million at December 31, 2004.

      TEP regularly assesses whether it can continue to apply FAS 71 to its
cost-based rate regulated operations. If TEP stopped applying FAS 71 to these
operations, it would write off the related balances of its regulatory assets as
an expense and its regulatory liabilities as income on its income statement.
Based on the regulatory asset balances, net of regulatory liabilities, at
September 30, 2005, if TEP had stopped applying FAS 71 to its remaining
cost-based rate regulated operations, it would have recorded an extraordinary
after-tax loss of $107 million. While regulatory orders and market conditions
may affect cash flows, TEP's cash flows would not be affected if it stopped
applying FAS 71 unless a regulatory order limited its ability to recover the
cost of its regulatory assets.


                                       13
<PAGE>


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

     UNS GAS AND UNS ELECTRIC

     UNS Gas and UNS Electric's regulatory liabilities exceeded their regulatory
assets by $6 million at September 30, 2005. At December 31, 2004, UNS Gas and
UNS Electric' regulatory liabilities exceeded their regulatory assets by $4
million. As of September 30, 2005, UNS Electric has $6 million of regulatory
liabilities that are not included in rate base. If UNS Gas and UNS Electric
stopped applying FAS 71 to their regulated operations, they would write off the
related balances of their regulatory assets as an expense and would write off
their regulatory liabilities as income on their income statements. Based on the
regulatory asset and liability balances, if UNS Gas and UNS Electric had stopped
applying FAS 71 to their regulated operations, they would have recorded an
extraordinary after-tax gain of $4 million at September 30, 2005. UNS Gas and
UNS Electric's cash flows would not be affected if they stopped applying FAS 71
unless a regulatory order limited their ability to recover the cost of their
regulatory assets.

   RECENT REGULATORY ACTION

     TEP

     Given recent court action, the ACC may revise its Retail Electric
Competition Rules (Rules) and rate methodologies prior to the expiration in 2008
of the Settlement Agreement. A new structure could replace that established
pursuant to the Settlement Agreement prior to January 2009.

     In an effort to resolve the uncertainty surrounding the methodology that
will be applied to determine TEP's rates for generation service after the
current Competition Transition Charges (CTCs) expire, TEP filed a motion with
the ACC on May 4, 2005 requesting that the ACC issue an order declaring its
position regarding the rate treatment that will be afforded to TEP's generation
assets after 2008.

     TEP believes that any actions by the ACC should not deny TEP the economic
benefits of the Settlement Agreement, and accordingly analyzed how the
Settlement Agreement can be modified so as to: (i) preserve the intent of the
parties; (ii) avoid a significant rate increase in 2009; (iii) mitigate a
negative financial impact on TEP; and (iv) provide all interested parties with
certainty in the near future about TEP's post-2008 rate structure.

     On June 10, 2005 and on July 11, 2005, the ALJ issued procedural orders
related to TEP's 2004 rate review. The procedural orders took no action on TEP's
May 4, 2005 motion, however suggested a more appropriate procedure was for TEP
to file a motion to reopen the record approving the Settlement Agreement.

     Motion to Amend the Settlement Agreement
     ----------------------------------------

     On September 12, 2005, TEP filed a motion and supporting testimony with the
ACC to amend the Settlement Agreement. In the motion, TEP proposes the following
amendments to extend the benefits and protections set forth in the Settlement
Agreement and provide additional price stability for TEP customers:

     1.   The extension of the existing rate freeze at TEP's current average
          retail base rate of 8.3 cents per kWh through December 31, 2010;

     2.   The retention of the current CTC amortization schedule;

     3.   The agreement of TEP not to seek base rate treatment for certain
          generating assets in order to minimize the rates TEP's customers will
          eventually pay once the rate freeze has expired; and

     4.   The implementation of an energy cost adjustment mechanism to protect
          TEP and its customers from energy market volatility, to be effective
          after December 31, 2008. TEP proposes the establishment of an
          incremental Energy Cost Adjustment Clause (ECAC). A base amount of
          retail energy consumption would be served at the existing fixed retail
          rates and the rate on the incremental amount of retail energy would be
          capped at an annual proxy set at forward power prices.

     On October 12, 2005, a number of participants in TEP's rate proceedings,
including the Staff of the ACC, filed responses to TEP's motion. Those responses
reflect differing interpretations of the Settlement Agreement which established
TEP's existing rate structure and generation service rates, and the effect of
the 2002 Track A order which eliminated the requirement that TEP transfer its
generation assets to a subsidiary and the future of electric competition in


                                       14
<PAGE>


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

Arizona. Responses filed by ACC Staff and the Residential Utility Consumer
Office disputed TEP's assertion that the existing rate structure contemplates
market-based rates for generation services after December 31, 2008.

     On October 21, 2005, TEP filed a reply in support of its motion. The reply
stated that the public interest is best served by the ACC taking affirmative
action to resolve the questions of how TEP's rates will be determined after
December 31, 2008, avoid rate increases for TEP customers, bolster wholesale
electric generation and remove customer risk and exposure to volatile energy
costs.

     On October 24, 2005, the ALJ held a procedural conference. A number of the
participants disagreed with aspects of TEP's request. The Chairman of the ACC
submitted a letter in support of resolving the issues arising from the
Settlement Agreement and the related effect on TEP's rates. The ALJ took the
motion under advisement and is expected to issue a procedural order. TEP does
not know when or how the ALJ will rule on its motion to amend the Settlement
Agreement.

     UNS GAS

     In August 2005, UNS Gas filed a request with the ACC, to approve an
increase in the PGA surcharge from $0.03 per therm to $0.27 per therm to be
effective October 1, 2005. An increase was necessary to allow for the recovery
of the existing PGA bank balance and recover the projected cost of gas for this
winter season. At September 30, 2005, the PGA bank balance was approximately $3
million.

     On October 19, 2005, the ACC approved a PGA surcharge of $0.15 per therm
effective November 1, 2005 through February 2006; $0.25 per therm in March and
April 2006; $0.30 per therm in May and June 2006; $0.35 per therm in July
through September 2006; $0.25 per therm in October and November 2006; $0.20 per
therm in December 2006 through February 2007 and $0.25 per therm in March and
April 2007. We believe that this PGA surcharge will result in a growing bank
balance. Sources to fund the growing balance could include an additional
surcharge, draws on the revolving credit facility, additional credit lines or
the investment of additional equity capital by UniSource Energy. We cannot
predict when UNS Gas will fully recover the PGA bank balance; however, we expect
that the balance will be recovered over time.

NOTE 3. DEBT AND CREDIT FACILITIES
----------------------------------

     Long-term debt matures more than one year from the date of the financial
statements.

   UNISOURCE ENERGY DEBT

     CONVERTIBLE SENIOR NOTES

     In March 2005, UniSource Energy issued $150 million of 4.50% Convertible
Senior Notes due 2035. The Convertible Senior Notes are unsecured and are not
guaranteed by TEP or any other UniSource Energy subsidiary. Each $1,000 of
Convertible Senior Notes is convertible into 26.6667 shares of our Common Stock
at any time representing a conversion price of approximately $37.50 per share of
our Common Stock, which is subject to adjustment in certain circumstances.

     On March 1, 2005, UniSource Energy used $106 million of the net proceeds
from the sale of the Convertible Senior Notes to repay its $95 million
promissory note to TEP plus accrued interest of $11 million. TEP used these
funds, along with borrowings under its revolving credit facility to repurchase
and redeem $225 million of fixed rate tax-exempt borrowings. See TEP Debt - Bond
Repurchase and Redemptions, below.


                                       15
<PAGE>


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

     UNISOURCE CREDIT AGREEMENT

     In April 2005, UniSource Energy entered into a $105 million five-year
credit agreement with a group of lenders (UniSource Credit Agreement) which
expires on April 15, 2010. The UniSource Credit Agreement includes a $90 million
term loan facility and a $15 million revolving credit facility. Quarterly
principal payments of $1.25 million are due beginning June 30, 2005, with the
balance due at maturity.

     As of September 30, 2005, there was $88 million outstanding under the term
loan facility at an interest rate of 5.2%. As of September 30, 2005, there were
no borrowings outstanding under the revolving credit facility.

     We pay interest on the term loan and on borrowings under the revolving
credit facility at LIBOR plus 1.75% or the agent bank's reference rate plus
0.75%. We paid a commitment fee of 0.50% on the unused portion of the term loan
until it was fully drawn at June 29, 2005, and pay a commitment fee of 0.50% on
the unused portion of the revolving credit facility.

     The UniSource Credit Agreement restricts additional indebtedness, liens,
mergers, sales of assets and investments and acquisitions. We must also meet:
(1) a minimum cash flow to debt service coverage ratio for UniSource Energy on a
standalone basis and (2) a maximum leverage ratio on a consolidated basis. We
may pay dividends, if after giving effect to the dividend payments, we have more
than $15 million of unrestricted cash and unused revolving credit. As of
September 30, 2005, we were in compliance with the terms of the UniSource Credit
Agreement.

     If an event of default occurs, the UniSource Credit Agreement may become
immediately due and payable. An event of default includes failure to make
required payments under the UniSource Credit Agreement, failure of UniSource
Energy or certain subsidiaries to make payments or default on debt greater than
$20 million, or certain bankruptcy events at UniSource Energy or certain
subsidiaries.

     INTER-COMPANY NOTE AND CAPITAL CONTRIBUTION FROM UNISOURCE ENERGY

     In January 2005, UNS Gas established a short-term inter-company promissory
note to UniSource Energy that allows UNS Gas to borrow up to $10 million for
general corporate purposes.

     On January 1, 1998, TEP and UniSource Energy exchanged all the outstanding
common stock of TEP on a share-for-share basis for the Common Stock of UniSource
Energy in a transaction which resulted in UniSource Energy becoming a holding
company with TEP as its subsidiary. Following the share exchange, TEP
transferred the stock of Millennium to UniSource Energy for a $95 million
promissory note due in 2008. On March 1, 2005, UniSource Energy used $106
million of the $146 million of net proceeds from the convertible debt offering,
see above, to repay the $95 million promissory note to TEP plus accrued interest
of $11 million. Approximately $25 million of this note represented a gain to
TEP. TEP did not record this gain in income. Instead, this gain was reflected as
an increase in TEP's common stock equity when UniSource Energy repaid the note.

     In May 2005, UniSource Energy made a $110 million capital contribution to
TEP.

   TEP DEBT

     BOND REPURCHASE AND REDEMPTIONS

     TEP made a sinking fund payment of $1 million on its 1941 Mortgage IDBs in
January 2005.

     In March 2005, TEP redeemed at par the remaining $31 million of its 6.1%
1941 Mortgage IDBs, which were due in 2008, as well as the remaining $21 million
of its 7.5% 1941 Mortgage IDBs, which were due in 2006. TEP recorded an expense
of $0.1 million for debt costs that were capitalized and being amortized through
2008. On June 10, 2005, TEP satisfied and discharged the 1941 Mortgage.

     In May 2005, TEP purchased $147 million of its 1997 Pima Series B and $74
million of its 1997 Pima Series C fixed-rate tax-exempt bonds (Repurchased
Bonds) at a price of $101.50 per $100 principal amount and redeemed at par the
remaining $4 million of bonds outstanding under those series. TEP does not
currently plan on canceling the Repurchased Bonds which will remain outstanding
under their respective indentures; however, the Repurchased Bonds will not be
presented in our financial statements. TEP recognized a loss of approximately $3


                                       16
<PAGE>


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

million on the Repurchased Bonds associated with the generation portion of its
business. In addition, TEP capitalized approximately $3 million of costs for
Repurchased Bonds associated with its regulated operations and will amortize the
cost over the remaining life of the bonds. TEP may choose to cancel or resell
the Repurchased Bonds to third parties in the future.

     As a result of the capital contribution, inter-company note repayment and
the bond purchases and redemptions, TEP's ratio of equity to total
capitalization (excluding capital leases) improved to 41% as of September 30,
2005, which meets an ACC requirement and allows TEP to dividend up to 100% of
its current year Net Income to UniSource Energy. Management believes it will be
able to maintain a 40% ratio of equity to total capitalization (excluding
capital leases) through the remainder of 2005.

     TEP CREDIT AGREEMENT

     In May 2005, TEP entered into a new $401 million Credit Agreement (TEP
Credit Agreement) to replace its previous $401 million credit agreement. The TEP
Credit Agreement includes a $60 million revolving credit facility and a $341
million letter of credit facility to support $329 million of tax-exempt variable
rate bonds. The TEP Credit Agreement expires May 4, 2010 and is secured by $401
million of Mortgage Bonds.

     The TEP Credit Agreement restricts additional indebtedness, liens, sale of
assets and sale-leasebacks agreements. The TEP Credit Agreement also requires
TEP to meet a minimum cash coverage ratio and a maximum leverage ratio. If TEP
complies with the terms of the TEP Credit Agreement, TEP may pay dividends to
UniSource Energy. Certain regulatory actions may cause a decrease in the amount
that may be borrowed. As of September 30, 2005, TEP was in compliance with the
terms of the TEP Credit Agreement.

     If an event of default occurs, the TEP Credit Agreement may become
immediately due and payable. An event of default includes failure to make
required payments under the TEP Credit Agreement; change in control, as defined;
failure of TEP or certain subsidiaries to make payments or default on debt
greater than $20 million; or certain bankruptcy events at TEP or certain
subsidiaries.

     Interest rates and fees under the TEP Credit Agreement are based on a
pricing grid tied to TEP's credit ratings. Letter of credit fees are 0.875% per
annum and amounts drawn under a letter of credit would bear interest at LIBOR
plus 0.875% per annum. TEP pays interest on borrowings under the revolving
credit facility at LIBOR plus 0.875% or at the agent bank's reference rate. TEP
also pays a commitment fee of 0.20% on the unused portion of the revolving
credit facility. In May 2005, TEP expensed $3 million for debt costs related to
the previous credit agreement that were capitalized and being amortized through
2009. Fees of $5 million associated with the TEP Credit Agreement are being
amortized through May 2010.

     During the three months ended September 30, 2005, TEP repaid $40 million of
borrowings under its revolving credit facility. As of September 30, 2005, TEP
had no borrowings outstanding under the revolving credit facility component of
the TEP Credit Agreement.

   UNS GAS/UNS ELECTRIC REVOLVER

     In April 2005, UNS Gas and UNS Electric entered into a $40 million
three-year unsecured revolving credit agreement due April 15, 2008 with a group
of lenders (the UNS Gas/UNS Electric Revolver). Either borrower may borrow up to
a maximum of $30 million; however, the total combined amount borrowed cannot
exceed $40 million.

     UNS Gas is only liable for UNS Gas' borrowings, and similarly, UNS Electric
is only liable for UNS Electric's borrowings under the UNS Gas/UNS Electric
Revolver. UES guarantees the obligations of both UNS Gas and UNS Electric.

     The borrowers pay interest at LIBOR plus 1.50% or at the agent bank's
reference rate plus 0.50%. UNS Gas and UNS Electric also pay a commitment fee of
0.45% on the unused portion of the revolving credit facility.

     The UNS Gas/UNS Electric Revolver contains restrictions on additional
indebtedness, liens, mergers and sales of assets. The UNS Gas/UNS Electric
Revolver also contains a maximum leverage ratio and a minimum cash flow to
interest coverage ratio for each borrower. As of September 30, 2005, UNS Gas and
UNS Electric were each in compliance with the terms of the UNS Gas/UNS Electric
Revolver.


                                       17
<PAGE>


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

     If an event of default occurs, the UNS Gas/UNS Electric Revolver may become
immediately due and payable. An event of default includes failure to make
required payments under the UNS Gas/UNS Electric Revolver; certain change in
control transactions, certain bankruptcy events of UNS Gas or UNS Electric, or
failure of UES, UNS Gas or UNS Electric to make payments or default on debt
greater than $4 million.

     As of September 30, 2005, UNS Gas and UNS Electric had no borrowings
outstanding under the UNS Gas/UNS Electric Revolver.

NOTE 4. BUSINESS SEGMENTS
-------------------------

     Based on the way we organize our operations and evaluate performance, we
have four reportable 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.
     (4)  Global Solar, a developer and manufacturer of light-weight thin-film
          photovoltaic cells and panels, is the largest investment held by
          Millennium.

     The UniSource Energy, UES and Millennium holding companies, UED, and
several other subsidiaries and equity investments, which are not considered
reportable segments, are included in All Other. Through affiliates, Millennium
holds investments in several unregulated energy and emerging technology
companies. UED, a wholly-owned subsidiary of UniSource Energy, developed
generating resources and performed other project development activities,
including the expansion of the Springerville Generating Station.

     Significant reconciling adjustments consist of the elimination of
inter-company activity and balances. Other Millennium subsidiaries recorded
revenue from transactions with TEP of $3 million and $9 million during the
three-month and nine-month periods ended September 30, 2005 and $6 million and
$14 million during the three-month and nine-month periods ended September 30,
2004. TEP's related expense is reported in Other Operations and Maintenance
expense on its income statement. Millennium's revenue and TEP's related expense
are eliminated in UniSource Energy consolidation. Other significant reconciling
adjustments include the elimination of investments in subsidiaries held by
UniSource Energy, the inter-company note between UniSource Energy and TEP, the
related interest income and expense on the note and reclassifications of
deferred tax assets and liabilities. The inter-company note between UniSource
Energy and TEP was repaid on March 1, 2005. See Note 3.


                                       18
<PAGE>


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

     We disclose selected financial data for our reportable segments in the
following table:

<TABLE>
<CAPTION>
                                                        REPORTABLE SEGMENTS
                                              -----------------------------------------                                UNISOURCE
                                                            UNS        UNS     GLOBAL       ALL       RECONCILING        ENERGY
                                                 TEP        GAS     ELECTRIC    SOLAR      OTHER      ADJUSTMENTS     CONSOLIDATED
--------------------------------------------- ---------- --------- ----------- -------- ------------ -------------- ----------------
INCOME STATEMENT                                                              -Millions of Dollars-
----------------
<S>                                            <C>        <C>       <C>         <C>      <C>            <C>            <C>
THREE MONTHS ENDED SEPTEMBER 30, 2005:
   Operating Revenues - External               $   281    $   17    $    48     $   2    $     1        $     -        $     349
   Operating Revenues - Intersegment                 1         -          -         -          3             (4)               -
   Income (Loss) Before Income Taxes                33        (3)         4        (3)        (2)             -               29
   Net Income (Loss)                                20        (2)         2        (2)         -              -               18
--------------------------------------------- ---------- --------- ----------- -------- ------------ -------------- ----------------

--------------------------------------------- ---------- --------- ----------- -------- ------------ -------------- ----------------
THREE MONTHS ENDED SEPTEMBER 30, 2004:
   Operating Revenues - External               $   272    $   16    $    45     $   -    $     2        $     -        $     335
   Operating Revenues - Intersegment                 -         -          -         3          4             (7)               -
   Income (Loss) Before Income Taxes                44        (3)         4        (3)        (1)             -               41
   Net Income (Loss)                                26        (2)         2        (2)         -              -               24
--------------------------------------------- ---------- --------- ----------- -------- ------------ -------------- ----------------

--------------------------------------------- ---------- --------- ----------- -------- ------------ -------------- ----------------
NINE MONTHS ENDED SEPTEMBER 30, 2005:
   Operating Revenues - External               $   699    $   91    $   116     $   4    $     1        $     -        $     911
   Operating Revenues - Intersegment                 2         -          -         -          9            (11)               -
   Income (Loss) Before Income Taxes                47         4          6        (8)        (8)             -               41
   Net Income (Loss)                                28         2          4        (5)        (5)             -               24
--------------------------------------------- ---------- --------- ----------- -------- ------------ -------------- ----------------

--------------------------------------------- ---------- --------- ----------- -------- ------------ -------------- ----------------
NINE MONTHS ENDED SEPTEMBER 30, 2004:
   Operating Revenues - External               $   692    $   87    $   112     $   3    $     1        $     -        $     895
   Operating Revenues - Intersegment                 1         -          -         4         11            (16)               -
   Income (Loss) Before Income Taxes                80         3          7        (6)        (6)             -               78
   Net Income (Loss)                                45         2          4        (4)        (4)             -               43
--------------------------------------------- --------- ---------- ---------- -------- ------------ --------------- ----------------

--------------------------------------------- --------- ---------- ---------- -------- ------------ --------------- ----------------
BALANCE SHEET
-------------
   Total Assets, September 30, 2005            $ 2,566    $  196    $   149     $  24    $   953        $  (849)       $   3,039
   Total Assets, December 31, 2004               2,742       201        135        21        930           (853)           3,176
--------------------------------------------- --------- ---------- ---------- -------- ------------ --------------- ----------------
</TABLE>

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

     TEP enters into forward contracts to purchase or sell a specified amount of
capacity or energy at a specified price over a given period of time, within
established limits to take advantage of favorable market opportunities and
reduce exposure to energy price risk resulting from generation and procurement
of power. In general, TEP enters into forward power purchase contracts when
market conditions provide the opportunity to purchase energy for its load at
prices that are below the marginal cost of its supply resources or to supplement
its own resources (e.g., during plant outages and summer peaking periods). TEP
enters into forward power sales contracts when it forecasts that it has excess
supply and the market price of energy exceeds its marginal cost. In addition,
TEP has a natural gas supply agreement under which it purchases all of its gas
requirements at spot market prices from Southwest Gas Corporation (SWG). In an
effort to minimize price risk on these purchases, TEP enters into price swap
agreements under which TEP purchases gas at fixed prices and simultaneously
sells gas at spot market prices.

     A portion of TEP's forward power contracts are considered to be normal
purchases and sales and, therefore, are not required to be marked to market.
However, some of TEP's forward power contracts and all of the gas swap
agreements are considered to be derivatives, which are required to be marked to
market each reporting period. The majority of these forward power contracts, as
well as the gas swaps, are accounted for as cash flow hedges. Unrealized gains
and losses resulting from the change in the fair value of derivatives that meet
the criteria for cash flow hedge accounting are recorded in Other Comprehensive
Income, a component of Common Stock Equity, rather than in current earnings.


                                       19
<PAGE>


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

There were no gains or losses recognized in Net Income related to hedge
ineffectiveness because all cash flow hedges are considered to be highly
effective. The unrealized gains and losses are reclassified into earnings when
the related transactions settle or terminate. The change in fair value of
forward power contracts considered derivatives that are not accounted for as
cash flow hedges is recorded in Net Income.

     The unrealized gains and losses that TEP reclassified into earnings from
Other Comprehensive Income were:

<TABLE>
<CAPTION>
                                                     Three Months Ended     Nine Months Ended
                                                        September 30,         September 30,
                                                       2005       2004       2005       2004
--------------------------------------------------- ---------- ---------- ---------- ----------
                                                                -Millions of Dollars-
<S>                                                   <C>         <C>        <C>        <C>
Unrealized gain (loss) reclassified into earnings      $  6       $ (1)      $  7       $  -
--------------------------------------------------- ---------- ---------- ---------- ----------
</TABLE>

     UNS Gas has a natural gas supply agreement under which it purchases
substantially all of its gas requirements at market prices from BP Energy
Company (BP). However, the contract allows UNS Gas to lock in fixed prices on a
portion of its gas purchases by entering into fixed price forward contracts with
BP at various times during the year. This enables UNS Gas to provide more stable
prices to its customers. These forward contracts, as well as the main gas supply
contract, meet the definition of normal purchases and therefore are not required
to be marked to market.

     UNS Electric does not currently have any contracts that are required to be
marked to market.

     Millennium Environmental Group, Inc. (MEG), a wholly-owned subsidiary of
Millennium, enters into swap agreements, options and forward contracts relating
to Emissions Allowances. MEG marks its trading contracts to market by recording
unrealized gains and losses and adjusting the related assets and liabilities on
a monthly basis to reflect the market prices at the end of the month.

     MEG is in the process of winding down its activities and will not engage in
any significant new activities after 2005.

     The market prices used to determine fair values for TEP and MEG's
derivative instruments are estimated based on various factors including broker
quotes, exchange prices, over the counter prices and time value.

     TEP and MEG's derivative activities are reported as follows:

<TABLE>
<CAPTION>
                                              FINANCIAL STATEMENT LINE
                               ----------------------------- ---------------------------
                                   NET UNREALIZED GAINS           NET REALIZED GAINS
                                        AND LOSSES                    AND LOSSES
------------------------------ ----------------------------- ---------------------------
<C>                            <C>                           <C>
TEP Forward Power Sales -
  Cash Flow Hedges             Other Comprehensive Income    Electric Wholesale Sales
TEP Forward Power Purchases -
  Cash Flow Hedges             Other Comprehensive Income    Purchased Power
TEP Forward Power Sales        Electric Wholesale Sales      Electric Wholesale Sales
TEP Forward Power Purchases    Purchased Power               Purchased Power
TEP Gas Price Swaps            Other Comprehensive Income    Fuel Expense
MEG Trading Activities         Other Operating Revenues      Other Operating Revenues
------------------------------ ----------------------------- ---------------------------
</TABLE>

     Although MEG's realized gains and losses on trading activities are reported
net on UniSource Energy's income statement, the related cash receipts and cash
payments are reported separately on UniSource Energy's statement of cash flows.

