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, 1998

                                       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)
                 220 West Sixth Street
                 Tucson, AZ  85701
                 (520) 571-4000
1-5924           TUCSON ELECTRIC POWER COMPANY            86-0062700
                 (An Arizona Corporation)
                 220 West Sixth Street
                 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 
    --------     --------

     At November 6, 1998, 32,246,455 shares of UniSource Energy Corporation's
Common Stock, no par value (the only class of Common Stock), were outstanding.

     UniSource Energy Corporation is the sole holder of the 32,162,167 shares 
of the outstanding Common Stock of Tucson Electric Power Company.


<PAGE>

This combined Form 10-Q is separately filed by UniSource Energy Corporation and
Tucson Electric Power Company.  Information contained herein 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.


                               TABLE OF CONTENTS
                                                                           Page
                                                                           ----

Definitions..................................................................iv
Report of Independent Accountants.............................................1
Independent Accountants' Review Report........................................2

                         PART I - FINANCIAL INFORMATION

Item 1.  -- Financial Statements
     UniSource Energy Corporation
         Comparative Condensed Consolidated Statements of Income .............3
         Comparative Condensed Consolidated Statements of Cash Flows..........4
         Comparative Condensed Consolidated Balance Sheets....................5
     Tucson Electric Power Company
         Comparative Condensed Consolidated Statements of Income..............6
         Comparative Condensed Consolidated Statements of Cash Flows..........7
         Comparative Condensed Consolidated Balance Sheets....................8
     Notes to Condensed Consolidated Financial Statements
     Note 1.    Accounting for the Effects of Regulation......................9
     Note 2.    Tax Assessments..............................................12
     Note 3.    Transfer of MEH from TEP to UniSource Energy.................12
     Note 4.    Investments in Energy Related Affiliates.....................13
     Note 5.    Long-Term Debt...............................................14
     Note 6.    Warrant Exchange.............................................14
     Note 7.    Rate Matters.................................................15
     Note 8.    Income Taxes.................................................15
     Note 9.    Change in Method of Estimating Unbilled Revenues.............16
     Note 10.   New Accounting Standard......................................16
     Note 11.   Reclassifications............................................17
     Note 12.   Review by Independent Public Accountants.....................17

Item 2.  -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
     Overview................................................................18
     Competition
         Retail..............................................................19
         Wholesale...........................................................23
     TEP Rate Settlement Agreement...........................................24
     Accounting for the Effects of Regulation................................24
     Investments in Energy Related Affiliates................................25
     Dividends on Common Stock
         UniSource Energy....................................................26
         TEP.................................................................26
     Earnings................................................................26
     Results of Operations...................................................27
          Utility Sales and Revenues.........................................27
          Operating Expenses........................................... .....28
          Other Income (Deductions)..........................................28
          Interest Expense......................................... .........29
       Events Affecting Future Results of Utility Operations
           TEP Generating Resources..........................................29
     Liquidity and Capital Resources
       Cash Flows
           UniSource Energy..................................................29
           TEP...............................................................30
       Financing Developments
         Warrant Exchange Offer..............................................30
         Direct Stock Purchase Plan............. ............................30
         TEP First Mortgage Bonds............................................31
         TEP Sale of Pollution Control Bonds.................................31
         TEP Credit Agreement................................................31
         UniSource Energy--Loans and Guarantees..............................32
     Impact of Year 2000 on Computer Systems and Applications................32
     Safe Harbor for Forward-Looking Statements..............................34

                          PART II - OTHER INFORMATION

Item 1. -- Legal Proceedings
     Tax Assessments.........................................................35
Item 5. - Other Information
     Investments in Energy-Related Affiliates................................35
     Additional Financial Data...............................................36
Item 6.  -- Exhibits and Reports on Form 8-K.................................36
Signature Page...............................................................37
Exhibit Index................................................................38


<PAGE>

                                  DEFINITIONS

The abbreviations and acronyms used in the 1998 Third Quarter Form 10-Q are
defined below:
-------------------------------------------------------------------------------

ACC...............   Arizona Corporation Commission.
ACC Staff.........   Staff of the Arizona Corporation Commission.
ADOR..............   Arizona Department of Revenue.
AET...............   Advanced Energy Technologies, Inc., a wholly-owned
                      subsidiary of MEH Corporation.
Affected Utilities   Electric utilities regulated by the ACC, including TEP,
                      Arizona Public Service, Citizens Utilities Company, and
                      several electric cooperatives.
APS...............   Arizona Public Service Company.
Banks.............   The financial institutions party to the Credit Agreement
                      dated as of December 30, 1997.
Common Stock......   The Company's common stock, without par value.
Company or UniSource 
 Energy...........   UniSource Energy Corporation.
Credit Agreement..   Credit Agreement between TEP and the Banks, dated as of
                      December 30, 1997.
EITF..............   Emerging Issues Task Force of the Financial Accounting
                      Standards Board.
FAS 71............   Statement of Financial Accounting Standards #71:
                      Accounting for the Effects of Certain Types of
                      Regulation.
FAS 101...........   Statement of Financial Accounting Standards #101:
                      Regulated Enterprises - Accounting for the
                      Discontinuation of Application of FAS 71.
FAS 121...........   Statement of Financial Accounting Standards #121:
                      Accounting for the Impairment of Long-Lived Assets and
                      for Long-Lived Assets to be Disposed Of.
FERC..............   Federal Energy Regulatory Commission.
First Collateral 
 Trust Bonds......   Bonds issued under the First Collateral Trust
                      Indenture.
First Collateral 
 Trust Indenture..   The Indenture, dated as of August 1,
                      1998, of Tucson Electric Power Company to Bank of
                      Montreal Trust Company of the City of New York, as
                      trustee.
First Mortgage Bonds  First mortgage bonds issued under the General First
                      Mortgage.
General First 
 Mortgage.........   The Indenture, dated as of April 1, 1941, of Tucson
                      Gas, Electric Light and Power Company to The Chase
                      National Bank of the City of New York, as trustee, as
                      supplemented and amended.
General Second 
 Mortgage.........   The Indenture, dated as of December 1, 1992, of
                      Tucson Electric Power Company to Bank of Montreal Trust
                      Company of the City of New York, as trustee, as
                      supplemented.
Global Solar......   Global Solar Energy, L.L.C., a corporation in which a 50%
                      interest is owned by AET.
Holding Company 
 Order............   ACC Order issued November 25, 1997 granting TEP the
                      authority to organize a public utility holding company.
IDBs..............   Industrial development revenue or pollution control bonds.
IRS...............   Internal Revenue Service.
Irvington.........   Irvington Generating Station.
Irvington Lease...   The leveraged lease arrangement relating to Irvington Unit
                      4.
ISO...............   Independent System Operator.
ITC...............   Investment Tax Credit.
kWh...............   Kilowatt-hour(s).
LOC...............   Letter of Credit.
MEH...............   MEH Corporation, a wholly-owned subsidiary of UniSource
                      Energy.
Millennium........   Millennium Energy Holdings, Inc., a wholly-owned
                      subsidiary of MEH.
MRA...............   Master restructuring agreement between TEP and certain
                      banks which included the Renewable Term Loan, Revolving
                      Credit and certain replacement reimbursement agreements,
                      which was terminated on December 30, 1997.
MSR...............   Modesto, Santa Clara and Redding Public Power Agency.
MW................   Megawatt(s).
Nations Energy....   Nations Energy Corporation, a wholly-owned subsidiary of
					  MEH.
NEV...............   New Energy Ventures, Inc., a company in which a 50%
                      interest is owned by Millennium.
NEV Technologies..   NEV Technologies, L.L.C., a majority owned subsidiary of
                      NEV.
1994 Rate Order...   ACC Rate Order concerning an increase in TEP's retail base
                      rates and certain regulatory write-offs, issued January
                      11, 1994.
1996 Rate Order...   ACC Rate Order concerning an increase in
                      TEP's retail base rates and the recovery of Springerville
                      Unit 2 costs, issued March 29, 1996.
NOL...............   Net Operating Loss carryforward for income tax purposes.
Rate Settlement...   TEP's rate settlement agreement approved by the ACC in
                      August 1998, which provides retail base price decreases
                      over a two year period.
Renewable Term Loan   Credit facility under the MRA, which was terminated
                       December 30, 1997.
Revolving Credit..   $100 million revolving credit facility entered into under
                      the Credit Agreement between a syndicate of certain of
                      the Banks and TEP.
SCR Agreement.....   Settlement Agreement dated November 4, 1998 between TEP
                      and the ACC Staff, regarding the divestiture of
                      generating assets and stranded cost recovery.
SEC...............   Securities and Exchange Commission.
Second Mortgage 
 Bonds............   TEP's second mortgage bonds issued under the General
                      Second Mortgage.
SES...............   Southwest Energy Solutions, Inc., a wholly-owned
                      subsidiary of MEH.
Shareholders......   Holders of UniSource Energy Common Stock.
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 Leases.........   Leveraged lease arrangements relating to
                      Springerville Unit 1, and an undivided one-half interest
                      in certain Springerville Common Facilities and which has
                      been assumed by TEP.
SRP...............   Salt River Project Agricultural Improvement and Power
                      District.
Standard Offer....   Bundled service offered to all consumers in a designated
                      service territory at regulated rates.
SWPP..............   SWPP Investment Company, a wholly-owned subsidiary of SES.
SWPPI.............   SWPP International, a wholly-owned subsidiary of SES.
TEP...............   Tucson Electric Power Company, the principal subsidiary of
                      UniSource Energy.
UniSource Energy..   UniSource Energy Corporation.
Valencia..........   Valencia Energy Company, previously a wholly owned
                      subsidiary of TEP, merged into TEP on May 31, 1996.
VSP...............   Voluntary Severance Plan offered to TEP employees and
                      implemented in May 1996.
WSCC..............   Western Systems Coordinating Council.


<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
UniSource Energy Corporation and
to the Board of Directors of
Tucson Electric Power Company

We have reviewed the accompanying condensed consolidated balance sheet and the
related condensed consolidated statements of income and of cash flows of
UniSource Energy Corporation and its subsidiaries (the Company) and of Tucson
Electric Power Company and its subsidiaries (TEP) as of and for the three-month
and nine-month periods ended September 30, 1998.  This financial information is
the responsibility of the Company's and TEP's management.  The financial
statements as of September 30, 1997 were reviewed by other independent
accountants whose report dated February 23,1998 stated that they were not aware
of any material modifications that should be made to such financial information
for it to be in conformity with generally accepted accounting principles.

We conducted our review in accordance with standards established by the 
American Institute of Certified Public Accountants. A review of interim 
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and 
accounting matters.  It is substantially less in scope than an audit conducted 
in accordance with generally accepted auditing standards, 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 financial information as of and for the three-month
and nine-month periods ended September 30, 1998 for it to be in conformity with
generally accepted accounting principles.

As discussed in Note 9 to the condensed consolidated financial statements, TEP
changed its method of estimating unbilled revenue during the three months ended
September 30, 1998.

The financial statements of the Company and of TEP for the year ended December
31, 1997 were audited by other independent accountants whose report dated
February 23, 1998 expressed an unqualified opinion on those statements.



PricewaterhouseCoopers LLP
Phoenix, Arizona
November 6, 1998


<PAGE>


INDEPENDENT ACCOUNTANTS' REVIEW REPORT


UniSource Energy Corporation and its Stockholders
Tucson Electric Power Company
220 West Sixth Street
Tucson, Arizona 85701

We have reviewed the condensed consolidated statements of income of UniSource
Energy Corporation and its subsidiaries (the Company) and Tucson Electric Power
Company (TEP) for the three-month and nine-month periods ended September 30,
1997 and cash flows for the nine-month period ended September 30, 1997.  These
financial statements are the responsibility of the Company's and TEP's
management.

We conducted our review in accordance with standards established by the 
American Institute of Certified Public Accountants.  A review of interim 
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters.  It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, 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 such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets and statements of capitalization of
the Company and TEP as of December 31, 1997 and the related statements of
income, cash flows, and changes in stockholders' equity (deficit) for the year
then ended (not presented herein);and in our report dated February 23, 1998, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheets as of December 31, 1997 is fairly stated, in all
material respects, in relation to the consolidated balance sheets from which
they have been derived.



DELOITTE & TOUCHE LLP
Tucson, Arizona
February 23, 1998


<PAGE>



                        PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

The weather causes seasonal fluctuations in UniSource Energy's sales. As a
result, quarterly results are not indicative of annual operating results. The
quarterly financial statements that follow 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. Also see Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations.  This quarterly report should
be reviewed in conjunction with the Company's 1997 Form 10-K.

UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                       Three Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-
Operating Revenues
 Retail Customers                                     $196,398    $201,566
 Amortization of MSR Option Gain Regulatory Liability        -           -
 Sales for Resale                                       56,831      29,523
                                                      ---------   ---------
    Total Operating Revenues                           253,229     231,089
                                                      ---------   ---------
Operating Expenses
 Fuel and Purchased Power                               94,705      66,243
 Capital Lease Expense                                  25,469      25,786
 Amortization of Springerville Unit 1 Allowance         (7,631)     (7,009)
 Other Operations                                       24,980      28,402
 Maintenance and Repairs                                 8,172       8,284
 Depreciation and Amortization                          22,033      21,598
 Taxes Other Than Income Taxes                          12,594      12,517
 Income Taxes                                           18,297      19,158
                                                      ---------   ---------
    Total Operating Expenses                           198,619     174,979
                                                      ---------   ---------
      Operating Income                                  54,610      56,110
                                                      ---------   ---------

Other Income (Deductions)
 Income Taxes                                             (974)     13,337
 Reversal of Loss Provision                                  -           -
 Interest Income                                         3,075       1,996
 Unregulated Energy Businesses - Net                     5,698      (1,648)
 Other                                                     536         434
                                                      ---------   ---------
    Total Other Income (Deductions)                      8,335      14,119
                                                      ---------   ---------

Interest Expense
 Long-Term Debt                                         18,591      16,896
 Interest Imputed on Losses Recorded at Present Value    8,544       8,101
 Other                                                   2,137       1,817
                                                      ---------   ---------
    Total Interest Expense                              29,272      26,814
                                                      ---------   ---------

Net Income                                            $ 33,673    $ 43,415
                                                      =========   =========


Average Shares of Common Stock Outstanding (000)        32,157      32,136
                                                      =========   =========

Basic Earnings per Share                                 $1.05       $1.35
                                                      =========   =========
Diluted Earnings per Share                               $1.05       $1.34
                                                      =========   =========

See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                        Nine Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-
Operating Revenues
 Retail Customers                                     $485,137    $490,752
 Amortization of MSR Option Gain Regulatory Liability        -       8,105
 Sales for Resale                                      108,636      69,483
                                                      ---------   ---------
    Total Operating Revenues                           593,773     568,340
                                                      ---------   ---------
Operating Expenses
 Fuel and Purchased Power                              199,798     163,382
 Capital Lease Expense                                  77,805      78,450
 Amortization of Springerville Unit 1 Allowance        (22,892)    (21,028)
 Other Operations                                       78,408      82,785
 Maintenance and Repairs                                27,327      29,899
 Depreciation and Amortization                          67,479      64,817
 Taxes Other Than Income Taxes                          38,154      38,235
 Income Taxes                                           19,398      21,070
                                                      ---------   ---------
    Total Operating Expenses                           485,477     457,610
                                                      ---------   ---------
      Operating Income                                 108,296     110,730
                                                      ---------   ---------

Other Income (Deductions)
 Income Taxes                                            1,411      39,280
 Reversal of Loss Provision                                  -      10,154
 Interest Income                                         8,315       6,602
 Unregulated Energy Businesses - Net                    (3,987)     (2,092)
 Other                                                   2,480      (1,057)
                                                      ---------   ---------
    Total Other Income (Deductions)                      8,219      52,887
                                                      ---------   ---------

Interest Expense
 Long-Term Debt                                         55,494      47,673
 Interest Imputed on Losses Recorded at Present Value   25,634      24,555
 Other                                                   7,691       6,581
                                                      ---------   ---------
    Total Interest Expense                              88,819      78,809
                                                      ---------   ---------

Net Income                                            $ 27,696    $ 84,808
                                                      =========   =========


Average Shares of Common Stock Outstanding (000)        32,144      32,138
                                                      =========   =========

Basic Earnings per Share                              $   0.86    $   2.64
                                                      =========   =========
Diluted Earnings per Share                            $   0.86    $   2.63
                                                      =========   =========

