________________________________________________________________________________



                                AMENDMENT NO. 3

                           dated as of June 1, 2003

                                     to

                            TAX INDEMNITY AGREEMENT
                         dated as of December 1, 1985



                                    between



                       PHILIP MORRIS CAPITAL CORPORATION
                      beneficiary under a Trust Agreement
                         dated as of December 1, 1985
                        with Wilmington  Trust Company
                                      and
                                William J. Wade,
                 as Owner Trustee and Cotrustee, respectively,
                                     Lessor

                                      and

                         TUCSON ELECTRIC POWER COMPANY,
                                      and
                           SAN CARLOS RESOURCES INC.,
                                     Lessee

                     _______________________________________
                                  Common Plant
                         Springerville Generating Station


________________________________________________________________________________
<PAGE>

                                AMENDMENT NO. 3
                                       to
                            TAX INDEMNITY AGREEMENT


     This AMENDMENT NO. 3 (this "Amendment"), dated as of June 1, 2003 to TAX
INDEMNITY AGREEMENT, dated as of December 1, 1985, between TUCSON ELECTRIC POWER
COMPANY, an Arizona corporation, and SAN CARLOS RESOURCES INC., an Arizona
corporation, as Lessee (the "Lessee"), and PHILIP MORRIS CAPITAL CORPORATION a
Delaware corporation (the "Owner Participant"), beneficiary under a Trust
Agreement, dated as of December 1, 1985, with Wilmington Trust Company and
William J. Wade, as Owner Trustee and Cotrustee, respectively (the "Lessor").

                              W I T N E S S E T H

     WHEREAS, the Owner Participant (or its predecessor in interest) and the
Lessee entered into a Tax Indemnity Agreement, dated as of December 1, 1985, as
amended by Amendment No. 1, dated as of December 15, 1992, to Tax Indemnity
Agreement dated as of December 1, 1985 and by Amendment No. 2, dated as of
December 1, 1999, to Tax Indemnity Agreement dated as of December 1, 1985  (such
Tax Indemnity Agreement, as so amended and as further amended, modified or
supplemented from time to time, being referred to herein as the "Tax Indemnity
Agreement);

     WHEREAS, the Lessee, the Lessor, the Owner Participant and certain other
parties have agreed pursuant to a Refunding Agreement, dated as of June 1, 2003
(as amended, modified or supplemented from time to time, the "Refunding
Agreement") to participate in refinancing the outstanding Secured Notes on the
Refunding Date (as defined in the Refunding Agreement);

     WHEREAS, the Owner Participant and the Lessee wish to amend the Tax
Indemnity Agreement as contemplated herein in order to reflect agreements and
amendments contemplated by the Refunding Agreement;

     NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

     Section 1.   Definitions.  General.  Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings specified in the Tax
Indemnity Agreement.

     Section 2.   Changed Definition. The definition of "Refunding Agreement"
and all references to such Refunding Agreement shall be modified to refer to the
Refunding Agreement dated as of June 1, 2003, among Lessee, Philip Morris
Capital Corporation, Lessor and certain parties (as such Refunding Agreement may
be amended, modified or supplemented from time to time).  "1999 Refunding
Agreement" shall mean the Refunding Agreement dated as of December 1, 1999,
among Lessee, Philip Morris Capital Corporation, Lessor and certain parties.

     Section 3.   Indemnified Losses.  (a) Section 3.1(c) is hereby amended to
read in its entirety as set forth below:

<PAGE>

          "(c) if, as a result  of the  Lessee paying any  Transaction
          Expenses   (as  defined  in  the   Refunding  Agreement)  or
          Transaction  Expenses  (as  defined  in the  1999  Refunding
          Agreement)  the  Owner  Participant  shall  be  required  to
          include any amount in its gross income; or".

     (b) Section 3.1(d) is hereby amended by replacing the phrase "the Refunding
Date (as defined in the Refunding Agreement)" with the following:

          "December 16, 1999,".

     (c) Section 3.1 is hereby amended by adding at the end of subsection (d)
(i.e. prior to the phrase "(any of the events)") the following:

          "; or  (e)  if,  as  a  result  of  the  Lessee  paying  any
          Supplemental  Rent  under  Section 3(c)  of the  Lease  with
          respect  to  payments  contemplated by  Section 2(h)  of the
          Supplemental  Indenture No. 3, dated  as of June 1, 2003, to
          the Indenture  the Owner  Participant  shall be  required to
          include any amount in its gross income".

     (d) Section 3.1 is hereby amended by replacing the phrase "(any of the
events described in these subsections (a)(2), (b), (c) or (d) being referred to
hereinafter as a "Loss")" with the following:


          "(any of the events  described in these  subsections (a)(2),
          (b), (c), (d) or  (e) being  referred  to  hereinafter  as a
          "Loss")".

     Section 4.   Counterpart Execution.  This Amendment may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original, but all such counterparts shall together
constitute but one and the same instrument.

     Section 5.   Ratification of the Tax Indemnity Agreement.  As amended by
this Amendment, the Tax Indemnity Agreement is in all respects ratified,
approved and confirmed, and the Tax Indemnity Agreement and this Amendment shall
together constitute one and the same instrument.

     Section 6.   Governing Law.  This Amendment has been delivered in, and
shall in all respects be governed by, construed in accordance with, the laws of
the State of New York applicable to agreements made and to be performed entirely
within such State, including such laws applicable to matters of construction,
validity and performance.

     Section 7.   No Duplication of Payment. Section 21 is hereby amended to
read in its entirety as set forth below:

          "Section 21.  No Duplication  of Payment.  Nothing contained
          in the  terms of  this  Tax  Indemnity  Agreement  shall  be
          construed to require the  Lessee or the Owner Participant to
          to  pay  any  Loss  or  savings  arising  out of  any  event
          indemnified hereunder more than once or to make any payments
          hereunder  to the  extent  previously  reflected  in  (x)  a
          rental adjustment  pursuant   to   Section   3 (g)  of   the

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<PAGE>

          Lease Agreement,  or (y) a payment made pursuant  to Section
          2.01(d) of the 1999 Refunding Agreement (with respect to the
          income  attributable  to the  payment  pursuant  to  Section
          2.01(c)  of the  1999 Refunding  Agreement),  except  as set
          forth in  Section 7 hereof.  For the avoidance of doubt, the
          parties  confirm   that  Section  4  hereof  shall  have  no
          application  to any  payments  made  pursuant  to  the  1999
          Refunding Agreement or any tax benefits arising therefrom."

                                       3
<PAGE>

     IN WITNESS WHEREOF, the Owner Participant and the Lessee have caused this
Amendment to be duly executed by their respective officers hereunto duly
authorized as of the date set forth above.

                                        TUCSON ELECTRIC POWER COMPANY


                                        By  ____________________________________
                                            Name:
                                            Title:



                                        SAN CARLOS RESOURCES INC.


                                        By  ____________________________________
                                            Name:
                                            Title:



                                        PHILIP MORRIS CAPITAL CORPORATION


                                        By  ____________________________________
                                            Name:
                                            Title:

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