     The net pre-tax gains and losses from TEP and MEG's derivative activities
for the three months ended and nine months ended September 30, 2005 and 2004,
were as follows:


                                       20
<PAGE>


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

<TABLE>
<CAPTION>
                                                      Three Months Ended    Nine Months Ended
                                                         September 30,         September 30,
                                                       2005       2004       2005       2004
--------------------------------------------------- ---------- ---------- ---------- ----------
                                                               -Millions of Dollars-
<S>                                                   <C>         <C>        <C>       <C>
TEP:
  Net Unrealized Loss on Forward Power Sales -
     Cash Flow Hedges                                 $  (3)      $   -      $  (3)    $   -
  Net Unrealized (Loss) Gain on Forward Power
     Sales                                               (9)          1         (9)        1
  Net Unrealized Gain on Forward Power
     Purchases                                            1           -          1         -
  Net Unrealized Gain on Gas Price Swaps                  7           1          7         1
  Net Realized Gain on Gas Price Swaps                    6          (1)         7         -
MEG:
  Net Gain from Trading Activities                        -           1          -         1
--------------------------------------------------- ---------- ---------- ---------- ----------
</TABLE>

     TEP and MEG's derivative assets and liabilities are reported as follows:

<TABLE>
<CAPTION>
                                                                            BALANCE SHEET LINE
                                                           ----------------------------------------------------
                                                                    ASSETS                  LIABILITIES
---------------------------------------------------------- ------------------------- --------------------------
<C>                                                        <C>                       <C>
TEP - Current                                              Other Current Assets      Other Current Liabilities
TEP - Noncurrent                                           Other Assets              Other Liabilities
MEG - Current (including Emissions Allowance Inventory)    Trading Assets            Trading Liabilities
MEG - Noncurrent                                           Other Assets              Other Liabilities
---------------------------------------------------------- ------------------------- --------------------------
</TABLE>

     The fair value of TEP and MEG's derivative assets and liabilities were as
follows:

<TABLE>
<CAPTION>
                                            September 30,       December 31,
                                                 2005               2004
---------------------------------------- ------------------- -------------------
                                                  -Millions of Dollars-
<S>                                            <C>                  <C>
TEP:
   Derivative Assets - Current                 $  11                $   2
   Derivative Assets - Noncurrent                  4                    1
   Derivative Liabilities - Current               12                    -
MEG:
   Trading Assets - Current                        -                   71
   Trading Assets - Noncurrent                     7                    6
   Trading Liabilities - Current                   -                  (65)
---------------------------------------- ------------------- -------------------
</TABLE>

     The settlement of forward power purchase and sales contracts that do not
result in physical delivery are recorded net as a component of Electric
Wholesale Sales in TEP's income statement. For the three months ended September
30, 2005, approximately $2 million in sales were netted against approximately $2
million in purchases. For the three months ended September 30, 2004, just over
$1 million in sales were netted against just over $1 million in purchases. For
the nine months ended September 30, 2005, approximately $10 million in sales
were netted against approximately $9 million in purchases, resulting in a small
net gain. For the nine months ended September 30, 2004, $3 million in sales were
netted against $3 million in purchases.

NOTE 6. COMMITMENTS AND CONTINGENCIES
-------------------------------------

   TEP CONTINGENCIES

     LITIGATION AND CLAIMS RELATED TO SAN JUAN GENERATING STATION

     Public Service Company of New Mexico (PNM), operator of San Juan, and the
coal supplier to San Juan have been participating in sessions sponsored by the
Environmental Protection Agency (EPA) to consider rulemaking for the disposal of
coal combustion products because of claims by third parties that San Juan has


                                       21
<PAGE>


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

contaminated water resources in the region as a result of disposing of fly ash
in the surface mine pits adjacent to the generating station. In November 2004, a
contractor for the EPA released a non-binding preliminary determination that any
contamination at San Juan cannot be conclusively attributed to the disposal of
fly ash; however, the EPA has not made a final determination. TEP owns 50% of
San Juan Units 1 and 2, which equates to 19.8% of the total San Juan Generating
Station. TEP does not believe that this issue will have a material adverse
impact on TEP or its operations.

     LITIGATION AND CLAIMS RELATED TO NAVAJO GENERATING STATION

     On October 15, 2004, Peabody Western Coal Company (Peabody), the coal
supplier to the Navajo Generating Station, filed a complaint in the Circuit
Court for the City of St. Louis, Missouri against the participants at Navajo,
including TEP, for reimbursement of royalties and other costs and breach of the
coal supply agreement. The case was removed to Federal District Court Eastern
District of Missouri on February 10, 2005. Peabody subsequently filed a motion
to remand to superior court. Because TEP owns 7.5% of the Navajo Generating
Station, its share of the current claimed damages would be approximately $35
million. TEP believes these claims are without merit and intends to continue to
contest them.

     POSTRETIREMENT AND PENSION BENEFIT COSTS AT NAVAJO GENERATING STATION

     In 1996, Peabody filed a lawsuit in Maricopa County Superior Court against
the participants at Navajo Generating Station, including TEP, for postretirement
benefit costs payable to the coal supplier's employees under the coal supply
agreements. The Navajo participants and Peabody have agreed to stay the
discovery process in this litigation until February 28, 2006 to allow the
parties additional time to negotiate a potential settlement. To the extent that
amounts become estimable and payment probable, TEP will record a liability for
additional postretirement benefit costs at the Navajo Generating Station. TEP
does not expect any settlement to be material to TEP.

     TEP has previously settled claims for postretirement benefit costs with the
coal suppliers at Springerville Generating Station and Four Corners Generating
Station. The cost of postretirement benefits is included in the cost of coal to
San Juan.

     ENVIRONMENTAL RECLAMATION AT REMOTE GENERATING STATIONS

     TEP currently pays on-going reclamation costs related to the coal mines
which supply the remote generating stations, and it is probable that TEP will
have to pay a portion of final reclamation costs upon mine closure. When a
reasonable estimate of final reclamation costs is available, the liability is
recognized as a cost of coal over the remaining term of the respective coal
supply agreement. TEP estimates its undiscounted final reclamation liability to
be $41 million, and the present value of TEP's liability for final reclamation
approximates $11 million at the expiration dates of the coal supply agreements.
At September 30, 2005 and December 31, 2004, TEP had recorded $2 million and $1
million, respectively, of its post-term reclamation liability, which is included
in Other Liabilities in the balance sheets.

     Amounts recorded for final reclamation are subject to various assumptions
and determinations, such as estimating the costs of reclamation, estimating when
final reclamation will occur, and the credit-adjusted risk-free interest rate to
be used to discount future liabilities. Changes that may arise over time with
regard to these assumptions and determinations will change amounts recorded in
the future as expense for post-term reclamation. TEP does not believe that
recognition of its final reclamation obligations will be material to TEP in any
single year since recognition occurs over the remaining lives of its coal supply
agreements.

   RESOLUTION OF SPRINGERVILLE GENERATING STATION COMPLAINT

     Environmental activist groups have expressed concerns regarding the
construction of any new units at the Springerville Generating Station. In
January 2003, environmental activist groups appealed an ACC Order affirming the
ACC's approval of the expansion at the Springerville Generating Station to the
Superior Court of the State of Arizona. On October 22, 2003, the Superior Court
affirmed the ACC's issuance of the Certificate of Environmental Compatibility
for Springerville Generating Station. The environmental activist groups appealed
the Superior Court decision on December 30, 2003 and filed an amended notice of
appeal on January 2, 2004 with the Arizona Court of Appeals. In February 2005,
the Arizona Court of Appeals upheld the lower court's ruling affirming the ACC's
approval of the expansion at Springerville Generating Station. In February 2005,
the Grand Canyon Trust (GCT), one of the environmental activist groups with this
appeal, and TEP reached a settlement under which the GCT will drop all claims


                                       22
<PAGE>


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

against TEP regarding Springerville Generating Station. TEP will implement new
emission limits at Units 1 and 2 by January 1, 2006. The Supreme Court of
Arizona denied the other environmental activist group's petition for review on
June 28, 2005.

   MILLENNIUM COMMITMENT

     In April 2005, Millennium committed to fund $3 million to Battco, Inc., a
company formed to carry on the business of IPS.

   GUARANTEES AND INDEMNITIES

     In the normal course of business, UniSource Energy and certain subsidiaries
enter into various agreements providing financial or performance assurance to
third parties on behalf of certain subsidiaries. We enter into these agreements
primarily to support or enhance the creditworthiness of a subsidiary on a
stand-alone basis. The most significant of these guarantees are:

     o    UES' guarantee of $160 million of aggregate principal amount of senior
          unsecured notes issued by UNS Gas and UNS Electric to purchase the
          Citizens Arizona gas and electric utility assets,
     o    UES' guarantee of a $40 million unsecured revolving credit agreement
          for UNS Gas and UNS Electric,
     o    UniSource Energy's guarantee of approximately $6 million in natural
          gas transportation and supply payments in addition to building and
          equipment lease payments for UNS Gas, UNS Electric, and subsidiaries
          of Millennium, and
     o    Millennium's guarantee of approximately $1 million in building lease
          payments for a subsidiary.

     In addition, UniSource Energy and its subsidiaries have indemnified the
purchasers of interests in certain investments from additional taxes due for
years prior to the sale of such investments. The terms of the indemnifications
provide for no limitation on potential future payments; however, we believe that
we have abided by all tax laws and paid all tax obligations. We have not made
any payments under the terms of these indemnifications to date.

     We believe that the likelihood UniSource Energy, UES, or Millennium would
be required to perform or otherwise incur any significant losses associated with
any of these guarantees or indemnities is remote.

NOTE 7. TEP WHOLESALE ACCOUNTS RECEIVABLE AND ALLOWANCES
--------------------------------------------------------

     TEP's Accounts Receivable from Electric Wholesale Sales, included in Trade
Accounts Receivable on the balance sheet, totaled $23 million at September 30,
2005 and $22 million at December 31, 2004, net of allowances. TEP's Allowance
for Doubtful Accounts on the balance sheet includes $13 million at September 30,
2005 and $13 million at December 31, 2004 related to sales to the California
Power Exchange (CPX) and the California Independent System Operator (CISO) in
2001 and 2000. Excluding the receivables from the CPX and the CISO,
substantially all of the September 30, 2005 and the December 31, 2004 wholesale
receivable balances have been collected as of the date of this filing.

     In May 2004, the FERC issued two separate orders addressing numerous issues
in the refund calculation and the fuel cost allowance calculation (an offset to
the refund obligation). Based on these new orders, TEP increased its reserve for
sales to the CPX and the CISO by $3 million by recording a reduction of
wholesale revenues.

     There are several other outstanding legal issues, complaints and lawsuits
concerning the California energy crisis related to the FERC, wholesale power
suppliers, Southern California Edison Company, Pacific Gas and Electric Company,
the CPX and the CISO. We cannot predict the outcome of these issues or lawsuits.
We believe, however, that TEP is adequately reserved for its transactions with
the CPX and the CISO.

NOTE 8. UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
-------------------------------------------------

     Basic EPS is computed by dividing Net Income (Loss) by the weighted average
number of common shares outstanding during the period. Except when the effect
would be anti-dilutive, the diluted EPS calculation includes the impact of


                                       23
<PAGE>


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

shares that could be issued upon exercise of outstanding stock options,
contingently issuable shares under equity-based awards or common shares that
would result from the conversion of convertible notes. The numerator in
calculating diluted earnings per share is Net Income (Loss) adjusted for the
interest on convertible notes (net of tax) that would not be paid if the notes
were converted to common shares.

     The following table shows the effects of potential dilutive common stock on
the weighted average number of shares:

<TABLE>
<CAPTION>
                                                                     Three Months Ended        Nine Months Ended
                                                                       September 30,             September 30,
                                                                      2005         2004         2005         2004
----------------------------------------------------------------- ------------ ------------ ------------ ------------
                                                                      - In Thousands -          - In Thousands -
<S>                                                                  <C>        <C>          <C>          <C>
Numerator:
  Net Income                                                        $18,397     $  23,799    $  24,082    $  43,021
  Income from assumed conversion of Senior Convertible
    Notes                                                             1,097             -            -            -
----------------------------------------------------------------- ------------ ------------ ------------ ------------
Adjusted Numerator                                                  $19,494     $  23,799    $  24,082    $  43,021
================================================================= ============ ============ ============ ============

Denominator:
  Weighted-average Shares of Common Stock Outstanding                34,915       34,464       34,786       34,347
  Effect of Dilutive Securities:
    Convertible Senior Notes                                          4,000            -            -            -
    Options and Stock Issuable under Employee Benefit Plans
      and the Directors' Plan                                           709          649          718          672
----------------------------------------------------------------- ------------ ------------ ------------ ------------
Total Shares                                                         39,624       35,113       35,504       35,019
================================================================= ============ ============ ============ ============
</TABLE>

     Dilutive shares for the nine months ended September 30, 2005 exclude 3,126
average incremental common shares related to Convertible Senior Notes because
they are antidilutive.

NOTE 9. EMPLOYEE BENEFITS PLANS
-------------------------------

   PENSION BENEFIT PLANS

     TEP, UNS Gas and UNS Electric maintain noncontributory, defined benefit
pension plans for substantially all regular employees and certain affiliate
employees. Benefits are based on years of service and the employee's average
compensation. TEP, UNS Gas and UNS Electric fund the plans by contributing at
least the minimum amount required under Internal Revenue Service regulations.
Additionally, we provide supplemental retirement benefits to certain employees
whose benefits are limited by Internal Revenue Service benefit or compensation
limitations.

OTHER POSTRETIREMENT BENEFIT PLANS

     TEP provides limited health care and life insurance benefits for retirees.
All regular employees may become eligible for these benefits if they reach
retirement age while working for TEP or an affiliate. UNS Gas and UNS Electric
provide postretirement medical benefits for current retirees and a small group
of active employees. The majority of UNS Gas and UNS Electric employees do not
participate in the postretirement medical plan.

     The ACC allows TEP, UNS Gas and UNS Electric to recover postretirement
costs through rates only as benefit payments are made to or on behalf of
retirees. The postretirement benefits are currently funded entirely on a
pay-as-you-go basis. Under current accounting guidance, TEP, UNS Gas and UNS
Electric cannot record a regulatory asset for the excess of expense calculated
per Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, over actual benefit payments.


                                       24
<PAGE>


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

   COMPONENTS OF NET PERIODIC BENEFIT COST

     The components of net periodic benefit costs are as follows:

<TABLE>
<CAPTION>
                                                                          OTHER POSTRETIREMENT
                                                  PENSION BENEFITS              BENEFITS
                                             -----------------------------------------------------
                                                 Three Months Ended        Three Months Ended
                                                   September 30,             September 30,
                                                  2005         2004         2005         2004
--------------------------------------------------------------------------------------------------
                                                              -Millions of Dollars-
<S>                                             <C>          <C>          <C>          <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
   Service Cost                                 $      2     $      1     $     1      $      1
   Interest Cost                                       2            2           1             1
   Expected Return on Plan Assets                     (3)          (3)          -             -
   Prior Service Cost Amortization                     1            1           -             -
   Recognized Actuarial Loss                           -            1           1             -
--------------------------------------------------------------------------------------------------
      NET PERIODIC BENEFIT COST                 $      2     $      2     $     3      $      2
==================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                          OTHER POSTRETIREMENT
                                                  PENSION BENEFITS              BENEFITS
                                             -----------------------------------------------------
                                                 Nine Months Ended         Nine Months Ended
                                                   September 30,             September 30,
                                                  2005         2004        2005          2004
--------------------------------------------------------------------------------------------------
                                                              -Millions of Dollars-
<S>                                             <C>          <C>          <C>          <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
   Service Cost                                 $      5     $      4     $     2      $      2
   Interest Cost                                       8            7           3             3
   Expected Return on Plan Assets                     (9)          (8)          -             -
   Prior Service Cost Amortization                     2            2          (1)           (1)
   Recognized Actuarial Loss                           2            1           2             1
--------------------------------------------------------------------------------------------------
      NET PERIODIC BENEFIT COST                 $      8     $      6     $     6      $      5
==================================================================================================
</TABLE>

NOTE 10. SHARE-BASED COMPENSATION PLANS
---------------------------------------

     At September 30, 2005, we had stock options, stock units and restricted
stock grants outstanding as discussed below. Effective January 1, 2005, we
adopted the new accounting guidance for share-based compensation. Prior to
January 1, 2005, we accounted for those plans under the recognition and
measurement principles of APB 25. See Note 1.

   STOCK OPTIONS

     In September 2005, the Board of Directors granted options on 50,000 shares
of UniSource Energy Common Stock as an employment inducement award to a new
executive officer. The award was granted on the same basis as grants under the
Omnibus Plan. The fair value of the option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:

     Expected life (years)                                     6
     Interest rate                                             4.00%
     Volatility                                               22.94%
     Dividend yield                                            2.54%
     Weighted-average grant-date fair value of option
       granted during the period                              $7.39
     ---------------------------------------------------------------


                                       25
<PAGE>


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

     There were no additional stock options granted during the nine months ended
September 30, 2005 and September 30, 2004. Stock option awards vest over three
years, become exercisable in one-third increments on each anniversary date of
the grant and expire on the tenth anniversary of the grant. Compensation expense
recorded for the nine months ended September 30, 2005 was minimal.

     A summary of stock option activity follows:

<TABLE>
<CAPTION>
                                           Nine Months Ended September 30,
                                        2005                              2004
--------------------------------------------------------------------------------------------
                                               WEIGHTED                          Weighted
                                                AVERAGE                          Average
                                               EXERCISE                          Exercise
                               SHARES            PRICE            Shares          Price
--------------------------------------------------------------------------------------------
<S>                           <C>               <C>              <C>             <C>
Options Outstanding,
  Beginning of Period         2,076,055         $ 16.19          2,478,551       $  16.04
   Granted                       50,000         $ 33.55                  -              -
   Exercised                   (377,443)        $ 16.11           (372,466)      $  15.17
   Forfeited                     (7,198)        $ 18.08             (2,613)      $  13.86
                          -----------------                  ----------------
Options Outstanding,
  End of Period               1,741,414         $ 16.70          2,103,472       $  16.20
                          =================                  ================
Options Exercisable,
  End of Period               1,683,942         $ 16.20          2,081,201       $  16.18

Weighted Average Remaining Contractual Life at September 30, 2005:          5.02 years
--------------------------------------------------------------------------------------------
</TABLE>

     Stock options awarded on January 1, 2002 accrue dividend equivalents that
are paid in cash on the earlier of the date of exercise of the underlying option
or the date the option expires. Compensation expense is recognized as dividends
are paid. We recorded compensation expense of less than $0.2 million for the
nine-month periods ended September 30, 2005 and 2004.

   RESTRICTED STOCK AND STOCK UNITS

     For the nine months ended September 30, 2005, we granted restricted stock
awards to directors totaling 14,186 shares at a grant date weighted-average fair
value of $28.20 per share. For the nine months ended September 30, 2004, we
granted restricted stock awards to directors totaling 6,480 shares at a grant
date fair value of $24.68 per share. Directors may elect to receive stock units
in lieu of restricted shares. Restricted shares or stock units granted prior to
February 2005 become 100% vested on the third anniversary of the grant date.
Restricted shares or stock units granted after February 1, 2005 become 100%
vested on the first anniversary of the grant date. Compensation expense equal to
the fair market value on the date of the award is recognized over the vesting
period.

     There were 415 stock unit awards granted to directors at a grant date fair
value of $30.72 during the nine months ended September 30, 2005. There were no
stock unit awards granted during the nine months ended September 30, 2004. Fully
vested but undistributed stock unit awards accrue dividend equivalent stock
units based on the fair market value of common shares on the date the dividend
is paid. Compensation expense is recognized when dividends are paid.

     We recorded compensation expense for the awards described above of less
than $0.3 million for each of the three and nine-month periods ended September
30, 2005 and 2004.

   PERFORMANCE SHARES

     In May 2003, the Board of Directors approved a grant of performance shares
to key employees. The shares were to be awarded at the end of a three-year
performance period based on goal attainment. The grant date fair value was
$17.84 per share. Compensation expense was initially recorded over the
performance period based on the anticipated number and market value of shares to
be awarded. As a result of the shareholder vote to approve the proposed merger,
53,566 performance shares vested and were distributed in March, 2004. See the
2004 Annual Report on Form 10-K, Note 17 of Notes to Consolidated Financial
Statements - Stock-Based Compensation Plans. Compensation expense of $2 million


                                       26
<PAGE>


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

was recorded during the three months ended March 31, 2004, for this award.

NOTE 11. INCOME AND OTHER TAXES
-------------------------------

   INCOME TAXES

     The differences between the income tax expense and the amount obtained by
multiplying pre-tax income by the U.S. statutory federal income tax rate of 35%
are as follows:

<TABLE>
<CAPTION>
                                                                             UNISOURCE ENERGY
                                                        -----------------------------------------------------------
                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                 September 30,
                                                             2005          2004            2005            2004
-------------------------------------------------------------------------------------------------------------------
                                                                         -Thousands of Dollars-
<S>                                                       <C>          <C>             <C>             <C>
FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE              $ 10,267     $   14,314      $   14,235      $   27,189
   State Income Tax Expense, Net of Federal Deduction        1,350          1,882           1,871           3,574
   Depreciation Differences (Flow Through Basis)               708            789           2,124           2,367
   Tax Credits                                                (205)          (346)           (466)           (604)
   Valuation Allowance                                      (1,000)             -          (1,000)            500
   Other                                                      (184)           460            (176)          1,637
-------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL AND STATE INCOME TAX EXPENSE                $ 10,936     $   17,099      $   16,588      $   34,663
===================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                  TEP
                                                        -----------------------------------------------------------
                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                 September 30,
                                                             2005          2004            2005            2004
-------------------------------------------------------------------------------------------------------------------
                                                                         -Thousands of Dollars-
<S>                                                       <C>          <C>             <C>             <C>
FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE              $ 11,401     $   15,549      $   16,387      $   28,053
   State Income Tax Expense, Net of Federal Deduction        1,499          2,043           2,153           3,687
   Depreciation Differences (Flow Through Basis)               708            789           2,124           2,367
   Tax Credits                                                (205)          (346)           (466)           (604)
   Valuation Allowance                                      (1,000)             -          (1,000)            500
   Other                                                      (193)           169            (199)          1,116
-------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL AND STATE INCOME TAX EXPENSE                $ 12,210     $   18,204      $   18,999      $   35,119
===================================================================================================================
</TABLE>

     The total Federal and State Income Tax Expense in the table above is
included in UniSource Energy and TEP's income statements. In the third quarter
of 2005, TEP released $1 million of valuation allowance based on an upward
revision of its estimated taxable income.

RECENT IRS ACTION

     On its 2002 tax return, TEP filed for an automatic change in accounting
method relating to the capitalization of indirect costs to the production of
electricity and self-constructed assets. The new accounting method was also used
on the 2003 and 2004 returns for TEP, UNS Gas and UNS Electric.

     In August 2005, the Internal Revenue Service issued a ruling which draws
into question the ability of electric and gas utilities to use the new
accounting method. TEP believes the IRS position is without merit, and intends
to vigorously pursue this issue. However, if the IRS were to prevail and
disallow the change in its entirety TEP, UNS Gas and UNS Electric could be
required to pay up to $18 million, $1 million and $2 million, respectively, in
taxes and interest in the first half of 2006. Such payment would not affect
total tax expense.


                                       27
<PAGE>


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

   OTHER TAXES

     TEP, UNS Gas and UNS Electric act as conduits or collection agents for
excise tax (sales tax) as well as franchise fees and regulatory assessments.
They record liabilities payable to governmental agencies when they bill their
customers for these amounts. Neither the amounts billed nor payable are
reflected in the income statement.

NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS
--------------------------------------

     The FASB recently issued the following Statements of Financial Accounting
Standards (FAS), FASB Interpretations (FIN), and FASB Staff Positions (FSP):

     o    FIN 47, Accounting for Conditional Asset Retirement Obligations,
          issued March 2005, provides guidance for a legal obligation to perform
          an asset retirement activity in which the timing and (or) method of
          settlement are conditional on a future event that may or may not be
          within the control of the entity. The obligation to perform the asset
          retirement activity is unconditional even though uncertainty exists
          about the timing and (or) method of settlement. FIN 47 requires a
          liability be recognized for the fair value of a conditional asset
          retirement obligation if the fair value can be reasonably estimated.
          FIN 47 is required to be applied by December 31, 2005. We are in the
          process of evaluating the impact of FIN 47 and have identified
          conditional asset retirement obligations associated with asbestos
          wrapping at our Sundt Generating Station. We are currently evaluating
          the amount of this obligation. Additional obligations may be
          identified as we continue our evaluation.
     o    FSP FIN 46(R)-5, Implicit Variable Interests under FASB Interpretation
          No. 46 (revised December 2003), Consolidation of Variable Interest
          Entities, issued March 2005, addresses whether a reporting enterprise
          should consider whether it holds an implicit variable interest in a
          variable interest entity (VIE) or potential VIE when specific
          conditions exist. The guidance in FSP FIN 46(R)-5 was effective April
          1, 2005, and did not have a significant impact on our financial
          statements.
     o    FAS 151, Inventory Costs, issued November 2004, is an amendment of
          Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory
          Pricing. FAS 151 clarifies that abnormal amounts of idle facility
          expense, freight, handling costs, and wasted materials (spoilage)
          should be recognized as current-period charges. FAS 151 also requires
          the allocation of fixed production overheads to inventory based on the
          normal capacity of the production facilities. FAS 151 is effective for
          inventory costs incurred during fiscal years beginning after June 15,
          2005. The adoption of FAS 151 is not expected to have a significant
          impact on our financial statements.
     o    FAS 153, Exchanges of Nonmonetary Assets, issued December 2004,
          requires nonmonetary exchanges be accounted for at fair value,
          recognizing any gains or losses, if their fair value is determinable
          within reasonable limits and the transaction has commercial substance.
          A nonmonetary exchange has commercial substance if future cash flows
          of the entity are expected to change significantly as a result of the
          exchange. FAS 153 is effective for nonmonetary asset exchange
          transactions occurring in fiscal periods beginning after June 15,
          2005. The adoption of FAS 153 is not expected to have a significant
          impact on our financial statements.
     o    FAS 154, Accounting Changes and Error Corrections, issued May 2005,
          provides guidance on the accounting for and reporting of accounting
          changes and error corrections. FAS 154 requires retrospective
          application to prior periods for a voluntary change in accounting
          principle, unless it is impracticable to do so. FAS 154 also provides
          guidance related to the reporting of a change in accounting estimate,
          a change in reporting entity and the correction of an error. FAS 154
          is effective for accounting changes and corrections of errors made in
          fiscal years beginning after December 15, 2005. The adoption of FAS
          154 is not expected to have a significant impact on our financial
          statements.
     o    FSP FAS 109-1, Application of FASB Statement No. 109, Accounting for
          Income Taxes, to the Tax Deduction on Qualified Production Activities
          Provided by the American Jobs Creation Act of 2004, issued in December
          2004, provides guidance on the application of FAS 109 to the provision
          within the American Jobs Creation Act of 2004 that provides a tax
          deduction, beginning in 2005, on qualified production activities,
          including a company's electric generation activities. Under FSP FAS
          109-1, recognition of the tax deduction on qualified production
          activities is ordinarily reported in the year it is earned. FSP FAS
          109-1 did not have a significant impact on our financial statements.


