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 June 30, 2003

                                     OR

     [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                    THE SECURITIES EXCHANGE ACT OF 1934

         For the transition period from __________ to __________.



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

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

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


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

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
     UniSource Energy Corporation       Yes   X     No
                                            -----      -----
     Tucson Electric Power Company      Yes         No   X
                                            -----      -----

     At August 4, 2003, 33,652,182 shares of UniSource Energy Corporation's
Common Stock, no par value (the only class of Common Stock), were outstanding.

     At August 4, 2003, 32,139,555 shares of Tucson Electric Power Company's
common stock, no par value, were outstanding, of which 32,139,434 were held by
UniSource Energy Corporation.


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

<PAGE>

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


                               TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Definitions................................................................. iv
Report of Independent Accountants...........................................  1

PART I  -  FINANCIAL INFORMATION

Item 1.  - Financial Statements
   UniSource Energy Corporation
      Comparative Condensed Consolidated Statements of Income...............  2
      Comparative Condensed Consolidated Statements of Cash Flows...........  3
      Comparative Condensed Consolidated Balance Sheets.....................  4
      Condensed Consolidated Statement of Changes in Stockholders' Equity...  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
      Condensed Consolidated Statement of Changes in Stockholders' Equity...  9
   Notes to Condensed Consolidated Financial Statements
   Note 1.   Nature of Operations, Basis of Accounting Presentation and
             Stock-Based Compensation....................................... 10
   Note 2.   Regulatory Accounting.......................................... 11
   Note 3.   Citizens Acquisition........................................... 12
   Note 4.   Accounting Change: Accounting for Asset Retirement Obligations. 14
   Note 5.   Stock-Based Compensation Plans................................. 15
   Note 6.   Accounting for Derivative Instruments and Trading Activities... 16
   Note 7.   Business Segments.............................................. 17
   Note 8.   Millennium..................................................... 19
   Note 9.   Commitments and Contingencies.................................. 20
   Note 10.  Wholesale Accounts Receivable and Allowances................... 22
   Note 11.  UniSource Energy Earnings per Share (EPS)...................... 22
   Note 12.  Income and Other Taxes......................................... 23
   Note 13.  New Accounting Pronouncements.................................. 24
   Note 14.  Review by Independent Accountants.............................. 25

Item 2.  -  Management's Discussion and Analysis of Financial Condition
   and Results of Operations
   Overview of Consolidated Business........................................ 26
   Results of Operations
      UniSource Energy Consolidated......................................... 26
      Contribution by Business Segment...................................... 28
      Results of TEP........................................................ 29
      Results of Millennium................................................. 31
      Results of UED........................................................ 32
   Citizens Acquisition..................................................... 32
   Springerville Generating Station Expansion............................... 33
   Factors Affecting Results of Operations
      Competition........................................................... 34
      Industry Restructuring................................................ 35
      Market Risks.......................................................... 37
      Generating Resources.................................................. 39
   Liquidity and Capital Resources
      UniSource Energy - Consolidated Cash Flows............................ 39
      UniSource Energy - Parent Company..................................... 40

                                       ii
<PAGE>

                               TABLE OF CONTENTS
                                  (concluded)
      TEP - Electric Utility................................................ 41
      Millennium - Unregulated Businesses................................... 42
      UED - Unregulated Energy Business..................................... 43
      Financing Risks....................................................... 43
      Contractual Obligations............................................... 44
      Guarantees and Indemnities............................................ 44
      Dividends on Common Stock............................................. 45
   Outlook and Strategies................................................... 45
   Critical Accounting Policies............................................. 46
   New Accounting Pronouncements............................................ 50
   Safe Harbor for Forward-Looking Statements............................... 51

Item 3.  -  Quantitative and Qualitative Disclosures about Market Risk...... 52

Item 4.  -  Controls and Procedures......................................... 52

PART II  -  OTHER INFORMATION

Item 1.  -  Legal Proceedings............................................... 53

Item 4.  -  Submission of Matters to a Vote of Security Holders............. 54

Item 5.  -  Other Information
   Additional Financial Data................................................ 54
   Approval of Non-Audit Services........................................... 54
   SEC Reports Available on UniSource Energy's Website...................... 54

Item 6.  -  Exhibits and Reports on Form 8-K................................ 55

Signatures.................................................................. 56

Exhibit Index............................................................... 57

                                      iii
<PAGE>

                                   DEFINITIONS

The abbreviations and acronyms used in the 2003 Second Quarter Form 10-Q are
defined below:
--------------------------------------------------------------------------------

ACC...............................  Arizona Corporation Commission.
ACC Holding Company Order.........  The order approved by the ACC in November
                                      1997 allowing TEP to form a holding
                                      company.
capacity..........................  The ability to produce power; the most power
                                      a unit can produce or the maximum that can
                                      be taken under a contract; measured in
                                      MWs.
CISO..............................  California Independent System Operator.
Citizens..........................  Citizens Communications Company.
Citizens Settlement Agreement.....  An agreement with the ACC Staff dated April
                                      April 1, 2003, addressing rate case
                                      and financing issues in the planned
                                      acquisition by UniSource Energy of the
                                      Citizens' Arizona gas and electric assets.
Common Stock......................  UniSource Energy's common stock, without par
                                      value.
Cooling Degree Days...............  An index used to measure the impact of
                                      weather on energy usage calculated by
                                      subtracting 75 from the average of the
                                      high and low daily temperatures.
CPX...............................  California Power Exchange.
Credit Agreement..................  Credit Agreement between TEP and a syndicate
                                      of banks, dated as of November 14, 2002.
Emission Allowance(s).............  An allowance issued by the Environmental
                                      Protection Agency which permits emission
                                      of one ton of sulfur dioxide.  These
                                      allowances can be bought and sold.
energy............................  The amount of power produced over a given
                                      period of time; measured in MWh.
ESP...............................  Energy Service Provider.
FAS 71............................  Statement of Financial Accounting Standards
                                      No. 71: Accounting for the Effects of
                                      Certain Types of Regulation.
FAS 133...........................  Statement of Financial Accounting Standards
                                      No. 133: Accounting for Derivative
                                      Instruments and Hedging Activities.
FAS 143...........................  Statement of Financial Accounting Standards
                                      No. 143: Accounting for Asset Retirement
                                      Obligations.
FERC..............................  Federal Energy Regulatory Commission.
GAAP..............................  Generally Accepted Accounting Principles.
Global Solar......................  Global Solar Energy, Inc., a company that
                                      develops and manufactures thin-film
                                      photovoltaic cells.  Millennium currently
                                      owns 98% of Global Solar.
Heating Degree Days...............  An index used to measure the impact of
                                      weather on energy usage calculated by
                                      subtracting the average of the high and
                                      low daily temperatures from 65.
IPS...............................  Infinite Power Solutions, Inc., a company
                                      that develops thin-film batteries.
                                      Millennium currently owns 72% of IPS.
ITN...............................  ITN Energy Systems, Inc., a company formed
                                      to provide research, development, and
                                      other services.  Millennium finalized a
                                      2002 Restructure Agreement and a share
                                      exchange agreement reducing its ownership
                                      in ITN to zero.
kWh...............................  Kilowatt-hour(s).
MEG...............................  Millennium Environmental Group, Inc., a
                                      wholly-owned subsidiary of Millennium,
                                      which manages and trades Emission
                                      Allowances, coal, and related financial
                                      instruments.
MicroSat..........................  MicroSat Systems, Inc., a company formed to
                                      develop and commercialize small-scale
                                      satellites.  Millennium currently owns 35%
                                      of MicroSat.
Millennium........................  Millennium Energy Holdings, Inc., a wholly-
                                      owned subsidiary of UniSource Energy.
MW................................  Megawatt(s).
MWh...............................  Megawatt-hour(s).
PGA...............................  Purchased Gas Adjuster, a retail rate
                                      mechanism designed to recover the cost of
                                      gas purchased for retail gas customers.
PG&E..............................  Pacific Gas and Electric Company.
Revolving Credit Facility.........  $60 million revolving credit facility
                                      entered into under the Credit Agreement
                                      between a syndicate of banks and TEP.
Rules.............................  Retail Electric Competition Rules.
SCE...............................  Southern California Edison Company.
Settlement Agreement..............  TEP's Settlement Agreement approved by the
                                      ACC in November 1999 that provided for
                                      electric retail competition and transition
                                      asset recovery.
Springerville.....................  Springerville Generating Station.

                                       iv
<PAGE>

                                  DEFINITIONS
                                  (concluded)

Springerville Common
  Facilities Leases...............  Leveraged lease arrangements relating to an
                                      undivided one-half interest in certain
                                      Springerville facilities used in common by
                                      Springerville Unit 1 and Springerville
                                      Unit 2.
Springerville Unit 1..............  Unit 1 of the Springerville Generating
                                      Station.
Springerville Unit 2..............  Unit 2 of the Springerville Generating
                                      Station.
SRP...............................  Salt River Project Agricultural Improvement
                                      and Power District.
Sundt.............................  H. Wilson Sundt Generating Station (formerly
                                      known as the Irvington Generating
                                      Station).
TEP...............................  Tucson Electric Power Company, the principal
                                      subsidiary of UniSource Energy.
Tri-State.........................  Tri-State Generation and Transmission
                                      Association.
TruePricing.......................  TruePricing, Inc., a start-up company
                                      established to market energy related
                                      products.  Millennium and TEP collectively
                                      own 55% of the outstanding shares of
                                      TruePricing.
UED...............................  UniSource Energy Development Company, a
                                      wholly-owned subsidiary of UniSource
                                      Energy, which engages in developing
                                      generation resources and other project
                                      development services and related
                                      activities.
UES...............................  UniSource Energy Services, Inc., an
                                      intermediate holding company established
                                      to own the operating companies (UNS Gas
                                      and UNS Electric) which will acquire the
                                      Citizens Arizona gas and electric utility
                                      assets.
UniSource Energy..................  UniSource Energy Corporation.
UNS Electric......................  UNS Electric, Inc., a wholly-owned
                                      subsidiary of UES, which will acquire the
                                      Citizens Arizona electric utility assets.
UNS Gas...........................  UNS Gas, Inc., a wholly-owned subsidiary of
                                      UES, which will acquire the Citizens
                                      Arizona gas utility assets.

                                       v
<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 sheets of
UniSource Energy Corporation and its subsidiaries (the Company) and Tucson
Electric Power Company and its subsidiaries (TEP) as of June 30, 2003 and the
related condensed consolidated statements of income and of cash flows for each
of the three-month and six-month periods ended June 30, 2003 and 2002 and the
condensed consolidated statement of stockholders' equity for the six-month
period ended June 30, 2003.  These financial statements are the responsibility
of the Company's and TEP's management.

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

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet and statement of
capitalization of the Company and TEP as of December 31, 2002, and the related
consolidated statements of income, of stockholders' equity, and of cash flows
for the year then ended (not presented herein), and in our report dated February
6, 2003 we expressed an unqualified opinion on those consolidated financial
statements.  In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet information as of December 31, 2002 is
fairly stated in all material respects in relation to the consolidated balance
sheets from which it has been derived.



PricewaterhouseCoopers LLP
Los Angeles, California
August 1, 2003

                                       1
<PAGE>
                        PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS
----------------------------------------------------------------------------
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                       Three Months Ended
                                                            June 30,
                                                         2003      2002
                                                           (Unaudited)
---------------------------------------------------------------------------
                                                   - Thousands of Dollars -
Operating Revenues
 Electric Retail Sales                                $173,238    $174,800
 Electric Wholesale Sales                               35,527      49,240
 Net Gain (Loss) on TEP Forward Contracts
  and MEG Trading Activities                              (203)       (460)
 Other Revenues                                          2,779       3,623
---------------------------------------------------------------------------
    Total Operating Revenues                           211,341     227,203
---------------------------------------------------------------------------

Operating Expenses
 Fuel                                                   51,763      58,196
 Purchased Power                                        18,042      22,094
 Other Operations and Maintenance                       49,490      45,346
 Depreciation and Amortization                          30,920      31,518
 Amortization of Transition Recovery Asset               7,762       6,639
 Taxes Other Than Income Taxes                          11,152      11,439
---------------------------------------------------------------------------
    Total Operating Expenses                           169,129     175,232
---------------------------------------------------------------------------
      Operating Income                                  42,212      51,971
---------------------------------------------------------------------------

Other Income (Deductions)
 Interest Income                                         5,056       4,926
 Other Income                                            2,025       1,896
 Other Expense                                            (150)     (1,769)
---------------------------------------------------------------------------
    Total Other Income (Deductions)                      6,931       5,053
---------------------------------------------------------------------------

Interest Expense
 Long-Term Debt                                         19,113      16,118
 Interest on Capital Leases                             20,796      21,708
 Other Interest Expense, Net of Amounts Capitalized        393         360
---------------------------------------------------------------------------
    Total Interest Expense                              40,302      38,186
---------------------------------------------------------------------------

Income (Loss) Before Income Taxes and
 Cumulative Effect of Accounting Change                  8,841      18,838
  Income Tax Expense (Benefit)                           4,258       6,950
---------------------------------------------------------------------------

Income (Loss) Before Cumulative Effect of Accounting
 Change                                                  4,583      11,888
Cumulative Effect of Accounting Change - Net of Tax          -           -
---------------------------------------------------------------------------

Net Income                                            $  4,583    $ 11,888
===========================================================================

Average Shares of Common Stock Outstanding (000)        33,821      33,684
===========================================================================

Basic Earnings per Share
 Income (Loss) Before Cumulative Effect of Accounting
  Change                                                 $0.14       $0.35
 Cumulative Effect of Accounting Change - Net of Tax         -          -
 Net Income                                              $0.14       $0.35
===========================================================================

Diluted Earnings per Share
 Income (Loss) Before Cumulative Effect of Accounting
  Change                                                 $0.13       $0.35
 Cumulative Effect of Accounting Change - Net of Tax         -           -
 Net Income                                              $0.13       $0.35
===========================================================================

Dividends Paid per Share                                 $0.15      $0.125
===========================================================================

See Notes to Condensed Consolidated Financial Statements.




UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                        Six Months Ended
                                                            June 30,
                                                        2003        2002
                                                           (Unaudited)
---------------------------------------------------------------------------
                                                   - Thousands of Dollars -
Operating Revenues
 Electric Retail Sales                                $303,783   $306,632
 Electric Wholesale Sales                               75,697     84,786
 Net Gain (Loss) on TEP Forward Contracts
  and MEG Trading Activities                              (545)       561
 Other Revenues                                          5,572      6,419
---------------------------------------------------------------------------
    Total Operating Revenues                           384,507    398,398
---------------------------------------------------------------------------

Operating Expenses
 Fuel                                                   98,265    106,515
 Purchased Power                                        33,698     23,564
 Other Operations and Maintenance                      101,646     94,222
 Depreciation and Amortization                          61,440     64,968
 Amortization of Transition Recovery Asset              11,370      9,521
 Taxes Other Than Income Taxes                          22,743     22,951
---------------------------------------------------------------------------
    Total Operating Expenses                           329,162    321,741
---------------------------------------------------------------------------
      Operating Income                                  55,345     76,657
---------------------------------------------------------------------------

Other Income (Deductions)
 Interest Income                                        10,290      9,682
 Other Income                                            3,532      3,962
 Other Expense                                          (2,375)    (3,640)
---------------------------------------------------------------------------
    Total Other Income (Deductions)                     11,447     10,004
---------------------------------------------------------------------------

Interest Expense
 Long-Term Debt                                         38,385     32,090
 Interest on Capital Leases                             41,534     43,952
 Other Interest Expense, Net of Amounts Capitalized        300        591
---------------------------------------------------------------------------
    Total Interest Expense                              80,219     76,633
---------------------------------------------------------------------------

Income (Loss) Before Income Taxes and
 Cumulative Effect of Accounting Change                (13,427)    10,028
  Income Tax Expense (Benefit)                          (3,809)     4,454
---------------------------------------------------------------------------

Income (Loss) Before Cumulative Effect of
 Accounting Change                                      (9,618)     5,574
Cumulative Effect of Accounting Change - Net of Tax     67,471          -
---------------------------------------------------------------------------

Net Income                                            $ 57,853   $  5,574
===========================================================================

Average Shares of Common Stock Outstanding (000)        33,780     33,635
===========================================================================

Basic Earnings per Share
 Income (Loss) Before Cumulative Effect of
  Accounting Change                                     $(0.29)     $0.17
 Cumulative Effect of Accounting Change - Net of Tax     $2.00          -
 Net Income                                              $1.71      $0.17
===========================================================================

Diluted Earnings per Share
 Income (Loss) Before Cumulative Effect of
  Accounting Change                                     $(0.29)     $0.16
 Cumulative Effect of Accounting Change - Net of Tax     $2.00          -
 Net Income                                              $1.71      $0.16
===========================================================================

Dividends Paid per Share                                 $0.30      $0.25
===========================================================================

See Notes to Condensed Consolidated Financial Statements.

                                      2
<PAGE>


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        Six Months Ended
                                                            June 30,
                                                        2003        2002
                                                          (Unaudited)
---------------------------------------------------------------------------
                                                   - Thousands of Dollars -
Cash Flows from Operating Activities
  Cash Receipts from Electric Retail Sales            $ 314,427  $ 317,195
  Cash Receipts from Electric Wholesale Sales           106,983    137,930
  MEG Cash Receipts from Trading Activity                45,074     25,263
  Interest Received                                      11,400      3,535
  Other Cash Receipts                                     2,406     11,034
  Fuel Costs Paid                                      (100,507)   (96,853)
  Purchased Power Costs Paid                            (53,894)   (78,388)
  Wages Paid, Net of Amounts Capitalized                (40,709)   (41,289)
  Payment of Other Operations and Maintenance Costs     (55,575)   (65,344)
  MEG Cash Payments for Trading Activity                (40,346)   (24,149)
  Capital Lease Interest Paid                           (43,314)   (66,013)
  Taxes Paid, Net of Amounts Capitalized                (49,442)   (51,184)
  Debt Interest Paid, Net of Amounts Capitalized        (36,696)   (30,437)
  Income Taxes Paid                                      (4,616)   (10,569)
  MEG Performance Deposits                               (7,608)    (1,984)
  Other                                                  (3,300)    (5,502)
---------------------------------------------------------------------------
Net Cash Flows - Operating Activities                    44,283     23,245
---------------------------------------------------------------------------
Cash Flows from Investing Activities
  Capital Expenditures                                  (68,514)   (52,681)
  Investment in Springerville Lease Debt and Equity       8,778   (104,368)
  Investment in and Loans to Equity Investees            (1,377)    (2,132)
  Other                                                  (1,177)      (325)
---------------------------------------------------------------------------
Net Cash Flows - Investing Activities                   (62,290)  (159,506)
---------------------------------------------------------------------------
Cash Flows from Financing Activities
  Proceeds from Borrowings under Revolving
   Credit Facility                                       20,000          -
  Repayments of Long-Term Debt                           (1,286)    (1,225)
  Common Stock Dividends Paid                           (10,090)    (8,400)
  Payments on Capital Lease Obligations                 (38,186)   (18,230)
  Other                                                   1,512      2,007
---------------------------------------------------------------------------
Net Cash Flows - Financing Activities                   (28,050)   (25,848)
---------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents               (46,057)  (162,109)
Cash and Cash Equivalents, Beginning of Year             90,928    228,154
---------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period              $  44,871  $  66,045
===========================================================================

SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
---------------------------------------------------------------------------
Net Income                                            $  57,853  $   5,574
Adjustments to Reconcile Net Income to Net Cash Flows
  Cumulative Effect of Accounting Change - Net of Tax   (67,471)         -
  Depreciation and Amortization Expense                  61,440     64,968
  Depreciation Recorded to Fuel and Other O&M Expense     2,803      2,836
  Amortization of Transition Recovery Asset              11,370      9,521
  Net Unrealized Gain on Forward Electric Sales and
   Purchases and MEG Trading Activities                  (1,422)      (763)
  Amortization of Deferred Debt-Related Costs included
   in Interest Expense                                    1,461        967
  Provision for Bad Debts                                 3,608      1,358
  Deferred Income Taxes                                  13,318     (2,364)
  Losses from Equity Method Entities                      1,950      1,393
Other, Net                                               (1,655)    (9,801)
Changes in Current Assets and Liabilities which
 Provided (Used) Cash Exclusive of Changes Shown
 Separately:
  Accounts Receivable                                    (8,616)    10,618
  Materials and Fuel Inventory                           (7,140)    (3,115)
  Accounts Payable                                        2,368    (20,933)
  Interest Accrued                                       (1,750)   (22,165)
  Taxes Accrued                                          (6,547)    (3,466)
  Other Current Assets                                  (26,752)   (12,891)
  Other Current Liabilities                               9,465      1,508
---------------------------------------------------------------------------
Net Cash Flows - Operating Activities                 $  44,283  $  23,245
===========================================================================

See Notes to Condensed Consolidated Financial Statements.