See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        Nine Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-
Cash Flows from Operating Activities
  Cash Receipts from Retail Customers                 $494,694    $496,765
  Cash Receipts from Sales for Resale                  100,228      67,850
  Fuel and Purchased Power Costs Paid                 (177,805)   (154,333)
  Wages Paid, Net of Amounts Capitalized               (52,666)    (48,115)
  Payment of Other Operations and Maintenance Costs    (68,757)    (67,617)
  Capital Lease Interest Paid                          (80,642)    (80,469)
  Taxes Paid, Net of Amounts Capitalized               (62,821)    (60,735)
  Interest Paid, Net of Amounts Capitalized            (57,982)    (47,057)
  Contract Termination Fee Paid                        (10,000)    (40,000)
  Income Taxes Paid                                         (3)     (1,050)
  Emission Allowance Inventory Sales                    11,368          39
  Interest Received                                      7,873       6,344
  Other                                                    477       1,529
                                                      ---------   ---------
    Net Cash Flows - Operating Activities              103,964      73,151
                                                      ---------   ---------

Cash Flows from Investing Activities
  Construction Expenditures                            (54,786)    (47,937)
  Investments in Joint Ventures                         (7,103)     (3,998)
  Other                                                    (36)        868
                                                      ---------   ---------
    Net Cash Flows - Investing Activities              (61,925)    (51,067)
                                                      ---------   ---------

Cash Flows from Financing Activities
  Proceeds from Issuance of Long-Term Debt              99,021      13,257
  Payments to Retire Long-Term Debt                    (99,472)       (500)
  Payments on Renewable Term Loan                            -     (31,000)
  Payments to Retire Capital Lease Obligations         (17,373)    (13,969)
  Other                                                 (5,941)       (381)
                                                      ---------   ---------
    Net Cash Flows - Financing Activities              (23,765)    (32,593)
                                                      ---------   ---------

Net Increase (Decrease) in Cash and Cash Equivalents    18,274     (10,509)
Cash and Cash Equivalents, Beginning of Year           146,256     130,291
                                                      ---------   ---------
Cash and Cash Equivalents, End of Period              $164,530    $119,782
                                                      =========   =========











See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION


                                                        Nine Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-

Net Income                                            $ 27,696    $ 84,808
Adjustments to Reconcile Net Income
   to Net Operating Cash Flows
  Depreciation and Amortization Expense                 67,479      64,817
  Deferred Income Taxes and Investment Tax Credits-Net  14,768     (19,260)
  Lease Payments Deferred                                4,127       6,771
  Amortization of Regulatory Assets & Liabilities,
   Net of Interest Imputed on Losses Recorded at
   Present Value                                         2,742      (4,578)
  Deferred Contract Termination Fee                     (7,115)    (39,038)
  Loss (Unremitted Earnings) of Unconsolidated
   Subsidiaries                                          6,373        (515)
  Emission Allowances                                   11,368          39
  Reversal of Loss Provision                                 -     (10,154)
  Other                                                  1,842         236
  Changes in Assets and Liabilities which Provided
   (Used) Cash Exclusive of Changes Shown Separately
    Accounts Receivable                                (36,001)    (34,964)
    Materials and Fuel                                  (3,405)     (6,900)
    Accounts Payable                                     7,740       7,805
    Other Current Assets and Liabilities                 7,791      20,763
    Other Deferred Assets and Liabilities               (1,441)      3,321
                                                      ---------   ---------
Net Cash Flows - Operating Activities                 $103,964    $ 73,151
                                                      =========   =========

Non-Cash Investing and Financing Activities (these activities do not affect
the statements of cash flows):
See Note 5 - Long Term Debt for a description of non-cash financing
activities in 1998.  Additionally, the proceeds from the issuance of $111.8
million of Pollution Control Revenue Bonds in April 1997 were held in trust
and used in June 1997 to redeem $111.8 million of previously issued bonds.


















See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS


                                                 September 30,   December 31,
                                                     1998           1997
ASSETS                                             - Thousands of Dollars -
Utility Plant
  Plant in Service                                  $2,246,957  $2,194,150
  Utility Plant Under Capital Leases                   886,901     893,064
  Construction Work in Progress                         71,406      72,404
                                                    ----------- -----------
    Total Utility Plant                              3,205,264   3,159,618
  Less Accumulated Depreciation and Amortization    (1,037,985)   (982,621)
  Less Accumulated Amortization of Capital Leases      (81,287)    (73,728)
  Less Springerville Unit 1 Allowance                 (170,498)   (167,756)
                                                    ----------- -----------
    Total Utility Plant - Net                        1,915,494   1,935,513
                                                    ----------- -----------

Investments and Other Property                          84,283      79,471
                                                    ----------- -----------

Current Assets
  Cash and Cash Equivalents                            164,530     146,256
  Accounts Receivable                                  107,226      71,225
  Materials and Fuel                                    38,155      34,005
  Deferred Income Taxes - Current                        6,537      14,910
  Other                                                 25,009      22,954
                                                    ----------- -----------
    Total Current Assets                               341,457     289,350
                                                    ----------- -----------

Deferred Debits - Regulatory Assets
  Income Taxes Recoverable Through Future Rates        159,333     170,034
  Deferred Springerville Common Facility Costs          56,317      58,222
  Deferred Springerville Contract Termination Fee       45,192      48,077
  Deferred Springerville Unit 2 Costs                    4,621      11,590
  Deferred Lease Expense                                10,116      11,571
  Other Regulatory Assets                               16,937      11,089
Deferred Debits - Other                                 22,165      19,492
                                                    ----------- -----------
    Total Deferred Debits                              314,681     330,075
                                                    ----------- -----------
Total Assets                                        $2,655,915  $2,634,409
                                                    =========== ===========













See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS


                                                 September 30,   December 31,
                                                     1998          1997
CAPITALIZATION AND OTHER LIABILITIES               - Thousands of Dollars -
Capitalization
  Common Stock                                      $  639,320  $  638,904
  Accumulated Deficit                                 (394,330)   (422,026)
                                                     ----------- -----------
  Common Stock Equity                                  244,990     216,878
  Capital Lease Obligations                            887,116     890,257
  Long-Term Debt                                     1,214,423   1,215,120
                                                    ----------- -----------
    Total Capitalization                             2,346,529   2,322,255
                                                    ----------- -----------

Current Liabilities
  Current Obligations Under Capital Leases              11,698      14,552
  Current Maturities of Long-Term Debt                   1,725         500
  Accounts Payable                                      42,649      34,909
  Interest Accrued                                      44,674      64,812
  Taxes Accrued                                         37,918      24,397
  Contract Termination Fee Payable                           -      10,000
  Other                                                 16,871      19,051
                                                    ----------- -----------
    Total Current Liabilities                          155,535     168,221
                                                    ----------- -----------

Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                    75,106      77,606
  Accumulated Deferred Investment Tax Credits
   Regulatory Liability                                 10,099      11,905
  Emission Allowance Gain Regulatory Liability          31,346      17,591
  Other                                                 37,300      36,831
                                                    ----------- -----------
    Total Deferred Credits and Other Liabilities       153,851     143,933
                                                    ----------- -----------
Total Capitalization and Other Liabilities          $2,655,915  $2,634,409
                                                    =========== ===========


















See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

The weather causes seasonal fluctuations in TEP's sales. As a result,
quarterly results are not indicative of annual operating results. The
quarterly financial statements that follow 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. Also see Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations.  This quarterly report should
be reviewed in conjunction with the TEP's 1997 Form 10-K.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                       Three Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-
Operating Revenues
 Retail Customers                                     $196,449    $201,566
 Amortization of MSR Option Gain Regulatory Liability        -           -
 Sales for Resale                                       56,831      29,523
                                                      ---------   ---------
    Total Operating Revenues                           253,280     231,089
                                                      ---------   ---------
Operating Expenses
 Fuel and Purchased Power                               94,705      66,243
 Capital Lease Expense                                  25,469      25,786
 Amortization of Springerville Unit 1 Allowance         (7,631)     (7,009)
 Other Operations                                       24,980      28,402
 Maintenance and Repairs                                 8,172       8,284
 Depreciation and Amortization                          22,033      21,598
 Taxes Other Than Income Taxes                          12,594      12,517
 Income Taxes                                           18,297      19,158
                                                      ---------   ---------
    Total Operating Expenses                           198,619     174,979
                                                      ---------   ---------
      Operating Income                                  54,661      56,110
                                                      ---------   ---------

Other Income (Deductions)
 Income Taxes                                           (1,924)     13,337
 Reversal of Loss Provision                                  -           -
 Interest Income                                         3,081       1,996
 Interest Income-Note Receivable from UniSource Energy   2,352           -
 Other                                                     476      (1,214)
                                                      ---------   ---------
    Total Other Income (Deductions)                      3,985      14,119
                                                      ---------   ---------

Interest Expense
 Long-Term Debt                                         18,591      16,896
 Interest Imputed on Losses Recorded at Present Value    8,544       8,101
 Other                                                   2,137       1,817
                                                      ---------   ---------
    Total Interest Expense                              29,272      26,814
                                                      ---------   ---------

Net Income                                            $ 29,374    $ 43,415
                                                      =========   =========










See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                        Nine Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-
Operating Revenues
 Retail Customers                                     $485,333    $490,752
 Amortization of MSR Option Gain Regulatory Liability        -       8,105
 Sales for Resale                                      108,636      69,483
                                                      ---------   ---------
    Total Operating Revenues                           593,969     568,340
                                                      ---------   ---------
Operating Expenses
 Fuel and Purchased Power                              199,798     163,382
 Capital Lease Expense                                  77,805      78,450
 Amortization of Springerville Unit 1 Allowance        (22,892)    (21,028)
 Other Operations                                       78,408      82,785
 Maintenance and Repairs                                27,327      29,899
 Depreciation and Amortization                          67,479      64,817
 Taxes Other Than Income Taxes                          38,154      38,235
 Income Taxes                                           19,398      21,070
                                                      ---------   ---------
    Total Operating Expenses                           485,477     457,610
                                                      ---------   ---------
      Operating Income                                 108,492     110,730
                                                      ---------   ---------

Other Income (Deductions)
 Income Taxes                                           (1,408)     39,280
 Reversal of Loss Provision                                  -      10,154
 Interest Income                                         8,323       6,602
 Interest Income-Note Receivable from UniSource Energy   6,978           -
 Other                                                   2,274      (3,149)
                                                      ---------   ---------
    Total Other Income (Deductions)                     16,167      52,887
                                                      ---------   ---------

Interest Expense
 Long-Term Debt                                         55,494      47,673
 Interest Imputed on Losses Recorded at Present Value   25,634      24,555
 Other                                                   7,691       6,581
                                                      ---------   ---------
    Total Interest Expense                              88,819      78,809
                                                      ---------   ---------

Net Income                                            $ 35,840    $ 84,808
                                                      =========   =========










See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        Nine Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-
Cash Flows from Operating Activities
  Cash Receipts from Retail Customers                 $494,694    $496,765
  Cash Receipts from Sales for Resale                  100,228      67,850
  Fuel and Purchased Power Costs Paid                 (177,805)   (154,333)
  Wages Paid, Net of Amounts Capitalized               (50,300)    (48,115)
  Payment of Other Operations and Maintenance Costs    (63,992)    (67,617)
  Capital Lease Interest Paid                          (80,642)    (80,469)
  Taxes Paid, Net of Amounts Capitalized               (62,733)    (60,735)
  Interest Paid, Net of Amounts Capitalized            (57,982)    (47,057)
  Contract Termination Fee Paid                        (10,000)    (40,000)
  Income Taxes Paid                                         (3)     (1,050)
  Emission Allowance Inventory Sales                    11,368          39
  Interest Received                                      6,472       6,344
  Other                                                    936       1,529
                                                      ---------   ---------
    Net Cash Flows - Operating Activities              110,241      73,151
                                                      ---------   ---------

Cash Flows from Investing Activities
  Construction Expenditures                            (54,788)    (47,937)
  Transfer of MEH Cash to UniSource Energy             (45,412)          -
  Investments in Joint Ventures                              -      (3,998)
  Other                                                    113         868
                                                      ---------   ---------
    Net Cash Flows - Investing Activities             (100,087)    (51,067)
                                                      ---------   ---------

Cash Flows from Financing Activities
  Proceeds from Issuance of Long-Term Debt              99,021      13,257
  Payments to Retire Long-Term Debt                    (99,472)       (500)
  Payments on Renewable Term Loan                            -     (31,000)
  Payments to Retire Capital Lease Obligations         (17,373)    (13,969)
  Other                                                 (6,177)       (381)
                                                      ---------   ---------
    Net Cash Flows - Financing Activities              (24,001)    (32,593)
                                                      ---------   ---------

Net Decrease in Cash and Cash Equivalents              (13,847)    (10,509)
Cash and Cash Equivalents, Beginning of Year           146,256     130,291
                                                      ---------   ---------
Cash and Cash Equivalents, End of Period              $132,409    $119,782
                                                      =========   =========










See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION


                                                        Nine Months Ended
                                                          September 30,
                                                         1998       1997
                                                     -Thousands of Dollars-

Net Income                                            $ 35,840  $  84,808
Adjustments to Reconcile Net Income to Net
   Operating Cash Flows
  Depreciation and Amortization Expense                 67,479     64,817
  Deferred Income Taxes and
   Investment Tax Credits - Net                         20,877    (19,260)
  Lease Payments Deferred                                4,127      6,771
  Amortization of Regulatory Assets & Liabilities, Net
   of Interest Imputed on Losses Recorded at
   Present Value                                         2,742     (4,578)
  Deferred Contract Termination Fee                     (7,115)   (39,038)
  Unremitted Earnings of Unconsolidated Subsidiaries      (753)      (515)
  Emission Allowances                                   11,368         39
  Reversal of Loss Provision                                 -    (10,154)
  Interest Income-Note Receivable from UniSource
   Energy                                               (6,978)         -
  Other                                                  3,196        236
  Changes in Assets and Liabilities which Provided
   (Used) Cash Exclusive of Changes Shown Separately
    Accounts Receivable                                (36,082)   (34,964)
    Materials and Fuel                                  (3,406)    (6,900)
    Accounts Payable                                     8,641      7,805
    Other Current Assets and Liabilities                11,802     20,763
    Other Deferred Assets and Liabilities               (1,497)     3,321
                                                      ---------   ---------
Net Cash Flows - Operating Activities                 $110,241    $73,151
                                                      =========   =========

Non-Cash Investing and Financing Activities (these activities do not affect
the statements of cash flows):
See Note 3 - Transfer of MEH from TEP to UniSource Energy and Note 5 - Long
Term Debt for a description of non-cash investing and financing activities in
1998.  Additionally, the proceeds from the issuance of $111.8 million of
Pollution Control Revenue Bonds in April 1997 were held in trust and used in
June 1997 to redeem $111.8 million of previously issued bonds.