                                       28
<PAGE>


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

     In June 2004, the EITF published Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-1). EITF 03-1 provides application guidance on impairment of securities
accounted for under FAS 115, Accounting for Certain Investments in Debt and
Equity Securities, and cost method investments and requires certain quantitative
and qualitative disclosures for securities that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The disclosure requirements are effective for reporting periods
ending after December 31, 2003. The FASB issued FSP EITF Issue 03-1-1, Effective
Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments in
September 2004 delaying the effective date of the application guidance on
impairment of securities until the final issuance of FSP EITF Issue 03-1-a. As
of November 4, 2005, a final FSP EITF Issue 03-1-a has not been issued. The
adoption of EITF 03-1 is not expected to have a significant impact on our
financial statements.

NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------

     A reconciliation of Net Income to Net Cash Flows - Operating Activities
follows:

<TABLE>
<CAPTION>
                                                                                       UNISOURCE ENERGY
                                                                                --------------------------------
                                                                                       Nine Months Ended
                                                                                         September 30,
                                                                                     2005             2004
------------------------------------------------------------------------------- ---------------- ---------------
                                                                                    -Thousands of Dollars-
<S>                                                                                <C>             <C>
NET INCOME                                                                         $  24,082       $   43,021
ADJUSTMENTS TO RECONCILE NET INCOME
  TO NET CASH FLOWS
     Depreciation and Amortization Expense                                           102,046          108,068
     Depreciation Recorded to Fuel and Other O&M Expense                               4,576            4,636
     Amortization of Transition Recovery Asset                                        43,865           39,712
     Net Unrealized Loss (Gain) on TEP Forward Electric Sales                         10,066           (1,272)
     Net Unrealized (Gain) Loss on TEP Forward Electric Purchases                       (779)             250
     Net Unrealized Gain on MEG Trading Activities                                    (5,413)          (4,020)
     Amortization of Deferred Debt-Related Costs included in Interest Expense          3,502            2,622
     Loss on Reacquired Debt                                                           5,261            1,839
     Provision for Bad Debts                                                           2,140            2,096
     Deferred Income Taxes                                                            16,684           11,544
     Loss (Income) from Equity Method Entities                                           109           (5,744)
     Other                                                                             4,152           17,012
     Changes in Assets and Liabilities which Provided (Used)
       Cash Exclusive of Changes Shown Separately
         Accounts Receivable                                                          (7,840)         (18,516)
         Materials and Fuel Inventory                                                (10,897)          (5,453)
         Accounts Payable                                                            (17,869)          12,729
         Interest Accrued                                                            (18,952)         (20,576)
         Taxes Accrued                                                                 6,352           37,173
         Other Current Assets                                                         82,335          (49,599)
         Other Current Liabilities                                                   (67,205)          73,799
------------------------------------------------------------------------------- ---------------- ---------------
NET CASH FLOWS - OPERATING ACTIVITIES                                              $ 176,215       $  249,321
=============================================================================== ================ ===============
</TABLE>


                                       29
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                              TEP
                                                                                --------------------------------
                                                                                       Nine Months Ended
                                                                                         September 30,
                                                                                     2005             2004
------------------------------------------------------------------------------- ---------------- ---------------
                                                                                    -Thousands of Dollars-
<S>                                                                                <C>             <C>
NET INCOME                                                                         $   27,822      $   45,033
ADJUSTMENTS TO RECONCILE NET INCOME
  TO NET CASH FLOWS
     Depreciation and Amortization Expense                                             86,903          94,035
     Depreciation Recorded to Fuel and Other O&M Expense                                4,763           4,636
     Amortization of Transition Recovery Asset                                         43,865          39,712
     Net Unrealized Loss (Gain) on TEP Forward Electric Sales                          10,066          (1,272)
     Net Unrealized (Gain) Loss on TEP Forward Electric Purchases                        (779)            250
     Amortization of Deferred Debt-Related Costs included in Interest Expense           2,775           2,392
     Loss on Reacquired Debt                                                            5,261           1,839
     Provision for Bad Debts                                                            1,645           1,171
     Deferred Income Taxes                                                             19,466           8,781
     Income from Equity Method Entities                                                  (281)           (190)
     Interest on Note Receivable from UniSource Energy                                 (1,684)         (6,984)
     Other                                                                              8,989          17,779
     Changes in Assets and Liabilities which Provided (Used)
       Cash Exclusive of Changes Shown Separately
         Accounts Receivable                                                          (30,885)        (26,721)
         Materials and Fuel Inventory                                                  (8,701)         (3,259)
         Accounts Payable                                                             (11,811)          7,642
         Interest Accrued                                                             (17,612)        (17,716)
         Interest Received from UniSource Energy                                       11,013               -
         Income Taxes Payable                                                         (15,946)         15,556
         Taxes Accrued                                                                 12,908          23,933
         Other Current Assets                                                           5,256           6,187
         Other Current Liabilities                                                     (3,569)          2,882
------------------------------------------------------------------------------- ---------------- ---------------
NET CASH FLOWS - OPERATING ACTIVITIES                                              $  149,464      $  215,686
=============================================================================== ================ ===============
</TABLE>

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

     With respect to the unaudited condensed consolidated financial information
of UniSource Energy and TEP for the three-month and nine-month periods ended
September 30, 2005 and 2004, PricewaterhouseCoopers LLP reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated November 4,
2005 appearing herein states that they did not audit and they do not express an
opinion on that unaudited condensed consolidated financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section
11 of the Securities Act of 1933 (the Act) for their report on the unaudited
condensed consolidated financial information because that report is not a
"report" or a "part" of a registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.


                                       30
<PAGE>


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

     Management's Discussion and Analysis explains the results of operations,
the general financial condition, and the outlook for UniSource Energy and its
four primary business segments and includes the following:

     o    outlook and strategies,
     o    operating results during the third quarter and first nine months of
          2005 compared with the same periods in 2004,
     o    factors which affect our results and outlook,
     o    liquidity, capital needs, capital resources, and contractual
          obligations,
     o    dividends, and
     o    critical accounting estimates.

     Management's Discussion and Analysis should be read in conjunction with
UniSource Energy and TEP's 2004 Annual Report on Form 10-K and with the
Condensed Consolidated Financial Statements, beginning on page 2, which present
the results of operations for the three and nine months ended September 30, 2005
and 2004. Management's Discussion and Analysis explains the differences between
periods for specific line items of the Condensed Consolidated Financial
Statements.

     References in this report to "we" and "our" are to UniSource Energy and its
subsidiaries, collectively.

                          UNISOURCE ENERGY CONSOLIDATED

OVERVIEW OF CONSOLIDATED BUSINESS
---------------------------------

     UniSource Energy is a holding company that has no significant operations of
its own. Operations are conducted by UniSource Energy's subsidiaries, each of
which is a separate legal entity with its own assets and liabilities. UniSource
Energy owns substantially all of the outstanding common stock of TEP, and all of
the outstanding common stock of UniSource Energy Services, Inc. (UES),
Millennium Energy Holdings, Inc. (Millennium), and UniSource Energy Development
Company (UED).

     TEP, an electric utility, has provided electric service to the community of
Tucson, Arizona, for over 100 years. UES began operations in August 2003. UES,
through its two operating subsidiaries, UNS Gas, Inc. (UNS Gas) and UNS
Electric, Inc. (UNS Electric), provides gas and electric service to 30
communities in northern and southern Arizona. Millennium invests in unregulated
businesses, including Global Solar Energy, Inc. (Global Solar), a developer and
manufacturer of thin-film photovoltaic cells and modules. Millennium is seeking
additional investors for Global Solar, or may sell all or part of its interest,
or a combination of both. UED engages in developing generating resources and
other project development activities, including facilitating the expansion of
the Springerville Generating Station, but has no significant operations. We
conduct our business in four primary business segments - TEP's Electric Utility
segment, UNS Gas, UNS Electric and Global Solar.

     UniSource Energy was incorporated in the State of Arizona on March 8, 1995
and obtained regulatory approval to form a holding company in November 1997. On
January 1, 1998, TEP and UniSource Energy exchanged shares of stock resulting in
TEP becoming a subsidiary of UniSource Energy. Following the share exchange, TEP
transferred the stock of its subsidiary Millennium to UniSource Energy.

OUTLOOK AND STRATEGIES
----------------------

     OPERATING PLANS AND STRATEGIES

     Our financial prospects and outlook for the next few years will be affected
by many competitive, regulatory and economic factors. Our plans and strategies
include the following:

     o    Continue to integrate UES' businesses with UniSource Energy's other
          businesses.

     o    Oversee the construction of Springerville Unit 3 and continue to
          enhance the value of existing assets by working with Salt River
          Project to facilitate the development of Springerville Unit 4.


                                       31
<PAGE>


     o    Reduce UniSource Energy's debt, using some of our excess cash flows.

     o    Enhance the value of TEP's transmission system while continuing to
          provide reliable access to generation for TEP and UES' retail
          customers and market access for all generating assets.

     o    Promote economic development in our service territories.

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

     o    Expand TEP's and UNS Electric's portfolio of generating and purchased
          power resources to meet growing retail energy demand.

     o    Increase production and sales of Global Solar's thin-film photovoltaic
          cells and seek additional investors, or sell all or part of
          Millennium's interest, or a combination of both.

     o    Manage the exit of our other Millennium investments to maximize their
          value to shareholders.

     To accomplish our goals, during 2005 we expect to spend the following
amounts on capital expenditures:

<TABLE>
<CAPTION>
                  Actual Year-to-Date         Estimate
                  September 30, 2005       Full Year 2005
------------------------------------------------------------
                           -Millions of Dollars-
<S>                     <C>                      <C>
TEP                      $108                     $153
UNS Gas                    18                       23
UNS Electric               17                       31
------------------------------------------------------------
</TABLE>

     While we believe that our plans and strategies will continue to have a
positive impact on our financial prospects and position, we recognize that we
continue to be highly leveraged, and as a result, our access to the capital
markets may be limited or more expensive than for less leveraged companies.

RESULTS OF OPERATIONS
---------------------

     THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004

     UniSource Energy recorded net income of $18 million, or 53 cents per
average basic share of Common Stock, in the third quarter of 2005, compared with
net income of $24 million, or 69 cents per average basic share of Common Stock,
in the same period of 2004. The following factors contributed to the decline:

     2005 included:

     o    a $27 million decrease in TEP's gross margin (the sum of retail and
          wholesale electric revenues less fuel and purchased power expense) due
          to the following:

          -    a $34 million increase in purchased power expense due to higher
               market prices for power and a 48% increase in kWh purchased. The
               increase in the quantity of purchased power was due in part to a
               26 day unplanned outage at TEP's 380 MW Springerville Unit 2
               coal-fired generating station that required TEP to buy
               replacement power in the wholesale market. Springerville Unit 2
               was taken out of service due to a control system malfunction and
               subsequent mechanical problem with the turbine; and

          -    a $6 million decline in wholesale revenues. Wholesale revenues
               would have increased $4 million due to higher market prices for
               power; however, unrealized losses on forward wholesale sales
               increased $10 million due to gas supply shortages caused by
               hurricane activity in the Gulf of Mexico, which led to higher
               market prices for power; partially offset by


                                       32
<PAGE>


          -    a $16 million increase in retail revenues due to warmer weather
               and a 3% increase in TEP's customer base.

     o    a $6 million decrease in other operations and maintenance (O&M)
          primarily due to a $4 million pre-tax gain on the sale of excess
          emissions allowances by TEP;

     o    a $3 million decrease in total interest expense due to: lower fees
          under TEP's new Credit Agreement entered into in May 2005 and the
          repurchase and redemption of $225 million of TEP debt in May 2005;

     o    a $2 million decline in depreciation and amortization related to the
          extension of useful lives of certain generating assets at TEP in July
          2004 and April 2005; and

     o    a $2 million increase in other income due to lower expenses related to
          Millennium investments.

   NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004

     UniSource Energy recorded net income of $24 million, or 69 cents per
average basic share of Common Stock, in the nine months ended September 30,
2005, compared with net income of $43 million, or $1.25 per average basic share
of Common Stock, in the same period of 2004. The following factors contributed
to the decline:

     2005 included:

     o    a $45 million decrease in TEP's gross margin (the sum of retail and
          wholesale electric revenues less fuel and purchased power expense) due
          to the following:

          -    a $48 million increase in purchased power expense due to
               replacement power costs resulting from planned and unplanned coal
               plant maintenance outages, higher purchased power costs driven
               primarily by higher natural gas costs and additional summer
               purchased power to replace energy from the expiration of the SCE
               Exchange in May 2005; and

          -    a $13 million decline in wholesale revenues. Unrealized losses on
               forward wholesale sales increased $10 million due to gas supply
               shortages caused by hurricane activity in the Gulf of Mexico,
               which let to higher market prices for power. In addition, planned
               and unplanned outages at TEP's coal plants limited the
               availability of excess power to sell into the wholesale market;
               partially offset by

          -    a $20 million increase in retail revenues due to warm weather and
               a 3% increase in TEP's customer base.

     o    a $3 million decrease in other O&M expense. Higher maintenance costs
          at TEP's coal-fired plants were offset by a $7 million pre-tax gain on
          the sale of excess emissions allowances by TEP;

     o    a $6 million decline in depreciation and amortization primarily
          related to the extension of useful lives of certain generating assets
          at TEP in July 2004 and April 2005; and

     2004 included:

     o    a $3 million after-tax gain at Millennium from its investment in
          Haddington.


                                       33
<PAGE>


   CONTRIBUTION BY BUSINESS SEGMENT

     The table below shows the contributions to our consolidated after-tax
earnings by our four business segments.

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED               NINE MONTHS ENDED
                                            SEPTEMBER 30,                    SEPTEMBER 30,
                                        2005           2004            2005             2004
----------------------------------- -------------- -------------- --------------- ---------------
                                        -Millions of Dollars-            -Millions of Dollars-
<S>                                    <C>            <C>            <C>             <C>
BUSINESS SEGMENT
   TEP                                 $   20         $   26         $   28          $   45
   UNS Gas                                 (2)            (2)             2               2
   UNS Electric                             2              2              4               4
   Global Solar                            (2)            (2)            (5)             (4)
   Other (1)                                -              -             (5)             (4)
----------------------------------- -------------- -------------- --------------- ---------------
       Consolidated Net Income         $   18         $   24         $   24          $   43
=================================== ============== ============== =============== ===============
<FN>
(1) Includes: UniSource Energy parent company expenses, including in 2005,
interest expense (net of tax) on the UniSource Energy Convertible Senior Notes,
on the UniSource Energy Credit Agreement, and on the note payable from UniSource
Energy to TEP; and in 2004 includes costs associated with the proposed
acquisition of UniSource Energy; income and losses from other Millennium
investments; and income and losses from UED.
</FN>
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

   UNISOURCE ENERGY CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
    NINE MONTHS ENDED SEPTEMBER 30,             2005              2004
                                                 -Millions of Dollars-
    -------------------------------------- ----------------------------------
    <S>                                         <C>              <C>
    Cash provided by (used in):
       Operating Activities                     $  176           $  249
       Investing Activities                       (116)             (98)
       Financing Activities                       (111)             (89)
    -------------------------------------- ---------------- -----------------
    Net Increase (Decrease) in Cash             $  (51)          $   62
    ====================================== ================ =================
</TABLE>

     UniSource Energy's consolidated cash flows are provided primarily from
retail and wholesale energy sales at TEP, UNS Gas and UNS Electric, net of the
related payments for fuel and purchased power. Generally, cash from operations
is lowest in the first quarter and highest in the third quarter due to TEP's
summer peaking load.

     We use our available cash primarily to:

     o    finance capital expenditures at TEP, UNS Gas and UNS Electric;
     o    pay dividends to shareholders; and
     o    reduce leverage by repaying or repurchasing debt.

     The primary source of liquidity for UniSource Energy, the parent company,
is dividends it receives from its subsidiaries, primarily TEP. Under our tax
sharing agreement, our subsidiaries make income tax payments to UniSource
Energy, which makes payments on behalf of the consolidated group.

     As of November 2, 2005, cash and cash equivalents available to UniSource
Energy was approximately $106 million.

     OPERATING ACTIVITIES

     In the first nine months of 2005, net cash flows from operating activities
decreased by $73 million compared with the same period in 2004. The following
factors contributed to the change:


                                       34
<PAGE>


     2005 included:

     o    a $33 million increase in cash receipts from electric and gas sales;
          offset by

          -    a $14 million increase in fuel costs paid and a $64 million
               increase in purchased power costs paid due to planned and
               unplanned coal plant outages, as well as higher natural gas
               prices;

     o    a $6 million increase in payments for O&M costs related to the outages
          at TEP's plants;

     o    a $6 million increase in wages paid due to a greater number of
          employees, rising wage levels and higher incentive compensation; and

     o    an $8 million decrease in total interest paid due to lower amounts of
          outstanding long-term debt and capital lease obligations.

     2004 included:

     o    $17 million received by TEP related to the return to TEP of a deposit
          for its 1992 Mortgage.

     INVESTING ACTIVITIES

     Net cash used for investing activities was $18 million higher in the first
nine months of 2005 compared with the same period in 2004, primarily due to the
following factors:

     2005 included:

     o    a $35 million increase in capital expenditures due to TEP's share of
          the construction costs of the Luna Energy Facility, maintenance
          expenditures at TEP's generating plants and information technology
          upgrades to TEP's customer service system; offset by

     o    other cash receipts of $9 million due primarily to the redemption of a
          $5 million certificate of deposit and proceeds from the sale of land
          at TEP; and

     o    cash receipts of $9 million by Millennium related to a return on one
          of its investments and a payment received on a note receivable.

     2004 included:

     o    $10 million received as a return on a Millennium investment in
          Haddington and a payment received on a note receivable held by Nations
          Energy;

     o    other cash used of $5 million related to the investment in a
          certificate of deposit by TEP; and

     o    a $4 million purchase of Springerville lease debt.

     FINANCING ACTIVITIES

     Net cash flows used for financing activities were $22 million higher in the
first nine months of 2005 compared with the same period in 2004. The following
factors contributed to the change:

     2005 included:

     o    proceeds of $240 million related to UniSource Energy's issuance of
          $150 million of Convertible Senior Notes and borrowings of $90 million
          under its term loan;

     o    $256 million increase in repayments on long-term debt related to TEP's
          early redemption of $53 million of First Mortgage Bonds in the first
          three months of 2005, the repurchase and redemption of $225 million of


                                       35
<PAGE>


          fixed-rate tax exempt debt in May 2005 and $3 million in principal
          payments on the UniSource Energy term loan;

     o    a $4 million increase in dividends paid to UniSource Energy
          shareholders; and

     o    a $3 million increase in TEP's payments on capital lease obligations.


     As a result of the activities described above, our consolidated cash and
cash equivalents decreased to $103 million at September 30, 2005, from $154
million at December 31, 2004. We invest cash balances in high-grade money market
securities with an emphasis on preserving the principal amounts invested.

     At November 2, 2005, our consolidated cash balance, including cash
equivalents, was approximately $106 million.

     We believe that we will continue to have sufficient cash flow to cover our
capital needs, as well as required debt payments and dividends to shareholders.
In the event that we experience lower cash from operations in 2005, the Company
will use its revolving credit facilities to fund its cash needs.

     Convertible Senior Notes
     ------------------------

     In March 2005, UniSource Energy issued $150 million of 4.50% Convertible
Senior Notes due 2035. The Convertible Senior Notes are unsecured and are not
guaranteed by TEP or any other UniSource Energy subsidiary. Each $1,000 of
Convertible Senior Notes is convertible into 26.6667 shares of our Common Stock
at any time, representing a conversion price of approximately $37.50 per share
of our Common Stock, subject to adjustment in certain circumstances.

     UniSource Credit Agreement
     --------------------------

     In April 2005, UniSource Energy entered into a $105 million five-year
credit agreement with a group of lenders (UniSource Credit Agreement) which
expires in April 2010. The UniSource Credit Agreement includes a $90 million
term loan facility and a $15 million revolving credit facility. Quarterly
principal payments of $1.25 million are due beginning June 30, 2005, with the
balance due at maturity.

     We borrowed $80 million under the $90 million term loan on May 10, 2005,
and the remaining $10 million on June 29, 2005. We made required $1.25 million
principal payments on June 30 and September 30, 2005, leaving an outstanding
balance on the term loan of $87.5 million.

     We pay interest on the term loan and on borrowings under the revolving
credit facility at LIBOR plus 1.75% or the agent bank's reference rate plus
0.75%. We paid a commitment fee of 0.50% on the unused portion of the term loan
until it was fully drawn at June 29, 2005, and pay a commitment fee of 0.50% on
the unused portion of the revolving credit facility.

     The UniSource Credit Agreement restricts additional indebtedness, liens,
mergers, sales of assets, and investments and acquisitions. We must also meet:
(1) a minimum cash flow to debt service coverage ratio for UniSource Energy on a
standalone basis and (2) a maximum leverage ratio on a consolidated basis. We
may pay dividends if, after giving effect to the dividend payment, we have more
than $15 million of unrestricted cash and unused revolving credit. As of
September 30, 2005, we were in compliance with the terms of the UniSource Credit
Agreement.

     If an event of default occurs, the UniSource Credit Agreement may become
immediately due and payable. An event of default includes failure to make
required payments under the UniSource Credit Agreement, failure of UniSource
Energy or certain subsidiaries to make payments or default on debt greater than
$20 million, or certain bankruptcy events at UniSource Energy or certain
subsidiaries.

     We expect that we may borrow from time to time under the revolving credit
facility to meet temporary cash needs. As of September 30, 2005, we had no
borrowings outstanding under the revolving credit facility.


                                       36
<PAGE>


     Use of Proceeds
     ---------------

     On March 1, 2005, we received $146 million of net proceeds from the sale of
the Convertible Senior Notes, which was used as follows:

     o    to repay our $95 million promissory note to TEP plus accrued interest
          of $11 million on March 1, 2005;
     o    to make a capital contribution of $6 million to UNS Gas and a capital
          contribution of $4 million to UNS Electric on March 10, 2005; and
     o    to make a capital contribution of $110 million to TEP on May 10, 2005,
          using the remaining $30 million from the sale of the notes, along with
          $80 million of proceeds from the term loan.

     TEP used the proceeds from the capital contribution, the inter-company note
repayment (described above), along with borrowings under its revolving credit
facility to repurchase and redeem $225 million of fixed-rate tax-exempt debt
obligations. See, Tucson Electric Power, Bond Repurchases and Redemptions, and
Tucson Electric Power Company, Liquidity and Capital Resources, Dividends on
Common Stock, below.

   GUARANTEES AND INDEMNITIES

     In the normal course of business, UniSource Energy and certain subsidiaries
enter into various agreements providing financial or performance assurance to
third parties on behalf of certain subsidiaries. We enter into these agreements
primarily to support or enhance the creditworthiness of a subsidiary on a
stand-alone basis. The most significant of these guarantees at September 30,
2005 are:

     -    UES' guarantee of $160 million of senior unsecured notes issued by UNS
          Gas and UNS Electric to purchase the Citizens Communication Company
          (Citizens') Arizona gas and electric system assets;
     -    UES' guarantee of a $40 million revolving credit facility available to
          UNS Gas and UNS Electric;
     -    UniSource Energy's guarantee of approximately $6 million in natural
          gas and supply payments and building lease payments for UNS Gas and
          UNS Electric and subsidiaries of Millennium.

     To the extent liabilities exist under the contracts subject to these
guarantees, such liabilities are included in the consolidated balance sheets.

     In addition, UniSource Energy and its subsidiaries have indemnified the
purchasers of interests in certain investments from additional taxes due for
years prior to the sale. The terms of the indemnifications provide for no
limitation on potential future payments; however, we believe that we have abided
by all tax laws and paid all tax obligations. We have not made any payments
under the terms of these indemnifications to date.

     We believe that the likelihood that UniSource Energy or TEP would be
required to perform or otherwise incur any significant losses associated with
any of these guarantees is remote.

   CONTRACTUAL OBLIGATIONS

     There are no significant changes in our contractual obligations or other
commercial commitments from those reported in our 2004 Annual Report on Form
10-K, other than: the UniSource Energy Credit Agreement (described above); the
repayment of debt obligations at TEP and the termination of TEP's 1941 Mortgage,
described below; and the UNS Gas/UNS Electric Credit Agreement, described below.

   DIVIDENDS ON COMMON STOCK

     The following table shows the dividends declared to UniSource Energy
shareholders for 2005.