                                     3
<PAGE>


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

                                                     June 30,  December 31,
                                                       2003        2002
                                                   (Unaudited)
---------------------------------------------------------------------------
ASSETS                                             - Thousands of Dollars -
Utility Plant
  Plant in Service                                $ 2,619,732  $ 2,598,884
  Utility Plant under Capital Leases                  747,533      747,556
  Construction Work in Progress                       103,818       59,926
---------------------------------------------------------------------------
    Total Utility Plant                             3,471,083    3,406,366
  Less Accumulated Depreciation and Amortization   (1,274,882)  (1,346,101)
  Less Accumulated Depreciation of Capital Lease
   Assets                                            (406,438)    (391,915)
---------------------------------------------------------------------------
    Total Utility Plant - Net                       1,789,763    1,668,350
---------------------------------------------------------------------------

Investments and Other Property
  Investments in Lease Debt and Equity                182,532      191,867
  Other                                               121,387      123,238
---------------------------------------------------------------------------
    Total Investments and Other Property              303,919      315,105
---------------------------------------------------------------------------

Current Assets
  Cash and Cash Equivalents                            44,871       90,928
  Trade Accounts Receivable                            69,978       75,787
  Unbilled Accounts Receivable                         23,366        9,910
  Allowance for Doubtful Accounts                     (11,701)      (9,062)
  Materials and Fuel Inventory                         53,827       46,657
  Trading Assets                                       25,817       15,150
  Current Regulatory Assets                            10,949       11,778
  Income Taxes Receivable                              16,050            -
  Deferred Income Taxes - Current                      15,728       15,917
  Interest Receivable - Current                        10,827       12,178
  Other                                                18,518       15,762
---------------------------------------------------------------------------
    Total Current Assets                              278,230      285,005
---------------------------------------------------------------------------

Regulatory and Other Assets
  Transition Recovery Asset                           295,750      307,120
  Income Taxes Recoverable Through Future Revenues     53,447       57,044
  Other Regulatory Assets                              11,219       10,504
  Other Assets                                         48,783       47,606
---------------------------------------------------------------------------
    Total Regulatory and Other Assets                 409,199      422,274
---------------------------------------------------------------------------
Total Assets                                      $ 2,781,111  $ 2,690,734
===========================================================================

CAPITALIZATION AND OTHER LIABILITIES
Capitalization
  Common Stock Equity                             $   486,294  $   438,229
  Capital Lease Obligations                           767,592      801,611
  Long-Term Debt                                    1,127,870    1,128,963
---------------------------------------------------------------------------
    Total Capitalization                            2,381,756    2,368,803
---------------------------------------------------------------------------

Current Liabilities
  Current Obligations under Capital Leases             48,109       42,960
  Current Maturities of Long-Term Debt                  1,799        1,840
  Borrowings under Revolving Credit Facility           20,000            -
  Accounts Payable                                     51,512       48,934
  Interest Accrued                                     49,079       60,238
  Trading Liabilities                                  20,409       10,255
  Taxes Accrued                                        26,474       33,850
  Accrued Employee Expenses                            11,182       13,644
  Other                                                10,429        7,659
---------------------------------------------------------------------------
    Total Current Liabilities                         238,993      219,380
---------------------------------------------------------------------------

Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                   88,320       34,552
  Other                                                72,042       67,999
---------------------------------------------------------------------------
    Total Deferred Credits and Other Liabilities      160,362      102,551
---------------------------------------------------------------------------

Commitments and Contingencies (Note 9)
---------------------------------------------------------------------------

Total Capitalization and Other Liabilities        $ 2,781,111  $ 2,690,734
===========================================================================

See Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>


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

                                                     Accumulated
                         Common          Accumulated    Other         Total
                         Shares   Common  Earnings  Comprehensive Stockholders'
                      Outstanding* Stock  (Deficit) Income (Loss)    Equity
-------------------------------------------------------------------------------
                                           (Unaudited)
                                        - In Thousands -

Balances at
 December 31, 2002       33,579 $ 661,185  $(218,932)  $  (4,024)   $ 438,229
-------------------------------------------------------------------------------
Comprehensive Income:
  2003 Year-to-Date Net
   Income                     -         -     57,853           -       57,853
                                                                     ---------
Total Comprehensive
  Income                                                               57,853
                                                                     ---------

  Dividends Declared          -         -    (10,090)          -      (10,090)
  Shares Issued under
   Stock Compensation
   Plans                      6        61          -           -           61
  Shares Distributed by
   Deferred Compensation
   Trust                      3        50          -           -           50
  Shares Issued for
   Stock Options             14       191          -           -          191
-------------------------------------------------------------------------------

Balances at
 June 30, 2003           33,602 $ 661,487  $(171,169)  $  (4,024)   $ 486,294
===============================================================================

*UniSource Energy has 75 million authorized shares of common stock.

See Notes to Condensed Consolidated Financial Statements.

                                     5
<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME


                                                       Three Months Ended
                                                            June 30,
                                                       2003        2002
                                                          (Unaudited)
---------------------------------------------------------------------------
                                                    - Thousands of Dollars -
Operating Revenues
 Electric Retail Sales                                $173,238    $174,800
 Electric Wholesale Sales                               35,527      49,240
 Net Unrealized Gain (Loss) on Forward Electric Sales
  and Purchases                                           (197)        (95)
 Other Revenues                                          1,388       2,417
---------------------------------------------------------------------------
    Total Operating Revenues                           209,956     226,362
---------------------------------------------------------------------------

Operating Expenses
 Fuel                                                   51,763      58,196
 Purchased Power                                        18,042      22,094
 Other Operations and Maintenance                       40,780      39,625
 Depreciation and Amortization                          29,760      30,489
 Amortization of Transition Recovery Asset               7,762       6,639
 Taxes Other Than Income Taxes                          10,796      11,156
---------------------------------------------------------------------------
    Total Operating Expenses                           158,903     168,199
---------------------------------------------------------------------------
      Operating Income                                  51,053      58,163
---------------------------------------------------------------------------

Other Income (Deductions)
 Interest Income                                         5,037       4,746
 Interest Income - Note Receivable from UniSource
  Energy                                                 2,554       2,325
 Other Income                                            1,520       1,171
 Other Expense                                            (275)       (408)
---------------------------------------------------------------------------
    Total Other Income (Deductions)                      8,836       7,834
---------------------------------------------------------------------------

Interest Expense
 Long-Term Debt                                         19,113      16,118
 Interest on Capital Leases                             20,793      21,690
 Other Interest Expense, Net of Amounts Capitalized        314         125
---------------------------------------------------------------------------
    Total Interest Expense                              40,220      37,933
---------------------------------------------------------------------------

Income Before Income Taxes and Cumulative Effect
 of Accounting Change                                   19,669      28,064
  Income Tax Expense                                     8,495      10,597
---------------------------------------------------------------------------

Income Before Cumulative Effect of Accounting Change    11,174      17,467
Cumulative Effect of Accounting Change - Net of Tax          -           -
---------------------------------------------------------------------------

Net Income                                            $ 11,174    $ 17,467
===========================================================================

See Notes to Condensed Consolidated Financial Statements.




TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                         Six Months Ended
                                                            June 30,
                                                        2003        2002
                                                          (Unaudited)
---------------------------------------------------------------------------
                                                   - Thousands of Dollars -
Operating Revenues
 Electric Retail Sales                                $ 303,783    $ 306,632
 Electric Wholesale Sales                                75,697       84,786
 Net Unrealized Gain (Loss) on Forward Electric Sales
  and Purchases                                            (109)         722
 Other Revenues                                           3,132        3,799
-----------------------------------------------------------------------------
    Total Operating Revenues                            382,503      395,939
-----------------------------------------------------------------------------

Operating Expenses
 Fuel                                                    98,265      106,515
 Purchased Power                                         33,698       23,564
 Other Operations and Maintenance                        86,081       83,893
 Depreciation and Amortization                           59,384       62,845
 Amortization of Transition Recovery Asset               11,370        9,521
 Taxes Other Than Income Taxes                           21,946       22,268
-----------------------------------------------------------------------------
    Total Operating Expenses                            310,744      308,606
-----------------------------------------------------------------------------
      Operating Income                                   71,759       87,333
-----------------------------------------------------------------------------

Other Income (Deductions)
 Interest Income                                         10,204        9,229
 Interest Income - Note Receivable from UniSource
  Energy                                                  5,079        4,626
 Other Income                                             2,495        2,347
 Other Expense                                             (540)        (833)
-----------------------------------------------------------------------------
    Total Other Income (Deductions)                      17,238       15,369
-----------------------------------------------------------------------------

Interest Expense
 Long-Term Debt                                          38,385       32,090
 Interest on Capital Leases                              41,527       43,920
 Other Interest Expense, Net of Amounts Capitalized          67          180
-----------------------------------------------------------------------------
    Total Interest Expense                               79,979       76,190
-----------------------------------------------------------------------------

Income Before Income Taxes and Cumulative Effect
 of Accounting Change                                     9,018       26,512
  Income Tax Expense                                      5,020       10,975
-----------------------------------------------------------------------------

Income Before Cumulative Effect of Accounting Change      3,998       15,537
Cumulative Effect of Accounting Change - Net of Tax      67,471           -
-----------------------------------------------------------------------------

Net Income                                            $  71,469    $  15,537
=============================================================================

See Notes to Condensed Consolidated Financial Statements.

                                      6
<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        Six Months Ended
                                                            June 30,
                                                         2003       2002
                                                           (Unaudited)
-----------------------------------------------------------------------------
                                                   - Thousands of Dollars -
Cash Flows from Operating Activities
  Cash Receipts from Electric Retail Sales            $ 314,427   $ 317,195
  Cash Receipts from Electric Wholesale Sales           106,983     137,930
  Interest Received                                      11,251       3,091
  Fuel Costs Paid                                      (100,507)    (96,853)
  Purchased Power Costs Paid                            (53,894)    (78,388)
  Wages Paid, Net of Amounts Capitalized                (32,997)    (32,719)
  Payment of Other Operations and Maintenance Costs     (50,681)    (55,219)
  Capital Lease Interest Paid                           (43,306)    (65,974)
  Taxes Paid, Net of Amounts Capitalized                (47,509)    (48,795)
  Debt Interest Paid, Net of Amounts Capitalized        (36,676)    (30,423)
  Income Taxes Paid                                      (3,718)    (10,459)
  Other                                                      (5)         72
-----------------------------------------------------------------------------
Net Cash Flows - Operating Activities                    63,368      39,458
-----------------------------------------------------------------------------
Cash Flows from Investing Activities
  Capital Expenditures                                  (67,450)    (47,419)
  Investment in Springerville Lease Debt and Equity       8,778    (104,368)
  Other                                                  (1,587)       (356)
-----------------------------------------------------------------------------
Net Cash Flows - Investing Activities                   (60,259)   (152,143)
-----------------------------------------------------------------------------
Cash Flows from Financing Activities
  Proceeds from Borrowings under Revolving
   Credit Facility                                       20,000           -
  Repayments of Long-Term Debt                           (1,225)     (1,225)
  Dividends Paid to UniSource Energy                    (15,000)          -
  Payments on Capital Lease Obligations                 (38,134)    (18,066)
  Other                                                   1,315       3,957
-----------------------------------------------------------------------------
Net Cash Flows - Financing Activities                   (33,044)    (15,334)
-----------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents               (29,935)   (128,019)
Cash and Cash Equivalents, Beginning of Year             55,778     159,680
-----------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period              $  25,843   $  31,661
============================================================================

SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
-----------------------------------------------------------------------------
Net Income                                            $  71,469   $  15,537
Adjustments to Reconcile Net Income to Net
 Cash Flows
  Cumulative Effect of Accounting Change - Net of Tax   (67,471)          -
  Depreciation and Amortization Expense                  59,384      62,845
  Depreciation Recorded to Fuel and Other O&M Expense     2,803       2,836
  Amortization of Transition Recovery Asset              11,370       9,521
  Net Unrealized (Gain) Loss on Forward Electric Sales
   and Purchases                                            109        (722)
  Amortization of Deferred Debt-Related Costs included
   in Interest Expense                                    1,461         967
  Provision for Bad Debts                                 3,608       1,358
  Deferred Income Taxes                                  11,518       4,294
  Losses from Equity Method Entities                        (81)        182
  Interest on Note Receivable from UniSource Energy      (5,079)     (4,626)
Other, Net                                                1,435      (1,109)
Changes in Current Assets and Liabilities which
 Provided (Used) Cash Exclusive of Changes Shown
 Separately:
  Accounts Receivable                                   (11,236)     16,465
  Materials and Fuel Inventory                           (6,098)       (543)
  Accounts Payable                                       10,042     (31,614)
  Interest Accrued                                       (1,750)    (22,165)
  Taxes Accrued                                          (8,557)     (3,589)
  Other Current Assets                                   (5,069)     (8,376)
  Other Current Liabilities                              (4,490)     (1,803)
-----------------------------------------------------------------------------
Net Cash Flows - Operating Activities                  $ 63,368    $ 39,458
=============================================================================

See Notes to Condensed Consolidated Financial Statements.

                                    7
<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

                                                     June 30,     December 31,
                                                       2003           2002
                                                   (Unaudited)
------------------------------------------------------------------------------
ASSETS                                             - Thousands of Dollars -
Utility Plant
  Plant in Service                                  $ 2,619,732   $ 2,598,884
  Utility Plant under Capital Leases                    747,533       747,556
  Construction Work in Progress                         103,818        59,926
------------------------------------------------------------------------------
    Total Utility Plant                               3,471,083     3,406,366
  Less Accumulated Depreciation and Amortization     (1,274,882)   (1,346,101)
  Less Accumulated Depreciation of Capital Lease
   Assets                                              (406,438)     (391,915)
------------------------------------------------------------------------------
    Total Utility Plant - Net                         1,789,763     1,668,350
------------------------------------------------------------------------------

Investments and Other Property
  Investments in Lease Debt and Equity                  182,532       191,867
  Other                                                  21,061        21,358
------------------------------------------------------------------------------

    Total Investments and Other Property                203,593       213,225
------------------------------------------------------------------------------

Note Receivable from UniSource Energy                    70,132        79,462
------------------------------------------------------------------------------

Current Assets
  Cash and Cash Equivalents                              25,843        55,778
  Trade Accounts Receivable                              60,976        66,826
  Unbilled Accounts Receivable                           23,366         9,910
  Allowance for Doubtful Accounts                       (11,651)       (9,012)
  Intercompany Accounts Receivable                       17,512        14,851
  Materials and Fuel Inventory                           50,628        44,500
  Interest on Note Receivable from UniSource Energy      14,408             -
  Current Regulatory Assets                              10,949        11,778
  Income Taxes Receivable                                 7,155             -
  Deferred Income Taxes - Current                        15,728        15,917
  Interest Receivable - Current                          10,827        12,178
  Other                                                   9,259         8,407
------------------------------------------------------------------------------
    Total Current Assets                                235,000       231,133
------------------------------------------------------------------------------

Regulatory and Other Assets
  Transition Recovery Asset                             295,750       307,120
  Income Taxes Recoverable Through Future Revenues       53,447        57,044
  Other Regulatory Assets                                11,219        10,504
  Other Assets                                           46,381        46,752
------------------------------------------------------------------------------
    Total Regulatory and Other Assets                   406,797       421,420
------------------------------------------------------------------------------

Total Assets                                        $ 2,705,285   $ 2,613,590
==============================================================================

CAPITALIZATION AND OTHER LIABILITIES
Capitalization
  Common Stock Equity                               $   368,975   $   337,463
  Capital Lease Obligations                             767,528       801,508
  Long-Term Debt                                      1,127,185     1,128,410
------------------------------------------------------------------------------
    Total Capitalization                              2,263,688     2,267,381
------------------------------------------------------------------------------

Current Liabilities
  Current Obligations under Capital Leases               48,026        42,872
  Current Maturities of Long-Term Debt                    1,725         1,725
  Borrowings under Revolving Credit Facility             20,000             -
  Accounts Payable                                       46,100        41,704
  Intercompany Accounts Payable                          18,124        12,478
  Intercompany Dividend Payable                          25,000             -
  Interest Accrued                                       49,079        60,238
  Taxes Accrued                                          26,386        35,772
  Accrued Employee Expenses                              10,884        13,370
  Other                                                   8,195         7,543
------------------------------------------------------------------------------
    Total Current Liabilities                           253,519       215,702
------------------------------------------------------------------------------

Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                    119,458        67,490
  Other                                                  68,620        63,017
------------------------------------------------------------------------------
    Total Deferred Credits and Other Liabilities        188,078       130,507
------------------------------------------------------------------------------

Commitments and Contingencies (Note 9)
------------------------------------------------------------------------------

Total Capitalization and Other Liabilities          $ 2,705,285   $ 2,613,590
==============================================================================

See Notes to Condensed Consolidated Financial Statements.

                                       8
<PAGE>


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

                                                   Accumulated
                               Capital Accumulated    Other         Total
                        Common  Stock   Earnings  Comprehensive Stockholders'
                        Stock  Expense  (Deficit) Income (Loss)    Equity
----------------------------------------------------------------------------
                                          (Unaudited)
                                    - Thousands of Dollars -

Balances at
 December 31, 2002   $ 653,529 $ (6,357) $(305,685) $ (4,024)     $ 337,463
----------------------------------------------------------------------------
Comprehensive Income:
  2003 Year-to-Date
   Net Income                -        -     71,469         -         71,469
                                                                   ---------
Total Comprehensive Income                                           71,469
                                                                   ---------

Dividend Declared            -        -    (40,000)        -        (40,000)
Other                       43        -          -         -             43
----------------------------------------------------------------------------

Balances at
 June 30, 2003       $ 653,572 $ (6,357) $(274,216) $ (4,024)     $ 368,975
============================================================================

See Notes to Condensed Consolidated Financial Statements.