See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS


                                                 September 30,  December 31,
                                                     1998          1997
ASSETS                                             - Thousands of Dollars -
Utility Plant
  Plant in Service                                  $2,246,957  $2,194,150
  Utility Plant Under Capital Leases                   886,901     893,064
  Construction Work in Progress                         71,406      72,404
                                                    ----------- -----------
    Total Utility Plant                              3,205,264   3,159,618
  Less Accumulated Depreciation and Amortization    (1,037,985)   (982,621)
  Less Accumulated Amortization of Capital Leases      (81,287)    (73,728)
  Less Springerville Unit 1 Allowance                 (170,498)   (167,756)
                                                    ----------- -----------
    Total Utility Plant - Net                        1,915,494   1,935,513
                                                    ----------- -----------

Investments and Other Property                          62,195      79,471
                                                   ----------- -----------

Note Receivable from UniSource Energy                   77,110           -
                                                    ---------- -----------
Current Assets

  Cash and Cash Equivalents                            132,409     146,256
  Accounts Receivable                                  106,397      71,225
  Materials and Fuel                                    38,116      34,005
  Deferred Income Taxes - Current                        6,537      14,910
  Other                                                 20,094      22,954
                                                    ----------- -----------
    Total Current Assets                               303,553     289,350
                                                    ----------- -----------

Deferred Debits - Regulatory Assets
  Income Taxes Recoverable Through Future Rates        159,333     170,034
  Deferred Springerville Common Facility Costs          56,317      58,222
  Deferred Springerville Contract Termination Fee       45,192      48,077
  Deferred Springerville Unit 2 Costs                    4,621      11,590
  Deferred Lease Expense                                10,116      11,571
  Other Regulatory Assets                               16,937      11,089
Deferred Debits - Other                                 22,165      19,492
                                                    ----------- -----------
    Total Deferred Debits                              314,681     330,075
                                                    ----------- -----------
Total Assets                                        $2,673,033  $2,634,409
                                                    =========== ===========










See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS


                                                September 30,  December 31,
                                                       1998        1997
CAPITALIZATION AND OTHER LIABILITIES               - Thousands of Dollars -
Capitalization
  Common Stock                                      $  645,928  $  645,261
  Capital Stock Expense                                 (6,357)     (6,357)
  Accumulated Deficit                                 (386,186)   (422,026)
                                                    ----------- -----------
  Common Stock Equity                                  253,385     216,878
  Capital Lease Obligations                            887,116     890,257
  Long-Term Debt                                     1,214,423   1,215,120
                                                    ----------- -----------
    Total Capitalization                             2,354,924   2,322,255
                                                    ----------- -----------

Current Liabilities
  Current Obligations Under Capital Leases              11,698      14,552
  Current Maturities of Long-Term Debt                   1,725         500
  Accounts Payable                                      42,832      34,909
  Interest Accrued                                      44,674      64,812
  Taxes Accrued                                         37,902      24,397
  Contract Termination Fee Payable                           -      10,000
  Other                                                 16,871      19,051
                                                    ----------- -----------
    Total Current Liabilities                          155,702     168,221
                                                    ----------- -----------

Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                    83,747      77,606
  Accumulated Deferred Investment Tax Credits
   Regulatory Liability                                 10,099      11,905
  Emission Allowance Gain Regulatory Liability          31,346      17,591
  Other                                                 37,215      36,831
                                                    ----------- -----------
    Total Deferred Credits and Other Liabilities       162,407     143,933
                                                    ----------- -----------
Total Capitalization and Other Liabilities          $2,673,033  $2,634,409
                                                    =========== ===========

















See Notes to Condensed Consolidated Financial Statements.



<PAGE>




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

NOTE 1.  ACCOUNTING FOR THE EFFECTS OF REGULATION

  Accounting Implications

     The ACC regulates TEP's utility business.  TEP generally uses the
same accounting policies and practices used by nonregulated companies
for financial reporting under generally accepted accounting principles.
However, sometimes these principles, such as FAS 71, require special
accounting treatment for regulated companies to show the effect of
regulation.  For example, in setting TEP's retail rates, the ACC may
not currently allow TEP to charge its customers to recover certain
expenses but; instead, require that these expenses be charged to
customers in the future.  In this situation, FAS 71 requires that TEP
not show these expenses on its current income statements but "defer"
these items and show them as "regulatory assets" on the balance sheet
until TEP is allowed to charge its customers.  TEP then amortizes these
items to the income statement as charges are billed to customers.
Similarly, certain items of revenue may be deferred as regulatory
liabilities, which are also eventually amortized to the income
statement.

     We have recorded regulatory assets and liabilities in our balance
sheets in accordance with FAS 71.  A regulated company must satisfy
certain conditions to apply the accounting policies and practices of
FAS 71.  These conditions include:

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

     We periodically assess whether we continue to meet these
conditions.  If we were required to stop applying FAS 71 to all or a
portion of TEP's regulated utility operations, we would write off the
related balances of TEP's regulatory assets and liabilities as a charge
in our income statement.  In that event, our earnings would be reduced
by the net amount of regulatory assets and liabilities, after
applicable deferred income taxes.  Based on the balances of TEP's
regulatory assets and liabilities at September 30, 1998, if we ceased
applying FAS 71 to all of TEP's regulated operations, we would record
an extraordinary loss of approximately $150 million, net of the related
deferred income tax benefit of $101 million.  Approximately 62% of
TEP's net regulatory assets on the balance sheet relate to electric
generation.  While our cash flows may be affected by regulatory orders
and market conditions, our cash flows would not be affected if we
ceased to apply FAS 71.

     If we stop applying FAS 71, we would need to evaluate the
likelihood that we could recover the cost of TEP's electric plant in
the marketplace.  If undiscounted cash flows are less than the carrying
value of those plant assets that we continue to own, then we would need
to write off as an expense a portion of those plant assets to reflect
their current market value.  Plant assets to be disposed of would be
written down to fair value if it is less than carrying value.  We
cannot predict if we would write off any plant assets as a result of
these evaluations.

  Recent Events That May Impact TEP's Application of FAS 71

     In December 1996, the ACC adopted rules (Retail Electric
Competition Rules) which would introduce retail electric competition in
Arizona.  If implemented as adopted, the rules would require each
"Affected Utility" (TEP, Arizona Public Service Company, Citizens
Utilities Company and several cooperatives) to open its retail service
area to competing electric service providers on a phased-in basis over
the period 1999 to 2003.  On August 5, 1998, the ACC adopted amendments
to the rules which, in part, provide a two-year phase-in schedule in
which all retail customers will have access to competitive generation
by January 1, 2001.

     On June 22, 1998, the ACC adopted an order requiring Arizona
utilities to choose from one of two options for recovery of stranded
costs resulting from the implementation of retail electric competition.
Stranded costs represent costs recoverable by a utility in a regulated
market that would not likely be recovered through the prices charged
for electricity and other services in a competitive market.  The two
options are:

(1)  Divestiture/Auction Methodology
 - This method requires the sale of all electric generation assets
through an auction by January 1, 2001;
 - Stranded costs are calculated as the difference between book value
of generation assets (including related regulatory assets) and the
proceeds from the sale;
 - 100% of the stranded costs will be recovered over a 10-year period,
including a return on the unamortized balance;
 - All customers of Affected Utilities will pay for the stranded costs.

(2)  Transition Revenues Methodology
 - The ACC would determine the revenues necessary to maintain financial
integrity (such as avoiding default under currently existing financial
instruments); and
 - Affected Utilities would recover the determined amount of stranded
costs over a period of ten years.

     The order encourages, but does not require, full divestiture of
generating assets through an auction.  The order states that only those
Affected Utilities choosing divestiture through the Divestiture/Auction
Methodology shall have the opportunity to recover 100% of unmitigated
stranded costs.  The order also specifies that some form of rate cap
will be in place for customers on Standard Offer electric service
during the transition period.

     On August 21, 1998, TEP filed a proposed plan for divestiture of
generating assets and stranded cost recovery with the ACC.  Under the
plan, TEP proposed to divest all of its generating assets and
associated property as a method of recovering stranded costs.  In its
filing with the ACC, TEP estimated its stranded costs may range from
$600 million to $1.1 billion.

  ACC Staff Stranded Cost Recovery Agreement (SCR Agreement)

     On November 4, 1998, TEP reached a settlement agreement, the SCR
Agreement, with the ACC Staff for approval of its plan to divest
generation assets and for 100% recovery of stranded costs.  The SCR
Agreement also supports a Memorandum of Understanding (MOU) between TEP
and APS to exchange TEP's interests in the Navajo and Four Corners
Generating Stations for certain high voltage transmission assets
currently owned by APS.  The SCR Agreement is subject to ACC approval.
The ACC Staff has requested that the ACC consider the SCR Agreement
beginning on November 20, 1998.  However, no date has been set.  If the
ACC does not approve the SCR Agreement, without changes, by November
25, 1998, the SCR Agreement would be considered withdrawn by both TEP
and the ACC Staff.  The SCR Agreement includes the following:

 - Stranded costs will include:
   -- the difference between the book value of generation assets under
traditional regulation and their market value determined through an
auction process;
   -- reasonable costs incurred for premiums, penalties and/or other
payments necessary to implement divestiture; and
   -- reasonable employee severance and retraining costs necessitated
by competition.

 - TEP will divest its generation assets, pursuant to specified auction
protocols, by December 31, 2000.  TEP would also seek to terminate its
obligations under the leveraged leases relating to generating assets.
TEP expects cash payments to lease participants would be required in
connection with any such terminations.  In order to complete
divestiture of both owned and leased assets, TEP also expects to be
required to make cash payments to various creditors and other parties.
In addition, a substantial portion of the generating assets have been
financed through tax-exempt bonds.  TEP expects that such bonds would
need to be redeemed or defeased as a result of the divestiture.

 - If the auction of one or more generating units is unsuccessful, TEP
would seek to recover stranded costs relating to such unit(s) based on
the "Net Revenues Lost" approach.  Under that approach, stranded cost
is determined as the net present value of the annual differences
between the expected revenues under traditional regulation and those
likely to be received after the introduction of retail competition.

  -  TEP  would recover 100% of its stranded costs and a return on  any
unamortized  balance over an eight- to ten-year period ending  December
31, 2008 as follows:

   -- Interim Transition Charge (ITC)
      Beginning January 1, 1999 through the date of divestiture (no
      later than December 31, 2000), an ITC would be recovered from
      customers under the Standard Offer and from those customers
      purchasing energy from competitive suppliers.   The ITC will be
      calculated as the difference between the embedded cost of
      generation included in current rates and a market price for
      electric power;

   -- Competition Transition Charge (CTC)
      Following divestiture, a CTC will be collected from all
      distribution customers for a period of six to eight years.  The
      CTC will include recovery of a carrying cost equal to TEP's cost
      of capital based on a capital structure consisting of 35 percent
      equity and 65 percent debt.

 - TEP expects that the cash TEP will pay to divest will exceed the
proceeds from the sale of owned assets.  To finance the cash
requirements of divestiture, TEP would be permitted to "securitize" the
CTC by issuing special bonds through a special purpose entity.  If the
SCR Agreement is approved by the ACC, which is a separate branch of
government in Arizona, it would represent an administrative (not
legislated) authority to securitize stranded costs.  To date, similar
securitizations have been issued under legislative rather than
administrative authority.

  -  Open access will begin in TEP's retail market on January 1, 1999,
consistent with the Retail Electric Competition Rules.

 - TEP's retail customers who remain on the Standard Offer will not
experience any increases in their current electric prices during the
transition period (prior to January 1, 2001.)  Rather, retail customers
who continue to purchase their energy requirements from TEP will
benefit from the base price decreases described in Note 7.  Rate
Matters.  After December 31, 2000, retail prices will include the price
TEP has to pay to acquire power in the competitive generation market.

 - The SCR Agreement will resolve all pending litigation between TEP
and the ACC involving the Retail Electric Competition Rules.

 - Transmission Assets

   -- TEP will establish a new subsidiary (Transmission Subsidiary) by
      December 31, 2000, to hold all of its transmission assets.  TEP
      will acquire transmission assets and then contribute these assets
      to the Transmission Subsidiary.  The SCR Agreement allows TEP to
      acquire all 345 kV and 500 kV transmission facilities owned by
      APS.

   -- The SCR Agreement supports an exchange of TEP's ownership
      interests in the Navajo Generating Station and Four Corners
      Generating Station for these transmission assets of APS.  TEP
      currently owns 7.5 percent of Units 1, 2 and 3 at Navajo, a total
      of 168 MW, and 7 percent of Units 4 and 5 at Four Corners, a
      total of 110 MW.  Under the MOU, the closing of this transaction
      is to be on or before January 2, 2001.  Upon completion of an
      asset exchange, TEP would enter into a four-year power sales
      contract with APS to purchase 200 MWs from these units.

   -- TEP expects to have a pre-tax gain from the exchange.  This
      assumes the market value for APS' transmission assets is greater
      than the net book value of TEP's generation assets at closing.
      The SCR Agreement allows for 35% of the net book value of
      transmission assets to be used to capitalize the Transmission
      Subsidiary.  TEP would also establish a regulatory liability in
      an equal amount.  Interest earned on the regulatory liability,
      based on the after-tax cost of capital of the stranded cost
      securitized balance, will be credited to retail customers during
      the CTC collection period.  Additionally, the regulatory
      liability will be amortized to retail customers over 10 years on
      a straight-line basis beginning after the conclusion of the CTC.

     We expect that TEP will cease to account for its generation
operations using FAS 71 at the time the ACC approves the SCR Agreement
or another cost recovery plan specific to TEP which includes the
specific percentage of stranded costs that TEP can recover and a cost
recovery method.  The amount and method of recovery that the ACC
approves for TEP will determine whether write-offs will be incurred at
that time.  TEP expects the ACC to make a decision and to issue a final
order regarding its stranded cost recovery plan by year-end 1998.
However, the specific amount of stranded costs won't be determined
until the divestiture plan is implemented.  We are unable to predict
the amount of write-offs, if any, that may be incurred at that time.

      In  May  1998  the  Arizona State Legislature  approved  and  the
Governor  signed  a  bill regarding retail electric  competition.   The
legislation requires the introduction of customer choice to 20% of each
public  power  entity's  retail load by December  31,  1998  with  100%
customer  choice by December 31, 2000.  This legislation  only  relates
directly  to  public  power entities such as  SRP;  however,  the  bill
encourages broader application of the legislation's principles  by  the
ACC  to  the  state's  investor-owned  utilities,  including  TEP,  and
cooperatives.

      We  cannot  predict the outcome of the legislation or  the  ACC's
retail competition rules.  Additionally, federal legislators introduced
several  retail competition initiatives in Congress which,  if  passed,
could  modify or override the actions taken by the ACC or  the  Arizona
Legislature.


NOTE 2.  TAX ASSESSMENTS
------------------------

  Arizona Sales Tax Assessments - Coal Sales

     We are protesting sales tax assessments received from the ADOR
alleging that Valencia is liable for sales tax on gross income from
coal sales, transportation and coal-handling services provided to TEP
from November 1985 through May 1996.  Arizona law generally requires
payment of an assessment prior to pursuing the appellate process.  We
have previously paid, under protest, a total of $23 million of the
disputed sales tax assessments.  These payments will be refunded if we
are successful in the appeals process.  In September 1996, the Arizona
Court of Appeals upheld the validity of the assessment issued for the
period November 1985 through March 1990.  In May 1998, the Arizona
Supreme Court remanded the case back to the Arizona Tax Court to be
reheard.

     We have previously recorded an expense and a related liability for
the sales taxes and interest that we believe are probable of incurrence
for the period November 1985 through May 1996.  On May 31, 1996,
Valencia was merged into TEP.  Because TEP now acquires coal directly
from other companies, we do not believe we are liable for sales tax
computed on a basis similar to the assessments described above after
May 31, 1996.  For periods prior to May 31, 1996, we continue to record
an estimated interest expense on the disputed assessments.

  Arizona Sales Tax Assessments - Leases

     The ADOR has issued sales tax assessments to some of TEP's lessors
of generation-related facilities and equipment.  The assessments allege
sales tax liability on a component of rents we paid on the
Springerville Unit 1 Leases, the Springerville Common Facilities
Leases, the Irvington Lease and the Springerville Coal Handling
Facilities Lease from August 1, 1988 to June 30, 1997.  Due to
indemnification provisions in the lease agreements, if the ADOR
prevails, we would be required to reimburse the lessors for the sales
taxes that they pay.  We filed an appeal of the assessments in the
Arizona Tax Court in February 1998.  In July 1998, the Arizona Tax
Court ruled against us on the assessment issued for the period August
1988 through September 1990 on the Irvington lease.  We have appealed
the Tax Court's decision.  Arizona law generally requires payment of an
assessment prior to pursuing the appellate process.  We paid, under
protest, a total of $2 million of the disputed assessments.  These
payments will be refunded if we are successful in the appeals process.

     We have recorded a liability for the probable amount of sales
taxes and interest due as of September 30, 1998.  If the ADOR prevails,
we would need to record an additional expense and related liability.
Even though it is reasonably possible that the resolution of this issue
could result in approximately $22 million of additional sales tax
expense, we do not believe this outcome is likely.  We do not expect
that the resolution of this assessment will have a material negative
impact on the financial statements.  We believe that the ultimate
resolution of this issue will occur over a period of two to four years.

  INCOME TAX ASSESSMENTS

     In February 1998, the IRS issued an income tax assessment for the
1992 and 1993 tax years.  The IRS is challenging our treatment for
income tax purposes of various items relating to the 1992 Financial
Restructuring, including the amount of NOL and ITC generated before
December 1991 that may be used to reduce taxes in future periods.

     Due to the Financial Restructuring, a change in ownership of TEP
occurred for tax purposes in December 1991.  As a result, the use of
the NOL and ITC generated before December 1991 may be limited under the
tax code.  The IRS is challenging our calculation of this limitation.
At September 30, 1998, pre-change federal NOL and ITC carryforwards
were approximately $239 million and $26 million, respectively.  In
addition to the pre-change NOL and ITC which are subject to the
limitation, $166 million of federal NOL at September 30, 1998, is not
subject to the limitation.