<TABLE>
<CAPTION>
                                                                     DIVIDEND AMOUNT
  DECLARATION DATE       RECORD DATE          PAYMENT DATE       PER SHARE OF COMMON STOCK
-------------------- -------------------- -------------------- -----------------------------
 <S>                 <C>                  <C>                             <C>
 February 4, 2005    February 15, 2005    March 8, 2005                   $0.19
 May 6, 2005         May 18, 2005         June 10, 2005                    0.19
 September 9, 2005   September 20, 2005   October 3, 2005                  0.19
-------------------- -------------------- -------------------- -----------------------------
</TABLE>


                                       37
<PAGE>


   INCOME TAX MATTERS

     Income Tax Position
     -------------------

     At September 30, 2005, UniSource Energy and TEP had, for federal and state
income tax filing purposes, the following carryforward amounts:

<TABLE>
<CAPTION>
                                   UNISOURCE ENERGY                            TEP
                                 Amount            Expiring            Amount            Expiring
------------------------- ---------------------- ------------- ----------------------- -------------
                          -Millions of Dollars-      Year      -Millions of Dollars-       Year
<S>                               <C>             <C>                  <C>                  <C>
NET OPERATING LOSSES              $ 18            2021-2022            $  -                  -
INVESTMENT TAX CREDIT                6            2005-2024               6               2005-2024
AMT CREDIT                          93                -                  83                  -
------------------------- ---------------------- ------------- ----------------------- -------------
</TABLE>

     The $18 million in NOL carryforwards is subject to limitation due to a
reorganization of certain Millennium entities in December 2002. The future use
of these losses is dependent upon the generation of sufficient future taxable
income at the separate company level. See Critical Accounting Estimates,
Deferred Tax Valuation - TEP and Millennium, below.

     Internal Revenue Service Matters
     --------------------------------

     On its 2002 tax return, TEP filed for an automatic change in accounting
method relating to the capitalization of indirect costs to the production of
electricity and self-constructed assets. The new accounting method was also used
on the 2003 and 2004 returns for TEP, UNS Gas and UNS Electric.

     In August 2005, the Internal Revenue Service (IRS) issued a ruling which
draws into question the ability of electric and gas utilities to use the new
accounting method. TEP believes the IRS position is without merit and intends to
vigorously pursue this issue. However, if the IRS were to prevail and disallow
the change in its entirety, TEP, UNS Gas and UNS Electric could be required to
pay up to $18 million, $1 million and $2 million, respectively, in taxes and
interest in the first half of 2006. Such payments would not affect total tax
expense.


                                       38
<PAGE>


                          TUCSON ELECTRIC POWER COMPANY

RESULTS OF OPERATIONS
---------------------

     The financial condition and results of operations of TEP are currently the
principal factors affecting the financial condition and results of operations of
UniSource Energy on an annual basis. The following discussion relates to TEP's
utility operations, unless otherwise noted.

<TABLE>
<CAPTION>
                                                      SALES                 OPERATING REVENUE
THREE MONTHS ENDED SEPT. 30,                   2005           2004         2005          2004
                                                -Millions of kWh-         -Millions of Dollars-
------------------------------------------ -------------- ------------- ------------ --------------
<S>                                             <C>          <C>         <C>          <C>
ELECTRIC RETAIL SALES:
  Residential                                   1,326         1,203      $ 125        $   113
  Commercial                                      574           548          60            58
  Industrial                                      669           626          49            46
  Mining                                          190           214           9            10
  Public Authorities                               70            64           5             5
------------------------------------------ -------------- ------------- ------------ --------------
TOTAL ELECTRIC RETAIL SALES                     2,829         2,655      $  248         $ 232
------------------------------------------ -------------- ------------- ------------ --------------
ELECTRIC WHOLESALE SALES DELIVERED:
  Long-term Contracts                             286           292          14            14
  Other Sales                                     374           435          24            22
  Transmission                                      -             -           2             2
  Net Unrealized Gain (Loss) on Forward
     Sales of Energy                                -             -          (9)           (1)
------------------------------------------ -------------- ------------- ------------ --------------
TOTAL ELECTRIC WHOLESALE SALES                    660           727          31            37
------------------------------------------ -------------- ------------- ------------ --------------
         TOTAL ELECTRIC SALES                   3,489         3,382      $  279       $   269
========================================== ============== ============= ============ ==============

WEATHER DATA:                                    2005            2004
   COOLING DEGREE DAYS
   Three Months Ended Sept. 30,                1,023          876
   10-Year Average                               949          951
   % Over / (Under) Prior Year                   17%         (15%)
   % Over / (Under) 10-Year Average               8%          (8%)
------------------------------------------ -------------- ------------- ------------ --------------
</TABLE>

     Total revenues from kWh sales to retail customers increased by $16 million,
or 7%, in the third quarter of 2005 compared with the same period last year.
Residential kWh sales increased 10% and commercial kWh sales increased 5%,
benefiting from warmer weather and customer growth. In July 2005, TEP set a new
record retail peak of 2,225 MW. Cooling degree days were 17% higher than last
year and 8% above the 10-year average. The total number of retail customers as
of September 30, 2005 was 382,325, up 3% from a year ago. Total retail kWh sales
increased by 7% in the third quarter of 2005 compared with the same period last
year.

     Wholesale revenues decreased $6 million, or 16%, in the third quarter of
2005 compared with the third quarter of 2004, primarily due to a $10 million
increase in unrealized losses on forward wholesale sales, due to higher market
prices for power resulting from hurricane activity in the Gulf of Mexico. In the
third quarter of 2005, wholesale sales opportunities were limited due to higher
retail energy demand and an unplanned outage at Springerville Unit 2. The 380 MW
coal-fired generating station was taken out of service for 26 days beginning
August 11, 2005 due to a control system malfunction and subsequent mechanical
problem with the turbine. These kWh sales limitations were partially offset by
higher market prices. The average wholesale market price of energy was $68 per
MWh in the third quarter of 2005, compared with $45 per MWh in the comparable
period in 2004.

     The table below summarizes the expected reversal of unrealized losses on
forward wholesale sales (net of unrealized gains on forward power purchases) at
the time the contracts settle. These estimates exclude any increases or
decreases in the market value of forward wholesale sales during the contract
settlement periods.


                                       39
<PAGE>


<TABLE>
<CAPTION>
                                                   REVERSAL AMOUNT
CONTRACT SETTLEMENT PERIOD                      -Millions of Dollars-
----------------------------------------- ----------------------------------
<S>                                                      <C>
4th Quarter Ending December 31, 2005                     $3
Six Months Ending June 30, 2006                           5
----------------------------------------- ----------------------------------
</TABLE>

See Factors Affecting Results of Operations, Western Energy Markets, Market
Prices, below.

<TABLE>
<CAPTION>
                                                         SALES                 OPERATING REVENUE
NINE MONTHS ENDED SEPT. 30,                       2005           2004         2005          2004
                                                   -Millions of kWh-         -Millions of Dollars-
--------------------------------------------- -------------- ------------- ------------ --------------
<S>                                                <C>            <C>         <C>         <C>
ELECTRIC RETAIL SALES:
  Residential                                       2,883         2,748       $ 264       $   253
  Commercial                                        1,423         1,384         148           145
  Industrial                                        1,777         1,719         129           125
  Mining                                              634           611          30            28
  Public Authorities                                  180           180          13            13
--------------------------------------------- -------------- ------------- ------------ --------------
TOTAL ELECTRIC RETAIL SALES                         6,897         6,642      $  584       $   564
--------------------------------------------- -------------- ------------- ------------ --------------
ELECTRIC WHOLESALE SALES DELIVERED:
  Long-term Contracts                                 871           919          41            42
  Other Sales                                       1,304         1,633          71            74
  Transmission                                          -             -           5             6
  Net Unrealized Gain (Loss) on Forward
     Sales of Energy                                    -             -          (9)           (1)
--------------------------------------------- -------------- ------------- ------------ --------------
TOTAL ELECTRIC WHOLESALE SALES                      2,175         2,552          108          121
--------------------------------------------- -------------- ------------- ------------ --------------
         TOTAL ELECTRIC SALES                       9,072         9,194      $  692       $   685
============================================= ============== ============= ============ ==============

WEATHER DATA:                                        2005            2004
   COOLING DEGREE DAYS
   Nine Months Ended Sept. 30,                    1,477         1,283
   10-Year Average                                1,384         1,369
   % Over / (Under) Prior Year                      15%          (15%)
   % Over / (Under) 10-Year Average                  7%           (6%)
   HEATING DEGREE DAYS
   Nine Months Ended Sept. 30,                      805          934
   10-Year Average                                  879          876
   % Over / (Under) Prior Year                     (14%)         24%
   % Over / (Under) 10-Year Average                 (8%)          7%
--------------------------------------------- -------------- ------------- ------------ --------------
</TABLE>

     Total revenues from kWh sales to retail customers increased by $20 million,
or 4%, in the first nine months of 2005 compared with the same period last year.
Mild winter weather during the first quarter was offset by customer growth and
warmer summer weather. Residential kWh sales increased 5% and commercial kWh
sales increased 3% during the first nine months of 2005.

     Wholesale revenues decreased $13 million, or 11%, in the first nine months
of 2005 compared with the same period in 2004 primarily due to a $10 million
increase in unrealized losses on forward wholesale sales, due to higher market
prices for power resulting from hurricane activity in the Gulf of Mexico.
Unrealized losses on forward wholesale sales are expected to reverse at the time
the contracts settle. In the third quarter of 2005, higher retail kWh sales and
planned and unplanned coal plant outages limited wholesale sales opportunities.
The impacts of lower kWh were partially offset by higher market prices. The
average wholesale market price of energy was $53 per MWh in the first nine
months 2005, compared with $43 per MWh in the same period last year. See Factors
Affecting Results of Operations, Western Energy Markets, Market Prices, below.


                                       40
<PAGE>


   OPERATING EXPENSES

     FUEL AND PURCHASED POWER EXPENSE

     TEP's fuel and purchased power expense, and energy resources for the third
quarters of 2005 and 2004 are shown in the table below.

<TABLE>
<CAPTION>
                                                   GENERATION                 EXPENSE
THREE MONTHS ENDED SEPTEMBER 30,               2005          2004         2005          2004
                                               -Millions of kWh-      -Millions of Dollars-
-------------------------------------------- ----------------------- -------------------------
<S>                                             <C>         <C>        <C>           <C>
Coal-Fired Generation                            2,823      2,924      $   49        $    47
Gas-Fired Generation                               191        218          18             17
-------------------------------------------- ----------- ----------- ------------ -------------
Total Generation                                 3,014      3,142          67             64
Purchased Power                                    761        513          63             29
-------------------------------------------- ----------- ----------- ------------ -------------
Total Resources                                  3,775      3,655      $  130        $    93
                                                                     ============ =============
Less Line Losses, Company Use and Other            286        273
-------------------------------------------- ----------- -----------
Total Energy Sold                                3,489      3,382
============================================ =========== ===========
</TABLE>

     Total fuel expense at TEP's generating plants was $3 million higher in the
third quarter of 2005 compared with the same period last year, despite lower
generating output. Coal-fired generation declined 101,000 MWh, or 3%, compared
with the third quarter of 2004 primarily due to an unplanned outage at
Springerville Unit 2. Despite the decline in coal-fired generation, coal-related
fuel expense increased $2 million compared with the third quarter of 2004 due to
a change in the generation mix, increased coal costs and $1 million of
fuel-related benefits at San Juan in the third quarter of 2004. Gas-fired
generation decreased by 27,000 MWh, however gas-related fuel expense increased
$1 million compared with last year due to rising natural gas prices. The average
price per MMBtu of gas at the Permian basin was 51% higher than in the same
period in 2004.

     Purchased power expense increased $34 million compared with the third
quarter of 2004, due to an increase of 48%, or 248,000 MWh, in power purchases
to replace energy lost during the Springerville Unit 2 outage and the expiration
of the SCE Exchange in May 2005. The agreement required SCE to provide 110 MW of
firm system capacity to TEP during the summer months (May through September) and
for TEP to return to SCE in the winter months (November through February) the
same amount of energy that TEP received during the preceding summer. In
addition, the average wholesale market price for power increased 23% compared
with the third quarter of 2004. In the third quarter of 2005, unrealized gains
on forward power purchases increased $2 million compared with the same period in
2004. See Factors Affecting Results of Operations, Western Energy Markets,
Market Prices, below.

<TABLE>
<CAPTION>
                                                   GENERATION                 EXPENSE
NINE MONTHS ENDED SEPTEMBER 30,                 2005        2004         2005          2004
                                                -Millions of kWh-      -Millions of Dollars-
--------------------------------------------- ----------------------- -------------------------
<S>                                               <C>        <C>         <C>           <C>
Coal-Fired Generation                             7,994      8,597       $  139        $   141
Gas-Fired Generation                                337        328           31             25
--------------------------------------------- ----------- ----------- ------------ -------------
Total Generation                                  8,331      8,925          170            166
Purchased Power                                   1,443        936          103             55
--------------------------------------------- ----------- ----------- ------------ -------------
Total Resources                                   9,774      9,861       $  273        $   221
                                                                      ============ =============
Less Line Losses, Company Use and Other             702        667
--------------------------------------------- ----------- -----------
Total Energy Sold                                 9,072      9,194
============================================= =========== ===========
</TABLE>

     During the first nine months of 2005, planned outages at Springerville Unit
2, San Juan Unit 2 and Four Corners Unit 5, the expiration of the SCE Exchange,
and an unplanned outage at Springerville Unit 2 during the third quarter led to
higher gas-related fuel costs and higher purchased power expenses. Total fuel
expense at TEP's generating plants was higher by $4 million in the first nine
months of 2005, compared to the same period last year. Lower coal-fired
generation costs were offset by an increase in gas-related fuel expense of $6
million, due to the higher use of TEP's gas-fired generating resources as well
as higher commodity prices for natural gas. The average price per MMBtu of gas
at the Permian basin was 20% higher than in the first nine months of 2004.

     Purchased power expense increased $48 million compared with the first nine
months of 2004, due to an increase of 54%, or 507,000 MWh, in power purchases.
In addition, the average wholesale market price for power was 51% higher


                                       41
<PAGE>


compared with the first nine months of 2004. In the first nine months of 2005,
unrealized gains on foward power purchases increased $2 million compared with
the same period in 2004. See Factors Affecting Results of Operations, Western
Energy Markets, Market Prices, below.

     The table below shows the average cost per kWh for TEP's generating plants
by fuel type.

<TABLE>
<CAPTION>
                        THREE MONTHS ENDED          NINE MONTHS ENDED
                          SEPTEMBER 30,                SEPTEMBER 30,
                        2005         2004          2005           2004
                         -cents per kWh-             -cents per kWh-
   ---------------- -------------------------- ----------------------------
   <S>                  <C>          <C>          <C>            <C>
   Coal                 1.74         1.60         1.74           1.64
   Gas                  9.06         7.64         8.98           7.78
   All fuels            2.21         2.02         2.04           1.86
   ---------------- ------------- ------------ ------------ ---------------
</TABLE>

     OTHER OPERATING EXPENSES

     Other O&M expense decreased $8 million in the third quarter of 2005,
compared with the same period last year; and decreased $3 million in the first
nine months of 2005 compared with the first nine months of 2004. O&M expenses
related to the plant outages described above were offset by the sale of excess
SO2 emissions allowances. During the third quarter and first nine months of
2005, TEP recorded gains of $4 million and $7 million, respectively, on the sale
of excess SO2 emissions allowances. See Factors Affecting Results of Operations,
Emissions Allowances, below.

     Depreciation and amortization decreased $3 million in the third quarter of
2005 and $7 million in the first nine months of 2005, compared with the same
periods last year, primarily due to the extension of useful lives of certain
generating assets at TEP in July 2004 and April 2005.

     Amortization of the Transition Recovery Asset (TRA) increased $1 million in
the third quarter of 2005 and $4 million in the first nine months of 2005.
Amortization of the TRA is the result of the Settlement Agreement with the ACC,
which changed the accounting method for TEP's generation operations. This item
reflects the recovery, through 2008, of transition recovery assets which were
previously regulatory assets of the generation business. The amount of
amortization is a function of the TRA balance and total kWh consumption by TEP's
distribution customers.

     The table below shows estimated annual TRA amortization and unamortized TRA
year-end balances for 2005 through 2008.

<TABLE>
<CAPTION>
                                ESTIMATED           UNAMORTIZED
                             TRA AMORTIZATION       TRA BALANCE
                                    -Millions of Dollars-
  ----------------------- --------------------- -------------------
           <S>                    <C>                 <C>
           2005                   $  55               $  169
           2006                      64                  105
           2007                      73                   32
           2008                      32                    -
  ----------------------- --------------------- -------------------
</TABLE>

     OTHER INCOME (DEDUCTIONS)

     In the first nine months of 2005, TEP's Income Statement included
inter-company Interest Income of $2 million. This represented Interest Income on
a promissory note TEP received from UniSource Energy in exchange for the
transfer to UniSource Energy of its stock in Millennium in 1998. UniSource
Energy repaid the inter-company promissory note on March 1, 2005. On UniSource
Energy's Consolidated Statement of Income, this Interest Income, as well as
UniSource Energy's related interest expense, was eliminated as an inter-company
transaction. See Liquidity and Capital Resources, TEP Cash Flows, Inter-Company
Note from UniSource Energy, below.


                                       42
<PAGE>


     INTEREST EXPENSE

     Total interest expense decreased by $6 million, or 15%, in the third
quarter of 2005, and $8 million or 7% in the first nine months of 2005, due to
debt retirements and lower fees under the TEP Credit Agreement entered into in
May 2005.

     When TEP entered into the new credit agreement, it expensed $2 million of
unamortized issuance costs associated with the prior credit agreement. Also in
May 2005, TEP repurchased and redeemed $225 million of debt and recorded a loss
of $3 million related to this transaction. For the first nine months of 2005,
the $5 million of expenses related to these two transactions was more than
offset by the lower rates under TEP's Credit Agreement and the interest savings
related to the $225 million of debt that was redeemed and repurchased.

     INCOME TAX EXPENSE

     Income tax expense decreased $6 million in the third quarter of 2005
compared with the same period in 2004, due to lower pre-tax income. In the first
nine months of 2005, income tax expense decreased $16 million compared with the
same period in 2004, due primarily to lower pre-tax income. Additionally, TEP
released $1 million of valuation allowance based on an upward revision of its
estimated taxable income.

FACTORS AFFECTING RESULTS OF OPERATIONS
---------------------------------------

   COMPETITION

     The electric utility industry has undergone significant regulatory change
in the last few years designed to encourage competition in the sale of
electricity and related services. However, the experience in California with
deregulation has caused many states, including Arizona, to re-examine the
viability of retail electric deregulation.

     On January 1, 2001, all of TEP's retail customers became eligible to choose
an alternate energy service provider (ESP). Certain portions of the ACC's rules
that enabled ESPs to compete in the retail market were invalidated by a recent
Arizona Court of Appeals decision described below. Currently, none of TEP's
retail customers are receiving service from ESPs.

     TEP has met all conditions required by the ACC to facilitate electric
retail competition, including ACC approval of TEP's direct access tariffs. ESPs
must meet certain conditions before electricity can be sold competitively in
TEP's service territory. Examples of these conditions include ACC certification
of ESPs, and execution by ESPs of, and compliance with, direct access service
agreements with TEP.

     In January 2005, an Arizona Court of Appeals decision became final in which
the Court held invalid certain portions of the ACC rules on retail competition
and related market pricing. Based on this decision, we expect that the ACC will
address the competition rules in an administrative proceeding. We cannot predict
what changes, if any, the ACC will make to the competition rules. See Rates,
Recent Motion Filed with ACC, below.

     TEP competes against gas service suppliers and others that provide energy
services. Other forms of energy technologies may provide competition to TEP's
services in the future, but to date, are not financially viable alternatives for
its retail customers. Self-generation by TEP's large industrial customers could
also provide competition for TEP's services in the future, but has not had a
significant impact to date.

     In the wholesale market, TEP competes with other utilities, power marketers
and independent power producers in the sale of electric capacity and energy.

   RATES

     TEP'S SETTLEMENT AGREEMENT AND RETAIL ELECTRIC COMPETITION RULES

     In September 1999, the ACC approved the Retail Electric Competition Rules
(Rules) that provided a framework for the introduction of retail electric
competition in Arizona. In November 1999, the ACC approved the Settlement
Agreement between TEP and certain customer groups related to the implementation
of retail electric competition in Arizona.


                                       43
<PAGE>


     The Rules and the Settlement Agreement established:

     o    a period, 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;
     o    the recovery through rates during the transition period of $450
          million of stranded generation costs through a fixed competitive
          transition charge (fixed CTC);
     o    capped rates for TEP retail customers through 2008;
     o    an ACC interim review of TEP retail rates in 2004;
     o    unbundling of electric services with separate rates or prices for
          generation, transmission, distribution, metering, meter reading,
          billing and collection, and ancillary services;
     o    a process for ESPs to become licensed by the ACC to sell generation
          services at market prices to TEP retail customers;
     o    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);
     o    transmission and distribution services would remain subject to
          regulation on a cost of service basis; and
     o    beginning in 2009, TEP's generation would be market based and its
          retail customers would pay the market rate for generation services.

     2004 General Rate Case Information
     ----------------------------------

     On June 1, 2004, as required by the Settlement Agreement, TEP filed general
rate case information with the ACC. TEP's filing does not propose any change in
retail rates, and under the terms of the Settlement Agreement, no rate case
filed by TEP through 2008 may result in a net rate increase. However, absent the
restriction on raising rates, TEP believes that the data in its filing would
justify an increase in retail rates of 16%.

     The general rate case information uses a historical test year ended
December 31, 2003 and establishes, based on TEP's standard offer service, that
TEP is experiencing a revenue deficiency of $111 million. The rate case
information includes, among other things, Springerville Unit 1 costs and other
generation costs including fuel costs in excess of those recovered through
existing rates. The proposed weighted cost of capital for the test year ended
December 31, 2003 is 8.78%, including an 11.5% return on equity (increased from
10.67% currently authorized). The rate case information uses a hypothetical 40%
equity capitalization (excluding capital lease obligations) rather than the
hypothetical 37.5% equity capitalization used in TEP's last general rate case.
As a result of the inter-company note repayment and the debt repurchases and
redemptions made earlier this year, TEP's actual equity capitalization at
September 30, 2005 improved to 41.0%.

     On June 24, 2005, intervenor testimony in TEP's 2004 rate review was due
and several intervenors filed their respective testimony. None of the intervenor
testimony filed proposed any increase or decrease to TEP's rates. On July 11,
2005, an ACC administrative law judge (ALJ) issued a procedural order suspending
the remaining testimony filing deadlines and hearing in the 2004 rate review.
The order indicated that the ALJ will evaluate the parties' positions and the
need for further proceedings.

     Despite TEP's position that it has a revenue deficiency and the intervenor
testimony recommending no change in rates, the ACC could conclude during this
2004 rate review process that TEP should decrease rates; any such determination
would be strongly opposed by TEP.

     Transition
     ----------

     The Settlement Agreement provides that TEP's fixed CTC will expire when
TEP's $450 million transition asset is fully amortized and recovered or on
December 31, 2008, whichever is earlier. Based on current projections of retail
sales, the TRA is expected to be fully amortized by mid-2008. The Settlement
Agreement also specifies that TEP's floating competitive transition charge
(floating CTC) will expire on December 31, 2008. This charge, which moves
inversely to changes in market-based generation services rates, presently
appears as a credit on retail customer bills. Based on current forward pricing
in the wholesale energy markets, TEP anticipates that the floating CTC will
continue to appear as a credit on retail customer bills through 2008. After the
expiration of the floating CTC, TEP's rates for generation services should be
market based.

     Absent any other change to TEP's retail rate structure, including continued
inability to recover actual costs, TEP estimates that the expiration of the
fixed CTC in 2008 (which has provided revenues, on average of .93 cents per kWh
sold, or approximately $80 million annually) would result in an average decrease
in revenues from retail rates of approximately 12% relative to revenues from
current retail rates. However, absent any other change except the expiration of


                                       44
<PAGE>


the fixed CTC, the expiration in 2008 of the floating CTC would result in
market-based generation services rates which would, based on current pricing in
the wholesale energy markets, produce a retail rate increase in January 2009 of
approximately 25-30% relative to current retail rates.

     We are operating pursuant to the Settlement Agreement. However, we cannot
predict the future rate methodologies for TEP which the ACC could authorize,
including whether the ACC will permit or require market-based rates for
generation services, reinstate cost of service ratemaking for all or a portion
of TEP's generation services or require an alternate methodology to determine
rates for TEP's generation services. Under any circumstances, TEP will seek
appropriate recovery and return on its investment in assets used to serve its
customers.

     TEP expects that, in establishing future rates, TEP and the ACC will review
the entirety of the retail rate structure rather than focusing solely on any one
of the elements noted above. Although TEP is unable to predict the type and
level of future retail rates, TEP believes that the 2004 general rate case
information filed with the ACC evidences that there have been a number of
factors that have changed since the Settlement Agreement was approved that
justify increasing or maintaining retail rates at current levels.

     Declaratory Motion Filed with ACC
     ---------------------------------

     Given the recent court action described above, the ACC may revise its Rules
and rate methodologies prior to the expiration in 2008 of the Settlement
Agreement. A new structure could replace that established pursuant to the
Settlement Agreement prior to January 2009.

     In an effort to resolve the uncertainty surrounding the methodology that
will be applied to determine TEP's rates for generation service after the
current CTCs expire, TEP filed a motion with the ACC on May 4, 2005 requesting
that the ACC issue an order declaring its position regarding the rate treatment
that will be afforded to TEP's generation assets after 2008.

     TEP believes that any actions by the ACC should not deny TEP the economic
benefits of the Settlement Agreement, and accordingly analyzed how the
Settlement Agreement can be modified so as to: (i) preserve the intent of the
parties; (ii) avoid a significant rate increase in 2009; (iii) mitigate a
negative financial impact on TEP; and (iv) provide all interested parties with
certainty in the near future about TEP's post-2008 rate structure.

     On June 10, 2005 and on July 11, 2005, the ALJ issued procedural orders
related to TEP's 2004 rate review. The procedural orders took no action on TEP's
May 4, 2005 motion, however suggested a more appropriate procedure was for TEP
to file a motion to reopen the record approving the Settlement Agreement.