                                       9
<PAGE>

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

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

     UniSource Energy Corporation (UniSource Energy) is an exempt holding
company under the Public Utility Holding Company Act of 1935.  UniSource
Energy has no significant operations of its own, but owns substantially all
of the common stock of Tucson Electric Power Company (TEP) and all of the
common stock of Millennium Energy Holdings, Inc. (Millennium) and UniSource
Energy Development Company (UED).  TEP, a regulated public utility
incorporated in Arizona since 1963, is UniSource Energy's largest operating
subsidiary and represents substantially all of UniSource Energy's assets.
TEP generates, transmits and distributes electricity.  TEP serves retail
electric customers in a 1,155 square mile area in Southern Arizona.  TEP also
sells electricity to other utilities and power marketing entities primarily
located in the western U.S.  Millennium holds the unregulated businesses
described in Note 8 and UED's services are described in Note 7.

     References to "we" and "our" are to UniSource Energy and its
subsidiaries, collectively.  References to the "utility business" are to TEP.

     The accompanying quarterly financial statements of UniSource Energy and
TEP are unaudited but reflect all normal recurring accruals and other
adjustments which we believe are necessary for a fair presentation of the
results for the interim periods presented.  These financial statements are
presented in accordance with the Securities and Exchange Commission's (SEC)
interim reporting requirements which do not include all the disclosures
required by accounting principles generally accepted in the United States of
America (GAAP) for annual financial statements.  The year-end condensed
balance sheet data was derived from audited financial statements, but does
not include disclosures required by GAAP for annual financial statements.
This quarterly report should be reviewed in conjunction with UniSource Energy
and TEP's 2002 Annual Report on Form 10-K.

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

  STOCK-BASED COMPENSATION

     UniSource Energy has two stock-based compensation plans, the 1994
Outside Director Stock Option Plan (Directors' Plan) and the 1994 Omnibus
Stock and Incentive Plan (Omnibus Plan).  We account for those plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and related interpretations.  No
compensation cost is reflected in net income for stock options, as all
options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant.  The following table
illustrates the effect on UniSource Energy's net income and earnings per
share and TEP's net income if we had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation:

UniSource Energy:
----------------
                                            Three Months Ended June 30,
                                                 2003        2002
      ----------------------------------------------------------------
                                              -Thousands of Dollars-
                                              (except per share data)
      Net Income - As Reported                  $  4,583   $ 11,888
      Deduct: Total stock-based employee
       compensation expense determined under
       fair value based method, net of
       related tax effects                          (248)      (318)
      ----------------------------------------------------------------
      Pro Forma Net Income                      $  4,335   $ 11,570
      ================================================================
      Basic Earnings per Share:
       As Reported                                 $0.14      $0.35
       Pro Forma                                   $0.13      $0.35
      ================================================================
      Diluted Earnings per Share:
       As Reported                                 $0.13      $0.35
       Pro Forma                                   $0.12      $0.34
      ================================================================

                                     10
<PAGE>

                                             Six Months Ended June 30,
                                                  2003       2002
      ----------------------------------------------------------------
                                              -Thousands of Dollars-
                                              (except per share data)
      Net Income - As Reported                  $ 57,853   $  5,574
      Deduct: Total stock-based employee
       compensation expense determined under
       fair value based method, net of
       related tax effects                          (486)      (635)
      ----------------------------------------------------------------
      Pro Forma Net Income                      $ 57,367   $  4,939
      ================================================================
      Basic Earnings per Share:
       As Reported                                 $1.71      $0.17
       Pro Forma                                   $1.70      $0.15
      ================================================================
      Diluted Earnings per Share:
       As Reported                                 $1.71      $0.16
       Pro Forma                                   $1.70      $0.14
      ================================================================

TEP:
---
                                            Three Months Ended June 30,
                                                  2003       2002
      ----------------------------------------------------------------
                                              -Thousands of Dollars-
      Net Income - As Reported                  $ 11,174   $ 17,467
      Deduct: Total stock-based employee
       compensation expense determined under
       fair value based method, net of
       related tax effects                          (244)      (314)
      ----------------------------------------------------------------
      Pro Forma Net Income                      $ 10,930   $ 17,153
      ================================================================

                                             Six Months Ended June 30,
                                                  2003       2002
      ----------------------------------------------------------------
                                              -Thousands of Dollars-
      Net Income - As Reported                 $ 71,469    $ 15,537
      Deduct: Total stock-based employee
       compensation expense determined under
       fair value based method, net of
       related tax effects                         (479)       (628)
      ----------------------------------------------------------------
      Pro Forma Net Income                     $ 70,990    $ 14,909
      ================================================================

     The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:

                                                 2003        2002
      ---------------------------------------------------------------
      Expected life (years)                        5           5
      Interest rate                              2.78%       1.45%
      Volatility                                23.38%      23.74%
      Dividend yield                             3.44%       2.83%
      Weighted-average grant-date fair value
       of options granted during the period     $2.92       $2.90
      ---------------------------------------------------------------


NOTE 2.  REGULATORY ACCOUNTING
------------------------------

     TEP generally uses the same accounting policies and practices used by
unregulated companies for financial reporting under GAAP.  However, sometimes
these principles, such as Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (FAS 71), require
special accounting treatment for regulated companies to show the effect of
regulation.  For example, in setting TEP's retail rates, the Arizona
Corporation Commission (ACC) may not allow TEP to currently charge its
customers to recover certain expenses, but instead requires that these
expenses be charged to customers in the future.  In this situation, FAS 71
requires that TEP 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 as expense to the income statement as those charges are

                                      11
<PAGE>

charges are recovered from customers.  Similarly, certain revenue items may be
deferred as regulatory liabilities, which are also eventually amortized to the
income statement as rates to customers are reduced.

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

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

     In November 1999, upon approval by the ACC of a settlement agreement
(Settlement Agreement) relating to recovery of TEP's transition costs and
standard retail rates, TEP discontinued application of FAS 71 to its
generation operations.

     TEP's regulatory assets total $371 million at June 30, 2003, $22 million
of which are not presently included in the rate base and consequently are not
earning a return on investment.

     TEP continues to apply FAS 71 to the distribution and transmission
portions of its business, its regulated operations, and continues to assess
whether it can continue to apply FAS 71 to these operations.  If TEP stopped
applying FAS 71 to its remaining regulated operations, it would write off the
related balances of its regulatory assets as an expense on its income
statement.  Based on the balances of TEP's regulatory assets at June 30,
2003, if TEP had stopped applying FAS 71 to its remaining regulated
operations, it would have recorded an extraordinary loss, after-tax, of
approximately $224 million.  While regulatory orders and market conditions
may affect TEP's cash flows, its cash flows would not be affected if it
stopped applying FAS 71 unless a regulatory order limited its ability to
recover the cost of that regulatory asset.

  RECENT DEVELOPMENTS IN THE ARIZONA REGULATORY ENVIRONMENT

     In 2003, the ACC issued an order that defines the process, for the
period 2003 through 2006, by which TEP will be required to obtain its
capacity and energy requirements beyond what is supplied by TEP's existing
resources, which represents approximately 0.5% of its retail load in the
first year and increases over the period.  This order further requires TEP to
bid out short-term energy purchases that it estimates it will make in the
2003 to 2006 period; however, it does not require TEP to purchase any power
that it deems to be uneconomical, unreasonable or unreliable.  As a result,
TEP entered into the following two agreements to meet TEP's 2003 bid
requirements under the Track B Order for the period 2003 through 2006: (1)
PPL EnergyPlus, LLC will supply 37 MW June 2003 through December 2003 and 75
MW January 2004 through December 2006 under a unit contingent contract; and
(2) Panda Gila River LP will supply 50 MW on-peak June through September of
2003 through 2005 under a unit contingent contract.


NOTE 3.  CITIZENS ACQUISITION
-----------------------------

     On October 29, 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens for the purchase by UniSource Energy of Citizens'
Arizona electric utility and gas utility businesses for a total of $220
million in cash plus other operating capital adjustments.  We expect the
transaction to close on August 11, 2003.   If the transaction closes after
August 11, 2003, the purchase price is increased by $10 million.  If the
transaction closes after October 29, 2003, the purchase price will be
increased by a total of $15 million.  In addition, the purchase price in each
transaction may also be adjusted if there is a casualty loss, governmental
taking, or discovery of substantial additional environmental liabilities, in
each case subject to materiality thresholds, prior to the closing.  UniSource
Energy will assume certain liabilities associated with the purchased assets,
but will not assume Citizens' obligations under the industrial development
revenue bonds issued to finance certain of the purchased assets for which
Citizens will remain the economic obligor.

     We have received all required regulatory approvals for the transaction
from the ACC, the FERC and the SEC under the Public Utility Holding Company
Act of 1935, as amended.

     The Asset Purchase Agreements are subject to termination if the closing
has not occurred by January 29, 2004 (subject to extension in limited
circumstances), if a governmental authority seeks to prohibit the
transactions or if either party is in material breach and such breach is not
cured.  If one Asset Purchase Agreement is terminated, the other will also be
automatically terminated.  If the Asset Purchase Agreements are terminated by

                                      12
<PAGE>

Citizens due to a material breach by UniSource Energy, UniSource Energy must
pay to Citizens a $25 million termination fee as liquidated damages.  If the
Asset Purchase Agreements are terminated by UniSource Energy due to a
material breach by Citizens, Citizens must pay to UniSource Energy a $10
million termination fee as liquidated damages.  The termination fees are also
payable in certain other limited circumstances.

     On July 3, 2003, the ACC approved the acquisition, as well as the April
3, 2003 settlement agreement (Citizens Settlement Agreement) entered into by
UniSource Energy, Citizens, and the ACC Staff, subject to certain terms and
conditions.  No motions to reconsider were filed within the applicable
reconsideration period.  The ACC Order and the Citizens Settlement Agreement
addressed acquisition financing issues, as well as two cases that were
pending before the ACC requesting rate relief for both the Citizens' Arizona
electric and Arizona gas assets.  The changes in rates and financing
approvals will take effect once the acquisition is completed, which is
expected to be on August 11, 2003.

     Pursuant to the terms of the Citizens Settlement Agreement, UniSource
Energy formed two wholly-owned subsidiaries, UNS Gas, Inc. (UNS Gas) and UNS
Electric, Inc. (UNS Electric) to own and operate the acquired assets, as well
as an intermediate holding company, UniSource Energy Services, Inc., to
finance and own the operating companies.

     The Citizens Settlement Agreement resolved two pending rate issues
before the ACC: (1) a gas utility base rate case and (2) a review of the
electric utility purchase power and fuel adjustment clause.  Upon completion
of the acquisition, gas rates will increase by 20.9%, compared with the 29%
increase requested by Citizens.  Because UniSource Energy is acquiring the
gas utility assets at a purchase price which is less than Citizens' book
value, the amount of rate recovery required is less than under the Citizens
rate case.  The gas utility rate case also takes into account a $10 million
permanent reduction to the gas rate base due to a disallowance for certain
capital expenditures for gas infrastructure, thereby reducing the revenue
level to be recovered from ratepayers.  Upon completion of the acquisition,
electric utility rates will increase by 22%, compared with the 45% requested
by Citizens.  The allowed electric rate increase represents the full recovery
in rates of the costs of a long-term purchase power contract on a going
forward basis.  At the same time, UniSource Energy agreed to forfeit the
collection of approximately $135 million in deferred purchased power costs
that had been incurred by Citizens but had not been collected from Citizens'
customers.

     The ACC order included the following amendments to the terms of the
Citizens Settlement Agreement:

     1) UniSource Energy shall commence renegotiation of the existing purchased
        power agreement with Pinnacle West Capital Corporation, and 90% of any
        savings associated with the renegotiated contract shall be allocated to
        ratepayers and 10% to shareholders (changed from a 60/40 allocation).

     2) A general rate case for UNS Gas and UNS Electric shall not be filed for
        a period of at least three years and the resulting rate increase shall
        not become effective prior to August 1, 2007.

     3) Within 120 days of the effective date of the decision, UniSource Energy
        shall file with the ACC a plan to open the electric service territories
        to retail competition by December 31, 2003.

     The Citizens Settlement Agreement limits dividends from each of UNS Gas
and UNS Electric to 75% of earnings until the ratio of common equity to total
capitalization reaches 40%.  The Citizens Settlement Agreement also modifies
TEP's dividend limitation.   Currently, TEP may not pay dividends in excess
of 75% of its earnings until the ratio of common equity to total
capitalization (excluding capital lease obligations) reaches 37.5%.  Under
the Citizens Settlement Agreement, upon the closing of the acquisition, the
75% earnings payout limitation will remain in effect until TEP's ratio of
common equity to total capitalization reaches 40% (excluding capital lease
obligations).

     On July 25, 2003, UNS Gas and Citizens filed a joint application with
the ACC requesting approval of a new Purchased Gas Adjustor (PGA) surcharge
to be effective October 1, 2003.  The surcharges approved and currently in
effect for the Citizens' Arizona gas assets expire on September 30, 2003.
The July 25, 2003 filing requests recovery of the undercollected PGA balance
of approximately $7 million that is projected to exist as of October 1, 2003.
The requested surcharge necessary to recover the undercollected balance by
October 1, 2004 is $0.1155 per therm.  UNS Gas and Citizens have requested
this matter be heard at the September 9, 2003 ACC Open Meeting.

                                    13
<PAGE>


NOTE 4.  ACCOUNTING CHANGE:  ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
------------------------------------------------------------------------

     In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (FAS 143).  It requires entities to record the fair
value of a liability for a legal obligation to retire an asset in the period
in which the liability is incurred.  A legal obligation is a liability that a
party is required to settle as a result of an existing or enacted law,
statute, ordinance or contract.  When the liability is initially recorded,
the entity should capitalize a cost by increasing the carrying amount of the
related long-lived asset.  Over time, the liability is adjusted to its
present value by recognizing accretion expense as an operating expense in the
income statement each period, and the capitalized cost is depreciated over
the useful life of the related asset.  Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain
or loss if the actual costs differ from the recorded amount.

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

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

     TEP has various transmission and distribution lines that operate under
land leases and rights of way that contain end dates and restorative clauses.
TEP operates its transmission and distribution lines as if they will be
operated in perpetuity and would continue to be used or sold without land
remediation.  As a result, TEP is not recognizing the costs of final removal
of the transmission and distribution lines in the financial statements.

     Upon adoption of FAS 143 on January 1, 2003, TEP recorded an asset
retirement obligation of $38 million at its net present value of $1.1
million, increased depreciable assets by $0.1 million for asset retirement
costs, reversed $112.8 million of costs previously accrued for final removal
from accumulated depreciation, reversed previously recorded deferred tax
assets of $44.2 million and recognized the cumulative effect of accounting
change as a gain of $111.7 million ($67.5 million net of tax).  TEP expects
that adopting FAS 143 will result in a reduction to current depreciation
expense charged throughout the year as well because asset retirement costs
are no longer recorded as a component of depreciation expense.  For the first
six months of 2003, this amount is approximately $3 million.

     The following table illustrates on a pro forma basis the amount of the
asset retirement obligation as if FAS 143 had been applied during all periods
presented:

                                                Six Months Ended June 30,
                                                  2003          2002
                                                 Actual       Pro Forma
      -------------------------------------------------------------------
                                                 -Thousands of Dollars-
      Asset Retirement Obligation - beginning
       of period                                $ 1,119      $ 1,017
      Accretion Expense                              55           50
      -------------------------------------------------------------------
      Asset Retirement Obligation - end
       of period                                $ 1,174      $ 1,067
      ===================================================================

                                    14
<PAGE>

     The following table illustrates on a pro forma basis the effect on
UniSource Energy's net income and earnings per share and TEP's net income as
if FAS 143 had been in effect for all income statement periods presented:

UniSource Energy:
----------------
                                      Three Months Ended    Six Months Ended
                                         June 30, 2002        June 30, 2002
-----------------------------------------------------------------------------
                                               -Thousands of Dollars-
                                               (except per share data)
Net Income - As Reported                   $ 11,888            $  5,574
Adjustment to accrued expense (net
 of tax) as if FAS 143 had been
 applied effective January 1, 2002              970               1,882
-----------------------------------------------------------------------------
Pro Forma Net Income                       $ 12,858            $  7,456
=============================================================================
Basic Earnings per Share:
 As Reported                                $  0.35            $   0.17
 Adjustment to accrued expense (net
  of tax) as if FAS 143 had been
  applied effective January 1, 2002            0.03                0.05
-----------------------------------------------------------------------------
 Pro Forma                                  $  0.38            $   0.22
=============================================================================
Diluted Earnings per Share:
 As Reported                                $  0.35            $   0.16
 Adjustment to accrued expense (net
  of tax) as if FAS 143 had been
  applied effective January 1, 2002            0.03                0.05
-----------------------------------------------------------------------------
 Pro Forma                                  $  0.38            $   0.21
=============================================================================

TEP:
---
                                       Three Months Ended   Six Months Ended
                                          June 30, 2002       June 30, 2002
-----------------------------------------------------------------------------
                                               -Thousands of Dollars-
Net Income - As Reported                   $ 17,467             $ 15,537
Adjustment to accrued expense (net
 of tax) as if FAS 143 had been
 applied effective January 1, 2002              970                1,882
-----------------------------------------------------------------------------
Pro Forma Net Income                       $ 18,437             $ 17,419
=============================================================================

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

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


NOTE 5.  STOCK-BASED COMPENSATION PLANS
---------------------------------------

     We account for UniSource Energy's two stock-based compensation plans,
the Directors' Plan and the Omnibus Plan, under the recognition and
measurement principles of APB 25 and related interpretations (see Note 1).

  STOCK OPTIONS

     The Directors' Plan granted 1,196 options during the second quarter of
2003 and a total of 22,418 stock options and 22,000 stock options,
respectively, during the six-month periods ended June 30, 2003 and 2002.
Additionally, the UniSource Energy Board of Directors granted 97,818 stock
options to key employees under the Omnibus Plan in the second quarter of 2003
and 568,000 stock options in the first quarter of 2002.  These options vest
over three years, become exercisable in one-third increments on each
anniversary date of the grant and expire on the tenth anniversary of the
grant.