     Resolution of this matter is not expected to have a material
adverse impact on the financial statements.


NOTE 3.  TRANSFER OF MEH FROM TEP TO UNISOURCE ENERGY
-----------------------------------------------------

     On January 1, 1998, TEP became a subsidiary of UniSource Energy.
At the same time, TEP transferred MEH to UniSource Energy and received
as consideration from UniSource Energy a $95 million 10-year promissory
note with a yearly interest rate of 9.78%.  Approximately $25 million
of this note represents a gain to TEP.  TEP has not recorded this gain.
Instead, this gain will be reflected as an increase in TEP's common
equity when UniSource Energy pays the principal portion of the note.
The note receivable appears on TEP's consolidated balance sheet but
does not appear on UniSource Energy's consolidated balance sheet
because intercompany balances and transactions are eliminated when
financial statements are consolidated.

     MEH owns Advanced Energy Technologies, Inc., Millennium Energy
Holdings, Inc., Nations Energy Corporation and Southwest Energy
Solutions, Inc.

     The transfer of MEH's cash balance of $45.4 million as part of the
transfer of MEH to UniSource Energy is included in the Cash Flows from
Investing Activities in TEP's cash flow statement for the nine months
ended September 30, 1998.


NOTE 4.  INVESTMENT IN ENERGY RELATED AFFILIATES
------------------------------------------------

  Loans and Guarantees for NEV

     Effective September 1, 1997, Millennium, a wholly-owned subsidiary
of  MEH,  exercised  an  option to acquire  a  50%  ownership  in  NEV.
Concurrent with the exercise of the option, Millennium made  a  capital
contribution in the amount of $0.8 million.

     In December 1997, Millennium committed to provide NEV with $20
million of funding.  At September 30, 1998, NEV had received $19
million in funding under the commitment.  As a result, the remaining
commitment amount available was $1 million at October 31, 1998.
Additionally, in October 1998, NEV issued a $4.7 million promissory
note to Millennium for a $3 million member loan Millennium extended to
NEV in September 1997, and preferred operating return due Millennium
under the terms of NEV's original operating agreement.

     UniSource Energy is the guarantor of $33.6 million of performance
bonds that secure amounts NEV may owe to utility distribution companies
(UDCs) and energy suppliers in connection with NEV's sales to retail
electric customers.  NEV bills its customers for these charges.
UniSource Energy's guarantees are secured by various NEV assets.
Additionally, in August 1998, UniSource Energy agreed to guarantee a
$10 million loan that NEV obtained from an unrelated party.  That loan
is due in 1999.

     NEV has incurred a total loss in excess of $40 million for the
period September 1997 through September 1998.

     From September 1997, the inception of Millennium's ownership in
NEV, through September 30, 1998, Millennium recorded approximately
$23.8 million of NEV losses.  The amount equals the total funds and
unsecured commitments provided by Millennium and UniSource Energy to
NEV.  Accounting principles limit the amount of NEV's loss to be
recorded by Millennium to the total amount invested and committed by
Millennium and UniSource Energy on an unsecured basis.  Should
Millennium or UniSource Energy provide additional unsecured funding to
NEV, the amounts provided would be immediately expensed up to the
lesser of the amount of funding provided or the amount of NEV
cumulative incurred losses in excess of the $23.8 million already
recorded by Millennium and UniSource Energy.  NEV is seeking sources
other than Millennium and UniSource Energy to provide funding.  There
can be no assurance that any such financing will be obtained.

  NEV Technologies

     NEV Technologies, a subsidiary of NEV, and its joint ventures hold
exclusive distribution rights for the AlliedSignal TurboGeneratorTM in
the western U.S. and certain international markets.  In October 1998,
Edison International made a $10 million minority interest equity
investment in NEV Technologies.  NEV Technologies' two joint ventures
are 50 percent owned by Dames & Moore Ventures.  NEV owns the remainder
of NEV Technologies.

  Purchase and Sale of Generating Assets by Nations Energy

     In September 1998, Nations Energy sold a 48% interest in Trigen-
Nations Energy, which owns and operates the 40 MW Coors Brewing Company
power plant in Golden, Colorado.  The $5.8 million (after-tax) gain on
the sale is included in Unregulated Energy Businesses - Net in
UniSource Energy's consolidated income statement.  Following the sale,
Nations Energy owns a 1% percent interest in Trigen-Nations.

     Also, in September 1998, Nations Energy purchased a minority
interest in Corporation Panamena de Energia, S.A. (COPESA) for $7.5
million.  COPESA is an independent power producer which owns and
operates a 43 MW power plant outside of Panama City.  The energy is
sold under a Power Purchase Agreement with an unrelated party.

     In October 1998, Nations Energy paid $8.1 million for a minority
equity interest in a power project located in the Czech Republic.  The
$400 million, 340 MW project is scheduled for completion in late-1999.
Once completed, the generating facility will sell power to a regional
distribution company and to an adjacent industrial complex.


NOTE 5.  LONG-TERM DEBT
-----------------------

     In March 1998, the Apache County, Arizona Industrial Development
Authority issued $200 million of Pollution Control Revenue Bonds.  The
new bonds, which are unsecured, were sold in three series: Series A
($83.7 million) bears interest at 5.85% and matures in 2028; Series B
($99.8 million) bears interest at 5.875% and matures in 2033; and
Series C ($16.5 million) bears interest at 5.85% and matures in 2026.
The proceeds from the issuance of the new bonds were held in trust and
used in May 1998 to redeem $200 million of previously issued variable
interest rate bonds that would have matured in 2020 and 2021.  Such
issuance and redemption are treated as non-cash transactions to TEP and
are not reflected in the consolidated statement of cash flows.

     In May 1998, TEP exchanged $46.9 million of its existing 12.22%
First Mortgage Bonds due 2000 for the same amount of new 12.22%
Exchange Series First Mortgage Bonds due 2000.  The new bonds have
substantially the same terms and conditions as the existing bonds
except for the elimination of a covenant restricting the payment of
dividends.  Because the exchange was a non-cash transaction, it is not
reflected in the consolidated statement of cash flows.

     In August 1998, TEP issued $140 million of First Collateral Trust
Bonds, Series A, and used the proceeds in September 1998 to redeem all
of its First Mortgage Bonds due in 1999, 2001, 2002 and 2003, as well
as $31.9 million of 12.22% First Mortgage Bonds due 2000 not tendered
for exchange as described above.  Interest rates on the bonds that were
redeemed ranged from 7.55% to 12.22%.  A portion of the proceeds from
the issuance ($43.8 million) was held in trust and used to redeem
certain First Mortgage Bonds described above.  The proceeds from the
issuance that were held in trust and the related redemption of bonds
are treated as non-cash transactions which are not reflected in the
consolidated statement of cash flows.   When TEP redeemed these bonds,
covenants that prohibited TEP from paying common stock dividends so
long as it has an accumulated earnings deficit were eliminated.
Dividends are permitted if certain other, more flexible financial
covenants are met.  The First Collateral Trust Bonds bear interest at
7.50%, mature in 2008, and are secured by an equal aggregate principal
amount of bonds issued under TEP's General First Mortgage and held by
the trustee.

     In November 1998 TEP called $30 million of its 8.50% First
Mortgage Bonds ($57.9 million principal amount outstanding) for
redemption on December 7, 1998.  Such bonds were scheduled to mature in
2009.


NOTE 6.  WARRANT EXCHANGE
-------------------------

     From August 18, 1998 through October 23, 1998, the Company offered
to exchange outstanding warrants previously issued by TEP for warrants
exercisable into UniSource Energy common stock.  TEP Warrants entitle
the holder of five warrants to purchase one share of TEP common stock
for $16.00.  Currently, UniSource Energy owns 100% of the common stock
of TEP and TEP common stock is not publicly traded.  For each TEP
Warrant surrendered, the holder received:

  -  0.20 1999 UniSource Energy Warrant expiring March 15, 1999; and
  -  0.20 2000 UniSource Energy Warrant expiring December 15, 2000.

Each whole new UniSource Energy Warrant entitles the holder to purchase
one share of UniSource Energy common stock for $16.

After the exchange, the following warrants are outstanding:
  -  1.5 million of 1999 UniSource Energy Warrants;
  -  1.5 million of 2000 UniSource Energy Warrants; and
  -  4.6 million of TEP Warrants expiring December 15, 2002;
     exercisable for 920,000 shares of TEP common stock.  Prior to the
     exchange, there were 12.1 million TEP Warrants outstanding
     exercisable for 2.4 million shares of TEP common stock.


NOTE 7.  RATE MATTERS
---------------------

  RATE REDUCTION

     On August 25, 1998, the ACC approved a rate settlement agreement
(Rate Settlement) which provides TEP's retail customers with base price
decreases over the next two years.  This agreement resolves TEP's
application for a price decrease in its Shared Savings Proposal filed
with the ACC on July 9, 1997.  TEP's base price will decrease by the
following percentages:

 - an initial 1.1% (about $7.0 million) decrease effective July 1,
   1998;
 - a second decrease of 1.0% (about $5.5 million) on July 1, 1999; and
 - an additional 1.0% (about $5.5 million) decrease on July 1, 2000.

The latter two decreases will apply to all Standard Offer customers who
do not have or do not choose access to retail competition during the
two-year phase-in of the ACC's Electric Competition Rules beginning
January 1, 1999.

     The Rate Settlement also provides for TEP to mitigate potentially
stranded costs through the accelerated recovery of  the Retail Excess
Capacity Deferrals.  Retail Excess Capacity Deferrals represent
operating and capital costs associated with Springerville Unit 2
capacity which the ACC did not allow TEP to recover in rates until the
1994 and 1996 Rate Orders.  These Retail Excess Capacity Deferrals
totaled $85.1 million and $88.7 million at September 30, 1998 and
December 31, 1997, respectively.  These deferrals are only reflected in
our regulatory calculations.  The accompanying balance sheets do not
include these deferrals as the costs were expensed when incurred for
financial reporting purposes.  The $4.3 million (after-tax) increase in
annual amortization expense decreases the amortization period from 20
years to 7.8 years as of December 31, 1996.  This increase in
amortization expense will be reflected in TEP's regulatory accounting
records but will have no impact on the expenses included in its
financial statements.

  SPRINGERVILLE COAL CONTRACT TERMINATION FEE

     On June 27, 1997, TEP signed an agreement with the coal supplier
for the Springerville Generating Station to terminate the then-existing
coal supply contract and enter into a new, more cost effective contract
with the same supplier.  TEP paid a $50 million termination fee in
three installments:  $30 million paid on June 30, 1997; $10 million
paid on September 30, 1997; and $10 million paid on March 31, 1998.

     TEP asked the ACC to allow the termination fee to be recorded as a
regulatory asset and to be amortized to fuel expense over the 13-year
term of the new agreement.  On July 29, 1997, the ACC issued an interim
accounting order granting the requested treatment until the ACC reached
a final decision.  The ACC reached a final decision and in the Rate
Settlement granted the requested treatment.


NOTE 8.  INCOME TAXES
---------------------

     The differences between the income tax expense (benefit) and the
amount obtained by multiplying income before income taxes by the U.S.
statutory federal income tax rate are as follows:

                                            UniSource Energy
                                ---------------------------------------
                                Three Months Ended    Nine Months Ended
                                   September 30,        September 30,
                                 1998        1997     1998        1997
                                ---------------------------------------
                                       - Thousands of Dollars -
Federal Income Tax Expense
 at Statutory Rate        $  19,777   $  17,233   $  14,951   $ 23,309
  State Income Tax Expense,
   Net of Federal Deduction   3,049       2,656       2,304      3,591
  Depreciation Differences
    (Flow Through Basis)        890           -       4,349          -
  Capital Loss Carryforwards      -           -      (4,463)         -
  Investment Tax Credit
   Amortization                (661)       (670)     (1,806)    (2,612)
  Reduction in Valuation
   Allowance                      -     (13,120)          -    (42,413)
  Other                        (223)       (278)       (315)       (85)
                          ----------  ----------  ----------  ---------
Total Expense (Benefit)
 for Federal and State
 Income Taxes             $  22,832   $   5,821   $  15,020   $(18,210)
                          ==========  ==========  ==========  =========

                                                   TEP
                                ---------------------------------------
                                Three Months Ended    Nine Months Ended
                                   September 30,        September 30,
                                 1998        1997     1998        1997
                                ---------------------------------------
                                       - Thousands of Dollars -
Federal Income Tax Expense
 at Statutory Rate        $  17,358   $  17,233   $  19,826   $ 23,309
  State Income Tax Expense,
   Net of Federal Deduction   2,673       2,656       3,054      3,591
  Depreciation Differences
    (Flow Through Basis)        890           -       4,349          -
  Capital Loss Carryforwards      -           -      (4,463)         -
  Investment Tax Credit
   Amortization                (661)       (670)     (1,806)    (2,612)
  Reduction in Valuation
   Allowance                      -     (13,120)          -    (42,413)
  Other                         (39)       (278)       (154)       (85)
                          ----------  ----------  ----------  ---------
Total Expense (Benefit)
 for Federal and State
 Income Taxes             $  20,221   $   5,821   $  20,806   $(18,210)
                          ==========  ==========  ==========  =========


Income taxes are included in the income statements as follows:

                                            UniSource Energy
                               ---------------------------------------
                               Three Months Ended    Nine Months Ended
                                  September 30,        September 30,
                                1998        1997     1998        1997
                               ----------------------------------------
                                       - Thousands of Dollars -
Operating Expenses        $  18,297   $  19,158   $  19,398   $ 21,070
Other Income (Deductions)       974     (13,337)     (1,411)   (39,280)
Unregulated Energy
  Businesses - Net            3,561           -      (2,967)         -
                          ---------   ----------  ----------  ---------
Total Income Tax Expense
 (Benefit)                $  22,832   $   5,821   $  15,020   $(18,210)
                          =========   ==========  ==========  =========

                                                  TEP
                               ---------------------------------------
                               Three Months Ended    Nine Months Ended
                                  September 30,        September 30,
                                1998        1997     1998        1997
                               ---------------------------------------
                                       - Thousands of Dollars -
Operating Expenses        $  18,297   $  19,158   $  19,398   $ 21,070
Other Income (Deductions)     1,924     (13,337)      1,408    (39,280)
                          ---------   ----------  ---------   ---------
Total Income Tax Expense
 (Benefit)                $  20,221   $   5,821   $  20,806   $(18,210)
                          =========   ==========  =========   =========

     The reduction in the valuation allowance and corresponding NOL
benefit in 1997 are primarily due to revisions in the estimated amount
of NOLs that we expect to offset future taxable income.  As of
December 31, 1997, both Unisource Energy and TEP had recorded the
amount of prior period NOL benefit that we expect to utilize on future
income tax returns.  At the present time, we are not able to estimate
future additional amounts of NOL benefit that we may recognize in the
income statements of either Unisource Energy or TEP.  This is because
there are still open tax years for which there may be additional
assessments and because federal and state NOL carryforwards have
varying expiration dates.  We do not expect to recognize additional
amounts of NOL benefit until such items are resolved.


NOTE 9.  CHANGE IN METHOD OF ESTIMATING UNBILLED REVENUES
---------------------------------------------------------

In the third quarter of 1998, TEP changed its method of estimating
unbilled revenues to more accurately reflect revenues between months.
If we had continued using the previous method of calculating unbilled
revenues, revenues for the three-months and nine-months ended September
30, 1998 would have been $7.1 million greater.  However, for the twelve
months ending December 31, 1998, we expect that revenues calculated
using the new method will not be significantly different from revenues
calculated under the previous method.


NOTE 10.  NEW ACCOUNTING STANDARD
---------------------------------

      In  June  1998, the Financial Accounting Standards  Board  issued
Statement  of  Financial  Accounting  Standards  No.  133  (FAS   133),
Accounting  for  Derivative Instruments and Hedging  Activities.   This
Statement  requires  that  all  derivative  financial  instruments   be
recognized  as  either  assets or liabilities  in  the  balance  sheet.
Measurement is at fair value and if the derivative is not designated as
a  hedging instrument, changes in fair values (i.e., gains and  losses)
are  to  be recognized in earnings in the period of change.  If certain
conditions  are met, a derivative may be designated a hedge,  in  which
case  the  accounting  for changes in fair value  will  depend  on  the
specific  exposure being hedged.  The Company is required to adopt  FAS
133  in the first quarter of 2000.  We are still evaluating the impact,
if  any,  that  the  adoption of FAS 133 will  have  on  our  financial
statements.