     Motion to Amend the Settlement Agreement
     ----------------------------------------

     On September 12, 2005, TEP filed a motion and supporting testimony with the
ACC to amend the Settlement Agreement. In the motion, TEP proposes the following
amendments to extend the benefits and protections set forth in the Settlement
Agreement and provide additional price stability for TEP customers:

          1.   The extension of the existing rate freeze at TEP's current
               average retail base rate of 8.3 cents per kWh through December
               31, 2010;

          2.   The retention of the current CTC amortization schedule;

          3.   The agreement of TEP not to seek base rate treatment for certain
               generating assets in order to minimize the rates TEP's customers
               will eventually pay once the rate freeze has expired; and

          4.   The implementation of an energy cost adjustment mechanism to
               protect TEP and its customers from energy market volatility, to
               be effective after December 31, 2008. TEP proposes the
               establishment of an incremental Energy Cost Adjustment Clause
               (ECAC). A base amount of retail energy consumption would be
               served at the existing fixed retail rates and the rate on the
               incremental amount of retail energy would be capped at an annual
               proxy set at forward power prices.

     On October 12, 2005, a number of participants in TEP's rate proceedings,
including the Staff of the ACC, filed responses to TEP's motion. Those responses
reflect differing interpretations of the Settlement Agreement which established


                                       45
<PAGE>


TEP's existing rate structure and generation service rates, and the effect of
the 2002 Track A order which eliminated the requirement that TEP transfer its
generation assets to a subsidiary and the future of electric competition in
Arizona. Responses filed by ACC Staff and the Residential Utility Consumer
Office disputed TEP's assertion that the existing rate structure contemplates
market-based rates for generation services after December 31, 2008.

     On October 21, 2005, TEP filed a reply in support of its motion. The reply
stated that the public interest is best served by the ACC taking affirmative
action to resolve the questions of how TEP's rates will be determined after
December 31, 2008, avoid rate increases for TEP customers, bolster wholesale
electric generation and remove customer risk and exposure to volatile energy
costs.

     On October 24, 2005, the ALJ held a procedural conference. A number of the
participants disagreed with aspects of TEP's request. The Chairman of the ACC
submitted a letter in support of resolving the issues arising from the
Settlement Agreement and the related effect on TEP's rates. The ALJ took the
motion under advisement and is expected to issue a procedural order. TEP does
not know when or how the ALJ will rule on its motion to amend the Settlement
Agreement.

   WESTERN ENERGY MARKETS

     As a participant in the western U.S. wholesale power markets, TEP is
directly and indirectly affected by changes in market conditions and market
participants. TEP competes with other utilities, power marketers and independent
power producers in the sale of electric capacity and energy at market-based
rates in the wholesale market.

     As of September 30, 2005, electric generating capacity in Arizona has grown
to approximately 25,000 MW; an increase of nearly 60% since 2001. A majority of
the growth over the last three years is the result of 16 new or upgraded
gas-fired generating units with a combined capacity of approximately 9,200 MW.

     MARKET PRICES

     The average market price for around-the-clock energy based on the Dow Jones
Palo Verde Index increased in the third quarter 2005, as did the average price
for natural gas based on the Permian Index. Average market prices for
around-the-clock energy began to rise in 2003 and have continued to increase
during 2004 and the first nine months of 2005 primarily due to high natural gas
prices. As a result of all of these factors, TEP's natural gas and purchased
power expenses were higher in the first nine months of 2005 than the same period
in 2004. Energy prices remain at these high levels to date; however, we cannot
predict whether these higher prices will continue, or whether changes in various
factors that influence demand and supply will cause prices to fall during 2005.

  AVERAGE MARKET PRICE FOR AROUND-THE-CLOCK ENERGY              $/MWH
  -------------------------------------------------------- ----------------
       Quarter Ended September 30, 2005                          $68
       Quarter Ended September 30, 2004                           45

       Nine Months Ended September 30, 2005                      $53
       Nine Months Ended September 30, 2004                       43
  -------------------------------------------------------- ----------------

  AVERAGE MARKET PRICE FOR NATURAL GAS                         $/MMBTU
  -------------------------------------------------------- ----------------
       Quarter Ended September 30, 2005                         $7.36
       Quarter Ended September 30, 2004                          5.45

       Nine Months Ended September 30, 2005                     $6.34
       Nine Months Ended September 30, 2004                      5.29
  -------------------------------------------------------- ----------------

     In addition to energy from its coal-fired facilities, TEP typically uses
purchased power, supplemented by generation from its gas-fired units, to meet
the summer peak demands of its retail customers and to meet local reliability
needs. Some of these purchased power contracts are price indexed to natural gas
prices. Short-term and spot power purchase prices are also closely correlated to
natural gas prices. Due to its increasing seasonal gas and purchased power
usage, TEP hedges a portion of its total natural gas exposure from plant fuel
and gas-indexed purchased power with fixed price contracts for a maximum of
three years. TEP currently has approximately 30% of this exposure hedged for the
summer peak period of 2006 at a weighted average price of $5.13 per MMBtu. TEP


                                       46
<PAGE>


purchases its remaining gas fuel needs and purchased power in the spot and
short-term markets.

     Market prices may also affect TEP's wholesale revenues. TEP commits to
future sales of energy as part of its ongoing efforts to hedge its excess
generation based on projected generation capability, forward prices and
generation costs. For the fourth quarter of 2005, TEP has sold forward
approximately 300,000 MWh at an average price of $57 per MWh, of which
approximately two-thirds is off-peak. This leaves approximately 200,000 MWh, of
which approximately half is off-peak energy, remaining for spot market sales.
For 2006 and 2007, TEP has sold foward 50 MW of fixed price energy at an average
approximate price of $70 per MWh. In 2006, this energy sale excludes on-peak
hours in June through September, and in 2007, excludes on-peak hours in April
through September.

     We expect the market price and demand for capacity and energy to continue
to be influenced by factors including:

          o    the availability and price of natural gas;
          o    weather;
          o    continued population growth in the western U.S.;
          o    economic conditions in the western U.S.;
          o    availability of generating capacity throughout the western U.S.;
          o    the extent of electric utility industry restructuring in Arizona,
               California and other western states;
          o    the effect of FERC regulation of wholesale energy markets;
          o    availability of hydropower;
          o    transmission constraints; and
          o    environmental regulations and the cost of compliance.

     WATER SUPPLY

     Drought conditions within the southwestern region, combined with increased
water usage in Arizona, Nevada and southern California, have caused water levels
to significantly recede at Lake Powell, which supplies operating water for the
Navajo Generating Station. Work has begun to lower the water intakes in Lake
Powell, which will help minimize the exposure of water loss to the plant due to
continuing drought conditions. This project is expected to be completed in the
fourth quarter of 2006. TEP's share of the expected total cost is approximately
$2 million based on its 7.5% ownership interest in Navajo Units 1, 2, and 3 (168
MW capacity).

     TEP does not believe that its operations will be materially affected by
this drought.

     EMISSIONS ALLOWANCES

     TEP has SO2 emissions allowances in excess of what is required to operate
its generating units. The excess results primarily from a higher removal rate of
SO2 emissions at Springerville Units 1 and 2 following recent upgrades to
environmental plant components and related changes to plant operations. From
time to time, TEP will sell a portion of its excess SO2 emissions allowances. In
the first nine months of 2005, TEP sold 10,000 SO2 emissions allowances,
recognizing a pre-tax gain of $7 million. The table below summarizes TEP's
forward sales of SO2 emissions allowances, as of September 30, 2005.

<TABLE>
<CAPTION>
                                                    ESTIMATED
                                                  PRE-TAX GAIN
          DELIVERY          ALLOWANCE SOLD         (MILLIONS)
------------------------ --------------------- --------------------
<S>                              <C>                  <C>
Fourth Quarter 2005              2,500                $2
2006                            10,000                 7
2007                            10,000                 6
------------------------ --------------------- --------------------
</TABLE>

     TEP expects to have additional excess SO2 Emission Allowances available for
sale in future periods.


                                       47
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

   TEP CASH FLOWS

     TEP's capital requirements consist primarily of capital expenditures and
optional and mandatory redemptions of long-term debt and capital lease
obligations. Cash flow from operations typically is the lowest in the first
quarter and highest in the third quarter due to TEP's summer peaking load.

<TABLE>
<CAPTION>
 NINE MONTHS ENDED SEPTEMBER 30,                              2005           2004
                                                             -Millions of Dollars-
 ------------------------------------------------------- --------------- --------------
 <S>                                                         <C>              <C>
 Net Cash Flows - Operating Activities                       $  149           $  216
    Capital Expenditures                                       (108)             (82)
 ------------------------------------------------------- --------------- --------------
          Net Cash Flows after Capital Expenditures*             41              134
 ------------------------------------------------------- --------------- --------------
    Debt Maturities                                               -               (2)
    Retirement of Capital Lease Obligations                     (53)             (49)
    Proceeds from Investment in Springerville
       Lease Debt and Equity                                     14               12
 ------------------------------------------------------- --------------- --------------
 Net Cash Flows Available after Required Payments*            $   2           $   95
 ======================================================= =============== ==============
<FN>
* We believe that Net Cash Flows after Capital Expenditures and Net Cash Flows
Available After Required Payments, which are non-GAAP financial measures,
provide useful information to investors as measures of liquidity and our ability
to meet our capital requirements and mandatory redemptions of debt and capital
lease obligations.
</FN>
</TABLE>

     During 2005, TEP expects to generate sufficient internal cash flows to fund
its operating activities, construction expenditures, required debt maturities,
and to pay dividends to UniSource Energy. However, TEP's cash flows may vary due
to changes in wholesale revenues, changes in short-term interest rates, and
other factors. TEP currently has $60 million available under its Revolving
Credit Facility which it may borrow if cash flows fall short of expectations or
if monthly cash requirements temporarily exceed available cash balances. As of
September 30, 2005, TEP had no outstanding borrowings under its Revolving Credit
Facility. On September 15, 2005, TEP paid a $15 million dividend to UniSource
Energy. TEP expects to pay another dividend to UniSource Energy before the end
of 2005. See UniSource Energy, Liquidity and Capital Resources, UniSource Energy
Credit Agreement, Use of Proceeds, above, and Bond Repurchases and Redemptions,
below.

     OPERATING ACTIVITIES

     In the first nine months of 2005, net cash flows from operating activities
declined by $66 million compared with the same period in 2004. Net cash flows
were impacted by:

     2005 included:

     o    a $24 million increase in cash receipts from electric retail sales was
          offset by a $3 million decrease in cash receipts from wholesale sales
          due to the lower availability of excess power to sell into the
          wholesale market;

     o    a $63 million increase in fuel and purchased power costs paid, due to
          higher replacement power costs resulting from planned and unplanned
          coal plant maintenance outages, lost energy from the expiration of the
          SCE Exchange in May 2005 and higher gas-related fuel costs;

     o    an $8 million increase in payments for O&M costs related to coal pant
          outages; O&M costs include $7 million in cash receipts from the sale
          of SO2 emissions allowances;

     o    a $7 million increase in wages paid due to a greater number of
          employees, rising wage levels and higher incentive compensation;

     o    a $12 million decrease in total interest paid due to lower capital
          lease obligation balances, lower long-term debt balances and lower
          annual fees under TEP's Credit Agreement that was entered into in May
          2005; and


                                       48
<PAGE>


     o    a $10 million increase in interest received, due primarily to interest
          received from UniSource Energy when it repaid its $95 million
          inter-company loan to TEP.

     2004 included:

     o    the return of a $17 million deposit related to TEP's 1992 Mortgage.

     INVESTING ACTIVITIES

     Net cash used for investing activities was $7 million higher in the first
nine months of 2005 compared with the same period in 2004, due to the following:

     2005 included:

     o    a $26 million increase in capital expenditures related primarily to a
          planned maintenance outage at Springerville and TEP's share of the
          construction costs of the Luna Energy Facility; and

     o    other cash receipts of $7 million related to proceeds received from
          the redemption of a certificate of deposit and the sale of land by a
          TEP subsidiary.

     2004 included:

     o    the use of $9 million for investment in a certificate of deposit and
          the purchased Springerville lease debt.

     Capital Expenditures
     --------------------

     TEP is currently undertaking its annual process of evaluating its capital
needs for growth and for maintenance of transmission, distribution and
generation assets. Based on initial estimates, TEP's capital expenditures for
2006-2009 could be 8-12% higher than the $596 million previously reported in its
2004 Annual Report on Form 10-K. This increase is the result of several factors
including deferral of 2005 projects to 2006, higher material and construction
costs and peak load growth greater than expected.

     FINANCING ACTIVITIES

     Net cash used for financing activities was $43 million higher in the first
nine months of 2005 compared with the same period in 2004. The following factors
contributed to the increase:

     2005 included:

     o    a $253 million increase in repayments on long-term debt related to
          TEP's early redemption of $53 million of First Mortgage Bonds in the
          first three months of 2005, and the repurchase and redemption of $225
          million of fixed-rate tax exempt debt in May 2005;

     o    a $3 million increase in scheduled payments made on capital lease
          obligations;

     o    a capital contribution of $110 million from UniSource Energy;

     o    the receipt of $95 million from UniSource Energy as a repayment for an
          inter-company loan;

     o    a $4 million decrease in dividends paid to UniSource Energy; and

     o    a $4 million decrease in debt issuance/retirement costs.

     At September 30, 2005, there were no outstanding borrowings under TEP's
revolving credit facility. As of November 2, 2005, cash and cash equivalents
available to TEP was approximately $44 million.


                                       49
<PAGE>


     Capital Contribution from UniSource Energy
     ------------------------------------------

     On May 10, 2005, UniSource Energy made a $110 million capital contribution
to TEP. TEP used the proceeds during May 2005 to redeem or repurchase certain of
its existing debt through tender offers and redemptions. See Bond Repurchases
and Redemptions, below.

     Bond Repurchases and Redemptions
     --------------------------------

     TEP made a sinking fund payment of $1 million on its 6.1% 1941 Mortgage
IDBs in January 2005. In March 2005, TEP redeemed at par the remaining $31
million of its 6.1% 1941 Mortgage IDBs due in 2008, as well as the remaining $21
million of its 7.5% 1941 Mortgage IDBs due in 2006.

     On May 11, 2005, TEP purchased $147 million of its 1997 Pima Series B and
$74 million of its 1997 Pima Series C fixed-rate tax-exempt bonds (Repurchased
Bonds) at a price of $101.50 per $100 principal amount. On May 18, 2005, TEP
redeemed at par the remaining $4 million of bonds outstanding under those
series. TEP does not currently plan on canceling the Repurchased Bonds, which
will remain outstanding under their respective indentures; however, the
Repurchased Bonds will not be presented in our financial statements. TEP may
choose to resell the Repurchased Bonds to third parties or cancel them in the
future.

     As a result of the capital contribution, inter-company note repayment, and
the bond repurchases and redemptions, TEP's ratio of equity to total
capitalization (excluding capital leases) improved to 41.0% as of September 30,
2005, which allows TEP to dividend up to 100% of its current year net income to
UniSource Energy.

     Capital Lease Obligations
     -------------------------

     At September 30, 2005, TEP had $712 million of total capital lease
obligations on its balance sheet. The table below provides a summary of the
outstanding lease amounts.

<TABLE>
<CAPTION>
                                                   BALANCE AT
  LEASED ASSET                                 SEPTEMBER 30, 2005           EXPIRATION
  ---------------------------------------- --------------------------- ---------------------
                                                - In Millions -
  <S>                                                <C>                       <C>
  Springerville Unit 1                               $ 431                     2014
  Springerville Coal Handling Facilities               122                     2015
  Springerville Common Facilities                      104                     2020
  Sundt Unit 4                                          54                     2011
  Other Leases                                           1                     2006
  ---------------------------------------- ---------------------------
  Total Capital Lease Obligations                    $ 712
  ======================================== ===========================
</TABLE>

     Except for TEP's 13% equity interest in the Springerville Coal Handling
Facilities, TEP will not own these assets at the expiration of the leases. TEP
may renew the leases or purchase the leased assets at such time. The renewal and
purchase options for Springerville Unit 1 and Sundt Unit 4 are generally for
fair market value as determined at that time, while the purchase price option is
fixed for the Springerville Coal Handing Facilities and Common Facilities.

     TEP Credit Agreement
     --------------------

     In May 2005, TEP entered into a new $401 million Credit Agreement (TEP
Credit Agreement) to replace its previous $401 million credit agreement. The TEP
Credit Agreement includes a $60 million revolving credit facility and a $341
million letter of credit facility to support $329 million of tax-exempt variable
rate bonds. The TEP Credit Agreement expires in May 2010 and is secured by $401
million of Mortgage Bonds.

     The TEP Credit Agreement restricts additional indebtedness, liens, sale of
assets and sale-leasebacks agreements. The TEP Credit Agreement also requires
TEP to meet a minimum cash coverage ratio and a maximum leverage ratio. If TEP
complies with the terms of the TEP Credit Agreement, TEP may pay dividends to
UniSource Energy. Certain regulatory actions may cause a decrease in the amount
that may be borrowed. As of September 30, 2005, TEP was in compliance with the
terms of the TEP Credit Agreement.


                                       50
<PAGE>


     If an event of default occurs, the TEP Credit Agreement may become
immediately due and payable. An event of default includes failure to make
required payments under the TEP Credit Agreement; change in control, as defined;
failure of TEP or certain subsidiaries to make payments or default on debt
greater than $20 million; or certain bankruptcy events at TEP or certain
subsidiaries.

     Interest rates and fees under the TEP Credit Agreement are based on a
pricing grid tied to TEP's credit ratings. Letter of credit fees are 0.875% per
annum and amounts drawn under a letter of credit would bear interest at LIBOR
plus 0.875% per annum. TEP pays interest on borrowings under the revolving
credit facility at LIBOR plus 0.875% or at the agent bank's reference rate. TEP
also pays a commitment fee of 0.20% on the unused portion of the revolving
credit facility.

     As of September 30, 2005, TEP had no outstanding borrowings under its
Revolving Credit Facility. See UniSource Energy, Liquidity and Capital
Resources, UniSource Energy Credit Agreement, Use of Proceeds, above, and Bond
Repurchases and Redemptions, above.

     Mortgage Indentures
     -------------------

     In June 2005, TEP terminated its 1941 Mortgage (formerly known as its First
Mortgage). TEP's remaining mortgage is its 1992 Mortgage (formerly known as its
Second Mortgage).

     TEP's Credit Agreement, which totals $401 million and is secured by first
mortgage bonds, limits the amount of mortgage bonds that may be outstanding to
no more than $650 million. At September 30, 2005, TEP had a total of $539
million in outstanding mortgage bonds. Although the 1992 Mortgage would allow
TEP to issue additional bonds, the limit imposed by the TEP Credit Agreement is
more restrictive and is currently the governing limitation.

   INCOME TAX MATTERS

     See UniSource Energy, Liquidity and Capital Resources, Income Tax Matters,
Internal Revenue Service Matters, above.

   CONTRACTUAL OBLIGATIONS

     There have been no significant changes in TEP's contractual obligations or
other commercial commitments from those reported in TEP's 2004 Annual Report on
Form 10-K, other than those reported above in Bond Repurchases and Redemption,
TEP Credit Agreement and Mortgage Indentures.

   DIVIDENDS ON COMMON STOCK

     TEP can pay dividends if it maintains compliance with the TEP Credit
Agreement and certain financial covenants. As of September 30, 2005, TEP was in
compliance with the terms of the TEP Credit Agreement.

     TEP paid a $15 million dividend on September 15, 2005. UniSource Energy is
the primary holder of TEP's common stock.

     The ACC Holding Company Order, as modified by the UES Settlement Agreement,
restricted the amount of dividends that TEP may pay to UniSource Energy. Until
TEP's ratio of common equity to total capitalization (excluding capital lease
obligations) equaled 40%, TEP could not pay dividends in excess of 75% of its
net income. As of September 30, 2005, TEP's ratio of common equity to total
capitalization (excluding capital lease obligations) was 41%.

     The Federal Power Act states that dividends shall not be paid out of funds
properly included in capital accounts. Although the terms of the Federal Power
Act are unclear, we believe that there is a reasonable basis to pay dividends
from current year earnings.


                                       51
<PAGE>


                                     UNS GAS

RESULTS OF OPERATIONS
---------------------

   THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
   SEPTEMBER 30, 2004

     UNS Gas reported a net loss of $2 million in the third quarters of 2005 and
2004.

     As of September 30, 2005, UNS Gas had 136,207 retail customers, a 4%
increase from last year. The table below shows UNS Gas' therm sales and revenues
for the third quarters of 2005 and 2004.

<TABLE>
<CAPTION>
                                                    SALES                            REVENUE
THREE MONTHS ENDED SEPTEMBER 30,           2005              2004             2005             2004
------------------------------------ ----------------- ---------------- ----------------- --------------
                                           - Millions of Therms -            - Millions of Dollars -
<S>                                        <C>               <C>               <C>             <C>
RETAIL THERM SALES:
   Residential                              5                 5                $ 8             $ 8
   Commercial                               4                 4                  4               4
   Industrial                               1                 1                  1               -
   Public Authorities                       -                 -                  -               1
------------------------------------ ----------------- ---------------- ----------------- --------------
TOTAL RETAIL THERM SALES                   10                10                 13              13
   Transport                                -                 -                  -               1
   Negotiated Sales Program (NSP)           4                 4                  3               2
------------------------------------ ----------------- ---------------- ----------------- --------------
TOTAL THERM SALES                          14                14                $16             $16
==================================== ================= ================ ================= ==============
</TABLE>

     Retail therm sales were the same in the third quarter of 2005 compared with
the same period last year. Customer growth was offset by warmer weather compared
with the third quarter of 2004. Retail revenues also remained unchanged in the
third quarter of 2005 compared with the same period last year.

     Through a Negotiated Sales Program (NSP) approved by the ACC, UNS Gas
supplies natural gas to some of its large transportation customers.
Approximately one half of the margin earned on these NSP sales is retained by
UNS Gas, while the remainder benefits retail customers through a credit to the
Purchased Gas Adjustor (PGA) mechanism which reduces the gas commodity price.
See Factors Affecting Results of Operations, Rates and Regulation, Energy Cost
Adjustment Mechanism, below.

     The table below provides summary financial information for UNS Gas.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,                 2005          2004
-------------------------------------------- ------------ --------------
                                               - Millions of Dollars -
<S>                                              <C>          <C>
Gas Revenues                                     $ 16         $ 16
Other Revenues                                      1            -
-------------------------------------------- ------------ --------------
     Total Operating Revenues                      17           16
-------------------------------------------- ------------ --------------
Purchased Gas Expense                              10            9
Other Operations and Maintenance Expense            6            6
Depreciation and Amortization                       1            1
Taxes other than Income Taxes                       1            1
-------------------------------------------- ------------ --------------
     Total Other Operating Expenses                18           17
-------------------------------------------- ------------ --------------
          Operating Income                         (1)          (1)
-------------------------------------------- ------------ --------------
Total Interest Expense                              2            2
Income Tax Expense (Benefit)                       (1)          (1)
-------------------------------------------- ------------ --------------
           NET INCOME                            $ (2)        $ (2)
============================================ ============ ==============
</TABLE>


                                       52
<PAGE>


   NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS
   ENDED SEPTEMBER 30, 2004

     UNS Gas reported net income of $2 million in the first nine months of 2005
and 2004.

     The table below shows UNS Gas' therm sales and revenues for the first nine
months ended September 30, 2005 and 2004.

<TABLE>
<CAPTION>
                                                    SALES                          REVENUE
NINE MONTHS ENDED SEPTEMBER 30,            2005             2004              2005             2004
------------------------------------ ----------------- ---------------- ----------------- --------------
                                              - Millions of Therms -          - Millions of Dollars -
<S>                                          <C>             <C>              <C>             <C>
RETAIL THERM SALES:
   Residential                               46              44               $ 51             $ 51
   Commercial                                20              19                 19               19
   Industrial                                 2               2                  2                1
   Public Authorities                         5               5                  4                4
------------------------------------ ----------------- ---------------- ----------------- --------------
TOTAL RETAIL THERM SALES                     73              70                 76               75
   Transport                                  -               -                  2                2
   Negotiated Sales Program (NSP)            16              15                 11                8
------------------------------------ ----------------- ---------------- ----------------- --------------
TOTAL THERM SALES                            89              85               $ 89             $ 85
==================================== ================= ================ ================= ==============
</TABLE>

     Retail therm sales were 4% higher in the first nine months of 2005 compared
with the same period last year due primarily to customer growth. Retail revenues
increased $1 million in the first nine months of 2005.

     The table below provides summary financial information for UNS Gas.

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,                   2005         2004
--------------------------------------------- ------------ --------------
                                               - Millions of Dollars -
<S>                                               <C>           <C>
Gas Revenues                                      $ 89          $ 85
Other Revenues                                       2             2
--------------------------------------------- ------------ --------------
     Total Operating Revenues                       91            87
--------------------------------------------- ------------ --------------
Purchased Gas Expense                               58            55
Other Operations and Maintenance Expense            18            17
Depreciation and Amortization                        5             4
Taxes other than Income Taxes                        2             3
--------------------------------------------- ------------ --------------
     Total Other Operating Expenses                 83            79
--------------------------------------------- ------------ --------------

          Operating Income                           8             8
--------------------------------------------- ------------ --------------

Total Interest Expense                               5             5
Income Tax Expense                                   1             1
--------------------------------------------- ------------ --------------
           NET INCOME                             $  2          $  2
============================================= ============ ==============
</TABLE>

FACTORS AFFECTING RESULTS OF OPERATIONS
---------------------------------------

   RATES AND REGULATION

     ENERGY COST ADJUSTMENT MECHANISM

     UNS Gas' retail rates include a PGA mechanism intended to address the
volatility of natural gas prices and allows UNS Gas to recover its costs through
a price adjustor. The PGA charge changes monthly based on an ACC approved
mechanism that compares the twelve-month rolling weighted average gas cost to
the base cost of gas, subject to limitations on how much the price per therm may
change in a twelve month period. The difference between the actual cost of UNS
Gas' gas supplies and transportation contracts and that currently allowed by the


                                       53
<PAGE>


ACC are deferred and recovered or repaid through the PGA mechanism. When
ACC-designated under or over recovery trigger points are met, UNS Gas may
request a PGA surcharge or surcredit with the goal of collecting or returning
the amount deferred from or to customers over a recovery period deemed
appropriate by the ACC.