                                  15
<PAGE>

     A summary of the stock option activity of the Directors' Plan and
Omnibus Plan is as follows:


                                     Six Months Ended June 30,
                                     2003                 2002
      ------------------------------------------------------------------
                                         Weighted             Weighted
                                         Average              Average
                                         Exercise             Exercise
                              Shares      Price     Shares     Price
      ------------------------------------------------------------------
      Options Outstanding,
       Beginning of Period  2,576,819   $15.77    2,075,234   $15.05
       Granted                120,236   $17.77      590,000   $18.14
       Exercised              (14,349)  $13.25      (56,887)  $14.55
       Forfeited              (12,546)  $14.29       (7,893)  $14.47
                            ----------            ----------
      Options Outstanding,
       End of Period        2,670,160   $15.88    2,600,454   $15.76
                            ==========            =========
      Options Exercisable,
       End of Period        1,623,294   $14.93    1,040,666   $14.37
                            ==========            =========
      Weighted Average Remaining
       Contractual Life at June 30, 2003:    6.63
      ------------------------------------------------------------------

  RESTRICTED STOCK UNITS

     During the six months ended June 30, 2003, 573 restricted shares or
stock units were awarded under the Directors' Plan to each of nine directors,
for a total of 5,157 shares or units.  The restricted shares or stock units
become 100% vested on the third anniversary of the grant date.  Compensation
expense equal to the fair market value on the date of award is recognized
over the vesting period.  The fair market value on the award date was $17.44.

  LONG-TERM INCENTIVE COMPENSATION

     In May 2003, the Board of Directors approved a grant of performance
shares and performance units to key employees under the Omnibus Plan.  The
shares and units may be awarded at the end of a three-year performance period
based on goal attainment.  Compensation expense is recorded over the
performance period based on the anticipated number and market value of shares
to be awarded.  Compensation expense of $410,000 was recorded for the six-
month period ended June 30, 2003 for this new incentive plan.


NOTE 6.  ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND TRADING ACTIVITIES
---------------------------------------------------------------------

     TEP enters into forward contracts to purchase or sell a specified amount
of capacity or energy at a specified price over a given period of time,
typically for one month, three months, or one year, within established limits
to take advantage of favorable market opportunities.  In general, TEP enters
into forward purchase contracts when market conditions provide the
opportunity to purchase for its load at prices that are below the marginal
cost of its supply resources or when additional supply is needed in addition
to TEP's own resources (i.e., during plant outages and summer peaking
periods).  TEP enters into forward sales contracts when TEP forecasts that it
has excess supply and the market price of energy exceeds its marginal cost.
The majority of TEP's forward contracts are considered normal purchases and
sales under Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (FAS 133) and, therefore,
are not required to be marked to market.  However, some of these forward
contracts are considered to be derivatives, which TEP marks to market under
FAS 133 by recording unrealized gains and losses and adjusting the related
assets and liabilities on a monthly basis to reflect the market prices at the
end of the month.

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

     Millennium Environmental Group, Inc. (MEG), a wholly-owned subsidiary of
Millennium, enters into swap agreements, options and forward contracts
relating to Emission Allowances and coal.  MEG also marks its trading

                                    16
<PAGE>

contracts to market under FAS 133 by recording unrealized gains and losses
and adjusting the related assets and liabilities on a monthly basis to
reflect the market prices at the end of the month.

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

     Statement of Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities (FAS 149), was
issued by the FASB in April 2003.  FAS 149 amends and clarifies accounting
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under FAS 133.  Due to TEP and
MEG's limited amount of derivative activity, we do not expect the adoption of
FAS 149 to have a significant effect on UniSource Energy or TEP's financial
statements.  See Note 13.

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

   - TEP's unrealized gain/loss on forward sales and purchase contracts is a
     component of Operating Revenues;
   - TEP's realized gain/loss on forward sales contracts is a component of
     Electric Wholesale Revenues;
   - TEP's realized gain/loss on forward purchase contracts is a component of
     Purchased Power; and
   - MEG's unrealized and realized gain/loss on trading activities are
     components of Operating Revenues.  Although MEG's realized gain/loss on
     trading activities are reported net on UniSource Energy's income statement,
     the related cash receipts and cash payments are reported separately on
     UniSource Energy's statement of cash flows.

     MEG physically settled the following transaction volumes under its
trading contracts in 2003 and 2002:

                                 Three Months Ended       Six Months Ended
                                      June 30,                June 30,
                                  2003        2002        2003        2002
-----------------------------------------------------------------------------
Emission Allowances Purchased   158,000     176,000     378,000     228,000
Emission Allowances Sold        158,000     133,000     338,000     216,000
-----------------------------------------------------------------------------

     The net pre-tax gains (losses) were as follows:

                                    Three Months Ended     Six Months Ended
                                         June 30,              June 30,
                                      2003       2002       2003       2002
-----------------------------------------------------------------------------
                                             -Millions of Dollars-
TEP Net Unrealized Gain (Loss) on
 Derivative Forward Contracts        $ (0.2)    $ (0.1)     $ (0.1)   $  0.7
MEG Net Unrealized and Realized
 Loss on Trading Activities               -       (0.4)       (0.4)     (0.1)
-----------------------------------------------------------------------------
UniSource Energy Net Gain (Loss) on
 TEP Forward Contracts and MEG
 Trading Activities                  $ (0.2)    $ (0.5)     $ (0.5)   $  0.6
=============================================================================

     At June 30, 2003, the fair value of TEP's derivative liabilities was
$0.1 million and is reported in Other Current Liabilities on TEP's balance
sheet.  At December 31, 2002, TEP had no open forward contracts that were
considered derivatives.  MEG's trading assets are reported in Current Assets
and MEG's trading liabilities are reported in Current Liabilities.  At June
30, 2003 and December 31, 2002, the fair value of MEG's trading assets was
$25.8 million and $15.1 million, respectively, including MEG's emission
allowance inventory.  At June 30, 2003 and December 31, 2002, the fair value
of MEG's trading liabilities was $20.3 million and $10.3 million,
respectively.


NOTE 7.  BUSINESS SEGMENTS
--------------------------
     Based on the way we organize our operations and evaluate performance, we
have three reportable business segments:
     (1) TEP, an electric utility business, is UniSource Energy's largest
         subsidiary.
     (2) Millennium holds interests in unregulated businesses (see Note 8).
     (3) UED is responsible for developing the expansion project at the
         Springerville Generating Station.  Prior to September 2002, UED owned
         a 20 MW gas turbine, which it leased to TEP.  In September 2002, UED
         sold the turbine to TEP for its net book value of $15 million.

                                     17
<PAGE>

     UniSource Energy's significant reconciling adjustments consist of the
elimination of intercompany activity and balances.  Millennium recorded
revenue from transactions with TEP of $5 million and $4 million in the three
months ended June 30, 2003 and June 30, 2002, respectively, and $7 million in
each of the six-month periods ended June 30, 2003 and June 30, 2002.  TEP's
related expense is reported in Other Operations and Maintenance expense on
its income statement.  Millennium's revenue and TEP's related expense are
eliminated in UniSource Energy consolidation.  Other significant reconciling
adjustments include the elimination of the intercompany note between
UniSource Energy and TEP, as well as the related interest income and expense;
and the elimination of UED's rental income and TEP's rental expense from
UED's turbine lease to TEP prior to UED's sale of the turbine to TEP in
September 2002.

     We record our percentage share of the earnings of affiliated companies
when we hold a 20% to 50% voting interest, except for investments where we
provide all of the financing, in which case we recognize 100% of the losses.
See Note 8.

     We disclose selected financial data for our business segments in the
following tables:

                                     Segments                      UniSource
                            ------------------------ Reconciling     Energy
                             TEP   Millennium    UED Adjustments Consolidated
-----------------------------------------------------------------------------
                                         -Thousands of Dollars-
Income Statement
----------------
Three months ended
 June 30, 2003:
  Operating Revenues -
   External            $  209,900  $  1,441   $     -  $       -  $  211,341
-----------------------------------------------------------------------------
  Operating Revenues -
   Intersegment                56     5,214         -     (5,270)          -
-----------------------------------------------------------------------------
  Income (Loss) Before
  Income Taxes             19,669    (7,263)       12     (3,577)      8,841
-----------------------------------------------------------------------------
  Net Income (Loss)        11,174    (4,428)        7     (2,170)      4,583
-----------------------------------------------------------------------------
Three months ended
 June 30, 2002:
  Operating Revenues -
   External            $  226,217  $    986   $     -  $       -  $  227,203
-----------------------------------------------------------------------------
  Operating Revenues -
   Intersegment               145     4,418       840     (5,403)          -
-----------------------------------------------------------------------------
  Income (Loss) Before
   Income Taxes            28,064    (7,294)      393     (2,325)     18,838
-----------------------------------------------------------------------------
  Net Income (Loss)        17,467    (4,411)      238     (1,406)     11,888
-----------------------------------------------------------------------------
Six months ended
 June 30, 2003:
  Operating Revenues -
   External            $  382,385  $  2,122   $     -  $       -  $  384,507
-----------------------------------------------------------------------------
  Operating Revenues -
   Intersegment               118     7,250         -     (7,368)          -
-----------------------------------------------------------------------------
  Income (Loss) Before
   Income Taxes and
   Cumulative Effect of
   Accounting Change        9,018   (15,538)     (187)    (6,720)    (13,427)
-----------------------------------------------------------------------------
  Net Income (Loss)        71,469    (9,433)     (113)    (4,070)     57,853
-----------------------------------------------------------------------------
Six months ended
 June 30, 2002:
  Operating Revenues -
   External            $  395,609  $  2,789   $     -  $       -  $  398,398
-----------------------------------------------------------------------------
  Operating Revenues -
   Intersegment               330     6,957     1,680     (8,967)          -
-----------------------------------------------------------------------------
  Income (Loss) Before
   Income Taxes            26,512   (12,756)      898     (4,626)     10,028
-----------------------------------------------------------------------------
  Net Income (Loss)        15,537    (7,711)      543     (2,795)      5,574
-----------------------------------------------------------------------------
Balance Sheet
-------------
Total Assets,
 June 30, 2003         $2,705,285  $147,182   $42,244  $(113,600) $2,781,111
Total Assets,
 December 31, 2002      2,613,590   151,468    37,839   (112,163)  2,690,734
-----------------------------------------------------------------------------

                                       18
<PAGE>

NOTE 8.  MILLENNIUM
-------------------

  ENERGY AND TECHNOLOGY INVESTMENTS

     We refer to Global Solar Energy, Inc. (Global Solar), Infinite Power
Solutions, Inc. (IPS), MicroSat Systems, Inc. (MicroSat) and ITN Energy
Systems, Inc. (ITN) as our Energy and Technology Investments.  As described
below, as of July 3, 2003 Millennium owns no interest in ITN.

     - Global Solar - Millennium funded $5.8 million to Global Solar in the
       first half of 2003, and $1.5 million in July 2003.  Millennium's unfunded
       commitment to Global Solar is $2.5 million of a $5 million line of credit
       committed in May 2003.  On July 3, 2003, Millennium exchanged its 9%
       interest in ITN and other consideration for additional shares of Global
       Solar which increased Millennium's ownership to 98%. Global Solar has a
       $0.5 million research and development funding commitment to ITN in 2004.

     - IPS - Millennium funded $1.5 million to IPS in the first half of 2003.
       Dow Corning Enterprises, Inc. funded a corresponding $1.5 million.
       Millennium has committed to fund an additional $0.5 million to IPS.
       As of June 30, 2003, Millennium owns 72% of IPS and in 2003 Millennium
       has recorded its ratable share of IPS' losses.  IPS has a $0.5 million
       annual research and development funding commitment to ITN through 2004.

     - MicroSat - Millennium reduced its ownership of MicroSat to 35% upon
       finalization of a 2002 Restructure Agreement.  As sole funder, Millennium
       continues to recognize 100% of MicroSat's losses.

     - ITN - On July 3, 2003, Millennium exchanged its 9% interest in ITN and
       other consideration for additional shares of Global Solar which decreased
       Millennium's ownership in ITN to zero.

     Millennium expects to fund an additional $5 million to $10 million to
these entities during the remainder of 2003.  A significant portion of this
funding will be used for research, development and administrative costs and
will be recognized as expense as amounts are spent.

  OTHER MILLENNIUM INVESTMENTS AND COMMITMENTS

     Millennium has a $15 million capital commitment to Haddington Energy
Partners II LP (Haddington), a limited partnership which funds energy-related
investments.  During the first half of 2003, Millennium invested
approximately $2 million in Haddington bringing the total funded to $8.1
million of the $15 million commitment.  The remaining $6.9 million is
expected to be funded within the next three years.  A member of the UniSource
Energy Board of Directors has an investment in the limited partnership and is
also a managing director of the general partner of the limited partnership.

     Millennium has a $6 million commitment to a venture capital fund that
focuses on information technology, microelectronics and biotechnology,
primarily within the southwestern U.S.  A member of the UniSource Energy
Board of Directors is a general partner of the company that manages the fund.
At June 30, 2003, Millennium had funded approximately $1 million of this
commitment.  Millennium does not expect to provide any additional funds to
this investment in 2003.

     During the first half of 2003, Millennium contributed $0.8 million to
TruePricing, Inc. (TruePricing) and has agreed to provide up to an additional
$0.4 million in future funding.  Following this investment Millennium began
accounting for TruePricing under the consolidation method.  Millennium and
TEP collectively now own approximately 55% of the outstanding shares of
TruePricing.  Prior to 2003, Millennium accounted for TruePricing under the
equity method.  Millennium, as sole funder, recognizes 100% of TruePricing's
losses.

  NATIONS ENERGY CONTINGENCY

     In September 2001, Nations Energy Corporation (Nations Energy) sold its
26% equity interest in a power project located in Curacao, Netherlands
Antilles to Mirant Curacao Investments, Ltd. (Mirant Curacao) a subsidiary of
Mirant Corporation (Mirant).  Nations Energy received $5 million in cash and
an $11 million note receivable from Mirant Curacao.  The note was recorded at
its net present value of $8 million using an 8% discount rate, the discount
being amortized to interest income over the five-year life of the note.  As
of June 30, 2003, Nations

                                     19
<PAGE>

Energy's receivable from Mirant Curacao is approximately $9.5 million.  The note
is included in Investments and Other Property - Other on UniSource Energy's
balance sheets.  The note is guaranteed by Mirant Americas, Inc., a subsidiary
of Mirant.  Payments on the note receivable are expected as follows:  $2 million
in July 2004, $4 million in July 2005, and $5 million in July 2006.

     On July 14, 2003, Mirant, Mirant Americas, Inc. and various other Mirant
companies filed for Chapter 11 bankruptcy protection.  Mirant Curacao was not
included in the Chapter 11 filings.  Based on a review of the projected cash
flows for the power project, it appears there are sufficient future cash
flows to pay the note receivable and any applicable interest.  However, we
cannot predict the ultimate outcome that Mirant's bankruptcy will have on the
collectibility of the note from Mirant Curacao.  Nations Energy will continue
to evaluate the collectibility of the receivable, but currently expects to
collect the note in its entirety and has not recorded any reserve for this
note.


NOTE 9.  COMMITMENTS AND CONTINGENCIES
--------------------------------------

  TEP CONTINGENCIES

     Springerville Generating Station Complaint

     Environmental activist groups have expressed concerns regarding the
construction of any new units at the Springerville Generating Station.  In
January 2003, environmental activist groups appealed an ACC Order affirming
the ACC's approval of the expansion at the Springerville Generating Station
to the Superior Court of the State of Arizona.

     Additionally, in November 2001, the Grand Canyon Trust (GCT), an
environmental activist group, filed a complaint in U.S. District Court
against TEP for alleged violations of the Clean Air Act at the Springerville
Generating Station.  The complaint alleged that more stringent emission
standards should apply to Units 1 and 2 and that new permits and the
installation of additional facilities meeting Best Available Control
Technology standards are required for the continued operation of Units 1 and
2 in accordance with applicable law.  In 2002, the U.S. District Court
granted TEP's motion for summary judgment on one of the primary issues in the
case: whether TEP commenced construction within 18 months and/or by March 19,
1979, after the original 1977 air permit covering Units 1 and 2 was issued.
The Court found that TEP had commenced construction of the Springerville
Generating Station in the time periods required by the original permits.
There were two remaining allegations: that (a) TEP discontinued construction
for a period of 18 months or longer and did not complete construction in a
reasonable period of time, and (b) TEP did not commence construction, for
purposes of New Source Performance Standard applicability, by September 18,
1978.  On March 4, 2003, the U.S. District Court determined that the GCT had
not commenced the case on a timely basis and dismissed the case.  The GCT has
appealed this decision to the U.S. Court of Appeals.  TEP believes these
claims are without merit and intends to vigorously contest them.

     Litigation Related to San Juan Coal Company

     On July 30, 2002, Dugan Production Corp. (Dugan) filed a lawsuit against
the San Juan Coal Company, the coal supplier to San Juan.  TEP owns 50% of
San Juan Units 1 and 2, which equates to 19.8% of the total San Juan Station.
Public Service Company of New Mexico (PNM) operates the San Juan Station.
The San Juan Coal Company, through leases with the federal government and the
State of New Mexico, owns coal interests with respect to an underground mine.
Dugan, through leases with the federal government, the State of New Mexico
and certain private parties, claims to own certain oil and gas interests in
portions of the land used for the underground mine.  Dugan alleges that San
Juan Coal Company's underground coal mining operations have or will interfere
with Dugan's gas production and will reduce the amount of natural gas that
Dugan would otherwise be entitled to recover.  Dugan seeks a declaration by
the court that the rights under its leases are senior and superior to the
rights of the San Juan Coal Company and seeks to prohibit the underground
mining of coal from a portion of the land used for the underground mine as
described above.  Dugan also seeks monetary damages.

     The San Juan Coal Company has informed PNM that it intends to strongly
dispute the litigation.  A mediator is currently working with the parties to
resolve the dispute.  TEP cannot predict the ultimate outcome of this
litigation, or whether it will adversely affect the amount of coal available
or cost of coal to San Juan.  TEP does not expect resolution of this
litigation to be material to TEP as a 19.8% owner of San Juan.

                                    20
<PAGE>

     Litigation Related to San Juan Generating Station

     On May 16, 2002, the GCT and the Sierra Club filed a citizen lawsuit
under the Clean Air Act in federal district court in New Mexico against PNM
as operator of San Juan.  The lawsuit, which alleges two violations of the
Clean Air Act and related regulations and permits, seeks penalties as well as
injunctive and declaratory relief and is presently scheduled for trial in the
third quarter of 2003.  Based on its investigation to date, PNM has stated
that it firmly believes that the allegations are without merit, and
vigorously disputes the allegations.  Only one of those allegations relates
to a unit in which TEP owns an interest.  While TEP is unable to predict the
ultimate outcome of the lawsuit, TEP does not believe the outcome will be
material to TEP.

     Postretirement and Pension Benefit Costs at Various Generating Stations

     The coal suppliers at Springerville and each of TEP's remote generating
stations have submitted demands for payment by TEP of postretirement and
pension benefit costs for these coal suppliers' employees under the coal
supply agreements with TEP.  As amounts become known and payment probable,
TEP will record a liability for additional postretirement and pension benefit
costs at these generating stations.  TEP does not expect any settlement to be
material to TEP.