NOTE 11.  RECLASSIFICATIONS
---------------------------

     Minor reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.


NOTE 12.  REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------

     With respect to the unaudited consolidated financial information
of UniSource Energy and TEP for the three-month and nine-month periods
ended September 30, 1998, 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 6, 1998, appearing herein, states that they did
not audit and they do not express an opinion on that unaudited
consolidated financial information.  PricewaterhouseCoopers LLP has not
carried out any significant or additional audit tests beyond those
which would have been necessary if their report had not been included.
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 for
their report on the unaudited 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.


<PAGE>

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

     UniSource Energy is a holding company which owns all of the
outstanding common stock of TEP and MEH.  TEP is an operating public
utility engaged in the generation, purchase, transmission,
distribution and sale of electricity for customers in the greater
Tucson, Arizona area and to wholesale customers.  MEH owns all of the
outstanding common stock of four subsidiaries established for the
purpose of operating or investing in various unregulated energy-
related businesses.

     TEP is the principal subsidiary of UniSource Energy and accounts
for substantially all of its assets, revenues and net income.  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, although losses
from energy-related ventures of MEH and certain of its subsidiaries
and interests have reduced the earnings reported by the Company for
the nine-months ended September 30, 1998.

     Management's Discussion and Analysis explains the general
financial condition and the results of operations for UniSource Energy
and its business subsidiaries including:
     
-	operating results during the third quarter and the first nine
    months compared with the same periods in the prior year,
-	the outlook for dividends on common stock,
-	changes in liquidity and capital resources during the third
    quarter and first nine months of 1998, and
-	expectations of identifiable material trends which may affect our
    business in the future.

     You should read Management's Discussion and Analysis along with
the Company's Condensed Consolidated Financial Statements, beginning
on page 3, which present the results of operations for the quarters
and the nine month periods ended September 30, 1998 and 1997.
Management's Discussion and Analysis analyzes and explains the
differences between periods for specific line items of the Condensed
Consolidated Financial Statements.

OVERVIEW
--------

     UniSource Energy recorded net income of $33.7 million for the
quarter ended September 30, 1998, and $27.7 million for the first nine
months of 1998.  This compares with net income of $43.4 million in the
third quarter and $84.8 million for the first nine months of 1997.
The decrease in earnings in both the third quarter and nine months of
1998 is primarily attributable to the absence of net operating loss
tax benefits in 1998, which amounted to $13.1 million in the third
quarter of 1997 and $42.4 million in the first nine months of 1997.
We discuss our results in more detail in Investments in Energy-Related
Affiliates, Earnings, and Results of Operations and below.

     The Company's and TEP's financial prospects are subject to
regulatory, economic, and other uncertainties.  Regulatory
uncertainties include the impact of the introduction of retail
competition in Arizona on January 1, 1999, and the resolution of the
Stranded Cost Recovery Plan filed by TEP with the ACC in the third
quarter of 1998.  Other uncertainties include the extent to which TEP
can alter operations and reduce costs in response to industry changes
or unanticipated economic downturns, which may be limited by continued
high financial and operating leverage.  Our future success will
depend, in part, on our ability to contain and/or reduce the costs of
serving retail customers and the level of sales to those customers.
Until the uncertainties surrounding the introduction of retail
competition in Arizona are resolved, predicting the level of TEP's
future energy sales and the composition of its future revenues is
difficult.  See Competition, Retail below.  In a deregulated
environment, revenues from energy sales will be less certain, although
revenues from transmission and distribution services, which we expect
to remain regulated, would likely continue to grow.  Even in a
deregulated environment, TEP expects to continue to benefit from
population and economic growth in the Tucson area through increased
revenues from its regulated distribution services.
     
     The Company's financial prospects are also subject to
uncertainties relating to the start-up and developmental activities of
the unregulated energy-related affiliates.  Although the Company's
investments in unregulated energy-related affiliates comprise
approximately 2% of total assets, start-up costs and other subsidiary
developmental activities have contributed to losses from certain of
these activities in 1998.  These losses have reduced the earnings
reported by the Company on a consolidated basis for the nine-month
period ended September 30, 1998.

     The Company is addressing the uncertainties discussed above and
is positioning itself to benefit from the changing regulatory
environment.  We are aligning our corporate structure to meet the
needs of the emerging energy markets.  Effective November 1, 1998, TEP
organized its regulated business activities into three separate
business units: distribution, generation and transmission.  We are
improving cost measurement and management techniques and are re-
engineering various functions at TEP.  We have also extended
contracts, where appropriate, for large wholesale and retail
customers, and are developing new affiliates to provide energy
services to markets beyond TEP's retail service territory.  See
Competition, Retail; Investments in Energy-Related Affiliates; and
Results of Operations below.

     TEP's and UniSource Energy's consolidated capital structures
remain highly leveraged. Since April 1997, however, we have made
significant progress in our financial strategy to reduce refinancing
risk by extending maturities of long-term debt and letters of credit
and to reduce exposure to variable interest rates by refinancing with
fixed interest rates.  TEP refinanced variable rate debt obligations
at fixed rates and entered into a new bank Credit Agreement to replace
the MRA.  On August 4, 1998, TEP issued bonds to refinance all of the
First Mortgage Bonds that restricted the payment of dividends, and
redeemed those bonds (which would have matured between 1999 and 2003)
on September 3, 1998.  See Financing Developments, TEP First Mortgage
Bonds and Dividends on Common Stock, below.

     During the next twelve months, TEP expects to fund its operating
activities and construction expenditures with internal cash flows,
existing cash balances, and, if necessary, borrowings under the
Revolving Credit Facility.  As of November 6, 1998, cash balances,
including cash equivalents for UniSource Energy, were approximately
$170 million, of which $151 million was held by TEP and its
consolidated subsidiaries.


COMPETITION
-----------

    RETAIL

     Under current law, TEP does not compete with other companies for
electric service in TEP's retail service territory.   However, TEP
competes against gas service suppliers and others who provide energy
services.  TEP actively markets energy and customized energy-related
services.  We have not lost any customers to self-generation partly
because of these efforts.  For example, in recent years, TEP executed
new contracts with two principal customers that provide approximately
9% of TEP's total annual retail revenues.  Both customers are in the
copper mining business.  The new contracts include price reductions,
term extensions, and a provision for interruptible service.  These
contracts expire in March 2001 and January 2003.  These mining
customers cannot terminate the contracts early without at least one
and up to two years prior notice.  We have not received any such
notices.

     Retail Electric Competition Rules

     In December 1996, the ACC adopted rules that require a phase-in
of retail electric competition in Arizona beginning January 1, 1999.
The rules were adopted as a framework to implement competition.  On
August 5, 1998 the ACC adopted amendments to the rules which, in part,
provide a two-year phase-in schedule in which all retail customers
will have access to competitive generation by January 1, 2001.

     The key provisions of the rules include the following:

-	 Each Affected Utility shall make available at least 20% of its 1995
	 system retail peak demand for competitive generation supply on a first-
	 come, first-served basis, as follows: (1) All Affected Utility
	 customers with non-coincident peak demand load of 1 MW or greater will
	 be eligible for competitive electric services no later than January 1,
	 1999.  (2) Groups of Affected Utility customers with individual non-
	 coincident peak load demands of 40 kW or greater aggregated into a
	 combined load of 1 MW or greater will also be eligible for competitive
	 service no later than January 1, 1999.  Each Affected Utility shall
	 also offer a residential phase-in program with a minimum of 1/2 of 1%
	 of residential customers having access to competitive electric
	 services on January 1, 1999, with the number of customers eligible in
	 this program to increase by 1/2 of 1% every quarter until January 1,
	 2001.  All retail customers shall be entitled to obtain competitive
	 electric services no later than January 1, 2001.

	 TEP currently serves about 80 customers who qualify under the 1 MW or
	 greater category described above, representing 351 MW of load.  Of
	 this load, 60% is under contract through 2001.

-	 Each Affected Utility shall file a report detailing possible
	 mechanisms to provide benefits, such as rate reductions of 3% - 5%, to
	 all Standard Offer customers.

-	 Each Affected Utility shall make available to all customers in its
	 service territory Standard Offer bundled generation, transmission,
	 ancillary, distribution and other necessary services at regulated
	 rates.  After January 1, 2001, Standard Offer service shall be
	 provided by the Affected Utilities, which will become Utility
	 Distribution Companies (UDCs), who shall also act as providers of last
	 resort.

-	 The Affected Utilities shall provide non-discriminatory open access to
	 transmission and distribution facilities to serve all customers.  The
	 ACC supports the development of an Independent System Operator (ISO)
	 or, absent an ISO, an Independent Scheduling Administrator (ISA).

-	 All competitive generation assets and services shall be separated from
	 an Affected Utility prior to January 1, 2001.  Such separation shall
	 either be to an unaffiliated party or to a separate corporate
	 affiliate or affiliates.  If an Affected Utility chooses to transfer
	 its competitive generation assets or competitive services to a
	 competitive electric affiliate, such transfer shall be at a value
	 determined by the ACC to be fair and reasonable.

     Appeal of ACC Order
     
     In February 1997, TEP filed in the Arizona Superior Court an
appeal of the ACC order adopting the rules. TEP filed a motion for
summary judgment, claiming, among other things that the Competition
Rules: (a) violated the Regulatory Compact between TEP and the State
of Arizona; (b) confiscated TEP's property; and (c) violated due
process.  The Court did not grant summary judgment but ruled that the
ACC must hold hearings before it can modify TEP's Certificate of
Convenience and Necessity (CC&N).  No trial date has been set in the
case and no final order has been issued.  We are unable to predict the
outcome of the appeal.

     State and Federal Legislative Initiatives on Retail Electric Competition

     A legislative study committee established by the Arizona
Legislature issued a report on retail electric competition in December
1997.  The report identified tax and other issues for the legislature
to address.  In January 1998, Arizona legislators introduced HB 2663
regarding the implementation of retail electric competition in
Arizona.  This bill was passed by the Arizona State Legislature and
signed by the Governor in May 1998.  The legislation requires the
introduction of customer choice to 20% of each public power entity's
retail load by December 31, 1998, with 100% customer choice by
December 31, 2000.  Although this legislation only relates directly to
public power entities such as SRP; the bill encourages broader
application of the legislation's principles by the ACC to the state's
investor-owned utilities, including TEP, and to cooperatives.

     Additionally, federal legislators introduced several retail
competition initiatives in Congress which, if passed, could modify or
override the actions taken by the ACC or the Arizona Legislature.
Congress is not expected to act on the legislation in 1998.  We are
unable to predict the ultimate impact of such federal legislative
initiatives.

     ACC Order on Stranded Cost Recovery

     On June 22, 1998, the ACC adopted an order which outlines its
policy for stranded cost recovery by Arizona utilities in a
competitive energy market.    The order provides two methods for
stranded cost recovery for the Affected Utilities: (1)
Divestiture/Auction Methodology and (2) Transition Revenues
Methodology.  The order encourages, but does not require, full
divestiture of generating assets through an auction to unaffiliated
third parties.  The order states that only those Affected Utilities
choosing divestiture through the Auction/Divestiture Methodology shall
have the opportunity to recover 100% of unmitigated stranded costs.
The key components of the order are summarized below:

     Divestiture/Auction Methodology
     -------------------------------

	-	Affected Utilities choosing divestiture through the auction method
		must file a divestiture plan for ACC approval no later than October 1,
		1998.  Divestiture must be completed by January 1, 2001.

	-	The amount of stranded costs shall be the difference between the value
		of generation assets (generating plants, purchased power contracts,
		fuel contracts, and related regulatory assets) under traditional
		regulation and the market value of the assets after divestiture.  The
		definition of stranded costs shall include reasonable costs incurred
		for premiums, penalties or other payments necessary to effect
		divestiture, income tax ramifications of divestiture, redemption costs
		associated with tax-exempt two-county debt which may have to be
		redeemed upon transfer of the assets, and other reasonable costs
		necessarily incurred to accomplish divestiture.  Unmitigated stranded
		costs shall also include reasonable employee severance and retraining
		costs necessitated by electric competition.

	-	An Affected Utility shall be permitted to collect 100% of its stranded
		costs, including a return on its unamortized balance over a ten-year
		period, with a true-up mechanism.

	-	The ACC will work with the Affected Utility to provide sufficient
		assurances in order to avoid triggering write-offs related to the
		application of FAS 71.
	
	-	An Affected Utility's generation affiliate may acquire the generation
		assets of its parent or sister company, or the generation assets of
		another Affected Utility in the auction if it establishes that it is
		the highest bidder and that the acquisition will not result in the
		entity having more than 40% of the state's total generation megawatts
		of capacity.

	-	An Affected Utility that divests all its generation costs to non-
		affiliated entities, that results in negative stranded costs (not
		including regulatory assets), shall be entitled to keep 50% of the
		negative stranded costs.

	-	All Affected Utilities' customers shall pay their appropriate share of
		stranded costs either through a Competitive Transition Charge (CTC) or
		a standard offer rate, collected over a maximum of ten years.

	 Transition Revenues Methodology
	 -------------------------------

	-	The order states that "this option would be to provide sufficient
		revenues necessary to maintain financial integrity, such as avoiding
		default under currently existing financial instruments for a period of
		ten years, at the end of which time there would be no remaining
		stranded costs, or for the Commission to otherwise provide an
		allocation of stranded cost responsibilities and risks between
		ratepayers and shareholders as is determined to be in the public
		interest for a given Affected Utility."
     
	 The order required that each Affected Utility file its choice of
options for stranded cost recovery by August 21, 1998.  The order also
required that each Affected Utility file an implementation plan that
would include the following items, if appropriate, for its option
choice: the estimation of stranded costs separated out into regulatory
assets and other generation related assets; a preliminary plan for
auction/divestiture; the minimum financial ratios to maintain
financial viability for ten years; the amount of regulatory assets
requested, how much of those assets are generation related, and the
Commission Decision Number that approved such assets; and other
information as necessary.

	 TEP's Stranded Cost Recovery Plan

     On August 21, 1998, TEP filed a proposed plan for divestiture of
generating assets and stranded cost recovery with the ACC.  Under the
plan, TEP proposed to divest all of its generating assets and
associated property as a method of recovering stranded costs.  In its
filing with the ACC, TEP estimated its stranded costs may range from
$600 million to $1.1 billion.

     TEP owns, leases or co-owns 1,895 MW of generating capacity at
five fossil-fueled power plants in Arizona and New Mexico.  Of that
total, 1,182 MW are TEP-operated facilities, including the
Springerville Generating Station and the Irvington Generating Station.
The net book value of TEP's generating plant assets (including assets
held under capitalized leases) was approximately $1.3 billion at
December 31, 1997.

     ACC Staff Stranded Cost Recovery Agreement (SCR Agreement)

     On November 4, 1998, TEP reached a settlement agreement, the SCR
Agreement, with the ACC Staff for approval of its plan to divest
generation assets and for 100% recovery of stranded costs.  The SCR
Agreement also supports a Memorandum of Understanding (MOU) between
TEP and Arizona Public Service Company (APS) to exchange TEP's
interests in the Navajo and Four Corners Generating Stations for
certain high voltage transmission assets currently owned by APS.  The
SCR Agreement is subject to ACC approval.  The ACC Staff has requested
that the ACC consider the SCR Agreement beginning on November 20,
1998.  However, no specific date has been set.  If the ACC does not
approve the SCR Agreement, without changes, by November 25, 1998, the
SCR Agreement would be considered withdrawn by both TEP and the ACC
Staff.  The SCR Agreement includes the following:

-	 Stranded costs will include:
	 -	the difference between the book value of generation assets under
		traditional regulation and their market value determined through an
		auction process;
	 -	reasonable costs incurred for premiums, penalties, and/or other
		payments necessary to implement divestiture; and
	 -	reasonable employee severance and retraining costs necessitated by
		competition.

-	 TEP will divest its generation assets, pursuant to specified auction
	 protocols, by December 31, 2000.  TEP would also seek to terminate
	 its obligations under its leases relating to generating assets.  TEP
	 expects cash payments to lease participants would be required in
	 connection with any such terminations.  In order to complete
	 divestiture of both owned and leased assets, TEP also expects to be
	 required to make cash payments to various creditors and other parties.
	 In addition, a substantial portion of the generating assets have been
	 financed through tax-exempt bonds.  TEP expects that such bonds would
	 need to be redeemed or defeased as a result of the divestiture.