     In August 2005, UNS Gas filed a request with the ACC, to approve an
increase in the PGA surcharge from $0.03 per therm to $0.27 per therm to be
effective October 1, 2005. An increase was necessary to allow for the recovery
of the existing PGA bank balance and recover the projected cost of gas for this
winter season. At September 30, 2005, the PGA bank balance was approximately $3
million.

     On October 19, 2005, the ACC approved a PGA surcharge of $0.15 per therm
effective November 1, 2005 through February 2006; $0.25 per therm in March and
April 2006; $0.30 per therm in May and June 2006; $0.35 per therm in July
through September 2006; $0.25 per therm in October and November 2006; $0.20 per
therm in December 2006 through February 2007 and $0.25 per therm in March and
April 2007. We believe that this PGA surcharge will result in a growing bank
balance. Sources to fund the growing balance could include an additional
surcharge, draws on the revolving credit facility, additional credit lines or
the investment of additional equity capital by UniSource Energy. Based on market
prices as of November 1, 2005, which range from $8 to $10 per MMBtu through
2006, the PGA bank balance is expected to rise to $14 million by December 31,
2005, $16 million by February 28, 2006 and $15 million by December 31, 2006. We
cannot predict when UNS Gas will fully recover the PGA bank balance; however, we
expect that the balance will be recovered over time.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     UNS Gas' capital requirements consist primarily of capital expenditures. In
the first nine months of 2005, capital expenditures were $18 million. During
2005, UNS Gas expects internal cash flows to fund a portion of its operating and
construction expenditures and PGA bank balance. During the fourth quarter of
2005 and due, in part, to the delays in recovering the PGA bank balance, UNS Gas
expects to borrow up to $20 million under its revolving credit facility to fund
working capital requirements. If UNS Gas is not allowed to recover its projected
gas costs or PGA bank balance on a timely basis, in 2006 UNS Gas may require
additional funding to meet operating and capital requirements. Sources of
funding could include an additional surcharge, draws on the revolving credit
facility, additional credit lines or the investment of additional equity capital
by UniSource Energy. See UNS Gas/UNS Electric Revolver, below.

     In January 2005, UNS Gas established a short-term inter-company promissory
note to UniSource Energy, by which it may borrow up to $10 million for general
corporate purposes. In March 2005, UniSource Energy contributed an additional $6
million in capital to UNS Gas. UNS Gas used the proceeds of this contribution to
repay the $6 million outstanding on the inter-company promissory note.

     The table below provides summary information for operating cash flow and
capital expenditures for the first nine months of 2005 and 2004.

<TABLE>
<CAPTION>
     NINE MONTHS ENDED SEPTEMBER 30,               2005            2004
     ---------------------------------------- -------------------------------
                                                  - Millions of Dollars -
     <S>                                            <C>             <C>
     Net Cash Flows - Operating Activities          $15             $20
     Capital Expenditures                            18              13
     ---------------------------------------- ---------------- --------------
</TABLE>

     UNS Gas/UNS Electric Revolver
     -----------------------------

     In April 2005, UNS Gas and UNS Electric entered into a $40 million
three-year unsecured revolving credit agreement due in April 2008, with a group
of lenders (the UNS Gas/UNS Electric Revolver). Either borrower may borrow up to
a maximum of $30 million; however, the total combined amount borrowed cannot
exceed $40 million. UNS Gas and UNS Electric intend to use the proceeds of any
loans or letters of credit for general corporate purposes.

     UNS Gas is only liable for UNS Gas' borrowings, and similarly, UNS Electric
is only liable for UNS Electric's borrowings under the UNS Electric/UNS Gas
Revolver. UES guarantees the obligations of both UNS Gas and UNS Electric.

     The borrowers pay interest at LIBOR plus 1.50% or at the agent bank's
reference rate plus 0.50%. UNS Gas and UNS Electric also pay a commitment fee of
0.45% on the unused portion of the revolving credit facility.


                                       54
<PAGE>


     The UNS Gas/UNS Electric Revolver contains restrictions on additional
indebtedness, liens, mergers and sales of assets. The UNS Gas/UNS Electric
Revolver also contains a maximum leverage ratio and a minimum cash flow to
interest coverage ratio for each borrower. As of September 30, 2005, UNS Gas and
UNS Electric were each in compliance with the terms of the UNS Gas/UNS Electric
Revolver.

     If an event of default occurs, the UNS Gas/UNS Electric Revolver may become
immediately due and payable. An event of default includes failure to make
required payments under the UNS Gas/UNS Electric Revolver; certain change in
control transactions, certain bankruptcy events of UNS Gas or UNS Electric, or
failure of UES, UNS Gas or UNS Electric to make payments or default on debt
greater than $4 million.

     UNS Gas and UNS Electric expect to draw upon the UNS Gas/UNS Electric
Revolver from time to time for seasonal working capital purposes and to fund a
portion of capital expenditures. As of September 30, 2005, UNS Gas and UNS
Electric had no borrowings outstanding under the UNS Gas/UNS Electric Revolver.

     Senior Unsecured Notes
     ----------------------

     UNS Gas has $100 million of senior unsecured notes outstanding that are
guaranteed by UES. The note purchase agreement for UNS Gas restricts
transactions with affiliates, mergers, liens, restricted payments, and
incurrence of indebtedness, and also contains a minimum net worth test. As of
September 30, 2005, UNS Gas was in compliance with the terms of its note
purchase agreement.

     UNS Gas must meet a leverage test and an interest coverage test in order to
issue additional debt or pay dividends. However, UNS Gas may, without meeting
these tests, refinance existing debt and incur up to $7 million in short-term
debt.

   INCOME TAX MATTERS

     See UniSource Energy, Liquidity and Capital Resources, Income Tax Matters,
Internal Revenue Service Matters, above.

   DIVIDENDS ON COMMON STOCK

     The ACC limits dividend payments by UNS Gas to 75% of earnings, until the
ratio of UNS Gas' common equity to total capitalization reaches 40%. In March
2005, UniSource Energy made a capital contribution of $6 million to UNS Gas. At
September 30, 2005, the ratio of common equity to total capitalization for UNS
Gas was 40%.

     The note purchase agreement for UNS Gas contains restrictions on dividends.
UNS Gas may pay dividends so long as (a) no default or event of default exists
and (b) it could incur additional debt under the debt incurrence test. See
Senior Unsecured Notes, above. It is unlikely, however, that UNS Gas will pay
dividends in the next few years due to expected cash requirements for capital
expenditures.

                                  UNS ELECTRIC

RESULTS OF OPERATIONS
---------------------

     THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004

     UNS Electric reported net income of $2 million in the third quarters of
2005 and 2004. Similar to TEP's operations, we expect UNS Electric's operations
to be seasonal in nature, with peak energy demand occurring in the summer
months.

     As of September 30, 2005, UNS Electric had 88,362 retail customers, a 5%
increase from last year. The table below shows UNS Electric's kWh sales and
revenues for the third quarters of 2005 and 2004.


                                       55
<PAGE>


<TABLE>
<CAPTION>
                                                    SALES                              REVENUE
THREE MONTHS ENDED SEPTEMBER 30,          2005               2004               2005              2004
------------------------------------ ------------------------------------ ----------------------------------
                                             - Millions of kWh -               - Millions of Dollars -
<S>                                       <C>                 <C>              <C>              <C>
ELECTRIC RETAIL SALES:
   Residential                            274                 251              $  27            $   25
   Commercial                             175                 167                 17                16
   Industrial                              47                  49                  4                 4
   Other                                    1                   1                  -                 -
------------------------------------ ---------------- ------------------- ---------------- -----------------
TOTAL ELECTRIC RETAIL SALES               497                 468              $  48            $   45
==================================== ================ =================== ================ =================
</TABLE>

     Retail kWh sales 6% higher in the third quarter of 2005 compared with the
same period last year due to customer growth and warm weather.

     The table below provides summary financial information for UNS Electric.

<TABLE>
<CAPTION>
   THREE MONTHS ENDED SEPTEMBER 30,                  2005          2004
   --------------------------------------------- ------------ --------------
                                                  - Millions of Dollars -
   <S>                                               <C>           <C>
   Electric Revenues                                 $ 48          $ 45
   Other Revenues                                       -             -
   --------------------------------------------- ------------ --------------
        Total Operating Revenues                       48            45
   --------------------------------------------- ------------ --------------
   Purchased Energy Expense                            33            31
   Other Operations and Maintenance Expense             7             6
   Depreciation and Amortization                        2             2
   Taxes other than Income Taxes                        1             1
   --------------------------------------------- ------------ --------------
        Total Other Operating Expenses                 43            40
   --------------------------------------------- ------------ --------------

             Operating Income                           5             5
   --------------------------------------------- ------------ --------------

   Total Interest Expense                               1             1
   Income Tax Expense                                   2             2
   --------------------------------------------- ------------ --------------
             NET INCOME                              $  2          $  2
   ============================================= ============ ==============
</TABLE>

   NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
   SEPTEMBER 30, 2004

     UNS Electric reported net income of $4 million in the first nine months of
2005 and 2004. The table below shows UNS Electric's kWh sales and revenues for
the nine months ended September 30, 2005 and 2004.

<TABLE>
<CAPTION>
                                                   SALES                               REVENUE
 NINE MONTHS ENDED SEPTEMBER 30,          2005               2004               2005             2004
 ---------------------------------- ------------------------------------- ----------------------------------
                                            - Millions of kWh -                - Millions of Dollars -
 <S>                                       <C>               <C>               <C>              <C>
 ELECTRIC RETAIL SALES:
    Residential                            595               544               $  60            $  55
    Commercial                             453               447                  45               45
    Industrial                             135               151                  10               11
    Other                                    2                 2                   -                -
 ---------------------------------- ----------------- ------------------- ---------------- -----------------
 TOTAL ELECTRIC RETAIL SALES             1,185             1,144               $ 115            $ 111
 ================================== ================= =================== ================ =================
</TABLE>

     Retail kWh sales increased 4% in the first nine months of 2005 compared
with the same period last year, due primarily to customer growth.


                                       56
<PAGE>


     The table below provides summary financial information for UNS Electric.

<TABLE>
<CAPTION>
    NINE MONTHS ENDED SEPTEMBER 30,                  2005          2004
    -------------------------------------------- ---------------------------
                                                  - Millions of Dollars -
    <S>                                             <C>             <C>
    Electric Revenues                               $ 115           $ 111
    Other Revenues                                      1               1
    -------------------------------------------- ------------ --------------
         Total Operating Revenues                     116             112
    -------------------------------------------- ------------ --------------
    Purchased Energy Expense                           78              75
    Other Operations and Maintenance Expense           18              17
    Depreciation and Amortization                       7               7
    Taxes other than Income Taxes                       3               2
    -------------------------------------------- ------------ --------------
         Total Other Operating Expenses               106             101
    -------------------------------------------- ------------ --------------

              Operating Income                         10              11
    -------------------------------------------- ------------ --------------

    Total Interest Expense                              4               4
    Income Tax Expense                                  2               3
    -------------------------------------------- ------------ --------------
               NET INCOME                           $   4           $   4
    ============================================ ============ ==============
</TABLE>

FACTORS AFFECTING RESULTS OF OPERATIONS
---------------------------------------

   COMPETITION

     As required by the ACC order approving UniSource Energy's acquisition of
the Citizens' Arizona gas and electric assets, on November 3, 2003, UNS Electric
filed with the ACC a plan to open its service territories to retail competition
by December 31, 2003. The plan addresses all aspects of implementation. It
includes UNS Electric's unbundled distribution tariffs for both standard offer
customers and customers that choose competitive retail access, as well as Direct
Access and Settlement Fee schedules. UNS Electric's direct access rates for both
transmission and ancillary services will be based upon its FERC Open Access
Transmission Tariff. The plan is subject to review and approval by the ACC. As a
result of the court decisions concerning the ACC's Retail Electric Competition
Rules, we are unable to predict when and how the ACC will address this plan. See
Tucson Electric Power Company, Factors Affecting Results of Operations,
Competition, above for information regarding the recent Arizona Court of Appeals
decision.

   RATES AND REGULATION

     ENERGY COST ADJUSTMENT MECHANISM

     UNS Electric's retail rates include a Purchased Power and Fuel Adjustor
Clause (PPFAC), which allows for a separate surcharge or surcredit to the base
rate for delivered purchased power to collect or return under or over recovery
of costs. The ACC has approved a PPFAC surcharge of $0.01825 per kWh to recover
transmission costs and the cost of the current full-requirements power supply
agreement with Pinnacle West Capital Corporation.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     UNS Electric's capital requirements consist primarily of capital
expenditures. In the first nine months of 2005, capital expenditures were $17
million.

     To improve the reliability of service in Santa Cruz County, UNS Electric
plans to build a 20 MW gas-fired combustion turbine as well as upgrade its
existing 115 kV line over time. The turbine should be in place by mid-2006,
helping to improve reliability while the approval and permitting process for the
345 kV Tucson to Nogales transmission line continues. In the third quarter of
2005, UNS Electric's capital expenditures included $2 million related to the
turbine and expects its capital expenditures for the fourth quarter to include
approximately $6 million related to this project.

     During 2005, UNS Electric expects to generate sufficient internal cash
flows to fund its operating activities and a portion of its construction
expenditures. UNS Electric will meet its remaining cash needs through a


                                       57
<PAGE>


combination of capital contributions from UniSource Energy and borrowings under
a revolving credit facility that was established in April 2005.

     In March 2005, UniSource Energy contributed an additional $4 million of
capital to UNS Electric.

     The table below provides summary information for operating cash flow and
capital expenditures for the first three quarters of 2005 and 2004.

<TABLE>
<CAPTION>
     NINE MONTHS ENDED SEPTEMBER 30,                  2005            2004
     ------------------------------------------- -------------------------------
                                                    - Millions of Dollars -
     <S>                                               <C>            <C>
     Net Cash Flows - Operating Activities             $13            $ 14
     Capital Expenditures                               17              14
     ------------------------------------------- ---------------- --------------
</TABLE>

     UNS Gas/UNS Electric Revolver
     -----------------------------

     See UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver
above for description of UNS Electric's unsecured revolving credit agreement.

     Senior Unsecured Notes
     ----------------------

     UNS Electric has $60 million of senior unsecured notes outstanding that are
guaranteed by UES. The note purchase agreement for UNS Electric restricts
transactions with affiliates, mergers, liens, restricted payments, and
incurrence of indebtedness and also contains a minimum net worth test. As of
September 30, 2005, UNS Electric was in compliance with the terms of its note
purchase agreement.

     UNS Electric must meet a leverage test and an interest coverage test to
issue additional debt or to pay dividends. However, UNS Electric may, without
meeting these tests, refinance existing debt and incur up to $5 million in
short-term debt.

   INCOME TAX MATTERS

     See UniSource Energy, Liquidity and Capital Resources, Income Tax Matters,
Internal Revenue Service Matters, above.

   DIVIDENDS ON COMMON STOCK

     The ACC limits dividend payments by UNS Electric to 75% of earnings, until
the ratio of common equity to total capitalization reaches 40%. In March 2005,
UniSource Energy made a capital contribution of $4 million to UNS Electric. At
September 30, 2005, the ratio of common equity to total capitalization for UNS
Electric was 45%.

     The note purchase agreement for UNS Electric contains restrictions on
dividends. UNS Electric may pay dividends so long as (a) no default or event of
default exists and (b) it could incur additional debt under the debt incurrence
test. See Senior Unsecured Notes, above. It is unlikely, however, that UNS
Electric will pay dividends in the next few years due to expected cash
requirements for capital expenditures.


                                       58
<PAGE>


                            GLOBAL SOLAR ENERGY, INC.

RESULTS OF OPERATIONS
---------------------

     UniSource Energy accounts for Global Solar under the consolidation method
and recognizes 100% of Global Solar's losses. Global Solar recognizes expense
when funding is used for research, development and administrative costs. The
table below provides a breakdown of the net losses recorded by Global Solar:

<TABLE>
<CAPTION>
   THREE MONTHS ENDED SEPTEMBER 30,                               2005           2004
   --------------------------------------------------------- ----------------------------
                                                                - Millions of Dollars -
   <S>                                                          <C>            <C>
   Global Solar
      Operating Revenues                                        $   2          $   3
      Research & Development Contract Expenses & Losses            (1)            (1)
      Depreciation & Amortization Expense                          (1)            (1)
      Administrative & Other Costs                                 (3)            (4)
      Income Tax Benefits                                           1              1
   --------------------------------------------------------- -------------- -------------
   Total Global Solar Net Loss                                  $  (2)         $  (2)
   ========================================================= ============== =============

   NINE MONTHS ENDED SEPTEMBER 30,                                2005           2004
   --------------------------------------------------------- ----------------------------
                                                                - Millions of Dollars -
   Global Solar
      Operating Revenues                                        $   4          $   7
      Research & Development Contract Expenses & Losses            (2)            (3)
      Depreciation & Amortization Expense                          (2)            (2)
      Administrative & Other Costs                                 (8)            (8)
      Income Tax Benefits                                           3              2
   --------------------------------------------------------- -------------- -------------
   Total Global Solar Net Loss                                  $  (5)         $  (4)
   ========================================================= ============== =============
</TABLE>

     GLOBAL SOLAR COMMITMENTS

     UniSource Energy intends to cease additional funding of Global Solar. To
that end, Millennium is seeking additional investors for Global Solar, or may
sell all or part of its interest, or a combination of both, to preserve the
value of Global Solar. We anticipate that any operating and capital funding
required to maintain Global Solar in the interim will be provided only out of
Millennium cash or cash returns from other Millennium investments. We believe
such cash and returns will be adequate for that purpose and to fund Millennium's
remaining commitments to Global Solar. In February 2005, Millennium was
authorized to fund up to an additional $5 million for capital expenditures and
operations at Global Solar and provided $5 million of funding during the first
nine months of 2005. Global Solar has $1 million in commitments to incur future
expenses related to government contracts.

                                      OTHER

RESULTS OF OPERATIONS
---------------------

     Other non-reportable segments consist of UniSource Energy parent company
expenses, which includes interest expense (net of tax) related to the UniSource
Energy Convertible Senior Notes, the UniSource Credit Agreement, a note payable
from UniSource Energy to TEP, which was repaid in March 2005; income and losses
from Millennium investments other than Global Solar, and income and losses from
UED.


                                       59
<PAGE>


     The table below summarizes the income and losses for the Other
non-reportable segments:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,                  2005           2004
-------------------------------------------- ------------------------------
                                                - Millions of Dollars -
<S>                                              <C>            <C>
Other Millennium Investments                     $   1          $     1
UniSource Energy Development Company                 -                -
UniSource Energy Parent Company                     (1)              (1)
-------------------------------------------- --------------- --------------
     Total Other                                 $   -          $     -
============================================ =============== ==============

NINE MONTHS ENDED SEPTEMBER 30,                   2005           2004
-------------------------------------------- ------------------------------
                                                - Millions of Dollars -
Other Millennium Investments                     $   -          $    1
UniSource Energy Development Company                 -              (1)
UniSource Energy Parent Company                     (5)             (4)
-------------------------------------------- -------------- ---------------
     Total Other                                 $  (5)         $   (4)
============================================ ============== ===============
</TABLE>

     OTHER MILLENNIUM INVESTMENTS

     Millennium accounts for its investments under the consolidation method and
the equity method. In some cases, Millennium is an investment's sole provider of
funding. When this is the case, Millennium recognizes 100% of an investment's
losses, because as sole provider of funds it bears all of the financial risk. To
the extent that an investment becomes profitable and Millennium has recognized
losses in excess of its percentage ownership, Millennium will recognize 100% of
an investment's net income until Millennium's recognized losses equal its
ownership percentage of losses.

     Results from Other Millennium Investments for the three months ended
September 30, 2005 was an after-tax gain of $1 million.

     Results from Other Millennium Investments for the three months ended
September 30, 2004 include after-tax gains of $3 million from Haddington and $1
million from MicroSat. These gains were partially offset by after-tax losses of
less than $1 million each from several of Millennium's other investments.

     CONSOLIDATED MILLENNIUM INVESTMENTS AND COMMITMENTS

     In 2004, Millennium funded $1.5 million and Dow Corning Enterprises, Inc.
(DCEI) funded $1 million in debt commitments to Infinite Power Solutions, Inc.
(IPS).

     In April 2005, Millennium and DCEI entered into a transaction with third
parties that included the formation of a new Delaware corporation, Battco, Inc.
(Battco), intended to carry on the current business of IPS. As its contribution
to the transaction, IPS transferred substantially all of its assets to Battco in
exchange for five million shares of Battco common stock. The transaction also
provides that Millennium and some of the third parties will contribute a
combined total of approximately $9 million to a subsequent Battco $25 million
preferred stock offering with the remainder coming from outside investors.
Millennium committed to fund $3.3 million of the $9 million, of which $1 million
has already been funded as a secured convertible loan to be converted to shares
of Battco preferred stock at the close of the $25 million financing.

     MEG is in the process of winding down its activities and does not expect to
engage in any new significant activities after 2005. Millennium is in the
process of selling its remaining interest in Nations Energy Corporation (Nations
Energy). Millennium's remaining commitments for other Millennium investments are
$2 million to Haddington and $2 million to Valley Ventures.

     In the third quarter of 2005, Millennium received $4 million as a return of
its investment in Carboelectrica Sabinas, S. de R.L. de C.V., (Sabinas) a
Mexican limited liability company. As a result of the $4 million payment, the
book value of the investment in Sabinas was reduced to approximately $14
million. Millennium owns 50% of Sabinas.


                                       60
<PAGE>


     Also in the third quarter of 2005, Millennium received a $4 million payment
on a note receivable from a subsidiary of Mirant Corporation. We expect to
receive the remaining payment of $5 million in July 2006.

     It is our intention for UniSource Energy to cease making capital
contributions to Millennium. We anticipate that the funding required to fund
Millennium's remaining commitments will be provided only out of existing
Millennium cash or cash returns from Millennium investments. We believe such
cash and returns will be adequate to fund Millennium's remaining commitments.


CRITICAL ACCOUNTING ESTIMATES
-----------------------------

     In preparing financial statements under Generally Accepted Accounting
Principles (GAAP), management exercises judgment in the selection and
application of accounting principles, including making estimates and
assumptions. UniSource Energy and TEP consider Critical Accounting Estimates to
be those that could result in materially different financial statement results
if our assumptions regarding application of accounting principles were
different. UniSource Energy and TEP describe their Critical Accounting Estimates
below. Other significant accounting policies and recently issued accounting
standards are discussed in the 2004 Annual Report on Form 10-K, Note 1 of Notes
to Consolidated Financial Statements - Nature of Operations and Summary of
Significant Accounting Estimates.

   ACCOUNTING FOR RATE REGULATION

     TEP, UNS Gas and UNS Electric generally use the same accounting policies
and practices used by unregulated companies for financial reporting under GAAP.
However, sometimes these principles, such as the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards No. 71, Accounting
for the Effects of Certain Types of Regulation (FAS 71), require special
accounting treatment for regulated companies to show the effect of regulation.
For example, in setting TEP, UNS Gas and UNS Electric's retail rates, the ACC
may not allow TEP, UNS Gas or UNS Electric to currently charge their customers
to recover certain expenses, but instead may require that these expenses be
charged to customers in the future. In this situation, FAS 71 requires that TEP,
UNS Gas and UNS Electric defer these items and show them as regulatory assets on
the balance sheet until TEP, UNS Gas and UNS Electric are allowed to charge
their customers. TEP, UNS Gas and UNS Electric then amortize these items as
expense to the income statement as these charges are recovered from customers.
Similarly, certain revenue items may be deferred as regulatory liabilities,
which are also eventually amortized to the income statement as rates to
customers are reduced.

     The conditions a regulated company must satisfy to apply the accounting
policies and practices of FAS 71 include:

     o    an independent regulator sets rates;

     o    the regulator sets the rates to recover specific costs of delivering
          service; and

     o    the service territory lacks competitive pressures to reduce rates
          below the rates set by the regulator.

     TEP

     Upon approval by the ACC of a settlement agreement (Settlement Agreement)
in November 1999, TEP discontinued application of FAS 71 for its generation
operations. TEP continues to apply FAS 71 to its cost-based rate regulated
operations, which include the transmission and distribution portions of its
business.

     TEP's transmission and distribution regulatory assets, net of regulatory
liabilities, totaled $178 million at September 30, 2005. Regulatory assets of
$31 million are not presently included in the rate base and consequently are not
earning a return on investment. These regulatory assets are being recovered
through the cost of service or are authorized to be collected in future base
rates. TEP's transmission and distribution regulatory assets, net of regulatory
liabilities, totaled $225 million at December 31, 2004.

     TEP regularly assesses whether it can continue to apply FAS 71 to its
cost-based rate regulated operations. If TEP stopped applying FAS 71 to its
remaining regulated operations, it would write off the related balances of its
regulatory assets as an expense and its regulatory liabilities as income on its
income statement. Based on the regulatory asset balances, net of regulatory
liabilities, at September 30, 2005, if TEP had stopped applying FAS 71 to its
remaining cost-based regulated operations, it would have recorded an
extraordinary after-tax loss of approximately $107 million. While regulatory
orders and market conditions may affect cash flows, TEP's cash flows would not
be affected if it stopped applying FAS 71 unless a regulatory order limited its
ability to recover the cost of its regulatory assets.