     Environmental Reclamation at Remote Generating Stations

     TEP pays on-going reclamation costs at each of its remote generating
stations, and it is probable that TEP will have to pay a portion of final
reclamation costs at the coal mines which supply the remote generating
stations.  In June 2003, TEP received an evaluation of the reclamation
liability at San Juan from PNM, operator of San Juan, in which post-term
reclamation activities are assumed to occur over a 13-year period beginning
in 2028.  The expected aggregate undiscounted reclamation liability totals
$163 million of which TEP's portion of the liability based on its ownership
of San Juan totals $32 million.  The present value, at December 31, 2017, of
TEP's liability for post-term reclamation at a 10% credit-adjusted risk free
rate approximates $7 million and will be recognized through 2017, the
remaining life of the coal supply agreement.  Amounts recorded for post-term
reclamation are subject to various assumptions and determinations, such as
estimating the fair value of the costs of reclamation, estimating when final
reclamation will occur, and the credit-adjusted risk-free interest rate to be
used to discount future liabilities.  Changes that may arise over time with
regard to these assumptions and determinations will change amounts recorded
in the future as expense for post-term reclamation.  TEP does not believe
that recognition of its post-term reclamation obligation at San Juan will be
material to TEP in any single year since recognition occurs over the
remaining 14 year life of its coal supply agreement.

     Although a cost is probable at TEP's other remote generating stations,
it is not possible at this time to reasonably estimate the amount of any
obligation for final reclamation because remediation alternatives have not
yet advanced to the stage where a reasonable estimate of any cost can be
made.  As amounts become known, TEP will recognize a liability for final
reclamation over the remaining lives of its coal supply agreements.

  TEP COMMITMENTS

     See Note 2 for a description of TEP's power purchase agreements.

  MILLENNIUM COMMITMENTS

     See Note 8 for a description of Millennium's commitments.

  UED COMMITMENTS

     UED and Salt River Project Agricultural Improvement and Power District
(SRP) entered into a Joint Development Agreement in October 2001 to develop
two 400 MW coal-fired units at TEP's existing Springerville Generating
Station.  UED and SRP are modifying the Joint Development Agreement to
provide for SRP's purchase of a specified amount of power from Unit 3 and
SRP's right to construct and own Unit 4 at a later date.  UED and SRP each
committed project development funding for professional services and other
third party costs.  SRP met its funding commitment for the project in 2002.
Tri-State Generation and Transmission Association, Inc. (Tri-State) and UED
signed a Development Cost Agreement in January 2003 to each share 50% of the
remaining development costs of Unit 3 effective from November 6, 2002 until
financial closing.  UED expects Tri-State to obtain financing for and lease
Unit 3.  At June 30, 2003, capitalized project development costs on UniSource

                                    21
<PAGE>

Energy's balance sheet were approximately $25 million.  Management believes
it is probable that Tri-State will proceed with this project.  If the project
does not proceed, the capitalized project development costs will be
immediately expensed.

  GUARANTEES AND INDEMNITIES

     In the normal course of business, UniSource Energy and certain
subsidiaries, including TEP, enter into various agreements providing
financial or performance assurance to third parties on behalf of certain
subsidiaries.  These agreements are entered into primarily to support or
enhance the creditworthiness otherwise attributed to a subsidiary on a stand-
alone basis, thereby facilitating the extension of sufficient credit to
accomplish the subsidiaries' intended commercial purposes.  The most
significant of these guarantees is Millennium's guarantee of approximately
$5.0 million in commodity-related payments for MEG at June 30, 2003.  To the
extent liabilities exist under the contracts subject to these guarantees,
such liabilities are included in the consolidated balance sheets.

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

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


NOTE 10.  WHOLESALE ACCOUNTS RECEIVABLE AND ALLOWANCES
------------------------------------------------------

     At June 30, 2003, TEP's Allowance for Doubtful Accounts on the balance
sheet includes $11 million for uncollectible receivables related to 2000 and
2001 sales to the California Power Exchange (CPX), the California Independent
System Operator (CISO) and Enron Corp. and certain of its affiliates (Enron).
At December 31, 2002, the allowance for these receivables was $8 million.

     TEP's collection shortfall from the CPX and the CISO was approximately
$9 million for sales made in 2000 and $7 million for sales made in 2001.
Since that time, the FERC has held hearings and the FERC staff has proposed
various methodologies for calculating amounts of refunds/offsets applicable
to wholesale sales made into the CISO's spot markets from October 2000 to
June 2001.  As of December 31, 2002, TEP had reserved $8 million, or 50%, of
its outstanding receivable based on the amount TEP believed would be
collected.  Based upon a FERC order in March 2003, TEP estimated that it may
receive approximately $6 million of its $16 million receivable.  This
represents amounts owed to TEP net of TEP's estimated refund liability.
Therefore, in the first quarter of 2003, TEP increased its reserve for sales
to the CPX and the CISO by $2.2 million by recording a reduction of wholesale
revenues.

     Additionally, a FERC order recommended that Enron no longer be allowed
to trade and within a few days thereafter, Enron was delisted from its stock
exchange.  As a result, in the first quarter of 2003, TEP increased its
reserve for sales to Enron by $0.4 million, to 100% of its $0.8 million
recorded receivable from Enron.

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

     TEP's Accounts Receivable from Electric Wholesale Sales are included in
Trade Accounts Receivable on the balance sheet.  TEP's wholesale receivables,
net of allowances, totaled $20 million at June 30, 2003 and $31 million at
December 31, 2002.  Excluding the receivables from the CPX, the CISO and
Enron, as described above, substantially all of the June 30, 2003 wholesale
receivable balance has been collected as of the date of this filing.


NOTE 11.  UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
---------------------------------------------------

     Basic EPS is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period.  Diluted EPS
assumes that proceeds from the hypothetical exercise of stock options

                                    22
<PAGE>

and other stock-based awards are used to repurchase outstanding shares of stock
at the average fair market price during the reporting period.  The numerator
in calculating both basic and diluted earnings per share for each period is
net income.  The following table shows the effects of potential dilutive
common stock on the weighted average number of shares.

                                  Three Months Ended       Six Months Ended
                                         June 30,                 June 30,
                                    2003       2002         2003       2002
----------------------------------------------------------------------------
                                                -In Thousands-
Denominator:
 Average Shares of Common
  Stock Outstanding               33,821     33,684       33,780     33,635
 Effect of Dilutive Securities:
  Warrants                             -        163            -        140
  Options and Stock Issuable
   under Employee Benefit
   Plans                             455        588            -        572
----------------------------------------------------------------------------
Total Shares                      34,276     34,435       33,780     34,347
============================================================================

     Options to purchase 42,000 shares of common stock at $18.74 to $18.84
per share were outstanding during the three months ended June 30, 2003 but
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common stock
and, therefore, the effect would be antidilutive.  No such antidilutive
options were outstanding during the three months ended June 30, 2002.

     An average of 537,000 options and 21,000 options were excluded from the
year to date computation of diluted EPS for the six-month periods ended June
30, 2003 and 2002, respectively, as these options were
antidilutive.  Additionally, the dilutive share base for the six months ended
June 30, 2003 excludes 414,000 average incremental common shares related to
options and contingently issuable shares that are excluded due to their
antidilutive effect as a result of UniSource Energy's loss before cumulative
effect of accounting change for the six months ended June 30, 2003.

     At June 30, 2003, UniSource Energy and TEP had no outstanding warrants.
At June 30, 2002, there were 4.6 million warrants outstanding that were
exercisable into TEP common stock at a ratio of five warrants to one common
share.  These warrants expired unexercised on December 15, 2002.  The
dilutive effect of these warrants was the same as it would have been if the
warrants were exercisable into UniSource Energy Common Stock.


NOTE 12.  INCOME AND OTHER TAXES
--------------------------------

  INCOME TAXES

     The differences between the income tax expense (benefit) and the amount
obtained by multiplying pre-tax income (loss) before cumulative effect of
accounting change by the U.S. statutory federal income tax rate of 35% are as
follows:

                                                 UniSource Energy
                                     ----------------------------------------
                                      Three Months Ended    Six Months Ended
                                           June 30,             June 30,
                                       2003       2002       2003      2002
-----------------------------------------------------------------------------
                                               -Thousands of Dollars-
Federal Income Tax Expense (Benefit)
 at Statutory Rate                    $ 3,094  $  6,593   $(4,699)   $ 3,510
  State Income Tax Expense,(Benefit),
   Net of Federal Deduction               407       866      (617)       461
  Depreciation Differences (Flow
   Through Basis)                       1,086     1,154     2,173      2,309

  Tax Credits                            (380)   (1,713)     (760)    (1,919)
  Other                                    51        50        94         93
  Tax on Cumulative Effect of
   Accounting Change (See Note 4)           -         -    44,236          -
-----------------------------------------------------------------------------
Total Expense for Federal
 and State Income Taxes               $ 4,258  $  6,950   $40,427    $ 4,454
=============================================================================

                                          23
<PAGE>

                                                        TEP
                                      ---------------------------------------
                                       Three Months Ended   Six Months Ended
                                             June 30,            June 30,
                                         2003       2002      2003      2002
-----------------------------------------------------------------------------
                                               -Thousands of Dollars-
Federal Income Tax Expense at
 Statutory Rate                       $ 6,884   $ 9,822   $ 3,156    $ 9,279
  State Income Tax Expense, Net
   of Federal Deduction                   904     1,291       415      1,219
  Depreciation Differences (Flow
   Through Basis)                       1,086     1,154     2,173      2,309
  Tax Credits                            (380)   (1,713)     (760)    (1,919)
  Other                                     1        43        36         87
  Tax on Cumulative Effect of
   Accounting Change (See Note 4)           -         -    44,236          -
-----------------------------------------------------------------------------
Total Expense for Federal and
 State Income Taxes                   $ 8,495   $10,597   $49,256    $10,975
=============================================================================

  OTHER TAXES

     TEP acts as a conduit or collection agent for excise tax (sales tax) as
well as franchise fees and regulatory assessments.  TEP records liabilities
payable to governmental agencies when TEP bills its customers for these
amounts.  Neither the amounts billed nor payable are reflected in the income
statement.

NOTE 13.  NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------

     The FASB recently issued the following Statement of Financial Accounting
Standards (FAS) and FASB Interpretations (FIN):

   - FIN 46, Consolidation of Variable Interest Entities, issued January
     2003, expands upon existing guidance that addresses when a company should
     include in its financial statements the assets and liabilities of another
     entity.  The primary objectives of FIN 46 are to provide guidance on the
     identification of entities for which control is achieved through means
     other than through voting rights (variable interest entities) and to
     determine when and which business enterprise should consolidate the
     variable interest entity (primary beneficiary).  FIN 46 requires that both
     the primary beneficiary and all other enterprises with a significant
     variable interest make additional disclosures.  The transitional disclosure
     requirements of FIN 46 are effective immediately.  The effective date of
     the consolidation requirements of FIN 46 depends on the date the variable
     interest entity was created.  FIN 46 is effective for all variable interest
     entities created after January 31, 2003. For variable interest entities
     created before February 1, 2003, the provisions of FIN 46 are to be applied
     to a variable interest entity for interim reporting periods beginning after
     June 30, 2003.  We do not currently expect the impact of FIN 46 to be
     material to the financial statements.

   - FAS 149, Amendment of Statement 133 on Derivative Instruments and
     Hedging Activities, was issued by the FASB in April 2003.  FAS 149 amends
     and clarifies accounting for derivative instruments, including certain
     derivative instruments embedded in other contracts, and for hedging
     activities under FAS 133.  FAS 149 is effective for contracts entered into
     or modified after June 30, 2003, except as stated below, and for hedging
     relationships designated after June 30, 2003.  The guidance should be
     applied prospectively.  The provisions of FAS 149 that relate to FAS 133
     Implementation Issues that have been effective for fiscal quarters that
     began prior to June 15, 2003, should continue to be applied in accordance
     with their respective effective dates.  Due to TEP and MEG's limited amount
     of derivative activity, we do not expect the adoption of FAS 149 to have a
     significant effect on UniSource Energy or TEP's financial statements.

   - FAS 150, Accounting for Certain Financial Instruments with Characteristics
     of both Liabilities and Equity, was issued by the FASB in May 2003.  FAS
     150 improves the accounting for certain financial instruments that, under
     previous guidance, issuers could account for as equity.  FAS 150's guidance
     requires that those instruments be classified as liabilities.  FAS 150 is
     effective immediately for financial instruments entered into or modified
     after May 31, 2003 and to all other financial instruments that exist
     beginning July 1, 2003.  Although we currently have no financial
     instruments recorded in equity that are required to be reported as
     liabilities, should we enter into any such financial instruments, we will
     comply with FAS 150 after the effective date.

                                   24
<PAGE>

     Additionally, the Emerging Issues Task Force (EITF) published Issue No.
01-08, Determining Whether An Arrangement Contains a Lease (EITF 01-08), in
May 2003. EITF 01-08 discusses how to determine whether an arrangement
contains a lease and states that the evaluation of whether an arrangement
conveys the right to use property, plant, or equipment should be based on the
substance of an arrangement and that the property that is the subject of a
lease must be specified (explicitly or implicitly) either at inception of the
arrangement or at the beginning of the lease term.  EITF 01-08 is effective
for new arrangements entered into after June 1, 2003 or arrangements modified
after June 1, 2003.  We are currently in the process of evaluating the impact
of EITF 01-08 on UniSource Energy and TEP's financial statements.  Since June
1, 2003, we have not entered into any new arrangements, or modified any
arrangements that would fall under this EITF.


NOTE 14.  REVIEW BY INDEPENDENT ACCOUNTANTS
-------------------------------------------

     With respect to the unaudited condensed consolidated financial
information of UniSource Energy and TEP for the three-month and six-month
periods ended June 30, 2003 and 2002, 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 August 1, 2003 appearing herein states that they did not audit and they
do not express an opinion on that unaudited condensed consolidated financial
information.  Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the review
procedures applied.  PricewaterhouseCoopers LLP is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 (the Act)
for their report on the unaudited condensed consolidated financial
information because that report is not a "report" or a "part" of a
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Act.

                                      25
<PAGE>

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

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

     UniSource Energy Corporation (UniSource Energy) is a holding company that
owns substantially all of the outstanding common stock of Tucson Electric Power
Company (TEP), and all of the outstanding common stock of Millennium Energy
Holdings, Inc. (Millennium), and UniSource Energy Development Company (UED).
TEP, an electric utility, has provided electric service to the community of
Tucson, Arizona, for over 100 years.  Millennium invests in unregulated
businesses, including a developer of thin-film batteries, a developer of small-
scale commercial satellites, and a developer and manufacturer of thin-film
photovoltaic cells.  UED engages in developing generating resources and other
project development activities, including facilitating the expansion of the
Springerville Generating Station.  We conduct our business in these three
primary business segments - TEP's Electric Utility Segment, the Millennium
Businesses Segment, and the UniSource Energy Development Segment.

     On October 29, 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens Communications Company (Citizens) for the purchase by
UniSource Energy of Citizens' Arizona electric utility and gas utility
businesses for a total of $220 million in cash plus other operating capital
adjustments.   We expect these transactions to close on August 11, 2003.
UniSource Energy formed two new operating companies called UNS Electric, Inc.
(UNS Electric) and UNS Gas, Inc. (UNS Gas) to acquire these assets, as well as
an intermediate holding company called UniSource Energy Services, Inc. (UES), to
hold the common stock of UNS Electric and UNS Gas.  If completed, these
transactions will add to our customer base approximately 77,500 retail electric
customers in Arizona, and approximately 126,000 retail gas customers in Arizona.
See Citizens Acquisition below.

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

   - operating results during the second quarter and first six months of 2003
     compared with the same periods in 2002,
   - factors which affect our results and outlook,
   - our outlook and strategy, and
   - our liquidity, capital needs, capital resources, and contractual
     obligations.

     TEP is the principal operating subsidiary of UniSource Energy and accounts
for substantially all of its assets and revenues.  The seasonal nature of TEP's
business causes operating results to vary significantly from quarter to quarter.
Income and losses from Millennium's unregulated businesses have had a
significant impact on earnings reported by UniSource Energy for the three months
and six months ended June 30, 2003 and 2002.  UED's unregulated business
segment, which was established in February 2001, may have a significant impact
on consolidated net income and cash flows in the future.  In addition, the
acquisition by UniSource Energy of the Citizens assets will have a significant
impact on our financial condition and results of operations.

     Management's Discussion and Analysis should be read in conjunction with
UniSource Energy and TEP's 2002 Form 10-K and with the Condensed Consolidated
Financial Statements, beginning on page 2, which present the results of
operations for the three months and six months ended June 30, 2003 and 2002.
Management's Discussion and Analysis explains the differences between periods
for specific line items of the Condensed Consolidated Financial Statements.

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


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

 UNISOURCE ENERGY CONSOLIDATED

     UniSource Energy recorded net income of $4.6 million, or $0.14 per average
share of Common Stock, in the second quarter of 2003.  This compares with net
income of $11.9 million, or $0.35 per average share of Common Stock, in the
second quarter of 2002.  The following factors contributed to the change in net
income:

   - A $13.7 million decrease in electric wholesale revenues, primarily
     attributable to unplanned outages at several of TEP's coal-fired
     generating facilities.  In addition, wholesale gas and energy prices made
     it uneconomical for TEP

                                       26
<PAGE

     to run its gas generation facilities to sell into the wholesale energy
     markets.

   - Mild weather during the second quarter of 2003 compared to the second
     quarter of 2002 contributed to a $1.6 million decline in TEP's retail
     revenues.

   - Planned and unplanned outages at some of TEP's generating facilities during
     the second quarter of 2003 resulted in approximately $2.5 million of
     replacement power costs.

   - Other Operations and Maintenance Expense was higher by $4.1 million in the
     second quarter of 2003, due to planned and unplanned outages at some of
     TEP's generating facilities, as well as increased manufacturing costs at
     Global Solar Energy, Inc. (Global Solar).

   - Higher interest expense of $2.1 million in the second quarter of 2003,
     primarily due to higher rates under TEP's Credit Agreement, which TEP
     entered into in November 2002.

   - A $0.1 million increase in Other Income, which consists of TEP's non-
     utility revenue, Millennium's minority interest income, and other
     miscellaneous non-utility income.

   - A $1.6 million decrease in Other Expense, which consists of losses from
     Millennium's equity method entities, TEP's charitable donations and other
     miscellaneous non-utility expenses.

     UniSource Energy recorded net income of $57.9 million, or $1.71 per average
share of Common Stock, in the first six months of 2003, including an after-tax
gain of $67.5 million, or $2.00 per average share of Common Stock, for the
Cumulative Effect of Accounting Change from the adoption of Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (FAS 143) in the first quarter of 2003.  The net loss before
Cumulative Effect of Accounting Change was $9.6 million, or $0.29 per average
share of Common Stock.  This compares with net income of $5.6 million, or $0.17
per average share of Common Stock, in the first six months of 2002.  The
following factors contributed to the change in income (loss) before the
Cumulative Effect of Accounting Change:

   - A $9.1 million decrease in electric wholesale revenues in the first six
     months of 2003, primarily attributable to unplanned outages at several of
     TEP's coal-fired generating facilities and unfavorable wholesale
     opportunities for its gas generation resources.

   - TEP's purchased power expenses increased by $10.1 million in the first six
     months of 2003, as a result of additional power purchases and higher power
     prices.  Power purchases were required to support retail demand at a time
     when TEP had planned and unplanned maintenance at some of its generating
     stations.  Also, because natural gas prices were high, power purchases were
     more economical than TEP using its gas generation facilities during outages
     at coal facilities.