-	 If the auction of one or more generating units is unsuccessful, TEP
	 would seek to recover stranded costs relating to such unit(s) based on
	 the "Net Revenues Lost" approach.  Under that approach, stranded cost
	 is determined as the net present value of the annual differences
	 between the expected revenues under traditional regulation and
	 revenues likely to be received after the introduction of retail
	 competition.

-	 TEP would recover 100% of its stranded costs and a return on any
	 unamortized balance over an eight to  ten-year period ending December
	 31, 2008 as follows:

	 -	Interim Transition Charge (ITC)
		Beginning January 1, 1999 through the date of divestiture (no later
		than December 31, 2000), an ITC would be recovered from customers
		under the Standard Offer and from those customers purchasing energy
		from competitive suppliers.  The ITC will be calculated as the
		difference between the embedded cost of generation included in current
		rates and a market price for electric power.

	 -	Competition Transition Charge (CTC)
	    Following divestiture, a CTC will be collected from all distribution
	    customers for a period of six to eight years.  The CTC will include
	    recovery of a carrying cost equal to TEP's cost of capital based on a
	    capital structure consisting of 35 percent equity and 65 percent debt.

-	 TEP expects that the cash TEP will pay to divest will exceed the
	 proceeds from the sale of owned assets.  To finance the cash
	 requirements of divestiture, TEP would be permitted to "securitize"
	 the CTC by issuing bonds through a special purpose entity. If the SCR
	 Agreement is approved by the ACC, which is a separate branch of
	 government in Arizona, it would represent an administrative (not
	 legislated) authority to securitize stranded costs.  To date, similar
	 securitizations have been issued under legislative rather than
	 administrative authority.

-	 Open access will begin in TEP's retail market on January 1, 1999,
	 consistent with the Retail Electric Competition Rules.

-	 TEP's retail customers who remain on the Standard Offer will not
	 experience any increases in their current electricity pricing during
	 the transition period (prior to January 1, 2001). Rather, retail
	 customers who continue to purchase their energy requirements from TEP
	 will benefit from the base price decreases described in TEP Rate
	 Settlement Agreement, below.  After December 31, 2000, retail prices
	 will include the price TEP has to pay to acquire power in the
	 competitive generation market.

-	 The SCR Agreement will resolve all pending litigation between TEP and
	 the ACC involving the Retail Electric Competition Rules.  See Appeal
	 of ACC Order, above.

-	 Transmission Assets

	-	TEP will establish a new subsidiary (Transmission Subsidiary) by
		December 31, 2000, to hold all of its transmission assets.  TEP will
		acquire transmission assets and then contribute these assets to the
		Transmission Subsidiary.  The SCR Agreement allows TEP to acquire all
		345 kV and 500 kV transmission facilities owned by APS.

	-	The SCR Agreement supports an exchange of TEP's ownership interests in
		the Navajo Generating Station and Four Corners Generating Station for
		these transmission assets of APS.  TEP currently owns 7.5 percent of
		Units 1, 2 and 3 at Navajo, a total of 168 MW, and 7 percent of Units
		4 and 5 at Four Corners, a total of 110 MW.  Under the MOU, the
		closing of this transaction is to be on or before January 2, 2001.
		Upon completion of the asset exchange, TEP would enter into a four-
		year power sales contract with APS to purchase 200 MWs from these
		units.

	-	TEP expects to have a pre-tax gain from the exchange.  This assumes
		the market value for APS' transmission assets less is greater than the
		net book value of TEP's generation assets at closing.  The SCR
		Agreement allows for 35% of the net book value of transmission assets
		to be used to capitalize the Transmission Subsidiary.  TEP would also
		establish a regulatory liability in an equal amount.  Interest earned
		on the regulatory liability, based on the after-tax cost of capital of
		the stranded cost securitized balance, will be credited to retail
		customers during the CTC collection period.  Additionally, the
		regulatory liability will be amortized to retail customers over 10
		years on a straight-line basis beginning after the conclusion of the
		CTC.

   WHOLESALE

     TEP competes with other utilities, marketers and independent power
producers in the sale of electric capacity and energy in the wholesale
market.  FERC generally does not permit TEP's prices for wholesale
sales of capacity and energy to exceed rates determined on a cost of
service basis.  However, in the fall of 1997, FERC granted TEP a
tariff to sell at market-based rates.  In the current market,
wholesale prices are substantially below total cost of service, but in
all instances, we make wholesale sales at prices which exceed fuel and
other variable costs.  In addition, we expect competition to sell
capacity to remain vigorous.  Prices may remain depressed for at least
the next several years due to increased competition and surplus
capacity in the southwestern United States.  Competition for the sale
of capacity and energy is influenced by the following factors:

	 -	availability of capacity in the southwestern United States,
	 -	the availability and prices of natural gas, oil and coal,
	 -	spot energy prices, and
	 -	transmission access.

     The FERC issued two orders pertaining to transmission access in
April 1996.  FERC Order No. 888 requires all public utilities that
own, control, or operate interstate transmission facilities to offer
transmission service to others under a single tariff.  This tariff
must incorporate certain minimum terms and conditions of transmission
service established by the FERC and must also be used by public
utilities for their own wholesale market transactions.  Transmission
and generation services for new wholesale service are to be unbundled
and priced separately.  FERC Order No. 889 requires transmission
service providers to establish or participate in an open access same-
time information system (OASIS) that provides information on the
availability of transmission capacity to wholesale market
participants.  The order also establishes standards of conduct to
prevent employees of a public utility engaged in marketing functions
from obtaining preferential access to OASIS-related information or
from engaging in discriminatory business practices.  TEP is in
compliance with the requirements of FERC Orders 888 and 889.

     TEP, along with other transmission owners and users located in
the southwestern United States, is investigating the feasibility of
forming an ISO for the region.  An ISO would be responsible for
ensuring transmission reliability and nondiscriminatory access to the
regional transmission grid.  Over 50 participants have signed a
Development Agreement.  The formation of an ISO would be subject to
approval by the FERC and state regulatory authorities in the region.
The financial aspects of forming an ISO, including the potential
effects on TEP's future results of operations, will be examined as
part of the developmental work.

TEP RATE SETTLEMENT AGREEMENT
------------------------------

     On August 25, 1998, the ACC approved a rate settlement agreement
(Rate Settlement) which provides TEP's retail customers with base
price decreases over the next two years.  TEP's base price will
decrease by the following percentages:

-	an initial 1.1% (about $7.0 million) decrease effective July 1, 1998;
-	a second decrease of 1.0% (about $5.5 million) on July 1, 1999; and
-	an additional 1.0% (about $5.5 million) decrease on July 1, 2000.

The latter two decreases will apply to all Standard Offer customers
who do not have or do not choose access to retail competition during
the two-year phase-in of the ACC's Electric Competition Rules
beginning January 1, 1999.  The Rate Settlement meets the requirement
in the ACC's Electric Competition Rules for a 3-5% rate reduction.
See Competition, Retail.

     The Rate Settlement resolves TEP's application for a price
decrease in its Shared Savings Proposal filed with the ACC on July 9,
1997.  The settlement also provides for TEP to mitigate potentially
stranded costs through the accelerated recovery of an additional $4.3
million (after-tax) of deferred regulatory assets.  This increase in
amortization expense will be reflected in TEP's regulatory accounting
records but will have no impact on the expenses included in its
financial statements.  See Note 6 of Notes to the Condensed
Consolidated Financial Statements, Rate Matters.

     The Rate Settlement further affirms an interim accounting order
issued by the ACC in July 1997.  That order authorizes TEP to record a
$50 million coal contract termination fee as a deferred regulatory
asset and amortize that asset over approximately 13 years, or $3.8
million per year.  At September 30, 1998, $45.2 million of this
regulatory asset remained unamortized.  This fee was incurred when TEP
negotiated a new coal contract with the coal supplier to the
Springerville Generating Station which reduced its annual fuel bill
initially by approximately $10 million.


ACCOUNTING FOR THE EFFECTS OF REGULATION
----------------------------------------

     The ACC regulates TEP's utility business.  TEP generally uses the
same accounting policies and practices used by nonregulated companies
for financial reporting under generally accepted accounting
principles.  However, sometimes these principles, such as FAS 71,
require special accounting treatment for regulated companies to show
the effect of regulation.  For example, in setting TEP's retail rates,
the ACC may not currently allow TEP to charge its customers to recover
certain expenses but, instead, require that these expenses be charged
to customers in the future.  In this situation, FAS 71 requires that
TEP not show these expenses on its current income statements but
"defer" these items and show them as "regulatory assets" on the
balance sheet until TEP is allowed to charge its customers.  TEP then
amortizes these items to the income statement as charges are billed to
customers.  Similarly, certain items of revenue may be deferred as
regulatory liabilities, which are also eventually amortized to the
income statement.

     We have recorded regulatory assets and liabilities in our balance
sheets in accordance with FAS 71.  A regulated company must satisfy
certain conditions to apply the accounting policies and practices of
FAS 71. These conditions include:

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

We periodically assess whether we continue to meet these conditions.
If we were required to stop applying FAS 71 to all or a portion of
TEP's regulated utility operations, we would write off the related
balances of TEP's regulatory assets and liabilities as a charge in our
income statement.  In that event, our earnings would be reduced by the
net amount of regulatory assets and liabilities, after applicable
deferred income taxes.  Based on the balances of TEP's regulatory
assets and liabilities at September 30, 1998, if we stopped applying
FAS 71 to all of TEP's regulated operations, we would record an
extraordinary loss of approximately $150 million, net of the related
deferred income tax benefit of $101 million.  Approximately 62% of
TEP's net regulatory assets on the balance sheet relate to electric
generation.  While our cash flows may be affected by regulatory orders
and market conditions, our cash flows would not be affected if we
ceased to apply FAS 71.

     If we stop applying FAS 71, we would need to evaluate the
likelihood that we could recover the cost of TEP's electric plant in
the marketplace.  If undiscounted cash flows are less than the
carrying value of those plant assets that we continue to own, then we
would need to write off as an expense a portion of those plant assets
to reflect their current market value.  Plant assets to be disposed of
would be written down to fair value if it is less than carrying value.
We cannot predict if we would write off any plant assets as a result
of these evaluations.

     On June 22, 1998, the ACC adopted an order which outlines its
policy for stranded cost recovery by Arizona utilities in a
competitive energy market.  On August 5, 1998, the ACC adopted
amendments to the Retail Electric Competition Rules which, in part,
provide a two-year phase-in schedule in which all retail customers
will have access to competitive generation by January 1, 2001.  See
Competition, Retail for a discussion of the ACC order regarding
stranded cost recovery and the ACC competition rules.

     We expect that TEP will cease to account for its generation
operations using FAS 71 at the time the ACC approves the SCR Agreement
or another cost recovery plan specific to TEP, which includes the
specific percentage of stranded costs that TEP can recover and a cost
recovery method.  The amount and method of recovery that the ACC
approves for TEP will determine whether write-offs will be incurred at
that time.  TEP expects the ACC to make a decision and issue a final
order regarding its stranded cost recovery plan by year-end 1998.
However, the specific amount of stranded costs won't be determined
until the divestiture plan is implemented.  We are unable to predict
the amount of write-offs, if any, that may be incurred at that time.


INVESTMENTS IN ENERGY-RELATED AFFILIATES
----------------------------------------

      Our investments in the energy-related affiliates owned by MEH
comprise approximately 2% of the consolidated total assets of the
Company.  These investments contributed net income of $5.7 million for
the third quarter, but contributed a net loss of $4.0 million for the
first nine months of 1998.  These results are included in the Other
Income (Deductions) section on UniSource Energy's income statement.
The sale of Nations Energy's interest in Trigen-Nations Energy was the
primary contributor to the net income reported in the third quarter of
1998.  The Company's equity in the losses at NEV caused the overall
loss at MEH for the first nine months of 1998.

      The California electricity market was originally scheduled to
open to competitors such as NEV on January 1, 1998.  However,
technical matters related to the California Independent System
Operator and the California Power Exchange delayed the opening of the
electricity market until March 31, 1998.  Therefore, NEV could not
make retail power sales in California in the first quarter.  Start-up
costs associated with expansion into additional regions of the country
also contributed to the losses in the first nine months of 1998.
Although the delays in establishment of the competitive market caused
losses at NEV in the first nine months, NEV expects losses to decline
as more customers are added throughout the year.

      NEV has incurred a total loss in excess of $40 million for the
period September 1997 through September 1998. From September 1997, the
inception of Millennium's ownership in NEV, through September 30,
1998, Millennium recorded approximately $23.8 million of NEV losses.
The amount equals the total funds and unsecured commitments provided
by Millennium and UniSource Energy to NEV.  Accounting principles
limit the amount of NEV's loss to be recorded by Millennium to the
total amount invested and committed by Millennium and UniSource Energy
on an unsecured basis.  Should Millennium or UniSource Energy provide
additional unsecured funding to NEV, the amounts provided would be
immediately expensed up to the lesser of the amount of funding
provided or the amount of NEV cumulative incurred losses in excess of
the $23.8 million already recorded by Millennium and UniSource Energy.
NEV is seeking sources other than Millennium and UniSource Energy to
provide funding.  There can be no assurance that any such financing
will be obtained.

      Depending on the nature of future investment opportunities, we
expect to make additional investments in energy-related ventures. The
ACC Holding Company Order requires that the capitalization (debt and
equity) of the Company's affiliates other than TEP not exceed 30% of
TEP's capitalization unless otherwise approved by the ACC.


DIVIDENDS ON COMMON STOCK
-------------------------

    UniSource Energy

     UniSource Energy's ability to pay dividends depends upon cash
flow from TEP and MEH.  As described below, in the third quarter of
1998 TEP redeemed those First Mortgage Bonds which had covenants
restricting the payment of dividends.  TEP has not declared or paid a
dividend on common stock since 1989.

    TEP

     On September 3, 1998, TEP redeemed the five outstanding issues
of First Mortgage Bonds (aggregating $137 million in principal amount)
which contained covenants which prevented TEP from paying dividends
unless specific cash flow coverage and retained earnings tests were
met.  See Financing Developments, TEP First Mortgage Bonds, below.

     TEP's Credit Agreement allows TEP to pay dividends if it
maintains compliance with the agreement and meets certain financial
covenants, including a covenant that requires TEP to maintain a
minimum level of net worth.  As of September 30, 1998, the required
minimum net worth was $180.8 million.  TEP's actual net worth at
September 30, 1998 was $253.4 million.  See Financing Developments,
TEP Credit Agreement, below.  As of September 30, 1998, TEP is in
compliance with the terms of the Credit Agreement.

     The ACC Holding Company Order states that TEP may not pay
dividends to UniSource Energy in excess of 75% of its earnings until
TEP's equity ratio equals 37.5% of total capital (excluding capital
lease obligations).  As of September 30, 1998, TEP's equity ratio on
that basis was 17.3%.

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

EARNINGS
--------

     UniSource Energy recorded net income of $33.7 million in the
third quarter of 1998 compared with net income of $43.4 million in the
third quarter of 1997.  Net income per average share of Common Stock
was $1.05 for the third quarter of 1998 compared with net income per
average share of Common Stock of $1.35 for the third quarter of 1997.
The major reasons for the variance between the results for the third
quarter of 1998 and the results for the third quarter of 1997 were:

	 -	$13.1 million in net operating loss carryforward tax benefits
        recorded in 1997,
	 -	a $5.8 million after-tax gain from the sale of a partnership
		interest by an unregulated energy-related affiliate in 1998,
	 -	retail sales were lower due to milder weather conditions in 1998,
	 -	retail revenues were lower due to a 1.1% rate decrease effective
		July 1, 1998,
	 -	a $7.1 million reduction in retail revenues in 1998 related to a
		change in the method of estimating unbilled revenues, and
	 -	interest expense was $2.5 million higher in 1998 due to
		refinancings.
  
     For the first nine months of 1998, the Company recorded net
income of $27.7 million, compared with net income of $84.8 million for
the first nine months of 1997.  Net income per average share of Common
Stock was $0.86 for the first nine months of 1998 compared with net
income per average share of Common Stock of $2.64 for the first nine
months of 1997.  The major reasons for the variance between the
results for the first nine months of 1998 and the results for the
first nine months of 1997 were:
     
	 -	$42.4 million in net operating loss carryforward tax benefits
		recorded in 1997,
	 -  $10.2 million in pre-tax other income from a reversal of loss
		provision in 1997,
	 -	$8.1 million of non-cash regulatory revenues recorded in 1997,
	 -	$4.0 million in net losses from investments in unregulated energy-
		related businesses in 1998,
	 -	retail sales were lower due to mild weather conditions in 1998,
	 -	retail revenues were lower due to a 1.1% rate decrease effective
		July 1, 1998,
	 -	a $7.1 million reduction in retail revenues in 1998 related to a
		change in the method of estimating unbilled revenues, and
	 -	interest expense was $10.0 million higher in 1998 due to
		refinancings.
     