                                       61
<PAGE>


     UNS GAS AND UNS ELECTRIC

     UNS Gas and UNS Electric's regulatory liabilities, net of regulatory
assets, collectively totaled $6 million at September 30, 2005 and $4 million at
December 31, 2004. As of September 30, 2005, UNS Electric has $6 million of
regulatory liabilities that are not included in rate base. If UNS Gas and UNS
Electric stopped applying FAS 71 to their regulated operations, they would write
off the related balances of regulatory assets as an expense and regulatory
liabilities as income on their income statements. Based on the balances of
regulatory liabilities and assets at September 30, 2005, if UNS Gas and UNS
Electric had stopped applying FAS 71 to their regulated operations, they would
have collectively recorded an extraordinary after-tax gain of $4 million. UNS
Gas and UNS Electric's cash flows would not be affected if they stopped applying
FAS 71 unless a regulatory order limited their ability to recover the cost of
their regulatory assets.

   ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS

     FAS 143, issued by the FASB in June 2001, requires entities to record the
fair value of a liability for a legal obligation to retire an asset in the
period in which the liability is incurred. A legal obligation is a liability
that a party is required to settle as a result of an existing or enacted law,
statute, ordinance or contract. When the liability is initially recorded, the
entity should capitalize a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is adjusted to its present value by
recognizing accretion expense as an operating expense in the income statement
each period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss if the actual costs
differ from the recorded amount.

     TEP

     Prior to adopting FAS 143, costs for final removal of all owned generation
facilities were accrued as an additional component of depreciation expense.
Under FAS 143, only the costs to remove an asset with legally binding retirement
obligations will be accrued over time through accretion of the asset retirement
obligation and depreciation of the capitalized asset retirement cost.

     TEP has identified legal obligations to retire generation plant assets
specified in land leases for its jointly-owned Navajo and Four Corners
Generating Stations. The land on which these stations reside is leased from the
Navajo Nation. The provisions of the leases require the lessees to remove the
facilities upon request of the Navajo Nation at the expiration of the leases.
TEP also has certain environmental obligations at the San Juan Generating
Station. TEP has estimated that its share of the cost to remove the Navajo and
Four Corners facilities and settle the San Juan environmental obligations will
be approximately $38 million at the date of retirement. No other legal
obligations to retire generation plant assets were identified.

     On November 12, 2004, TEP, Phelps Dodge Energy Services, LLC and PNM
Resources, Inc. each purchased from Duke Energy North America, LLC a one-third
interest in a limited liability company which owns the partially constructed
natural gas-fired Luna Energy Facility (Luna) in southern New Mexico. Luna is
designed as a 570-MW combined cycle plant and is expected to be operational by
the summer of 2006. The new owners assumed asset retirement obligations to
remove certain piping and evaporation ponds and to restore the ground to its
original condition. TEP has estimated its share to settle the obligations will
be approximately $2 million at the date of retirement.

     TEP has various transmission and distribution lines that operate under land
leases and rights of way that contain end dates and restorative clauses. TEP
operates its transmission and distribution lines as if they will be operated in
perpetuity and would continue to be used or sold without land remediation. As a
result, TEP is not recognizing the costs of final removal of the transmission
and distribution lines in the financial statements. As of September 30, 2005,
TEP had accrued $74 million for the net cost of removal for the interim
retirements from its transmission, distribution and general plant. As of
December 31, 2004, TEP had accrued $67 million for these removal costs. The
amount is recorded as a regulatory liability.

     Amounts recorded under FAS 143 are subject to various assumptions and
determinations, such as determining whether a legal obligation exists to remove
assets, estimating the fair value of the costs of removal, estimating when final
removal will occur, and the credit-adjusted risk-free interest rates to be used
to discount future liabilities. Changes that may arise over time with regard to
these assumptions and determinations will change amounts recorded in the future
as expense for asset retirement obligations.


                                       62
<PAGE>


     If TEP retires any asset at the end of its useful life, without a legal
obligation to do so, it will record retirement costs at that time as incurred or
accrued. TEP does not believe that the adoption of FAS 143 will result in any
change in retail rates since all matters relating to the rate-making treatment
of TEP's generating assets have been determined pursuant to the Settlement
Agreement.

     UES

     UES has various transmission and distribution lines that operate under land
leases and rights of way that contain end dates and restorative clauses. UES
operates its transmission and distribution lines as if they will be operated in
perpetuity and would continue to be used or sold without land remediation. As a
result, UES is not recognizing the cost of final removal of the transmission and
distribution lines in the financial statements. UES had accrued $3 million as of
September 30, 2005 and $2 million as of December 31, 2004, for the net cost of
removal for interim retirements from its transmission, distribution and general
plant. The amount is recorded as a regulatory liability.

   PENSION AND OTHER POST RETIREMENT BENEFIT PLAN ASSUMPTIONS

     We record plan assets, obligations, and expenses related to pension and
other postretirement benefit plans based on actuarial valuations. These
valuations include key assumptions on discount rates, expected returns on plan
assets, compensation increases and health care cost trend rates. These actuarial
assumptions are reviewed annually and modified as appropriate. The effect of
modifications is generally recorded or amortized over future periods. We believe
that the assumptions used in recording obligations under the plans are
reasonable based on prior experience, market conditions and the advice of plan
actuaries.

     TEP

     TEP discounted its future pension plan obligations at December 31, 2004,
using rates of 6.1% for its Salaried and Union Plans and 6.0% for its Excess
Benefit Plan. The discount rate used at December 31, 2003, was 6.25% for all
plans. TEP discounted its other postretirement plan obligations using a rate of
5.9% at December 31, 2004, compared with 5.5% at December 31, 2003. TEP
determines the discount rate annually based on the rates currently available on
high-quality, long-term bonds. TEP looks to bonds that receive one of the two
highest ratings given by a recognized rating agency whose future cash flows
match the timing and amount of expected future benefit payments.

     The pension liability and future pension expense both increase as the
discount rate is reduced. A decrease in the discount rate results in an increase
in the Projected Benefit Obligation (PBO) and the service cost component of
pension expense. Additionally, the recognized actuarial loss is significantly
impacted by a reduction in the discount rate. Since the PBO increases with the
decrease in discount rate, the obligation is that much larger than would
normally occur due to normal growth of the plan. This leads to an actuarial loss
(or a greater actuarial loss than would occur in the absence of the discount
rate change), which is amortized over future periods leading to a greater
expense. The resulting change in the interest cost component of pension expense
is dependent on the effect that the change in the discount rate has on the PBO
and will vary based on employee demographics. The effect of the lower rate used
to calculate the interest cost is offset to some degree by a larger obligation.
The relative magnitude of these two changes determines whether interest cost
will increase or decrease. For TEP's pension plans, a 25 basis point decrease in
the discount rate would increase the accumulated benefit obligation (ABO) by
approximately $5 million and the related plan expense for 2005 by approximately
$1 million. A similar increase in the discount rate would decrease the ABO by
approximately $5 million and the related plan expense for 2005 by approximately
$1 million. For TEP's plan for other postretirement benefits, a 25 basis point
change in the discount rate would increase or decrease the accumulated
postretirement benefit obligation (APBO) by approximately $2 million. A 25 basis
point change in the discount rate would not have a significant impact on the
related plan expense for 2005.

     TEP calculates the market-related value of plan assets using the fair value
of plan assets on the measurement date. TEP assumed that its plans' assets would
generate a long-term rate of return of 8.5% at December 31, 2004 and 8.75% at
December 31, 2003. In establishing its assumption as to the expected return on
plan assets, TEP reviews the plans' asset allocation and develops return
assumptions for each asset class based on advice from an investment consultant
and the plans' actuary that includes both historical performance analysis and
forward looking views of the financial markets. Pension expense increases as the
expected rate of return on plan assets decreases. A 25 basis point change in the
expected return on plan assets would not have a significant impact on pension
expense for 2005.


                                       63
<PAGE>


     TEP used an initial health care cost trend rate of 11.0% in valuing its
postretirement benefit obligation at December 31, 2004. This rate reflects both
market conditions and the plan's experience. Assumed health care cost trend
rates have a significant effect on the amounts reported for health care plans. A
1% increase in assumed health care cost trend rates would increase the
postretirement benefit obligation by approximately $5 million and the related
plan expense by approximately $1 million. A similar decrease in assumed health
care cost trend rates would decrease the postretirement benefit obligation by
approximately $4 million and the related plan expense by less than $1 million.

     TEP recorded a minimum pension liability in Other Comprehensive Income of
approximately $20 million at December 31, 2004, compared with $3 million at
December 31, 2003. This increase resulted primarily from changes in actuarial
assumptions including revised retirements rates, updated mortality rates and a
reduction in the assumed discount rate.

     Based on the above assumptions, TEP will record pension expense of
approximately $10 million and other postretirement benefit expense of $7 million
ratably throughout 2005. TEP will make required pension plan contributions of $6
million in 2005. TEP's other postretirement benefit plan is not funded. TEP
expects to make benefit payments to retirees under the postretirement benefit
plan of approximately $3 million in 2005.

     UNS GAS AND UNS ELECTRIC

     Concurrent with the acquisition of the Arizona gas and electric system
assets from Citizens on August 11, 2003, UES established a pension plan for
substantially all employees of UNS Gas and UNS Electric. UES did not assume the
pension obligation for employees' years of service with Citizens.

     UES discounted its future pension plan obligations using a rate of 6.1% at
December 31, 2004 and 6.25% at December 31, 2003. For UES' pension plan, a 25
basis point change in the discount rate would have minimal effect on either the
ABO or the related pension expense. UES recorded a minimum pension liability and
an offsetting Intangible Asset of less than $1 million at December 31, 2004 and
approximately $1 million at December 31, 2003. UES will record pension expense
of $1 million in 2005. UES will make a pension plan contribution of $1 million
in 2005.

     On the acquisition date, UES assumed the obligation to provide
postretirement benefits for a small population of former Citizens employees,
both active and retired. The plan is not funded. UES discounted its other
postretirement plan obligations using a rate of 5.9% at December 31, 2004,
compared with 5.5% at December 31, 2003. Postretirement medical benefit expenses
are insignificant to UES' operations.

   ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND
   HEDGING ACTIVITIES

     A derivative financial instrument or other contract derives its value from
another investment or designated benchmark. TEP enters into forward contracts to
purchase or sell a specified amount of capacity or energy at a specified price
over a given period of time, typically for one month, three months, or one year,
within established limits to take advantage of favorable market opportunities.
In general, TEP enters into forward purchase contracts when market conditions
provide the opportunity to purchase energy for its load at prices that are below
the marginal cost of its supply resources or to supplement its own resources
(e.g., during plant outages and summer peaking periods). TEP enters into forward
sales contracts when it forecasts that it has excess supply and the market price
of energy exceeds its marginal cost. A portion of TEP's forward contracts are
considered to be normal purchases and sales and, therefore, are not required to
be marked to market. However, some of these forward contracts are considered to
be derivatives, which TEP marks to market by recording unrealized gains and
losses and adjusting the related assets and liabilities on a monthly basis to
reflect the market prices at the end of the month. Some of these forward
contracts satisfy the requirements for cash flow hedge accounting and the
unrealized gains and losses are recorded in Other Comprehensive Income, a
component of Common Stock Equity, rather than being reflected in the income
statement.

     TEP has a natural gas supply agreement under which it purchases all of its
gas requirements at spot market prices from Southwest Gas Corporation (SWG). TEP
also has agreements to purchase power that are priced using spot market gas
prices. These contracts meet the definition of normal purchases and are not
required to be marked to market. During 2004 and early 2005, in an effort to
minimize price risk on these purchases, TEP entered into commodity price swap
agreements under which TEP purchases gas at fixed prices and simultaneously
sells gas at spot market prices. The spot market price in the swap agreements is
tied to the same index as the purchases under the SWG and purchased power
contracts. These swap agreements, which expire during the summer months through
2008, were entered into with the goal of locking in fixed prices on at least 45%


                                       64
<PAGE>


and not more than 80% of TEP's expected summer monthly gas risk prior to
entering into the month. The swap agreements are marked to market on a monthly
basis; however, since the agreements satisfy the requirements for cash flow
hedge accounting, the unrealized gains and losses are recorded in Other
Comprehensive Income, rather than being reflected in the income statement. As
the gains and losses on these cash flow hedges are realized, a reclassification
adjustment is recorded in Other Comprehensive Income for realized gains and
losses that are included in Net Income.

     TEP manages the risk of counterparty default by performing financial credit
reviews, setting limits, monitoring exposures, requiring collateral when needed,
and using a standardized agreement which allows for the netting of current
period exposures to and from a single counterparty.

     UNS Gas and UNS Electric do not currently have any contracts that are
required to be marked to market. UNS Gas does have a natural gas supply and
management agreement under which it purchases substantially all of its gas
requirements at market prices from BP Energy Company (BP). However, the contract
terms allow UNS Gas to lock in fixed prices on a portion of its gas purchases by
entering into fixed price forward contracts with BP at various times during the
year. This enables UNS Gas to provide more stable prices to its customers. These
purchases are made up to three years in advance with the goal of locking in
fixed prices on at least 45% and not more than 80% of the expected monthly gas
consumption prior to entering into the month. These forward contracts, as well
as the main gas supply contract, meet the definition of normal purchases and
therefore are not required to be marked to market.

     MEG, a wholly-owned subsidiary of Millennium, enters into swap agreements,
options and forward contracts relating to emissions allowances. MEG marks its
trading contracts to market by recording unrealized gains and losses and
adjusting the related assets and liabilities on a monthly basis to reflect the
market prices at the end of the month. In accordance with UniSource Energy's
intention to cease making capital contributions to Millennium, Millennium has
significantly reduced the holdings and activity of MEG. MEG is in the process of
winding down its activities and will not engage in any significant new
activities after 2005.

     The market prices used to determine fair values for TEP and MEG's
derivative instruments at September 30, 2005, are estimated based on various
factors including broker quotes, exchange prices, over the counter prices and
time value. For TEP's forward power contracts, a 10% decrease in market prices
would result in a decrease in unrealized losses of $2 million, while a 10%
increase in market prices would result in an increase in unrealized losses of $2
million. For TEP's forward contracts that are accounted for as cash flow hedges,
a 10% decrease in market prices would result in a $1 million decrease in
unrealized losses reported in Other Comprehensive Income, while a 10% increase
in market prices would result in a $1 million increase in unrealized losses
reported in Other Comprehensive Income. For TEP's gas swap agreements, a 10%
decrease in market prices would result in a $4 million decrease in unrealized
gains reported in Other Comprehensive Income, while a 10% increase in market
prices would result in a $4 million increase in unrealized gains reported in
Other Comprehensive Income. For MEG's remaining trading contracts, a 10%
decrease in market prices or a 10% increase in market prices would be
immaterial.

     Because of the complexity of derivatives, the FASB established a
Derivatives Implementation Group (DIG). To date, the DIG has issued more than
100 interpretations to provide guidance in applying Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133). As the DIG or the FASB continues to issue interpretations,
TEP, UNS Gas and UNS Electric may change the conclusions they have reached and,
as a result, the accounting treatment and financial statement impact could
change in the future.

     See Market Risks - Commodity Price Risk in Item 3.

   UNBILLED REVENUE - TEP, UNS GAS AND UNS ELECTRIC

     TEP's, UNS Gas's and UNS Electric's retail revenues include an estimate of
MWhs/therms delivered but unbilled at the end of each period. Unbilled revenues
are dependent upon a number of factors that require management's judgment
including estimates of retail sales and customer usage patterns. The unbilled
revenue is estimated by comparing the estimated MWhs/therms delivered to the
MWhs/therms billed to TEP, UNS Gas and UNS Electric retail customers. The excess
of estimated MWhs/therms delivered over MWhs/therms billed is then allocated to
the retail customer classes based on estimated usage by each customer class.
TEP, UNS Gas and UNS Electric then record revenue for each customer class based
on the various bill rates for each customer class. Due to the seasonal
fluctuations of TEP's actual load, the unbilled revenue amount increases during
the spring and summer months and decreases during the fall and winter months.
The unbilled revenue amount for UNS Gas sales increases during the fall and


                                       65
<PAGE>


winter months and decreases during the spring and summer months, whereas, the
unbilled revenue amount for UNS Electric sales increases during the spring and
summer months and decreases during the fall and winter months.

   PLANT ASSET DEPRECIABLE LIVES - TEP, UNS GAS AND UNS ELECTRIC

     We calculate depreciation expense based on our estimate of the useful lives
of our plant assets. The estimated useful lives, and resulting depreciation
rates used to calculate depreciation expense for the transmission and
distribution businesses of TEP, UNS Gas and UNS Electric have been approved by
the ACC in prior rate decisions. Depreciation rates for transmission and
distribution cannot be changed without ACC approval.

     The estimated remaining useful lives of TEP's generating facilities are
based on management's best estimate of the economic life of the units. These
estimates are based on engineering estimates, economic analysis, and statistical
analysis of TEP's past experience in maintaining the stations. For 2004,
depreciation expense related to generation assets was $35 million, and our
generation assets are currently depreciated over periods ranging from 23 to 70
years from the original in-service dates.

     During the first quarter of 2004, TEP engaged an independent third party to
review the economic estimated useful lives of its owned generating assets in
Springerville, Arizona. TEP then hired a different independent third party to
perform a depreciation study for its generation assets, taking into
consideration the newly determined economic useful life for the Springerville
assets, and changes in generation plant life information used by the operators
and other participants of the joint power plants in which TEP participates. As a
result of these analyses, TEP lengthened the useful lives of various generation
assets for periods ranging from 11 to 22 years in July 2004. Consequently,
depreciation rates and the corresponding depreciation expense have been revised
prospectively to reflect the life extensions. The annual impact of these changes
in depreciation rates is a reduction in depreciation expense of $9 million.

     During the second quarter of 2005, a study requested by the participants in
the San Juan Generating Station was completed which indicated San Juan's
economic useful life had changed from previous estimates. As a result of the
study and other analysis performed, TEP lengthened the estimated useful life of
San Juan from 40 to 60 years beginning April 1, 2005. TEP's depreciation expense
for the three months ended September 30, 2005, decreased $2 million. Annual
depreciation expense related to San Juan is expected to decrease by $6 million
or $2 million for the last quarter of 2005.

   DEFERRED TAX VALUATION - TEP AND MILLENNIUM

     We record deferred tax liabilities for amounts that will increase income
taxes on future tax returns. We record deferred tax assets for amounts that
could be used to reduce income taxes on future tax returns. We record a
valuation allowance, or reserve, for the deferred tax asset amount that we may
not be able to use on future tax returns. We estimate the valuation allowance
based on our interpretation of the tax rules, prior tax audits, tax planning
strategies, scheduled reversal of deferred tax liabilities, and projected future
taxable income.

     At September 30, 2005 and December 31, 2004, UniSource Energy and TEP had a
valuation allowances of $7 million and $8 million relating to net operating loss
(NOL) and investment tax credit (ITC) carryforward amounts.

     Of the $7 million and $8 million valuation allowance balances at September
30, 2005 and December 31, 2004, $7 million relates to losses generated by the
Millennium entities. In the future, if UniSource Energy and the Millennium
entities determine that all or a portion of the losses may be used on tax
returns, then UniSource Energy and the Millennium entities would reduce the
valuation allowance and recognize a tax benefit of up to $7 million. The primary
factor that could cause the Millennium entities to recognize a tax benefit would
be a change in expected future taxable income.

     The remaining $1 million of valuation allowance balance at December 31,
2004, relates to ITC carryforwards at TEP which were not expected to be utilized
on tax returns prior to their expiration. Due to anticipated changes to prior
year taxable income as a result of current IRS audits, it is now expected that
UniSource and TEP will utilize all of the ITC carryforward amounts. Therefore,
at September 30, 2005, no valuation allowance on ITC carryforward amounts is
required. If in the future UniSource Energy and TEP determine that it is
probable that TEP will not use all or a portion of the ITC carryforward amounts,
then UniSource Energy and TEP would record additional valuation allowance and
recognize tax expense. The primary factor that could cause TEP to record a
valuation allowance would be a change in expected future taxable income.


                                       66
<PAGE>


     As of September 30, 2005 and December 31, 2004, UniSource Energy's and
Millenniums' deferred income tax assets include $14 million related to
unregulated investment losses of Millennium. UniSource Energy's and TEP's
deferred income tax assets as of September 30, 2005 and December 31, 2004,
include $1 million related to TEP's unregulated investment losses. These losses
have not been reflected on UniSource Energy's consolidated income tax returns.
If UniSource Energy is unable to recognize such losses through its consolidated
income tax return in the foreseeable future, UniSource Energy, TEP and
Millennium would be required to write off these deferred tax assets. Millennium
intends to restructure its ownership in two of these investments, TFB, Inc.
(TFB) and Corporacion Panama de Energia S.A. (Copesa), within the next twelve
months. As a result of these actions, UniSource Energy expects to liquidate TFB
for tax purposes and dispose of its stock interest in Copesa, both resulting in
taxable losses that will be reflected on UniSource Energy's consolidated income
tax return. If these actions, or other actions resulting in the recognition of
the losses for tax purposes, do not occur, UniSource Energy would be required to
eliminate the deferred tax assets and recognize additional tax expense of $9
million.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

     The FASB recently issued the following Statements of Financial Accounting
Standards (FAS), FASB Interpretations (FIN), and FASB Staff Positions (FSP):

     o    FIN 47, Accounting for Conditional Asset Retirement Obligations,
          issued March 2005, provides guidance for a legal obligation to perform
          an asset retirement activity in which the timing and (or) method of
          settlement are conditional on a future event that may or may not be
          within the control of the entity. The obligation to perform the asset
          retirement activity is unconditional even though uncertainty exists
          about the timing and (or) method of settlement. FIN 47 requires a
          liability be recognized for the fair value of a conditional asset
          retirement obligation if the fair value can be reasonably estimated.
          FIN 47 is required to be applied by December 31, 2005. We are in the
          process of evaluating the impact of FIN 47 and have identified
          conditional asset retirement obligations associated with asbestos
          wrapping at our Sundt Generating Station. We are currently evaluating
          the amount of this obligation. Additional obligations may be
          identified as we continue our evaluation.

     o    FSP FIN 46(R)-5, Implicit Variable Interests under FASB Interpretation
          No. 46 (revised December 2003), Consolidation of Variable Interest
          Entities, issued March 2005, addresses whether a reporting enterprise
          should consider whether it holds an implicit variable interest in a
          variable interest entity (VIE) or potential VIE when specific
          conditions exist. The guidance in FSP FIN 46(R)-5 was effective April
          1, 2005, and did not have a significant impact on our financial
          statements.

     o    FAS 151, Inventory Costs, issued November 2004, is an amendment of
          Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory
          Pricing. FAS 151 clarifies that abnormal amounts of idle facility
          expense, freight, handling costs, and wasted materials (spoilage)
          should be recognized as current-period charges. FAS 151 also requires
          the allocation of fixed production overheads to inventory based on the
          normal capacity of the production facilities. FAS 151 is effective for
          inventory costs incurred during fiscal years beginning after June 15,
          2005. The adoption of FAS 151 is not expected to have a significant
          impact on our financial statements.

     o    FAS 153, Exchanges of Nonmonetary Assets, issued December 2004,
          requires nonmonetary exchanges be accounted for at fair value,
          recognizing any gains or losses, if their fair value is determinable
          within reasonable limits and the transaction has commercial substance.
          A nonmonetary exchange has commercial substance if future cash flows
          of the entity are expected to change significantly as a result of the
          exchange. FAS 153 is effective for nonmonetary asset exchange
          transactions occurring in fiscal periods beginning after June 15,
          2005. The adoption of FAS 153 is not expected to have a significant
          impact on our financial statements.

     o    FAS 154, Accounting Changes and Error Corrections, issued May 2005,
          provides guidance on the accounting for and reporting of accounting
          changes and error corrections. FAS 154 requires retrospective
          application to prior periods' for a voluntary change in accounting
          principle, unless it is impracticable to do so. FAS 154 also provides
          guidance related to the reporting of a change in accounting estimate,
          a change in reporting entity and the correction of an error. FAS 154
          is effective for accounting changes and corrections of errors made in
          fiscal years beginning after December 15, 2005. The adoption of FAS
          154 is not expected to have a significant impact on our financial
          statements.

     o    FSP FAS 109-1, Application of FASB Statement No. 109, Accounting for
          Income Taxes, to the Tax Deduction on Qualified Production Activities
          Provided by the American Jobs Creation Act of 2004, issued in December
          2004, provides guidance on the application of FAS 109 to the provision
          within the American Jobs Creation Act of 2004 that provides a tax
          deduction, beginning in 2005, on qualified production activities,
          including a company's electric generation activities. Under FSP FAS
          109-1, recognition of the tax deduction on qualified production


                                       67
<PAGE>


          activities is ordinarily reported in the year it is earned. FSP FAS
          109-1 did not have a significant impact on our financial statements.

     In June 2004, the EITF published Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-1). EITF 03-1 provides application guidance on impairment of securities
accounted for under FAS 115, Accounting for Certain Investments in Debt and
Equity Securities, and cost method investments and requires certain quantitative
and qualitative disclosures for securities that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The disclosure requirements are effective for reporting periods
ending after December 31, 2003. The FASB issued FSP EITF Issue 03-1-1, Effective
Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments in
September 2004 delaying the effective date of the application guidance on
impairment of securities until the final issuance of FSP EITF Issue 03-1-a. As
of November 4, 2005, a final FSP EITF Issue 03-1-a has not been issued. The
adoption of EITF 03-1 is not expected to have a significant impact on our
financial statements.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
------------------------------------------

     This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. UniSource
Energy and TEP are including the following cautionary statements to make
applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by or for UniSource Energy or TEP in this Quarterly Report on Form 10-Q.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements that are not statements of historical facts. Forward-looking
statements may be identified by the use of words such as "anticipates",
"estimates", "expects", "intends", "plans", "predicts", "projects", and similar
expressions. From time to time, we may publish or otherwise make available
forward-looking statements of this nature. All such forward-looking statements,
whether written or oral, and whether made by or on behalf of UniSource Energy or
TEP, are expressly qualified by these cautionary statements and any other
cautionary statements which may accompany the forward-looking statements. In
addition, UniSource Energy and TEP disclaim any obligation to update any
forward-looking statements to reflect events or circumstances after the date of
this report.