   - Mild weather during the first six months of 2003 in TEP's service territory
     contributed to a $2.8 million decrease in TEP's retail revenues.

   - Other Operations and Maintenance Expense was higher by $7.4 million in the
     first six months of 2003, due to planned and unplanned outages at several
     of TEP's generating facilities, as well as increased manufacturing costs at
     Global Solar.

   - The adoption of FAS 143 resulted in a $3 million decrease in depreciation
     expense for the first six months of 2003 because of a change in the
     calculation of asset retirement costs included as a component of
     depreciation expense.

   - Higher interest expense of $3.6 million in the first six months of 2003
     related to higher interest rates under TEP's Credit Agreement, which TEP
     entered into in November 2002.

   - A $2.6 million increase in TEP's reserve against receivables from
     California wholesale sales and from Enron Corp. (Enron) recorded in the
     first quarter of 2003.

   - A $0.4 million decrease in Other Income, which consists of TEP's non-
     utility revenue, Millennium's minority interest income, and other
     miscellaneous non-utility income.

                                       27
<PAGE>

   - A $1.3 million decrease in Other Expense, which consists of losses from
     Millennium's equity method entities, TEP's charitable donations and other
     miscellaneous non-utility expenses.



 CONTRIBUTION BY BUSINESS SEGMENT

     The table below shows the contributions to our consolidated after-tax
earnings by our three business segments, as well as parent company expenses, for
the second quarter and first six months of 2003 and 2002:

                                         Three Months Ended     Six Months Ended
                                              June 30,               June 30,
                                           2003     2002           2003    2002
--------------------------------------------------------------------------------
                                                  - Millions of Dollars -
   Business Segment
      TEP (1)                            $ 11.2    $17.5         $ 71.5   $15.5
      Millennium                           (4.4)    (4.4)          (9.4)   (7.7)
      UED                                   0.0      0.2           (0.1)    0.6
      UniSource Energy Standalone (2)      (2.2)    (1.4)          (4.1)   (2.8)
--------------------------------------------------------------------------------
         Consolidated Net Income         $  4.6    $11.9         $ 57.9   $ 5.6
================================================================================

   (1)Includes an after-tax gain of $67.5 million for the Cumulative Effect of
      Accounting Change from the adoption of FAS 143 in the first quarter of
      2003.
   (2)Primarily represents interest expense (net of tax) on the note payable
      from UniSource Energy to TEP.

 RESULTS OF TEP

     The financial condition and results of operations of TEP are currently the
principal factors affecting the financial condition and results of operations of
UniSource Energy on an annual basis.  The following discussion relates to TEP's
utility operations, unless otherwise noted.  The results of our unregulated
businesses are discussed in Results of Millennium and Results of UED, below.

     Utility kWh Sales and Revenues

     Customer growth, weather and other consumption factors affect retail sales
of electricity.  Price changes also contribute to changes in retail revenues.
Electric wholesale revenues are affected by market prices in the wholesale
energy market, availability of TEP generating resources, and the level of
wholesale forward contract activity.

     TEP's electric wholesale sales consist primarily of three types of sales:

       (1)  Sales under long-term contracts for periods of more than one year.
            TEP currently has long-term contracts with three entities to sell
            firm capacity and energy: Salt River Project Agricultural
            Improvement and Power District (SRP), the Navajo Tribal Utility
            Authority and the Tohono O'odham Utility Authority.  TEP also has a
            multi-year interruptible contract with Phelps Dodge Energy Services,
            which requires a fixed contract demand of 60 MW at all times except
            during TEP's peak customer energy demand period, from July through
            September of each year.  Under the contract, TEP can interrupt
            delivery of power if the utility experiences significant loss of any
            electric generating resources.

       (2)  Other sales include forward sales and short-term sales.  Under
            forward contracts, TEP commits to sell a specified amount of
            capacity or energy at a specified price over a given period of time,
            typically for one-month, three-month or one-year periods.  Under
            short-term sales, TEP sells energy in the daily or hourly markets at
            fluctuating spot market prices and other non-firm energy sales.

       (3)  Sales of transmission service.

     Comparisons of TEP's kWh sales delivered and the corresponding electric
revenues for the second quarter and first six months of 2003, compared with the
same periods in 2002, are shown below:

                                       28
<PAGE>

<TABLE>
<CAPTION>

                                                  Sales                            Operating Revenue
----------------------------------------------------------------------------------------------------------
                                                            Percent                                Percent
Three Months Ended June 30,               2003     2002     Change              2003      2002     Change
----------------------------------------------------------------------------------------------------------
                                             - Millions of kWh -                 - Millions of Dollars -
<S>                                      <C>      <C>        <C>             <C>       <C>          <C>
Electric Retail Sales:
   Residential                             782      781        -             $  71.5   $  71.3        -
   Commercial                              444      442        -                46.2      46.0        -
   Industrial                              598      624       (4%)              43.4      44.9       (3%)
   Mining                                  172      174       (1%)               6.9       7.1       (3%)
   Public Authorities                       72       76       (5%)               5.2       5.5       (5%)
----------------------------------------------------------------------------------------------------------
Total Electric Retail Sales              2,068    2,097       (1%)             173.2     174.8       (1%)
----------------------------------------------------------------------------------------------------------
Electric Wholesale Sales Delivered:
   Long-term Contracts                     258      191       35%               11.7      11.5        2%
   Other Sales                             541    1,104      (51%)              22.0      36.9      (40%)
   Transmission                              -        -        -                 1.8       0.8      125%
----------------------------------------------------------------------------------------------------------
Total Electric Wholesale Sales             799    1,295      (38%)              35.5      49.2      (28%)
----------------------------------------------------------------------------------------------------------
      Total                              2,867    3,392      (16%)            $208.7    $224.0       (7%)
==========================================================================================================

</TABLE>

     TEP's average number of retail customers increased by 2.3% to 362,375,
while kWh sales to retail customers decreased by 1% for the second quarter of
2003, compared with the same period in 2002.  Kilowatt-hour sales to residential
and commercial customers were relatively flat, in spite of customer growth, due
to mild weather compared to a year ago.  Cooling Degree Days decreased by 2.9%
for the second quarter of 2003.  Kilowatt-hour sales to industrial customers
declined due primarily to the loss of approximately 12 MW of load from one
customer that is self-generating a portion of its load.  Revenue from sales to
retail customers decreased by 1% in the second quarter of 2003, compared with
the same period in 2002, reflecting the lower demand.

     Electric wholesale sales decreased by 38% in the second quarter of 2003,
compared with the same period in 2002, while revenues decreased by 28%.  The
decline in wholesale revenues is not as large as the decline in wholesale kWh
sales due to higher average power prices.  Average-around-the-clock energy
prices for the second quarter of 2003 increased to $39 per MWh compared with $24
per MWh during the same period in 2002, primarily due to increased natural gas
prices in the region.  The unavailability of some of TEP's coal-fired generating
plants during planned and unplanned outages reduced opportunities to sell
wholesale power and contributed to the decline in wholesale kWh sales during the
second quarter of 2003.  Approximately 211,000 MWh of coal-fired energy was
unavailable due to unplanned outages during the second quarter of 2003, compared
to approximately 72,000 MWh during the same period in 2002.

<TABLE>
<CAPTION>

                                                  Sales                            Operating Revenue
----------------------------------------------------------------------------------------------------------
                                                            Percent                                Percent
Six Months Ended June 30,                 2003     2002     Change              2003      2002     Change
----------------------------------------------------------------------------------------------------------
                                             - Millions of kWh -                 - Millions of Dollars -
<S>                                      <C>      <C>        <C>             <C>       <C>          <C>
Electric Retail Sales:
   Residential                           1,428    1,435        -             $ 126.0   $ 126.5        -
   Commercial                              772      768        1%               79.9      79.5        1%
   Industrial                            1,068    1,107       (4%)              76.0      77.6       (2%)
   Mining                                  325      339       (4%)              13.0      13.7       (5%)
   Public Authorities                      123      129       (5%)               8.9       9.3       (4%)
----------------------------------------------------------------------------------------------------------
Total Electric Retail Sales              3,716    3,778       (2%)             303.8     306.6       (1%)
----------------------------------------------------------------------------------------------------------
Electric Wholesale Sales Delivered:
   Long-term Contracts                     587      472       24%               25.9      26.0        -
   Other Sales                           1,150    1,714      (33%)              46.7      57.3      (19%)
   Transmission                              -        -        -                 3.1       1.5      107%
----------------------------------------------------------------------------------------------------------
Total Electric Wholesale Sales           1,737    2,186      (21%)              75.7      84.8      (11%)
----------------------------------------------------------------------------------------------------------
      Total                              5,453    5,964       (9%)           $ 379.5   $ 391.4       (3%)
==========================================================================================================

</TABLE>

     Total retail kWh sales in the first six months of 2003 decreased by 2%
compared to the same period in 2002, despite a 2.3% increase in the average
number of retail customers.  Kilowatt-hour energy sales to residential customers
during the first six months of 2003 were relatively flat, in spite of customer
growth, primarily due to mild weather compared to a year ago.  Mild winter
weather caused Heating Degree Days to decrease by 19% for the first quarter of
2003 and also decrease 16% when compared with the 10-year average.  Likewise,
mild weather in the second quarter of 2003 led to a 2.9% decline in Cooling
Degree Days compared to the second quarter of 2002.  Energy sales to industrial
customers were

                                       29
<PAGE>

lower in the first six months of 2003 due primarily to the loss of approximately
12 MW of load from one customer that is self-generating a portion of its load.
Reduced energy sales to TEP's copper mining customers, particularly during the
first quarter of 2003, reflect the continuing cutback in production by one of
TEP's mining customers.  Revenue from sales to retail customers decreased by 1%
in 2003, compared with 2002, reflecting the lower demand.

     Electric wholesale sales decreased by 21% in the first six months of 2003,
compared with the same period in 2002, while revenues decreased by 11%. The
decline in wholesale revenues is not as large as the decline in wholesale kWh
sales due to higher average power prices.  Average-around-the-clock energy
prices for the first six months of 2003 were $42 per MWh compared to $24 per MWh
during the same period in 2002.  The unavailability of some of TEP's coal-fired
generating plants during planned and unplanned outages reduced opportunities to
sell wholesale power and contributed to the decline in wholesale kWh sales
during the first six months of 2003.  In addition, wholesale revenues were
reduced by a $2.2 million reserve for doubtful accounts recorded in the first
quarter related to wholesale sales made to the California Independent System
Operator (CISO) and the California Power Exchange (CPX) in 2001 and 2000.  See
Payment Defaults and Allowances for Doubtful Accounts, below.

     Fuel and Purchased Power Expenses

     Fuel expense at TEP's generating plants decreased by approximately $6
million, or 11%, in the quarter ended June 30, 2003, compared with the same
quarter in 2002, due to lower retail and wholesale kWh sales, as well as planned
and unplanned outages at some of TEP's generating stations.  The increase in the
regional supply of gas-generated energy allowed TEP to purchase less expensive
power in the wholesale market rather than use its less efficient gas generation
facilities.  Despite higher natural gas prices, the average cost of fuel per kWh
generated for the second quarter of 2003 was 1.89 cents compared with 1.98 cents
for the second quarter of 2002 because TEP used less gas for generation in 2003.
In the first six months of 2003, Fuel expense at TEP's generating plants
decreased by approximately $8 million, or 8%, compared with the same period in
2002.  The average cost of fuel per kWh generated for the first six months of
2003 and the first six months of 2002 was 1.90 cents and 1.92 cents,
respectively. See Market Risks - Commodity Price Risk, below.

     Purchased Power expense decreased approximately $4 million, or 18%, in the
second quarter of 2003, compared with the same period in 2002. Purchased Power
expenses would have been even lower in the second quarter of 2003, but TEP had
to purchase replacement power due to unplanned outages at some of its generating
facilities.  Purchased Power expense during the first six months of 2003 was up
approximately $10 million, or 43%, compared with the same period in 2002.
During the first quarter of 2003, TEP purchased power to serve its retail load
while several of its generating facilities were down for scheduled maintenance.
See Other Operating Expenses, below.

     Other Operating Expenses

     Other Operations and Maintenance expense increased by approximately $1
million, or 3%, in the second quarter of 2003, compared with the same period in
2002, due to planned and unplanned maintenance at some of TEP's generating
facilities.  In the first six months of 2003, Other Operations and Maintenance
expense increased by approximately $2 million, or 3%, compared with the same
period in 2002.   The duration of planned and unplanned outages at TEP's coal-
fired facilities, particularly at Springerville and San Juan, were considerably
longer in the second quarter of 2003 compared with the second quarter of 2002.
Also, scheduled plant maintenance at several of TEP's coal-fired facilities,
including Sundt (formerly Irvington), San Juan, Four Corners, Navajo and
Springerville Unit 2 during the first quarter of 2003 contributed to the higher
expense for the first six months of 2003.  Although TEP also had scheduled
maintenance at certain plants in the first quarter of 2002, the outages in 2003
were for more extended periods at more of TEP's plants.

     Depreciation and amortization expense decreased $0.7 million in the second
quarter of 2003 and $3.5 million in the first six months of 2003 compared with
the same periods in 2002.  The adoption of FAS 143 resulted in a $3 million
decrease because asset retirement costs are no longer recorded as a component of
depreciation expense.  See Critical Accounting Policies - Accounting for Asset
Retirement Obligations, below.

     Other Income (Deductions)

     TEP's income statements for the quarters ended June 30, 2003 and 2002
include $3 million and $2 million, respectively, of Interest Income on the
promissory note TEP received from UniSource Energy in exchange for the transfer
to UniSource Energy of its stock in Millennium in 1998.  In the first six months
of 2003 and 2002, Interest Income on this promissory note was $5 million in each
period.   On UniSource Energy's consolidated income statement, this interest
income is eliminated as an inter-company transaction.

                                       30
<PAGE>

     Other Interest Income increased $0.3 million in the second quarter of 2003,
compared with the second quarter of 2002.  Interest income in the first six
months of 2003 was up $1 million compared with the same period in 2002 due to
higher interest income on investments in Springerville lease debt.

     Other Income increased $0.3 million and Other Expense decreased $0.1
million in the second quarter of 2003, compared with the same period in 2002.
In the first six months of 2003, Other Income increased by $0.1 million, while
Other Expense decreased by $0.3 million, compared with the same period in 2002.
Other Income includes non-utility revenue, the cost of financing construction
for transmission and distribution projects (AFUDC) attributable to equity funds,
and other miscellaneous non-utility income.  Other Expense includes charitable
contributions and other miscellaneous non-utility expenses.

     Interest Expense

     Interest Expense for the second quarter of 2003 increased by approximately
$2 million, compared with the same period in 2002.  Letter of Credit fees under
TEP's Credit Agreement were $3 million higher, partially offset by decreased
interest expense on capital leases of $1 million due to scheduled repayments and
declining principal balances.  The same factors contributed to a $4 million
increase in Interest Expense in the first six months of 2003 compared with the
same period in 2002.

     Income Tax Expense

     Income tax expense before the Cumulative Effect of Accounting Change
decreased by $2 million in the second quarter of 2003, compared with the same
period in 2002, due to lower pre-tax income.  In the first six months of 2003,
Income tax expense before the Cumulative Effect of Accounting Change decreased
by $6 million compared with the same period in 2002.

     Cumulative Effect of Accounting Change

     TEP adopted FAS 143 on January 1, 2003 and recorded a one-time $67.5
million after-tax gain.  Upon adoption of FAS 143, TEP recorded an asset
retirement obligation of $38 million at its net present value of $1.1 million,
increased depreciable assets by $0.1 million for asset retirement costs,
reversed $112.8 million of costs previously accrued for final removal from
accumulated depreciation, and reversed previously recorded deferred tax assets
of $44.2 million.  TEP expects that adopting FAS 143 will result in a reduction
to depreciation expense charged throughout the year as well because asset
retirement costs are no longer recorded as a component of depreciation expense.
For the year 2003, this amount is approximately $6 million.  See Critical
Accounting Policies - Accounting for Asset Retirement Obligations, below.

 RESULTS OF MILLENNIUM

     Millennium's Energy and Technology Investments include Global Solar Energy,
Inc. (Global Solar), Infinite Power Solutions, Inc. (IPS), MicroSat Systems,
Inc. (MicroSat) and ITN Energy Systems, Inc. (ITN).  The major factors
contributing to the losses in 2003 and 2002 are development efforts of solar
modules by Global Solar, expenditures to develop thin-film and solid-state
rechargeable batteries by IPS, research and development work performed by ITN
and contract work performed by MicroSat on satellite development. Results of
Other Millennium Investments include the operating results from Millennium
Environmental Group, Inc. (MEG), POWERTRUSION International, Inc. and
TruePricing, Inc. (TruePricing). The table below provides a breakdown of the net
losses recorded by Millennium:

                                       31
<PAGE>

<TABLE>
<CAPTION>
                                                                     Three Months Ended     Six Months Ended
                                                                          June 30,              June 30,
                                                                        2003     2002         2003     2002
--------------------------------------------------------------------------------------------------------------
                                                                               - Millions of Dollars -
<S>                                                                    <C>      <C>          <C>      <C>
Energy and Technology Investments
   Global Solar and IPS
      Research and Development Contract Revenues to Third Parties      $  0.8   $  0.6       $  1.0   $  1.0
      Research and Development Contract Expenses & Losses                (1.2)    (1.1)        (2.6)    (2.3)
      Research and Development - Internal Development Expenses           (0.7)    (1.7)        (1.1)    (2.3)
      Depreciation and Amortization Expense                              (0.9)    (0.6)        (1.6)    (1.4)
      Administrative and Other Costs                                     (3.7)    (2.0)        (5.7)    (4.4)
      Income Tax Benefits                                                 2.3      1.9          4.0      3.7
--------------------------------------------------------------------------------------------------------------
   Global Solar and IPS Loss, after tax                                  (3.4)    (2.9)        (6.0)    (5.7)
   MicroSat and ITN Loss (Income), after tax                             (0.3)     0.1         (1.0)    (0.4)
--------------------------------------------------------------------------------------------------------------
Total Energy and Technology Investment Loss, after tax                   (3.7)    (2.8)        (7.0)    (6.1)
   Other Millennium Investment Loss, after tax                           (0.7)    (1.6)        (2.4)    (1.6)
--------------------------------------------------------------------------------------------------------------
Total Millennium Loss, after tax                                       $ (4.4)  $ (4.4)      $ (9.4)  $ (7.7)
==============================================================================================================

--------------------------------------------------------------------------------------------------------------
Funding Provided by Millennium to Investees                            $  3.5   $ 13.0       $ 11.4   $ 19.5
==============================================================================================================

</TABLE>

 RESULTS OF UED

     UED recorded a net loss of $0.1 million in the first six months of 2003,
compared with a net profit of $0.6 million in the first six months of 2002.
UED's loss in 2003 represents operating expenses.  UED's income in 2002
represented rental income (less expenses) under an operating lease of a 20 MW
turbine to TEP.  The rental income was eliminated from UniSource Energy's
consolidated after-tax earnings as an intercompany transaction.  TEP purchased
the turbine from UED in September 2002.