     TEP recorded net income of $29.4 million for the third quarter of
1998, compared with net income of $43.4 million in the third quarter
of 1997.  The third quarter earnings decrease was primarily
attributable to the absence of tax benefit recognition in 1998, lower
retail sales due to mild weather conditions, a 1.1% rate decrease
effective July 1, 1998, an adjustment to retail revenues for a change
in the method of estimating unbilled revenues, and higher interest
expense from refinancings.  Earnings for the nine-months ended
September 30, 1998 were $35.8 million, compared with net income of
$84.8 million for the same period in 1997.  The same factors which
contributed to the variance for the third quarter also explain the
nine-month results.  In addition, income from a reversal of loss
provision and non-cash regulatory revenues, both recorded in the nine
months ended September 30, 1997, contributed to the earnings variance.
     
RESULTS OF OPERATIONS
---------------------

     Currently, TEP's financial condition and results of operations
are the primary factors affecting the financial condition and results
of operations of UniSource Energy on an annual basis.  We note any
fluctuations that are not primarily due to TEP activities.  All
nonutility operating transactions are reflected in Other Income
(Deductions) on the UniSource Energy Consolidated Statement of Income.

  Utility Sales and Revenues

     Comparisons of TEP's kilowatt-hour sales and electric revenues
are shown below:

<TABLE>
<CAPTION>

                                                                              Increase/(Decrease)
                                                                              -------------------
Three Months Ended September 30                    1998           1997         Amount     Percent
-------------------------------                    ----           ----         -----      -------
<S>                                                <C>           <C>            <C>         <C>
Electric kWh Sales (000):               
      Retail Customers                           2,280,253      2,321,385      (41,132)      (1.8)%
      Sales for Resale                           1,417,787        921,220      496,567       53.9
                                                 ---------      ---------      --------      
             Total                               3,698,040      3,242,605      455,435       14.0
                                                                                                   
Electric Revenues (000):                                                                           
      Retail Customers                            $196,449       $201,566      $(5,117)     (2.5)%
      Sales for Resale                              56,831         29,523       27,308      92.5
                                                  --------       --------      --------     
             Total                                $253,280       $231,089      $22,191       9.6
</TABLE>



<TABLE>
                                                                              Increase/(Decrease)
                                                                              -------------------
Nine Months Ended September 30                     1998           1997         Amount     Percent
------------------------------                     ----           ----         -----      -------
<S>                                                     <C>        <C>          <C>             <C>
Electric kWh Sales (000):                                                                           
      Retail Customers                           5,889,674      5,830,042      59,632        1.0%
      Sales for Resale                           3,304,675      2,385,481     919,194       38.5
                                                 ---------      ---------     -------
             Total                               9,194,349      8,215,523     978,826       11.9
Electric Revenues (000):                                                                            
      Retail Customers                            $485,333       $490,752     $(5,419)      (0.1)%
      Amortization of MSR Option                                                                    
            Gain Regulatory Liability                    0          8,105      (8,105)    (100.0)
      Sales for Resale                             108,636         69,483      39,153       56.3
                                                 ---------      ---------     --------   
            Total                                 $593,969       $568,340     $25,629        4.5
</TABLE>


     TEP's kWh sales to retail customers decreased by 1.8% during the
third quarter of 1998 compared with the third quarter of 1997.
Although TEP experienced retail customer growth of 2.7%, moderate
weather conditions in the quarter contributed to the decline in retail
kWh sales.  Based on cooling degree days, a commonly used measure in
the electric industry that is calculated by subtracting 75 from the
average of the high and low daily temperatures, the Tucson area
registered a decrease of approximately 7% in cooling degree days for
the third quarter of 1998 compared with the same period in 1997, and a
decrease of approximately 3% in cooling degree days compared with the
ten year average for the same period from 1988 to 1997.  Cooling
degree days for the third quarter of 1998 were 944, compared with 1015
for the third quarter of 1997 and 970 for the ten-year average.

     For the first nine months of 1998, kWh sales to retail customers
were 1.0% higher than the same period in 1997.  Retail customer growth
for the nine months ended September 30, 1998 averaged 2.1%.  Milder
weather conditions in both the second and third quarters of 1998
contributed to the moderate growth in retail kWh sales for the nine-
month period.

     Revenues from sales to retail customers decreased by 2.5% in the
third quarter of 1998 compared with the same period in 1997 because of
the lower kWh sales and a 1.1% across the board rate reduction
retroactive to July 1, 1998.  Also, in the third quarter of 1998, TEP
changed its method of estimating unbilled revenues, which resulted in
a $7.1 million adjustment to retail revenues.  Renegotiated pricing of
contracts with large commercial, industrial and mining customers also
resulted in reduced revenues.  Retail revenues for the nine-month
period of 1998 were relatively flat, with the increase in kWh sales
noted above offset by the impacts of lower rates under long-term
contracts to large customers, the retail rate reduction implemented in
the third quarter of 1998, and the adjustment for the change in the
method of estimating unbilled revenues.  See Note 9. of Notes to
Condensed Consolidated Financial Statements, Change in Method of
Estimating Unbilled Revenues.

     The lower retail demand in the third quarter allowed TEP to
increase its wholesale sales activity.  Our kWh sales for resale
increased by 54% and the related revenues nearly doubled in the third
quarter of 1998 relative to the same period in 1997.  For the nine
months ended September 30, 1998, sales for resale were up 39% and
wholesale revenues increased 56% compared to the same period in 1997.
     
     Although average temperatures were milder overall in the second
and third quarters of 1998, TEP set a record for retail electricity
sold in a 24-hour period on July 16, 1998, distributing 33,959
megawatt-hours to its retail customers, a 7.0% increase over the
previous record set in 1997.  On the same date, TEP experienced a new
record peak demand of 1,786 MW, an increase of 7.7% over the previous
record of 1,659 MW set on August 10, 1997.

     TEP's non-cash revenue from the Amortization of the MSR Option
Gain Regulatory Liability was $8.1 million in the first nine months of
1997.  This regulatory liability was fully amortized in May 1997.
Therefore, no amortization was recognized in 1998.  If we exclude the
revenue from the MSR Option Gain amortization from 1997 revenues,
total operating revenues would have been 6.0% higher in the first nine
months of 1998 than the same period in 1997.

  Operating Expenses

     Fuel and Purchased Power expense increased by 43% in the third
quarter and 22% in the first nine months of 1998 compared with the
same period in 1997 because of the increased purchased power to
support the higher wholesale sales we discussed above, as well as to
provide energy during several brief, but unscheduled, power plant
outages during the third quarter of 1998.  If we exclude the growth in
Fuel and Purchased Power expense, other operating expenses decreased
in total by 4% in the third quarter and by 3% in the first nine months
of 1998 over the same periods in 1997.

     Other Operations expense was $3.4 million lower in the third
quarter and $4.4 million lower in the first nine months of 1998 than
in the same periods of 1997.  Results for 1997 included consulting
fees paid to NEV of $2.6 million in the third quarter and $6.3 million
for the nine-month period.

 Other Income (Deductions)
 
     UniSource Energy and TEP recognized $13.1 million of NOL benefit
in the third quarter of 1997 and none in 1998. This lack of benefit
recognition and higher tax expense resulting from increased income,
caused the third quarter 1998 income tax benefits included in Other
Income (Deductions) to decrease by $14.3 million and $15.3 million for
UniSource Energy and TEP, respectively, from the third quarter of
1997.

     Compared with the first nine months of 1997, 1998 income tax
benefits included in Other Income (Deductions) decreased by $37.9
million and $40.7 million for UniSource Energy and TEP, respectively.
These changes are mainly due to the lack of recognition of Net
Operating Loss (NOL) benefits offset by greater tax benefits as a
result of lower income.  UniSource Energy and TEP recognized $42.4
million of NOL benefit in the first nine months of 1997 and none in
1998.

     As of December 31, 1997, both UniSource Energy and TEP had
recorded the amount of prior period NOL benefit that we expect to use
on future income tax returns.  At the present time, we are not able to
estimate future additional amounts of NOL benefit that we may
recognize in the income statements of either UniSource Energy or TEP.
This is because there are still open tax years for which there may be
additional assessments and because federal and state NOL carryforwards
have varying expiration dates.  We do not expect to recognize
additional amounts of NOL benefit until such items are resolved.

     A Reversal of Loss Provision of $10.2 million was recorded in the
second quarter of 1997.  The Reversal of Loss Provision relates to the
dissolution of a subsidiary which formed part of TEP's former
investment operations.

     Other Income for TEP includes interest income on the promissory
note it received from the Company in exchange for the transfer of its
stock in MEH.  See Note 3 of Notes to the Condensed Consolidated
Financial Statements, Transfer of MEH from TEP to UniSource Energy.
TEP recorded interest income of $2.4 million in the third quarter and
$7.0 million in the first nine months of 1998 from this note.  On the
Consolidated Statement of Income for UniSource Energy, this income is
eliminated as an inter-company transaction.

     The unregulated energy subsidiaries owned by MEH reported net
income of $5.7 million for the third quarter and a net loss of $4.0
million for the first nine months of 1998, compared with net losses of
$1.6 million in the third quarter and $2.1 million for the first nine
months of 1997.  Net income for the third quarter of 1998 resulted
from a $5.8 million after-tax gain on the sale of Nations Energy's
interest in Trigen-Nations Energy, which owns and operates the Coors
Brewing Company power plant in Golden, CO.  The delayed implementation
of California's competitive electricity market until March 31, 1998,
expansion into additional regions of the country, and other subsidiary
development activities affected the financial results for these
businesses for the nine month period.  See Investments in Energy-
Related Affiliates.

  Interest Expense

     Interest expense increased by $2.5 million in the third quarter
and by $10.0 million of the first nine months of 1998 relative to the
same periods in 1997.  Higher letter of credit fees for TEP's new
Credit Agreement, as well as higher interest rates from the
refinancing of certain variable rate debt obligations with fixed rate
debt obligations accounted for a substantial part of the increase.
TEP also incurred higher interest expense in 1998 when new bonds were
issued and began accruing interest for periods up to 45 days before
the redemption of old bonds.  (See Financing Developments, TEP Sale of
Pollution Control Bonds and TEP First Mortgage Bonds, below).  These
refinancings benefit TEP by extending debt maturities and reducing the
risk from changes in variable interest rates.

 EVENTS AFFECTING FUTURE RESULTS OF UTILITY OPERATIONS

  TEP Generating Resources

     On May 1, 1998, the lease on three internal combustion turbine
generating units having a combined generating capacity of 96 MW ended.
TEP is in the process of evaluating the need for this type of peaking
generation resource in the near term.  Firm capacity purchases needed
to replace the expired leased capacity are not expected to have a
material negative impact on UniSource Energy or TEP financial results.


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

  CASH FLOWS

     UniSource Energy

     Cash and cash equivalents increased by $44.7 million or 37%
during the twelve months ended September 30, 1998.  The September 30,
1998 ending balance was $164.5 million compared with the September 30,
1997 ending balance of $119.8 million.  For the twelve-month period
ended September 30, 1998, net cash flows from operating activities
exceeded the cash needed for investing and financing activities.

     Net cash flows from operating activities increased in aggregate
by $30.8 million in the first nine months of 1998 compared with the
same period in 1997.  This increase was mainly due to the payment of
$40.0 million in contract termination fees to the Springerville coal
supplier in the first nine months of 1997 compared to $10.0 million
paid to the coal supplier in the first nine months of 1998 (see Note 6
of Notes to Condensed Consolidated Financial Statements, Rate
Matters).  Significant increases in cash receipts for the nine-month
period included cash receipts from sales for resale and proceeds from
the sale of emission allowances.  These were offset by increased
payments for higher fuel and purchased power costs supporting the
higher wholesale sales, and higher cash interest payments due to debt
redemptions and higher interest rates on refinanced debt for 1998.

     Total net cash outflows from investing activities increased by
$10.9 million during the first nine months of 1998 compared with the
same period in 1997.  Construction Expenditures increased by $6.8
million in the 1998 period, while net Investments in Joint Ventures
were $3.1 million higher.

     Total net cash outflows from financing activities decreased by
$8.8 million in the first nine months of 1998 compared with the same
period in 1997.  Net retirements of long-term debt and capital lease
obligations were greater in the first nine months of 1997, primarily
due to the repayment of the $31 million balance outstanding on TEP's
Renewable Term Loan.

     Our consolidated cash balance, including cash equivalents, at
November 6, 1998 was approximately $170 million.  Of this amount, $151
million was held by TEP and its wholly-owned subsidiaries.  We invest
cash balances in high-grade money market securities with an emphasis
on preserving the principal amounts invested.

     TEP

     Cash and cash equivalents increased by $12.6 million, or 11%,
from the September 30, 1997 ending balance of $119.8 million to the
September 30, 1998 ending balance of $132.4 million.  TEP expects to
generate enough cash flow during the next twelve months to fund
continuing operating activities and construction expenditures.  Actual
cash flows may vary from projections if there are changes in wholesale
revenues, changes in short-term interest rates or other factors.  If
cash flows were to fall short of expectations, TEP would use existing
cash balances and, if necessary, borrow from the Revolving Credit
Facility.  At November 6, 1998, there was no outstanding balance due
under the Revolving Credit Facility.

  FINANCING DEVELOPMENTS

    Warrant Exchange Offer

     From August 18, 1998 through October 23, 1998, the Company
offered to exchange outstanding warrants previously issued by TEP.  At
the time of the exchange offer, there were approximately 12.1 million
aggregate number of TEP Warrants outstanding.  TEP Warrants entitle
the holder of five warrants to purchase one share of TEP common stock
for $16.00.  Currently, UniSource Energy owns 100% of the common stock
of TEP and TEP common stock is not publicly traded.  In order to
provide TEP Warrant holders with the opportunity to obtain warrants
exercisable into UniSource Energy common stock, which is listed and
has an established market, the Company offered to exchange UniSource
Energy Warrants for TEP Warrants.  Each whole new UniSource Energy
Warrant entitles the holder to purchase one share of UniSource Energy
common stock for $16.00.  For each TEP Warrant, the holder received:

-	0.20 UniSource Energy Warrant, expiring March 15, 1999; and
-	0.20 UniSource Energy Warrant, expiring December 15, 2000.

      The Exchange Offer expired on October 23, 1998.  Approximately
1.5 million UniSource Energy Warrants of each series were issued in
exchange for approximately 7.5 million tendered TEP Warrants.
Approximately 4.6 million TEP Warrants were not tendered for exchange
and retain the right to purchase, upon payment of the exercise price,
TEP common stock.  The shares of TEP common stock issued as a result
of any exercise of TEP Warrants are not exchangeable for UniSource
Energy common stock.

    Direct Stock Purchase Plan

      The Company established a direct stock purchase plan, called the
Investment Plus Plan, in the third quarter of 1998.  The Investment
Plus Plan provides a method of investing directly in the Company's
common stock without brokerage commissions or service charges.

    TEP First Mortgage Bonds

     In 1997 the ACC granted authority to TEP to refinance up to $184
million of its First Mortgage Bonds scheduled to mature between 1999
and 2003, as well as any redemption premiums, by issuing new debt
and/or equity securities.  TEP completed these transactions in the
third quarter of 1998 and fulfilled its objective to extend maturities
and eliminate certain restrictive covenants contained in the existing
First Mortgage Bonds.

     In May 1998, TEP exchanged $46.9 million of its then existing
12.22% First Mortgage Bonds due 2000 for the same amount of new 12.22%
Exchange Series First Mortgage Bonds due 2000.  With the exception of
the elimination of a covenant restricting the payment of dividends,
the new bonds have substantially the same terms and conditions as the
then existing bonds.