     Forward-looking statements involve risks and uncertainties, which could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements. We express our expectations, beliefs and
projections in good faith and believe them to have a reasonable basis. However,
we make no assurances that management's expectations, beliefs or projections
will be achieved or accomplished. We have identified the following important
factors that could cause actual results to differ materially from those
discussed in our forward-looking statements. These may be in addition to other
factors and matters discussed in other parts of this report:

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

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

     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 electrical 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.


                                       68
<PAGE>


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

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

     10.  Changes in the depreciable lives of our assets.

     11.  Market conditions and technological changes affecting our unregulated
          businesses.

     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
--------------------------------------------------------------------

     The information contained in this Item updates, and should be read in
conjunction with, information included in Part II, Item 7A in UniSource Energy
and TEP's Annual Report on Form 10-K for the year ended December 31, 2004, in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Items 1 and 2 of this Form 10-Q.

     We are exposed to various forms of market risk. Changes in interest rates,
returns on marketable securities, and changes in commodity prices may affect our
future financial results. The market risks resulting from changes in interest
rates and returns on marketable securities have not changed materially from the
market risks reported in the 2004 Annual Report on Form 10-K. For additional
information concerning risk factors, including market risks, see Safe Harbor for
Forward-Looking Statements, above.

     RISK MANAGEMENT COMMITTEE

     We have a Risk Management Committee responsible for the oversight of
commodity price risk and credit risk related to the wholesale energy marketing
activities of TEP, the emissions and trading activities of MEG, and the fuel and
power procurement activities at TEP and UES. Our Risk Management Committee,
which meets on a quarterly basis and as needed, consists of officers from the
finance, accounting, legal, wholesale marketing, transmission and distribution
operations, and the generation operations departments of UniSource Energy. To
limit TEP's, UES' and MEG's exposure to commodity price risk, the Risk
Management Committee sets trading and hedging policies and limits, which are
reviewed frequently to respond to constantly changing market conditions. To
limit TEP's, UES' and MEG's exposure to credit risk, the Risk Management
Committee reviews counterparty credit exposure, as well as credit policies and
limits.

     COMMODITY PRICE RISK

     We are exposed to commodity price risk primarily relating to changes in the
market price of electricity, natural gas, coal and emissions allowances.


                                       69
<PAGE>


     TEP

     To manage its exposure to energy price risk, TEP enters into forward
contracts to buy or sell energy at a specified price and future delivery period.
Generally, TEP commits to future sales based on expected excess generating
capability, forward prices and generation costs, using a diversified market
approach to provide a balance between long-term, mid-term and spot energy sales.
TEP generally enters into forward purchases during its summer peaking period to
ensure it can meet its load and reserve requirements and account for other
contracts and resource contingencies. TEP also enters into limited forward
purchases and sales to optimize its resource portfolio and take advantage of
locational differences in price. These positions are managed on both a
volumetric and dollar basis and are closely monitored using risk management
policies and procedures overseen by the Risk Management Committee. For example,
the risk management policies provide that TEP should not take a short position
in the third quarter and must have owned generation backing up all forward sales
positions at the time the sale is made. TEP's risk management policies also
restrict entering into forward positions with maturities extending beyond the
end of the next calendar year except for approved hedging purposes.

     The majority of TEP's forward contracts are considered to be "normal
purchases and sales" of electric energy and are not considered to be derivatives
under FAS 133. TEP records revenues on its "normal sales" and expenses on its
"normal purchases" in the period in which the energy is delivered. From time to
time, however, TEP enters into forward contracts that meet the definition of a
derivative under FAS 133. When TEP has derivative forward contracts, it marks
them to market using actively quoted prices obtained from brokers for power
traded over-the-counter at Palo Verde and at other southwestern U.S. trading
hubs. TEP believes that these broker quotations used to calculate the
mark-to-market values represent accurate measures of the fair values of TEP's
positions, because of the short-term nature of TEP's positions, as limited by
risk management policies, and the liquidity in the short-term market.

     To adjust the value of its derivative forward contracts to fair value in
Other Comprehensive Income and on its income statement, TEP recorded net
unrealized gains of $4 million in Other Comprehensive Income for the three month
period ended September 30, 2005, and gains of $8 million in Other Comprehensive
Income for the three month period ended September 30, 2004. For the nine month
periods ended September 30, 2005 and 2004, TEP recorded net unrealized gains of
$1 million and $3 million, respectively, in Other Comprehensive Income. TEP also
recorded net unrealized losses of $8 million in Wholesale Sales for the three
month period ended September 30, 2005, and net unrealized gains of $1 million in
Wholesale Sales for the three month period ended September 30, 2004. For the
nine month periods ended September 30, 2005 and 2004, TEP recorded net
unrealized losses of $9 million and net unrealized gains of $1 million,
respectively, in Wholesale Sales.

     TEP uses sensitivity analysis to measure the impact of an unfavorable
change in market prices on the fair value of its derivative forward contracts.
As of September 30, 2005, for TEP's forward power contracts (a majority of which
are sales contracts), a 10% decrease in market prices would result in a decrease
in unrealized losses of $2 million, while a 10% increase in market prices would
result in an increase in unrealized losses of $2 million. For TEP's forward
contracts that are accounted for as cash flow hedges (a majority of which are
sales contracts), a 10% decrease in market prices would result in a $1 million
decrease in unrealized losses reported in Other Comprehensive Income, while a
10% increase in market prices would result in a $1 million increase in
unrealized losses reported in Other Comprehensive Income.

     TEP is also subject to commodity price risk from changes in the price of
natural gas. In addition to energy from its coal-fired facilities, TEP typically
uses purchased power, supplemented by generation from its gas-fired units, to
meet the summer peak demands of its retail customers and to meet local
reliability needs. Some of these purchased power contracts are price indexed to
natural gas prices. Short-term and spot power purchase prices are also closely
correlated to natural gas prices. Due to its increasing seasonal gas and
purchased power usage, TEP hedges a portion of its total natural gas exposure
from plant fuel, gas-indexed purchase power and spot market purchases with fixed
price contracts for a maximum of three years. TEP purchases its remaining gas
fuel needs and purchased power in the spot and short-term markets.

     In the first nine months of 2005, the average market price of natural gas
was $6.34 per MMBtu, or 20% higher than the same period in 2004. TEP's
generation output fueled by natural gas was approximately 337,000 MWh, or 3% of
total generation and purchased power in the first nine months of 2005. During
the first nine months of 2005, TEP purchased a total of 1,443,000 MWh of energy,
or 15% of total generation and purchased power. As of September 30, 2005, for
TEP's gas swap agreements, a 10% decrease in market prices would result in a $4
million decrease in unrealized gains reported in Other Comprehensive Income,
while a 10% increase in market prices would result in a $4 million increase in
unrealized gains reported in Other Comprehensive Income.


                                       70
<PAGE>


     UES

     UES is also subject to commodity price risk, primarily from the changes in
the price of natural gas purchased for its UNS Gas customers. This risk is
mitigated through the PGA mechanism in UNS Gas' retail rates which provides an
adjustment to recover the actual costs of gas and transportation. UNS Gas
further reduces this risk by purchasing forward fixed price contracts for a
portion of its projected gas needs under its Price Stabilization Plan. UNS Gas
purchases between 45% and 80% of its estimated gas needs in this manner.

     UNS Electric is not exposed to commodity price risk for its purchase of
electricity as it has a fixed price full-requirements supply agreement with PWCC
through May 2008.

     MEG

     MEG trades emissions allowances and related instruments; however, MEG is in
the process of winding down its activities and does not expect to engage in any
significant new activities after 2005. We manage the market risk of this line of
business by setting notional limits by product, as well as limits to the
potential change in fair market value under a 33% change in price or volatility.
We closely monitor MEG's trading activities, which include swap agreements,
options and forward contracts, using risk management policies and procedures
overseen by the Risk Management Committee.

     MEG marks its trading positions to market on a daily basis using actively
quoted prices obtained from brokers and options pricing models for positions
that extend through 2007. As of September 30, 2005 and December 31, 2004, the
fair value of MEG's trading assets combined with emissions allowances it holds
in escrow was $8 million and $77 million, respectively. The fair value of MEG's
trading liabilities was zero at September 30, 2005 and $65 million at December
31, 2004. For the nine months ended September 30, 2005, MEG reflected a $5
million unrealized gain and a $5 million realized loss on its income statement,
compared with an unrealized gain of $4 million and a realized loss of $3 million
for the nine months ended September 30, 2004. For MEG's remaining trading
contracts at September 30, 2005, a 10% decrease in market prices or a 10%
increase in market prices would be immaterial.


<TABLE>
<CAPTION>
                                                              Unrealized Gain (Loss) of MEG's Trading Activities
                                                                            - Millions of Dollars -
                                                      Maturity 0 - 6    Maturity 6 - 12   Maturity over        Total
Source of Fair Value at September 30, 2005                months            months            1 yr.       Unrealized Gain
                                                                                                               (Loss)
---------------------------------------------------- ----------------- ------------------ --------------- -----------------
<S>                                                      <C>              <C>               <C>             <C>
Prices actively quoted                                   $    -           $     -           $     -         $      -
Prices based on models and other valuation methods            -                 -                7                 7
---------------------------------------------------- ----------------- ------------------ --------------- -----------------
Total                                                    $    -           $     -           $    7          $      7
==================================================== ================= ================== =============== =================

</TABLE>

     CREDIT RISK

     UniSource Energy is exposed to credit risk in its energy-related marketing
and trading activities related to potential nonperformance by counterparties. We
manage the risk of counterparty default by performing financial credit reviews,
setting limits, monitoring exposures, requiring collateral when needed, and
using a standard agreement which allows for the netting of current period
exposures to and from a single counterparty.

     We calculate counterparty credit exposure by adding any outstanding
receivable (net of amounts payable if a netting agreement exists) to the
mark-to-market value of any forward contracts. As of September 30, 2005, TEP's
total credit exposure related to its wholesale marketing and gas hedging
activities was approximately $35 million. Approximately $1 million of TEP's
exposure is to non-investment grade companies. TEP had three counterparties with
exposures of greater than 10% of its total credit exposure, totaling
approximately $25 million. MEG's total credit exposure related to its trading
activities was $7 million and was concentrated primarily with one counterparty.
None of MEG's credit exposure is to non-investment grade counterparties.

     UNS Gas is subject to credit risk from non-performance by its supply
counterparty, BP Energy (BP), to the extent that this contract has a
mark-to-market value in favor of UNS Gas. As of September 30, 2005, UNS Gas has


                                       71
<PAGE>


purchased under fixed price contracts approximately 45% of the expected monthly
consumption for the 2005/2006 winter season (November through March) and
approximately 30% of its expected consumption for the 2006/2007 winter season.
At September 30, 2005, the supply contract with BP was in a favorable
mark-to-market position for UNS Gas. When netted against amounts owed to BP,
this credit exposure was approximately $40 million.


ITEM 4. - CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------

     UniSource Energy and TEP have disclosure controls and procedures to ensure
that material information recorded, processed, summarized and reported in their
filings with the SEC is accurate and reported on a timely basis. Management of
UniSource Energy and TEP, with the participation of the principal executive
officer and principal financial officer of UniSource Energy and TEP, have
evaluated these disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of September 30, 2005. Based on such evaluation, the principal executive
officer and principal financial officer of UniSource Energy and TEP have
concluded that such disclosure controls and procedures were, as of such date,
effective at ensuring that material information is recorded, processed,
summarized and reported accurately and within the time periods specified by the
SEC's rules and forms.

     During the fiscal quarter ended September 30, 2005, there have not been any
changes in UniSource Energy or TEP's internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect,
these controls.


                           PART II - OTHER INFORMATION

ITEM 1. - LEGAL PROCEEDINGS
--------------------------------------------------------------------------------

     See Item 7. - Management's Discussion and Analysis of Financial Condition
and Results of Operations, Tucson Electric Power Company, Factors Affecting
Operations, for litigation related to ACC orders and retail competition.

     We discuss other legal proceedings in Note 6 of Notes to Condensed
Consolidated Financial Statements.

     CROSS-COMPLAINTS IN WHOLESALE ELECTRICITY ANTITRUST CASES I AND II

     In late 2000, various California municipalities and citizens filed suits
against Duke Energy Trading and Marketing, L.L.C., Reliant Energy Services, Inc.
and other large suppliers of wholesale electricity alleging that Duke, Reliant,
and the other large suppliers violated antitrust laws by colluding to effect the
price of electricity in the California wholesale electricity market. These
actions were subsequently consolidated in San Diego Superior Court in March 2002
as Wholesale Electricity Antitrust Cases I and II.

     Duke and Reliant responded by filing cross-complaints against TEP and
numerous other wholesale electricity market participants in April 2002. The
cross complaints allege that cross-defendants sold power in significant amounts
at prices the antitrust plaintiffs allege were excessive, and as participants in
power sales, cross-defendants are equally liable for plaintiffs alleged damages.
The entire action was removed to the United States District Court for the
Southern District of California in May 2002. The antitrust plaintiffs responded
to the removal by filing a motion for remand, and on December 13, 2002, the
District Court remanded the case back to state court.

     Duke and Reliant appealed the District Court's remand order and requested
that the order be stayed pending resolution of their appeal. On December 8,
2004, the Ninth Circuit affirmed the District Court's order and the case was
remanded to the state court. Once there, the defendants filed a joint motion to
dismiss to the master complaint and TEP and other cross-defendants filed a joint
motion to dismiss to the cross-complaints. On October 3, 2005, the state court
sustained defendants' joint motion to dismiss and dismissed the master complaint
without leave to amend. TEP is currently negotiating with Duke and Reliant for a
dismissal, but if no agreement can be reached, TEP will proceed with its motion
to dismiss the cross-complaints.



                                       72
<PAGE>


     TEP believes these claims are without merit and intends to vigorously
contest them.

     CITY OF TACOMA

     On June 7, 2004, the City of Tacoma, Washington filed a lawsuit (City of
Tacoma v. American Electric Power Services Corporation, et al. (U.S. District
Ct. W. D. Wash.)) against TEP and various other electricity generators and
marketers alleging that the defendants violated antitrust laws by colluding to
affect the price of electricity in the Pacific Northwest from May 2000 through
2001. These claims are similar to those alleged in the antitrust cases against
TEP and other wholesale electricity market participants described above in
Cross-Complaints in Wholesale Electricity Antitrust Cases I and II. On September
14, 2004, the case was transferred to the United States District Court for the
Southern District of California. TEP along with other defendants filed a joint
motion to dismiss and the motion was granted on February 11, 2005. The City of
Tacoma appealed the dismissal to the Ninth Circuit and the appeal is now
pending.

     TEP believes these claims are without merit and intends to vigorously
contest them.

ITEM 5. - OTHER INFORMATION
--------------------------------------------------------------------------------

NON-GAAP MEASURES

   ADJUSTED EBITDA
   ---------------

     Adjusted EBITDA represents EBITDA excluding the cumulative effect of
accounting change which is a non-cash item. EBITDA is earnings before interest,
taxes, depreciation and amortization. Adjusted EBITDA is presented here as a
measure of liquidity because it can be used as an indication of a company's
ability to incur and service debt and is commonly used as an analytical
indicator in our industry. Adjusted EBITDA measures presented may not be
comparable to similarly titled measures used by other companies. Adjusted EBITDA
is not a measurement presented in accordance with United States generally
accepted accounting principles (GAAP), and we do not intend Adjusted EBITDA to
represent cash flows from operations as defined by GAAP. Adjusted EBITDA should
not be considered to be an alternative to cash flows from operations or any
other items calculated in accordance with GAAP or an indicator of our operating
performance.

     UniSource Energy and TEP view Adjusted EBITDA, a non-GAAP financial
measure, as a liquidity measure. The most directly comparable GAAP measure to
Adjusted EBITDA is Net Cash Flows from Operating Activities.

ADJUSTED EBITDA AND NET CASH FLOWS FROM OPERATING ACTIVITIES

<TABLE>
<CAPTION>
                                                                        UNISOURCE ENERGY
                                                  -------------------------------------------------------------
                                                        THREE MONTHS ENDED            NINE MONTHS ENDED
                                                           SEPTEMEBR 30,                SEPTEMBER 30,
------------------------------------------------- ------------------------------ ------------------------------
UNISOURCE ENERGY                                       2005           2004           2005            2004
                                                                    - Millions of Dollars -

<S>                                                   <C>            <C>            <C>            <C>
  Adjusted EBITDA                                     $  123         $   139        $   314        $   354
  Net Cash Flows from Operating Activities            $   85         $   111        $   176        $   249
</TABLE>


                                       73
<PAGE>


<TABLE>
<CAPTION>
                                                                                              TEP
                                                                  -------------------------------------------------------------
                                                                        THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                           SEPTEMBER 30,                SEPTEMBER 30,
----------------------------------------------------------------- -------------------------------------------------------------
TEP                                                                    2005           2004           2005            2004
                                                                                    - Millions of Dollars -

<S>                                                                   <C>            <C>            <C>            <C>
  Adjusted EBITDA                                                     $  115         $   135        $   290        $   334
  Net Cash Flows from Operating Activities                            $   75         $   100        $   149        $   216


RECONCILIATION OF ADJUSTED EBITDA TO CASH FLOWS FROM OPERATIONS
</TABLE>


<TABLE>
<CAPTION>
                                                                                        UNISOURCE ENERGY
                                                                  -------------------------------------------------------------
                                                                        THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                          SEPTEMBER 30,                  SEPTEMBER 30,
----------------------------------------------------------------- ------------------------------ ------------------------------
                                                                       2005           2004           2005            2004
                                                                                    - Millions of Dollars -
<S>                                                                   <C>             <C>            <C>            <C>
ADJUSTED EBITDA (1)                                                   $  123          $  139         $  314         $  354
Amounts from the Income Statements:
  Less:  Income Taxes                                                     11              17             17             35
  Less:  Total Interest Expense                                           38              41            122            123
Changes in Assets and Liabilities and
   Other Non-Cash Items                                                   11              30              1             53
----------------------------------------------------------------- --------------- -------------- -------------- ---------------
NET CASH FLOWS FROM OPERATING ACTIVITIES                              $   85          $  111         $  176         $  249
================================================================= =============== ============== ============== ===============
</TABLE>

<TABLE>
<CAPTION>

                                                                                              TEP
                                                                  -------------------------------------------------------------
                                                                       THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                          SEPTEMBER 30,                  SEPTEMBER 30,
----------------------------------------------------------------- ------------------------------ ------------------------------
                                                                       2005           2004           2005            2004
                                                                                    - Millions of Dollars -
<S>                                                                   <C>             <C>            <C>            <C>
ADJUSTED EBITDA (1)                                                   $  115          $  135         $  290         $  334
Amounts from the Income Statements:
  Less:  Income Taxes                                                     12              18             19             35
  Less:  Total Interest Expense                                           32              38            107            115
Changes in Assets and Liabilities and
   Other Non-Cash Items                                                    4              21            (15)            32
----------------------------------------------------------------- --------------- -------------- -------------- ---------------
NET CASH FLOWS FROM OPERATING ACTIVITIES                              $   75          $  100         $  149         $  216
================================================================= =============== ============== ============== ===============

(1) ADJUSTED EBITDA WAS CALCULATED AS FOLLOWS:
</TABLE>


                                       74
<PAGE>


<TABLE>
<CAPTION>
                                                                                        UNISOURCE ENERGY
                                                                  -------------------------------------------------------------
                                                                        THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                           SEPTEMBER 30,                 SEPTEMBER 30,
                                                                  ------------------------------ ------------------------------
                                                                       2005           2004           2005            2004
                                                                                    - Millions of Dollars -
<S>                                                                   <C>             <C>            <C>            <C>
NET INCOME                                                            $   18          $   24         $   24         $   43
Amounts from the Income Statements:
Plus:  Income Taxes                                                       11              17             17             35
Plus:  Total Interest Expense                                             38              41            122            123
Plus:  Depreciation and Amortization                                      34              36            102            108
Plus:  Amortization of Transition Recovery Asset                          20              19             44             40
Plus:  Depreciation included in Fuel and Other O&M
          Expense (see Note 13 of Notes to Consolidated
          Financial Statements)                                            2               2              5              5
----------------------------------------------------------------- --------------- -------------- -------------- ---------------
ADJUSTED EBITDA                                                       $  123          $  139         $  314         $  354
================================================================= =============== ============== ============== ===============
</TABLE>

<TABLE>
<CAPTION>


                                                                                              TEP
                                                                  -------------------------------------------------------------
                                                                        THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                          SEPTEMBER 30,                   SEPTEMBER 30,
                                                                  ------------------------------ ------------------------------
                                                                       2005           2004           2005            2004
                                                                                    - Millions of Dollars -
<S>                                                                   <C>             <C>            <C>            <C>
NET INCOME                                                            $   20          $   26         $   28         $   45
Amounts from the Income Statements:
Plus:  Income Taxes                                                       12              18             19             35
Plus:  Total Interest Expense                                             32              38            107            115
Plus:  Depreciation and Amortization                                      29              32             87             94
Plus:  Amortization of Transition Recovery Asset                          20              19             44             40
Plus:  Depreciation included in Fuel and Other O&M
          Expense (see Note 13 of Notes to Consolidated
          Financial Statements)                                            2               2              5              5
----------------------------------------------------------------- --------------- -------------- -------------- ---------------
ADJUSTED EBITDA                                                       $  115          $  135         $  290         $  334
================================================================= =============== ============== ============== ===============
</TABLE>

NET DEBT AND TOTAL DEBT AND CAPITAL LEASE OBLIGATIONS - TEP
-----------------------------------------------------------

     Net Debt represents the current and non-current portions of TEP's long-term
debt and capital lease obligations less investment in lease debt. We have
subtracted investment in lease debt because it represents TEP's ownership of the
debt component of its own capital lease obligations. Net Debt measures presented
may not be comparable to similarly titled measures used by other companies. Net
Debt is not a measurement presented in accordance with GAAP and we do not intend
Net Debt to represent debt as defined by GAAP. You should not consider Net Debt
to be an alternative to debt or any other items calculated in accordance with
GAAP.

<TABLE>
<CAPTION>
                                                 AS OF              AS OF
                                           SEPTEMBER 30, 2005  DECEMBER 31, 2004
------------------------------------------ ------------------  -----------------
                                                  - Millions of Dollars -
<S>                                            <C>                    <C>
Net Debt                                       $  1,376             $  1,684
Total Debt and Capital Lease Obligations       $  1,533             $  1,855
------------------------------------------ ------------------  -----------------
</TABLE>


                                       75
<PAGE>


<TABLE>
<CAPTION>
RECONCILIATION OF TOTAL DEBT AND CAPITAL LEASE OBLIGATIONS TO NET DEBT

                                                      AS OF              AS OF
                                                SEPTEMBER 30, 2005  DECEMBER 31, 2004
----------------------------------------------- ------------------  -----------------
                                                       - Millions of Dollars -
<S>                                                 <C>               <C>
Long-Term Debt                                      $    821           $  1,098
Current Portion - Long-Term Debt                           -                  2
----------------------------------------------- ------------------ ------------------
  TOTAL DEBT                                             821              1,100
----------------------------------------------- ------------------ ------------------

Capital Lease Obligations                                663                701
Current Portion - Capital Lease Obligations               49                 54
----------------------------------------------- ------------------ ------------------
TOTAL DEBT AND CAPITAL LEASE OBLIGATIONS               1,533              1,855
----------------------------------------------- ------------------ ------------------

Investment in Lease Debt                                (157)              (171)
----------------------------------------------- ------------------ ------------------
NET DEBT                                            $  1,376           $  1,684
=============================================== ================== ==================
</TABLE>

RATIO OF EARNINGS TO FIXED CHARGES
----------------------------------

     The following table reflects the ratio of earnings to fixed charges for
UniSource Energy and TEP:

<TABLE>
<CAPTION>
                                 3 Months Ended             9 Months Ended
                               September 30, 2005         September 30, 2005
-------------------------- --------------------------- -------------------------
<S>                                   <C>                        <C>
UniSource Energy                      1.74                       1.34

TEP                                   1.98                       1.44

</TABLE>

SEC REPORTS AVAILABLE ON UNISOURCE ENERGY'S WEBSITE
---------------------------------------------------

     UniSource Energy and TEP make available their annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to those reports as soon as reasonably practicable after they electronically
file them with, or furnish them to, the SEC. These reports are available free of
charge through UniSource Energy's website address: http://www.uns.com. A link
from UniSource Energy's website to these SEC reports is accessible as follows:
At the UniSource Energy main page, select Investor Relations from the menu shown
at the top of the page; next select SEC filings from the menu shown on the
Investor Relations page.

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

     The SEC also maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. The SEC website address is http://www.sec.gov.
Interested parties may also read and copy any materials UniSource Energy or TEP
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. Information on the operation of the Public Reference Room
is available by calling the SEC at 1-800-SEC-0030.


ITEM 6. - EXHIBITS
--------------------------------------------------------------------------------

     See Exhibit Index.


                                       76
<PAGE>


                                   SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiaries.


                                             UNISOURCE ENERGY CORPORATION
                                             ----------------------------
                                                      (Registrant)


Date:  November 4, 2005                      /s/        Kevin P. Larson
                                             -----------------------------------
                                                        Kevin P. Larson
                                             Senior Vice President and Principal
                                                        Financial Officer



                                             TUCSON ELECTRIC POWER COMPANY
                                             -----------------------------
                                                      (Registrant)


Date:  November 4, 2005                      /s/        Kevin P. Larson
                                             -----------------------------------
                                                        Kevin P. Larson
                                             Senior Vice President and Principal
                                                        Financial Officer


                                       77
<PAGE>


                                  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).

*Pursuant to Item 601(b)(32)(ii) of Regulation S-K, this certificate is not
being filed for purposes of Section 18 of the Securities Exchange Act of 1934.


                                       78