CITIZENS ACQUISITION
--------------------

     On October 29, 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens for the purchase by UniSource Energy of Citizens'
Arizona electric utility and gas utility businesses for a total of $220 million
in cash plus other operating capital adjustments.  We expect the transactions to
close on August 11, 2003.  If the transaction closes after August 11, 2003, the
purchase price is increased by $10 million.  If the transaction closes after
October 29, 2003, the purchase price will be increased by a total of $15
million.  In addition, the purchase price in each transaction may also be
adjusted if there is a casualty loss, governmental taking, or discovery of
substantial additional environmental liabilities, in each case subject to
materiality thresholds, prior to the closing.  UniSource Energy will assume
certain liabilities associated with the purchased assets, but will not assume
Citizens' obligations under the industrial development revenue bonds issued to
finance certain of the purchased assets for which Citizens will remain the
economic obligor.

     We have received all required regulatory approvals for the transactions
from the ACC, the FERC and the SEC under the Public Utility Holding Company Act
of 1935, as amended.

     The Asset Purchase Agreements are subject to termination if the closing has
not occurred by January 29, 2004 (subject to extension in limited
circumstances), if a governmental authority seeks to prohibit the transactions,
or if either party is in material breach and such breach is not cured.  If one
Asset Purchase Agreement is terminated, the other will also be automatically
terminated.  If the Asset Purchase Agreements are terminated by Citizens due to
a material breach by UniSource Energy, UniSource Energy must pay to Citizens a
$25 million termination fee as liquidated damages.  If the Asset Purchase
Agreements are terminated by UniSource Energy due to a material breach by
Citizens, Citizens must pay to UniSource Energy a $10 million termination fee as
liquidated damages.  The termination fees are also payable in certain other
limited circumstances.

    On July 3, 2003, the ACC approved the acquisition, as well as the April 3,
2003 settlement agreement (Citizens Settlement Agreement) entered into by
UniSource Energy, Citizens, and the ACC Staff, subject to certain terms and
conditions.  No motions to reconsider were filed within the applicable
reconsideration period.  The ACC Order and the Citizens Settlement Agreement
addressed acquisition financing issues, as well as two cases that were pending
before the

                                       32
<PAGE>

ACC requesting rate relief for both the Citizens Arizona electric and Arizona
gas assets.  The changes in rates and financing approvals will take effect once
the acquisition is completed, which is expected to be on August 11, 2003.

     Pursuant to the terms of the Citizens Settlement Agreement, UniSource
Energy formed two wholly-owned subsidiaries, UNS Gas and UNS Electric, to own
and operate the acquired assets, as well as an intermediate holding company,
UES, to finance and own the operating companies.  The operating companies are
authorized to issue new debt and equity securities to fund the acquisition of
the Citizens gas and electric assets and to provide for initial working capital
requirements.  We expect the acquisition to be funded by a combination of senior
unsecured notes issued in a private placement by UNS Electric and UNS Gas,
bridge financing debt to be issued by UniSource Energy, and the remainder from
cash at UniSource Energy.  The senior unsecured notes are expected to be
guaranteed by UES and bear interest at a fixed rate of interest.  The bridge
financing debt to be issued by UniSource Energy is expected to mature in May
2004 and bear interest at a floating rate of interest.  UNS Electric and UNS Gas
also plan to establish a revolving credit facility for working capital purposes
during the third quarter of 2003.

     The Citizens Settlement Agreement resolved two pending rate issues before
the ACC: (1) a gas utility base rate case and (2) a review of the electric
utility purchase power and fuel adjustment clause.  Upon completion of the
acquisition, gas rates will increase by 20.9%, compared with the 29% increase
requested by Citizens.  Because UniSource Energy is acquiring the gas utility
assets at a purchase price which is less than Citizens' book value, the amount
of rate recovery required is less than under the Citizens rate case.  The gas
utility rate case also takes into account a $10 million permanent reduction to
the gas rate base due to a disallowance for certain capital expenditures for gas
infrastructure, thereby reducing the revenue level to be recovered from
ratepayers.  Upon completion of the acquisition, electric utility rates will
increase by 22%, compared with the 45% requested by Citizens.  The allowed
electric rate increase represents the full recovery in rates of the costs of a
long-term purchase power contract on a going forward basis.  At the same time,
UniSource Energy agreed to forfeit the collection of approximately $135 million
in deferred purchased power costs that had been incurred by Citizens but had not
been collected from Citizens' customers.

     The ACC order included the following amendments to the terms of the
Citizens Settlement Agreement:

       1)  UniSource Energy shall commence renegotiation of the existing
           purchased power agreement with Pinnacle West Capital Corporation, and
           90% of any savings associated with the renegotiated contract shall be
           allocated to ratepayers and 10% to shareholders (changed from a 60/40
           allocation).

       2)  A general rate case for UNS Gas and UNS Electric shall not be filed
           for a period of at least three years and the resulting rate increase
           shall not become effective prior to August 1, 2007.

       3)  Within 120 days of the effective date of the decision, UniSource
           Energy shall file with the ACC a plan to open the electric service
           territories to retail competition by December 31, 2003.

     The Citizens Settlement Agreement limits dividends from each of UNS Gas and
UNS Electric to 75% of earnings until the ratio of common equity to total
capitalization reaches 40%.  The Citizens Settlement Agreement also modifies
TEP's dividend limitation.   Currently, TEP may not pay dividends in excess of
75% of its earnings until the ratio of common equity to total capitalization
(excluding capital lease obligations) reaches 37.5%.  Under the Citizens
Settlement Agreement, upon the closing of the acquisition, the 75% earnings
payout limitation will remain in effect until TEP's ratio of common equity to
total capitalization reaches 40% (excluding capital lease obligations).

     On July 25, 2003, UNS Gas and Citizens filed a joint application with the
ACC requesting approval of a new Purchased Gas Adjustor (PGA) surcharge to be
effective October 1, 2003.    The surcharges approved and currently in effect
for the Citizens' Arizona gas assets expire on September 30, 2003.  The July 25,
2003 filing requests recovery of the undercollected PGA balance of approximately
$7 million that is projected to exist as of October 1, 2003.  The requested
surcharge necessary to recover the undercollected balance by October 1, 2004 is
$0.1155 per therm.  UNS Gas and Citizens have requested that this matter be
heard at the September 9, 2003 ACC Open Meeting.


SPRINGERVILLE GENERATING STATION EXPANSION
------------------------------------------

     As reported in our 2002 Annual Report on Form 10-K, UED is facilitating the
expansion of the Springerville Generating Station.  The Springerville Generating
Station was originally designed for four units.  If constructed, each of Units 3
and 4 would consist of a 400 MW coal-fired, base-load generating unit at the
same site as Springerville Units 1 and 2.  If Unit 3 (and subsequently Unit 4)
is built, this would allow TEP to spread the fixed costs of the existing common
facilities over the additional generating unit (or units).

                                       33
<PAGE>

     UED currently expects to act as project manager for the development of
Springerville Unit 3 and anticipates that financing and ownership will occur
through third parties.  The entire output of Unit 3 is expected to be taken by
regional power companies, including Tri-State Generation and Transmission
Association (Tri-State), SRP, and TEP.  UED currently expects that Tri-State
will obtain financing and lease Unit 3 and will take 300 MW of the 400 MW
capacity.  TEP would purchase from Tri-State up to 100 MW of Tri-State system-
wide capacity for no more than five years from commercial operation of
Springerville Unit 3.  SRP will purchase 100 MW of capacity from Unit 3 under a
30 year power purchase agreement and will have the right to construct and own
Unit 4 at a later date.  If SRP decides to construct Unit 4, TEP would be
required, along with Tri-State, to exercise best efforts to find a replacement
purchaser for SRP to purchase 100 MW of capacity from Unit 3.  If TEP and Tri-
State are unable to find such a replacement purchaser, TEP would then purchase
100 MW of output from Unit 4, beginning with the commercial operation of Unit 4.

     As of June 30, 2003, UniSource Energy had approximately $25 million of
capitalized project development costs on its balance sheet.  Under a Development
Cost Agreement signed in January 2003, Tri-State and UED each share 50% of the
development costs of Unit 3 until financial close.  UED expects to provide an
additional $3 million in funding for development prior to Tri-State obtaining
construction financing.  Upon financial close, UED expects to be reimbursed for
these development costs, and expects to receive a development fee of
approximately $10 million.  If the project does not proceed, UED would not
receive the $38 million in cash and would have to write-off as expense the
capitalized project development costs.  Management believes it is probable that
this project will proceed.

     On October 29, 2002, the ACC issued an order that affirms the Certificate
of Environmental Compatibility (CEC) granted to TEP authorizing the construction
of Unit 3, subject to compliance with certain conditions, and approved the CEC
for Unit 4 subject to certain conditions occurring.  The ACC approved
construction of a third and fourth unit at the Springerville Generating Station
in 1977 and 1987, respectively, but with respect to Unit 4, the ACC provided
that TEP, as plant operator, demonstrate that the fourth unit was needed to
provide an adequate, economical and reliable supply of electric power to its
customers.  That demonstration was made as part of the proceedings that resulted
in the issuance of the October 29, 2002 ACC Order.

     UED expects to finalize the power purchase agreements, the engineering,
procurement and construction contract, and other required project agreements
during the third quarter of 2003.  UED expects Tri-State to obtain construction
financing in the third quarter of 2003 and then begin construction.  UED expects
commercial operation of Unit 3 to occur in 2006.  We can make no assurances,
however, about the ultimate timing, or whether this project will proceed.


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

 COMPETITION

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

     As of January 1, 2001, all of TEP's retail customers are eligible to choose
an alternate energy supplier.  Although there is one Energy Service Provider
(ESP) certified to provide service in TEP's retail service area, currently none
of TEP's retail customers have opted to receive service from this ESP.  TEP has
met all conditions required by the ACC to facilitate electric retail
competition, including ACC approval of TEP's direct access tariffs.  ESPs must
meet certain conditions before electricity can be sold competitively in TEP's
service territory.  Examples of these conditions include ACC certification of
ESPs, and execution of and compliance with direct access service agreements with
TEP.

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

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

                                       34
<PAGE>

 INDUSTRY RESTRUCTURING

     RETAIL

     TEP's Settlement Agreement and Retail Electric Competition Rules

     In September 1999, the ACC approved Rules that provided a framework for the
introduction of retail electric competition in Arizona.  In November 1999, the
ACC approved the Settlement Agreement between TEP and certain customer groups
relating to the implementation of retail electric competition, including TEP's
recovery of its transition recovery assets and the unbundling of tariffs.
During 2002, the ACC reexamined circumstances that had changed since it approved
the Rules in 1999.  The outstanding issues were divided into two groups-
"Track A" and "Track B" issues.  Track A related primarily to the divestiture of
generation assets while Track B related primarily to the competitive energy
bidding process.

     In September 2002, the ACC issued the Track A Order, which eliminated the
requirement in the Settlement Agreement that TEP transfer its generation assets
to a subsidiary.  At the same time, the ACC ordered the parties, including TEP,
to develop a competitive bidding process, and reduced the amount of power to be
acquired in the competitive bidding process to only that portion not supplied by
TEP's existing resources.

     Recent Developments in the Arizona Regulatory Environment

     On February 27, 2003, the ACC issued the Track B Order, which defined the
competitive bidding process TEP must use to obtain capacity and energy
requirements beyond what is supplied by TEP's existing resources.  For the
period 2003 through 2006, TEP estimates these amounts to be 50,000 MWh of
energy in 2003, or approximately 0.5% of its retail load, gradually increasing
to 104,000 MWh by 2006.  The Track B Order further required TEP to bid out
"Economy Energy", or short-term energy purchases, that it estimates it will make
in the 2003 to 2006 period (210,000 to 181,000 MWh).

     TEP was also required to bid out its Reliability Must Run (RMR) generation
requirements, which are currently met by its existing local generation units.
TEP's RMR generation requirements are estimated at 471 MW of capacity and 37,000
MWh of energy in 2003 increasing to 687 MW of capacity and 38,000 MWh of energy
in 2005.  TEP does not anticipate that any near-term RMR requirements will be
met through this competitive bidding process because of the locational and
operational requirements of TEP's RMR generation as well as TEP's belief that
its existing RMR generation solutions are economically sound.

     TEP is not required to purchase any power through this process that it
deems to be uneconomical, unreasonable or unreliable.  The Track B bidding
process involved the ACC Staff and an independent monitor.  The Track B Order
also confirmed that it is not intended to change the current rate-base status of
TEP's existing assets.

     In March 2003, TEP issued requests for proposals on its RMR and Economy
Energy requirements.  TEP received no RMR bids in its 2003 request for
proposals.  TEP received various proposals with respect to its Economy Energy
requirements and, following review, entered into two agreements to meet TEP's
2003 bid requirements under the Track B Order for the period 2003 through 2006
as listed below:

   - PPL EnergyPlus, LLC will supply 37 MW June 2003 through December 2003 and
     75 MW January 2004 through December 2006 under a unit contingent contract.
   - Panda Gila River LP will supply 50 MW on-peak June through September of
     2003 through 2005 under a unit contingent contract.

     WESTERN ENERGY MARKETS

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

     Since 2000, the generating capacity in Arizona has increased by more than
27%.  A majority of this growth is the result of 16 new or upgraded gas-fired
generating units with a combined capacity of approximately 4,300 MW that has
increased the state's total capacity to over 20,000 MW.  An additional 5,200 MW
of gas-fired generation is scheduled to be operational in Arizona by early 2004.
In addition, the presence of fewer creditworthy counterparties, as well as
legal, political and regulatory uncertainties, has reduced market liquidity and
trading volume.

                                       35
<PAGE>

     Market Prices

     The average market price for around-the-clock energy based on the Dow Jones
Palo Verde Index increased in 2003 compared with 2002, as shown below.

     Average Market Price for Around-the-Clock Energy           MWh
    -----------------------------------------------------------------
       Quarter ended June 30, 2003                              $39
       Quarter ended June 30, 2002                               24

       Six months ended June 30, 2003                            42
       Six months ended June 30, 2002                            24
    -----------------------------------------------------------------

     Average market prices for around-the-clock energy began to rise in February
2003 due to increased demand and higher natural gas prices resulting from low
gas storage levels resulting from colder temperatures in other regions of the
U.S. and reduced gas production.  Reduced hydropower supply in the western U.S.
also contributed to the higher market prices.  Starting in July 2003, the
average forward around-the-clock market price for the balance of the year 2003
is estimated at approximately $48 per MWh, based on forward market broker quotes
as of June 30, 2003.  As a result, we expect our wholesale revenues and
purchased power expense may be higher in 2003 than in 2002, depending on the
actual volumes sold and purchased.  We cannot predict whether these higher
prices will continue, or whether changes in various factors that influence
demand and supply will cause prices to fall again during the remainder of 2003.

     We expect the market price and demand for capacity and energy to continue
to be influenced by the following factors during the next few years:

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

     Payment Defaults and Allowances for Doubtful Accounts

     California claims that it was overcharged by up to $9 billion for wholesale
power purchases in 2000 and 2001, and is seeking refunds from numerous power
generators, including TEP.  In early 2001, California's two largest utilities,
Southern California Edison Company (SCE) and Pacific Gas & Electric Company
(PG&E), defaulted on payment obligations owed to various energy sellers,
including the CPX and the CISO.  The CPX and the CISO defaulted on their payment
obligations to market participants, including TEP.  While SCE subsequently
satisfied its obligations to the CPX, TEP has not received a corresponding
payment from the CPX.  The total amount owed to TEP by the CPX and CISO is $16
million.  The FERC has held hearings and the FERC staff has proposed various
methodologies for calculating amounts of refunds/offsets applicable to wholesale
sales made into the California spot markets from October 2000 to June 2001.
Based upon a FERC order in March 2003, TEP estimated that it may receive $6
million of its $16 million receivable.  This represents amounts owed to TEP net
of TEP's estimated refund liability.  Therefore, in the first quarter of 2003,
TEP increased its allowance for doubtful accounts for its CPX and CISO
receivables by approximately $2 million, from $8 million to $10 million.

     In late 2001, Enron filed for bankruptcy protection.  At that time, TEP had
an outstanding receivable from Enron of $0.8 million.  A FERC order recommended
that Enron no longer be allowed to trade and within a few days thereafter, Enron
was delisted from its stock exchange.  As a result, in the first quarter of
2003, TEP increased its allowance for doubtful accounts for its sales to Enron
by $0.4 million, to fully reserve its $0.8 million receivable from Enron.

     TEP is not able to predict the length and outcome of the FERC hearings and
the outcome of any subsequent lawsuits and appeals that might be filed.  As a
participant in the refund proceedings, TEP will be subject to any final refund
orders.  TEP does not expect its refund liability, if any, to have a significant
impact on the financial statements.  See Critical Accounting Policies - Payment
Defaults and Allowances for Doubtful Accounts, below.

                                       36
<PAGE>

     Market Manipulation Investigations

     On June 25, 2003, the FERC alleged that 60 energy companies, including TEP,
may have engaged in manipulative practices that disrupted western energy markets
in 2000 and 2001.  The FERC issued an order to show cause to explain certain
transactions.  There were 39 hours in which it is alleged that TEP used a
specific trading strategy ("ricochet") in which TEP purportedly purchased energy
out of the California markets on a day-ahead basis with the intent of re-selling
it to the California markets at higher rates in real-time.  The basis of the
allegation against TEP are trades in May through August of 2000 where TEP
purchased energy from the CPX in the day ahead market, and also sold power to
the CPX or CISO during the same hours in the real-time markets the following
day.  TEP has reviewed the transactions and believes that every hour had a
legitimate operational or trading explanation and that TEP did not use the
"ricochet" strategy.  The total amount of profit supposedly made by TEP in these
39 hours is less than $9,000, which is below the $10,000 prosecutorial
discretion limit set by the FERC in the same order.

 MARKET RISKS

     We are exposed to various forms of market risk.  Changes in interest rates,
returns on marketable securities, and changes in commodity prices may affect our
future financial results.  The market risks resulting from changes in interest
rates and returns on marketable securities have not changed materially from the
market risks reported in the 2002 Form 10-K.

     For additional information concerning risk factors, including market risks,
see Safe Harbor for Forward-Looking Statements below.

     Risk Management Committee

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

     Commodity Price Risk

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

     The majority of TEP's forward contracts are considered to be "normal
purchases and sales" of electric energy and are not considered to be derivatives
under Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (FAS 133).  TEP records revenues
on its "normal sales" and expenses on its "normal purchases" in the period in
which the energy is delivered.  From time to time, however, TEP enters into
forward contracts that meet the definition of a derivative under FAS 133.  When
TEP has derivative forward contracts, it marks them to market on a daily basis
using actively quoted prices obtained from brokers for power traded over-the-
counter at Palo Verde and at other southwestern U.S. trading hubs.  TEP believes
that these broker quotations used to calculate the mark-to-market values
represent accurate measures of the fair values of TEP's positions, because of
the short-term nature of TEP's positions, as limited by risk management
policies, and the liquidity in the short-term market.  When TEP has derivative
forward contracts, it uses a sensitivity analysis to measure the impact of an
unfavorable change in market prices on the fair value of its derivative forward
contracts.  As of June 30, 2003, all of TEP's derivative forward contracts

                                       37
<PAGE>

were for settlement within twelve months.  To adjust the value of its derivative
forward contracts to fair value on its income statement, TEP recorded an
unrealized loss of $0.2 million and $0.1 million, respectively, on its income
statements for the quarter and six months ended June 30, 2003. This compares
with an unrealized loss of $0.1 million and an unrealized gain of $0.7 million
for the comparable periods in 2002.  This demonstrates the limited derivative
forward contract activity conducted by TEP and the limited impact on TEP's
operating results and financial condition.