     In August 1998, TEP issued $140 million of First Collateral Trust
Bonds, Series A, and used the net proceeds in September 1998 to redeem
all of its First Mortgage Bonds due in 1999, 2001, 2002, and 2003, as
well as the $31.9 million of 12.22% First Mortgage Bonds due 2000 not
tendered for exchange as described above.  Interest rates on the bonds
that were redeemed ranged from 7.55% to 12.22%.  When TEP redeemed
these bonds, it eliminated covenants that prohibited the payment of
common stock dividends so long as it had an accumulated earnings
deficit (see Dividends on Common Stock).  The First Collateral Trust
Bonds, Series A bear interest at 7.50% and mature in 2008.  The First
Collateral Trust Bonds are not secured by a direct mortgage or other
lien on property of TEP, but instead are collateralized by an equal
aggregate principal amount of bonds issued under TEP's General First
Mortgage and held by the trustee.  If and when the bonds
collateralizing the First Collateral Trust bonds constitute all bonds
outstanding under TEP's General First Mortgage, the bonds issued under
the General First Mortgage may be surrendered and substituted with an
equal amount of bonds issued under the General Second Mortgage.  If
and when the bonds collateralizing the First Collateral Trust bonds
constitute all bonds outstanding under the General Second Mortgage,
the bonds may be surrendered and the First Collateral Trust Bonds,
Series A will become unsecured obligations of TEP.

     In November 1998, TEP called $30 million of its 8.50% First
Mortgage Bonds ($57.9 million aggregate principal amount outstanding)
for redemption on December 7, 1998.  Such bonds are scheduled to
mature in 2009.

    TEP Sale of Pollution Control Bonds

     On March 17, 1998, the Apache County, Arizona Industrial
Development Authority issued $200 million of new bonds for the benefit
of TEP.  The proceeds were used on May 15, 1998 to redeem the 1981
Series A Apache County Pollution Control Revenue Bonds due 2020 ($100
million) and the 1981 Series B Apache County Pollution Control Revenue
Bonds due 2021 ($100 million).  The new bonds, which are unsecured,
were issued in three series: Series A Pollution Control Revenue Bonds
($83.7 million) bears interest at 5.85% and matures in 2028; Series B
Pollution Control Revenue Bonds ($99.8 million) bears interest at
5.875% and matures in 2033; and Series C Industrial Development
Revenue Bonds ($16.5 million) bears interest at 5.85% and matures in
2026.

     The 1981 Series A Apache Bonds were supported by a letter of
credit.  This LOC was collateralized by Second Mortgage Bonds under
the terms of TEP's Credit Agreement.  When TEP redeemed these bonds,
the Letter of Credit Facility decreased from $444 million to $341
million and the Second Mortgage Bonds collateralizing those LOCs
decreased by $103 million.  The 1981 Series B Apache Bonds were
supported by a letter of credit outside of the Credit Agreement.  This
LOC was collateralized by First Mortgage Bonds.  When TEP redeemed
these bonds, it eliminated the supporting LOC and retired $103 million
of First Mortgage Bonds collateralizing the LOC.

    TEP Credit Agreement
     
     As of September 30, 1998 and as of November 6, 1998, TEP had no
borrowings outstanding under its $100 million Revolving Credit
Facility.

     As described above in TEP Sale of Bonds, after TEP redeemed the
1981 Series A Apache County Pollution Control Revenue Bonds on May 15,
1998, the amount of its Letter of Credit Facility decreased to $341
million and the amount of its total facilities under the Credit
Agreement, which includes the Revolving Credit Facility discussed
above, decreased to $441 million.

     TEP is required by its Credit Agreement to maintain certain
financial covenants including (a) a minimum Consolidated Tangible Net
Worth equal to the sum of $133 million plus 40% of cumulative
Consolidated Net Income since January 1, 1997, (b) a minimum Cash
Coverage Ratio ranging from 1.30 in 1998 and gradually increasing to
1.55 in 2002, and (c) a maximum Leverage Ratio ranging from 7.00 in
1998 and gradually decreasing to 6.20 in 2002.  For the quarter ended
September 30, 1998, TEP was in compliance with each of these
covenants.

    UniSource Energy--Loans and Guarantees

     Effective September 1, 1997, Millennium exercised an option to
acquire a 50% ownership in NEV. Concurrent with the exercise of the
option, Millennium made a capital contribution in the amount of $0.8
million.

     In December 1997, Millennium committed to provide NEV with $20
million of funding.  At September 30, 1998, NEV had received $19
million under the commitment.  As a result, the remaining commitment
amount available was $1 million at October 31, 1998.  Additionally, in
October 1998, NEV issued a $4.7 million promissory note to Millennium
for a $3.0 million member loan Millennium extended to NEV in September
1997, and preferred operating return due Millennium under the terms of
NEV's original operating agreement.

     UniSource Energy is the guarantor of $33.6 million of performance
bonds that secure amounts NEV may owe to the utility distribution
companies (UDCs) and energy suppliers in connection with NEV's sales
to retail electric customers.  NEV bills its customers for these
charges.  Additionally, in August 1998, UniSource Energy agreed to
guarantee a $10 million loan that NEV obtained from an unrelated
party.  That loan is due in 1999.


IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS AND APPLICATIONS
--------------------------------------------------------

      The Company continues to review, test and make modifications to
its computer systems and applications in an effort to ensure that it
will provide uninterrupted service and that year 2000 transactions can
be processed.  The Company's year 2000 program commenced in 1996.  We
believe that all identified systems and applications within our
control will be year 2000 ready by June 30, 1999. "Year 2000 ready"
means the system properly functions for our specific business
requirements now, into, and through the next century.

State of Readiness
------------------

      We have completed an inventory and assessment for each of TEP's
critical and non-critical information systems and embedded
technologies.  The following areas are being addressed: enterprise
information systems; control and embedded systems; suppliers; and
subsidiaries.

Enterprise Information Systems--We began the remediation, replacement
or upgrade of these systems in 1996 and we expect to complete this
process by the end of 1998, including testing and implementation.  The
following systems are included:

     Customer Services, Billing, Receivables: Compliant--Customer
	 Information System installed in 1998;
     Human Resources, Payroll: System installed in 1993 and upgraded
	 to full compliance in 1998;
     Work Management: Compliant--System installed in 1997;
     General Ledger, Fixed Assets, Projects: Scheduled for replacement
     in 1999 and current systems now being remediated with completion
     date in fourth quarter 1998;
     Accounts Payable, Purchasing, Inventory: Remediation completed in
	 1998.
     
Upgrades to the operating system software are scheduled through the
first quarter 1999.  An integrated test is then scheduled for the
second quarter 1999 of the enterprise hardware, operating software and
major applications with year 2000 date processing.
     
Control and Embedded Systems--We are reviewing the control and
embedded systems of TEP's utility plant (including the generation
units that TEP owns part of but does not operate).  Many of these
systems are critical to the power generation, transmission and
distribution of electrical service.  The inventory and assessment
stages of the control and embedded systems program are complete as of
the third quarter of 1998.  The testing and remediation efforts are
55% complete and are expected to be substantially completed by the end
of the second quarter of 1999.  Major upgrades are scheduled for the
Energy Management (SCADA) System and for power generation systems.

Suppliers--We have identified the major vendors from whom we purchase
products or services relating to the generation, transmission and
distribution of electrical service.  We are working with those vendors
to determine their plans to correct any problems they may face with
year 2000 compliance and investigate any potential impact on TEP.
Other business areas of the Company are also being reviewed for major
vendors and the identified vendors will be pursued for their
corrective plans and impact on TEP.

Subsidiaries--The Company is contacting NEV, Nations Energy and Global
Solar to determine their state of readiness.  These companies will be
monitored to ensure plans are in place to avoid year 2000 disruptions.

Costs
-----

      From 1996 through September 30, 1998, specific year 2000 project
costs of approximately $686,000 have been incurred, all of which were
expensed.  Those amounts exclude the costs of major system
replacements which, in addition to other functional changes, served to
remediate year 2000 issues.  A budget of $1.35 million has been
established for year 2000 project costs.  All year 2000 remediation
costs will be expensed as incurred.  An additional $1.1 million of
capital costs were moved up to 1999 due to year 2000 issues.  This
amount includes $0.6 million of capital costs that may be reclassified
as expense for system upgrades at power generation facilities where
TEP has a partial interest and is not the operator.

Risks
-----

      At this time we believe that all identified modifications to
systems which the Company operates will be made within the required
time frames.  Notwithstanding the Company's efforts, there can be no
assurance that all year 2000 problems with systems the Company
operates will be identified and remediated in a timely fashion.
Although the Company believes that, as a result of its year 2000
program, any problems arising from the failure to achieve year 2000
readiness will be minor, it is possible that such failure could
disrupt the generation, transmission or distribution of electric
energy or the billing and collection process.  We cannot assure the
year 2000 readiness status of systems or parties that the Company does
not control.  We cannot assess the effect on the Company of non-
compliance by systems or parties that the Company does not control.

     TEP and other electric service providers in the WSCC are
evaluating potential year 2000 risks resulting from interconnected
electric and informational systems.  Such interconnected systems are
critical to the reliability and integrity of each interconnected
electric service provider.  It is possible that the failure of one
such interconnected provider to achieve year 2000 readiness could
disrupt the provision of electric services by others.  TEP and other
providers in the WSCC are working together in an effort to avoid such
disruptions.  TEP will participate in a 2nd Neighboring
Interconnection meeting planned for December 7,1998, involving our
adjacent Electric Utilities in the Southwest.  TEP has scheduled
compliance testing to coincide with the NERC 1st Industry Coordinated
drill on April 8, 1999, and the 2nd drill on September 8, 1999.

Contingency Plans
-----------------

     The Company is preparing contingency plans to address the
possibility that not all remediation efforts will succeed.  TEP is
documenting scenarios and has a schedule to document a draft
mitigation plan by December 31, 1998.  The plan includes procedure
development, tests, and drills to coincide with the NERC plans.

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 include the following cautionary
statements to 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.  They include
statements which are not statements of historical fact.  Such forward-
looking statements may be identified by the use of words such as
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions.  UniSource Energy and TEP may
occasionally publish or make available forward-looking statements of
this nature. These cautionary statements and any other cautionary
statements which may accompany the forward-looking statements
expressly qualify all such forward-looking statements, whether written
or oral, and whether made by or for UniSource Energy or TEP.  In
addition, UniSource Energy and TEP disclaim any obligation to update
any forward-looking statements to reflect events or circumstances
after the date we make forward-looking statements.

      Forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those
we express in the forward-looking statements.  We express in good
faith the expectations, beliefs and projections contained in this
document.   We believe we have a reasonable basis to make such
statements based on our examination of historical operating trends,
data contained in our records and other data available from third
parties.  However, we cannot assure that we will achieve our
expectations, beliefs or projections.  In addition to other factors
and matters discussed in this document, we believe some of the
important factors that could cause actual results to differ materially
from those we discuss in the forward-looking statements include the
following:

1.	Effects of restructuring initiatives in the electric industry and
	other energy-related industries.

2.	Changes in economic conditions, demographic patterns and weather
	conditions in TEP's retail service area.

3.	Changes affecting TEP's cost of providing electrical service including
	changes in fuel costs, generating unit operating performance, interest
	rates, tax laws, environmental laws, and the general rate of
	inflation.

4.	Changes in governmental policies and regulatory actions with respect
	to allowed rates of return, financings, rate structures, and methods
	of establishing rates.

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

6.	Changes in accounting principles or the application of such principles
	to UniSource Energy, TEP, or any subsidiary.


                      PART II - OTHER INFORMATION
                                   
ITEM 1. -- LEGAL PROCEEDINGS
-------------------------------------------------------------------------------

TAX ASSESSMENTS

     See Note 2 of Notes to Condensed Consolidated Financial

Statements, Tax Assessments.

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

INVESTMENTS IN ENERGY-RELATED AFFILIATES

      MEH Corporation (MEH), a wholly-owned subsidiary of UniSource
Energy, owns 100% of the stock of four subsidiaries.  We established
these subsidiaries to pursue various unregulated energy-related
investment opportunities:

	(1)	Nations Energy Corporation (Nations Energy) develops independent power
		projects worldwide.  Recent transactions completed by Nations Energy
		include:

		-	The sale to Trigen Energy Corporation of a 48% interest in Trigen-
			Nations Energy, a partnership which owns and operates the 40 MW 
			Coors Brewing Company power plant in Golden, CO.  Nations Energy 
			recorded a $5.8 million after-tax gain on the sale.  Following the
			sale, Nations Energy owns a 1% interest in Trigen-Nations.  The 
			partnership	purchased the steam and electric power plant from Coors
			in September 1995.
		-	The purchase of a minority interest in Corporation Panamena de
			Energia, S.A. (COPESA) for $7.5 million.  COPESA is an independent
			power producer which owns and operates a 43 MW power plant outside
			of Panama City. The energy is sold under a Power Purchase Agreement
			with an unrelated party.
		-	The purchase of a minority equity interest in the ECK Generating
			Power Project in the Czech Republic.  The 340 MW project consists 
			of the upgrade and expansion of an existing cogeneration facility
			located in the city of Kladno.  The project is scheduled for
			completion in late 1999.  Once completed, the generating facility 
			will sell power to a regional distribution company and to an 
			adjacent industrial complex.

	(2)	Millennium Energy Holdings, Inc. (Millennium) holds a 50% interest in
		New Energy Ventures, Inc. (NEV).  NEV, a buyer's agent, provides
		electric load aggregation and advisory services to retail purchasers
		of electric energy.

		-	As of September 30, 1998, NEV had contracts to purchase energy for 
			and	sell energy to customers principally in California and New York
			with a combined electrical demand of more that 1,850 MW.  NEV began
			serving	its California customers on March 31, 1998 when the 
			California retail electricity market opened to competition.
		-	In October 1998, the Company and NEV announced the formation of a 
			new	subsidiary, NEV Southwest L.L.C., with offices in Tucson and
			Phoenix.NEV Southwest will be responsible for developing new 
			customer service opportunities, including energy supply and trading,
			in Arizona, Nevada, Utah, Colorado, and New Mexico, as these states 
			move ahead	with plans to open to retail electric competition.
		-	NEV Technologies, a subsidiary of NEV, and its joint ventures hold
			exclusive distribution rights for the AlliedSignal TurboGeneratorTM 
			in the western U.S. and certain international markets.  In October 
			1998, Edison International made a $10 million minority equity 
			investment in NEV Technologies.  NEV Technologies' two joint 
			ventures are 50% owned by Dames & Moore Ventures.  NEV owns the 
			remainder of NEV Technologies.

	(3)	Advanced Energy Technologies, Inc. (AET) holds a 50% interest in
		Global Solar Energy, L.L.C. (Global Solar), a manufacturer of thin-
		film photovoltaic cells.

	(4)	Southwest Energy Solutions, Inc. (SES) provides ancillary energy
		services to electric consumers.  SES owns 100% of the stock of SWPP
		Investment Company (SWPP) and SWPP International, Ltd. (SWPPI), which
		hold ownership interests in businesses engaged in the manufacture and
		sale of concrete power poles.

ADDITIONAL FINANCIAL DATA

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

											   12 Months Ended
										September 30,       December 31,
											1998               1997
											----               ----
Ratio of Earnings to Fixed Charges          1.30               1.39


ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------------

(a)  Exhibits.
     
     -- See Exhibit Index.

(b)   Reports on Form 8-K.
     
     -- Dated August 27, 1998, reporting on TEP's Stranded Cost
          Recovery Plan filed with the ACC, TEP's Rate Settlement
          Agreement, and the TEP/UniSource Energy Warrant Exchange
          Offer.
     


                               SIGNATURE


     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 subsidiary.


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

Date:  November 12, 1998                    Ira R. Adler
							       ------------------------------
											Ira R. Adler
                                 Executive Vice President and Principal
                                          Financial Officer



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


Date:  November 12, 1998                     Ira R. Adler
                                  ---------------------------------								
                                             Ira R. Adler
                                Executive Vice President and Principal
                                             Financial Officer





                             EXHIBIT INDEX
                                   
     * 4 -  Form of Warrant Agreement relating to the UniSource
			Energy Warrants (Form S-4, Registration Statement No. 333-
			60809--Exhibit 4(a)).
	  11 -  Statement re computation of per share earnings - UniSource
			Energy.
      12 -  Computation of Ratio of Earnings to Fixed Charges - TEP.
      15(a)-Letter regarding unaudited interim financial information
			(PricewaterhouseCoopers LLP).
      15(b)-Letter regarding unaudited interim financial information
			(Deloitte &Touche LLP).
      27(a)-Financial Data Schedule - UniSource Energy.
      27(b)-Financial Data Schedule - TEP.
     

     (*) Previously filed as indicated and incorporated herein by reference.