     During the fourth quarter of 2001, MEG began managing and trading Emission
Allowances, coal and related instruments.  We manage the market risk of this
line of business by setting notional limits by product, as well as limits
to the potential change in fair market value under a 33% change in price or
volatility.  We closely monitor MEG's trading activities, which include swap
agreements, options and forward contracts, using risk management policies
and procedures overseen by the Risk Management Committee.  MEG marks its
trading positions to market on a daily basis using actively quoted prices
obtained from brokers and options pricing models for positions that extend
through 2005.  As of June 30, 2003 and December 31, 2002, the fair value of
MEG's trading assets combined with Emission Allowances it holds in escrow was
$25.8 million and $15.1 million, respectively.  During the first half of 2003,
MEG reflected a $1.5 million unrealized gain and a $1.9 million realized loss on
its income statement, compared with an unrealized gain of less than $0.1 million
and a realized loss of $0.2 million in the first half of 2002.

<TABLE>
<CAPTION>

                                                 Unrealized Gain (Loss) of MEG's Trading Activities
                                                               - Millions of Dollars -
                                        -------------------------------------------------------------------
Source of Fair Value                      Maturity      Maturity      Maturity over      Total Unrealized
At June 30, 2003                         0 - 6 mos.    6 - 12 mos.         1 yr.            Gain (Loss)
-----------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>               <C>                <C>
Prices actively quoted                    $ (0.3)       $  0.3            $  1.2             $  1.2
Prices provided by other
  external sources                             -             -                 -                  -
Prices based on models and
  other valuation methods                    0.5          (0.1)             (0.1)               0.3
-----------------------------------------------------------------------------------------------------------
Total                                     $  0.2        $  0.2            $  1.1             $  1.5
===========================================================================================================

</TABLE>

     TEP Coal and Gas Supply Contracts

     TEP also purchases coal and natural gas in the normal course of business to
fuel its generating plants.  The majority of its coal supplies are purchased
under long-term contracts, which result in very predictable prices.

     TEP typically uses its gas generation to meet the summer peak demands of
its firm electric wholesale and retail customers and transmission import
requirements.  Due to its limited and historically seasonal usage of natural gas
for firm electric wholesale and retail customers, TEP typically purchases its
gas needs in the spot and short-term markets.

     In the first half of 2003, natural gas prices were nearly double those in
the first half of 2002, due to low gas storage levels and reductions in gas
production.  The increase in the regional supply of gas-generated energy,
however, allowed TEP to decrease use of its less efficient gas generation units
in the first half of 2003 in favor of more economical purchases of energy in the
wholesale market.  In the first half of 2003, TEP's generation output fueled by
natural gas was approximately 194,000 MWh, or 4% of total generation output,
compared with approximately 314,000 MWh, or 6% of total generation output in the
first half of 2002.

     TEP obtains its gas supply as a retail customer of the local gas supplier,
Southwest Gas Corporation (SWG).  TEP periodically negotiates its contract with
its gas supplier to establish terms relating to pricing and scheduling of gas
delivery.  SWG is affected by recent FERC actions relating to its gas
allocations from the San Juan and Permian basins.  A FERC order was issued on
this topic on July 9, 2003.  TEP is in the process of renegotiating its gas
supply and transportation agreement with SWG.  In the interim, TEP and SWG have
agreed on an extension of the current contract terms through October 31, 2003.
TEP does not anticipate any material difference in operational or economic terms
in the new agreement, which is estimated to begin November 1, 2003.

     Credit Risk

     UniSource Energy is exposed to credit risk in its energy-related marketing
and trading activities related to potential nonperformance by counterparties.
We manage the risk of counterparty default by performing financial credit
reviews, setting limits monitoring exposures, requiring collateral when needed,
and using a standard agreement which allows for the netting of current period
exposures to and from a single counterparty.  Despite such mitigation efforts,
there is a potential for defaults by counterparties to occur from time to time.
In the fourth quarter of 2000 and the first quarter of 2001, TEP was affected by
payment defaults by SCE and PG&E for amounts owed to the CPX and CISO.  In the
fourth

                                       38
<PAGE>

quarter of 2001, Enron defaulted on amounts owed to TEP for energy sales.

     We calculate counterparty credit exposure by adding any outstanding
receivable (net of amounts payable if a netting agreement exists) to the mark-
to-market value of any forward contracts.  As of June 30, 2003, TEP's total
credit exposure related to its wholesale marketing activities (excluding
defaulted amounts owed by the CPX, the CISO and Enron), was approximately $3
million and MEG's total credit exposure related to its trading activities was
$6.6 million.  TEP and MEG's credit exposure is diversified across approximately
21 counterparties.  Approximately $1 million of exposure is to non-investment
grade companies.

     UniSource Energy is also exposed to credit risk related to the sale of
assets owned by Nations Energy Corporation (Nations Energy).  In September 2001,
Nations Energy sold its 26% equity interest in a power project located in
Curacao, Netherland Antilles to Mirant Curacao Investments, Ltd. (Mirant
Curacao), a subsidiary of Mirant Corporation (Mirant).  Nations Energy received
$5 million in cash and recorded an $11 million note receivable from the sale at
its net present value of $8 million using an 8% discount rate, with the discount
amortized to interest income over the five-year life of the note.  As of June
30, 2003, Nations Energy's receivable from Mirant Curacao is approximately $9.5
million.  The note is guaranteed by Mirant Americas, Inc., a subsidiary of
Mirant.  Payments on the note receivable are expected as follows:  $2 million in
July 2004, $4 million in July 2005, and $5 million in July 2006.

     On July 14, 2003, Mirant, Mirant Americas, Inc., and various other Mirant
companies filed for Chapter 11 bankruptcy protection.  Mirant Curacao was not
included in the Chapter 11 filings.  Based on a review of the projected cash
flows for the power project, it appears there are sufficient future cash flows
to pay the note receivable and any applicable interest.  However, we cannot
predict the ultimate outcome that Mirant's bankruptcy will have on the
collectibility of the note from Mirant Curacao.  Nations Energy will continue to
evaluate the collectibility of the receivable, but currently expects to collect
the note in its entirety and has not recorded any reserve for this note.


 GENERATING RESOURCES

     Water Supply

     Drought conditions in the Four Corners region, combined with water usage in
upper New Mexico, have resulted in decreasing water levels in the lake that
indirectly supplies water to the San Juan and Four Corners generating stations.
These drought conditions may affect the water supply of the plants in the
remainder of 2003, as well as in later years, if adequate moisture is not
received in the watershed that supplies the area.  TEP has a 50% ownership
interest in each of San Juan units 1 and 2 (322 MW capacity) and a 7% ownership
interest in each of Four Corners units 4 and 5 (110 MW capacity).

     PNM, the operating agent for San Juan, has negotiated supplemental water
contracts with the U.S. Bureau of Reclamation and the Jicarilla Apache Nation to
assist San Juan in meeting its water requirements in the event of a water
shortage.  TEP does not believe that its operations will be materially affected
by this drought.  However, TEP cannot predict the ultimate outcome of the
drought, or whether it will adversely affect the amount of power available from
the San Juan and Four Corners generating stations.


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

 UNISOURCE ENERGY CONSOLIDATED CASH FLOWS

            Six months ended             June 30,     June 30,
                                           2003         2002
    -----------------------------------------------------------
                                       - Millions of Dollars -
     Cash Provided by (Used in):
        Operating Activities              $  44       $  23
        Investing Activities                (62)       (159)
        Financing Activities                (28)        (26)
    -----------------------------------------------------------
     Net Decrease in Cash                 $ (46)      $(162)
    ===========================================================

     UniSource Energy's primary source of liquidity is its cash flow from
operations, which is provided primarily from retail and wholesale energy sales
at TEP, net of the related payments for fuel and purchased power.  However, due
to the

                                       39
<PAGE>

seasonal nature of TEP's business, cash provided by operating activities varies
significantly from quarter to quarter.  Cash from operations is lowest in the
first quarter and highest in the third and fourth quarters due to TEP's summer
peaking load.  We use our available cash to finance capital expenditures,
primarily at TEP, to make investments in our energy and technology affiliates,
to pay dividends to shareholders, and to reduce leverage at TEP by repaying high
coupon debt and investing in lease debt.  We may also use our available cash to
help fund acquisitions when appropriate, such as the Citizens acquisition.

     Net cash flows from operating activities were $21 million higher in the
first six months of 2003, compared with the same period of 2002.  The net
increase resulted primarily from the following factors:

   - $23 million decrease in capital lease interest paid because in 2002, TEP
     made certain Springerville lease payments early;
   - $8 million increase in interest received on TEP's investments in
     Springerville lease debt due to higher investment balances; offset by
   - $13 million decrease in cash receipts from sales to wholesale and retail
     customers, net of fuel and purchased power costs paid, reflecting the lower
     kWh sales described in Results of Operations, Results of TEP, above.

     Net cash used for investing activities was $97 million lower in the first
six months of 2003, compared with the same period in 2002.  During the first six
months of 2003, construction expenditures were $16 million higher.
Approximately $10 million of this increase was spent on completing a new one
mile 500-kV transmission line and related substations to enhance TEP's
distribution system link to the regional high voltage transmission system.  In
the first six months of 2003, TEP received $9 million in principal payments on
its investments in outstanding Springerville lease debt.  In contrast, in the
first six months of 2002, TEP made net investments in Springerville lease debt
of $104 million.

     Net cash used in financing activities totaled $28 million in the first six
months of 2003, compared with $26 million during the same period in 2002.
During the first six months of 2003, UniSource Energy paid approximately $10
million in dividends to its common shareholders and TEP paid $38 million on its
capital lease obligations.  Partially offsetting these cash outflows was $20
million in borrowings by TEP under its revolving credit facility in the second
quarter of 2003.  In 2002, UniSource Energy paid approximately $8 million in
dividends to its common shareholders and TEP paid $18 million on its capital
lease obligations.  TEP's capital lease payments were higher in 2003 due to a
$28 million scheduled principal payment on the Springerville Unit 1 lease debt
in the first quarter.

     Our consolidated cash and cash equivalents decreased to $45 million at June
30, 2003 from $66 million at June 30, 2002.  TEP's cash and cash equivalents
decreased to $26 million at June 30, 2003 compared with $32 million at June 30,
2002.  At August 4, 2003, our consolidated cash balance, including cash
equivalents, was approximately $81 million, including TEP's cash balance of
approximately $32 million.  We invest cash balances in high-grade money market
securities with an emphasis on preserving the principal amounts invested.

     In the event that we experience lower cash from operations in 2003, we may
adjust our discretionary uses of cash accordingly.  We believe, however, that we
will continue to have sufficient cash flow to cover our capital needs, as well
as required debt payments and dividends to shareholders.  Furthermore, we
believe that we will have sufficient excess cash flow to continue to make
average annual discretionary debt reductions or lease debt investments at TEP in
the range of $30 - $50 million.

 UNISOURCE ENERGY - PARENT COMPANY

     Our primary cash needs are to pay dividends to shareholders, to fund
investments in Millennium's unregulated businesses, and to make interest
payments on our promissory note to TEP.  In addition, as part of our ACC Holding
Company Order, we must invest at least 30% of any proceeds of equity issuances
in TEP until TEP's equity reaches 37.5% of total capital (excluding capital
leases).  In August 2003, UniSource Energy expects to use approximately $50
million of its available cash to help finance the purchase of the Citizens
Arizona electric and gas utility assets.

     Our primary sources of cash are dividends from TEP.  In 2002, TEP paid
dividends to UniSource Energy of $35 million.  In May 2003, the TEP Board of
Directors declared a dividend of $40 million, of which $15 million was paid to
UniSource Energy in June 2003 and the remaining $25 million was paid in July
2003.  On August 4, 2003, TEP's Board of Directors declared an additional
dividend of $11.5 million, which will be paid to UniSource Energy on August 8,
2003.

     If cash flows fall short of expectations, we may reevaluate the investment
requirements of Millennium's unregulated businesses and/or seek additional
financing for, or investments in, those businesses by unrelated parties.

                                       40
<PAGE>

 TEP - ELECTRIC UTILITY

     TEP's capital requirements consist primarily of capital expenditures and
optional and mandatory redemptions of long-term debt and capital lease
obligations.

     During 2003, TEP expects to generate sufficient internal cash flows to fund
its operating activities, construction expenditures, required debt maturities,
and to pay dividends to UniSource Energy.  However, due to the seasonal nature
of TEP's business, cash provided by operating activities varies significantly
from quarter to quarter.  At June 30, 2003, TEP had $40 million available under
its $60 million Revolving Credit Facility.  As of August 4, 2003, TEP had $15
million available under this facility.  TEP expects to repay the outstanding
borrowings during the third quarter of of 2003 from cash from operations.  If
cash flows fall short of expectations or if monthly cash requirements
temporarily exceed available cash balances, TEP may borrow additional amounts
from its Revolving Credit Facility.

     Operating Activities

     Net cash flows from operating activities were $24 million higher in the
first six months of 2003, compared with the same period of 2002.  The net
increase resulted from the same factors described in UniSource Energy
Consolidated Cash Flows, above.

     Investing Activities

     Net cash used for investing activities was $92 million lower in the first
six months of 2003, compared with the same period in 2002.  During the first six
months of 2003, construction expenditures were $20 million higher.  In the first
six months of 2003, TEP received $9 million in principal payments on its
investments in outstanding Springerville lease debt.  In contrast, in the first
six months of 2002, TEP made net investments in Springerville lease debt of $104
million.

     Construction expenditures for 2003 include approximately $10 million for
completing a new one mile 500-kV transmission line and related substations to
enhance TEP's distribution system link to the regional high voltage transmission
system.  This project was completed in May 2003.  This project provides TEP with
greater import capability into TEP's service area thereby reducing the need to
run more expensive local gas generation during the summer peaking periods.

     TEP's capital expenditures for the six months ended June 30, 2003 were $67
million.  TEP's forecast for capital expenditures for the year ending December
31, 2003 is approximately $121 million.  These expenditures include costs for
TEP to comply with current federal and state environmental regulations.  Actual
construction expenditures may differ from these estimates due to changes in
business conditions, construction schedules, environmental requirements and
changes to our business arising from retail competition.  TEP plans to fund
these expenditures through internally-generated cash flow.

     In January 2001, TEP and Citizens entered into a project development
agreement for the joint construction of a 62-mile transmission line from Tucson
to Nogales, Arizona.  In January 2002, the ACC approved the location and
construction of the proposed 345-kV line.  Pending federal studies and approvals
for the portion of the line that will pass through a national forest,
construction could begin as early as the third quarter of 2004, with an expected
in-service date at the end of 2005.  Construction costs are expected to be
approximately $75 million.  TEP has also applied to the U.S. Department of
Energy for a Presidential Permit that would allow building an extension of the
line across the international border with Mexico to interconnect with Mexico's
utility system, providing further reliability and market opportunities in the
region.  Through June 30, 2003, approximately $8 million in engineering and
environmental expenses have been capitalized related to this project.

     Financing Activities

     Net cash used in financing activities totaled $33 million in the first six
months of 2003, compared with $15 million during the same period in 2002.  TEP
spent $38 million to retire scheduled capital lease obligations, compared with
$18 million in 2002.  Capital lease payments were higher in 2003 due to a $28
million scheduled principal payment on the Springerville Unit 1 lease debt in
the first quarter of 2003.  TEP paid $15 million in dividends to UniSource
Energy in the first six months of 2003.  These cash outflows were partially
offset by $20 million in borrowings under TEP's Revolving Credit Facility.

                                       41
<PAGE>

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

     In November 2002, TEP entered into a new $401 million Credit Agreement to
replace the credit facilities provided under its then existing $441 million
credit agreement that would have expired December 30, 2002.  The new agreement
consists of a $60 million Revolving Credit Facility and two letter of credit
(LOC) facilities (Tranche A and Tranche B) totaling $341 million.  The Revolving
Credit Facility is used to provide liquidity for general corporate purposes.
The LOC Facilities support $329 million aggregate principal amount of tax-exempt
variable rate debt obligations.  The Revolving Credit Facility is a 364-day
facility that expires on November 13, 2003.  The Tranche A letters of credit,
totaling $135 million, expire in January 2006, and the Tranche B letters of
credit, totaling $206 million, expire in November 2006.

     The new facilities are secured by $401 million in aggregate principal
amount of Second Mortgage Bonds issued under TEP's General Second Mortgage
Indenture.  The Credit Agreement contains a number of restrictive covenants,
including restrictions on additional indebtedness, liens, sale of assets,
mergers and sale-leasebacks.  The Credit Agreement also contains several
financial covenants including: (a) a minimum Consolidated Tangible Net Worth,
(b) a minimum Cash Coverage Ratio, and (c) a maximum Leverage Ratio.  Under the
terms of the Credit Agreement, TEP may pay dividends so long as it maintains
compliance with the Credit Agreement; however, dividends and certain investments
in affiliates may not exceed 65% of TEP's net income so long as the Tranche B
LOCs are outstanding. The Credit Agreement also provides that under certain
circumstances, certain regulatory actions could result in a required reduction
of the commitments.  As of June 30, 2003, TEP was in compliance with these
financial covenants.

     From time to time, TEP borrows under its Revolving Credit Facility.  At
June 30, 2003, there were $20 million in outstanding borrowings under this
facility, and at August 4, 2003 there were $45 million in outstanding
borrowings.  TEP expects to repay these borrowings during the third quarter of
2003 from its cash from operations.  If TEP encounters temporary cash needs
during the course of the year, it may borrow additional amounts from its
Revolving Credit Facility.

     In May 2003, TEP filed an application with the ACC requesting authority to
refinance its Credit Agreement and to refinance up to $200 million of its tax-
exempt variable rate industrial development revenue bonds with fixed rate
industrial development revenue bonds.  TEP expects the ACC to act on this
request in the third quarter of 2003.

     Springerville Common Facilities Leases
     --------------------------------------

     In 1985, TEP sold and leased back its undivided one-half ownership interest
in the common facilities at the Springerville Generating Station.  Under the
terms of the Springerville Common Facilities Leases, TEP must periodically
refinance or refund the secured notes underlying the leases prior to the named
date in order to avoid a special event of loss.  TEP was required to refinance
the lease debt prior to the special event of loss date of June 30, 2003 or the
leases would be terminated and TEP would be required to repurchase the
facilities for $125 million.

     TEP refinanced the lease debt on June 26, 2003 and the special event of
loss date was reset for June 30, 2006.  Interest on the new debt is payable at
LIBOR plus 4.25%.  Prior to the refinancing, the interest rate was LIBOR plus
2.50%.


 MILLENNIUM - UNREGULATED BUSINESSES

     Millennium's significant investments, commitments and investment proceeds
through June 30, 2003 are discussed below.  Millennium provided funding to these
investments of approximately $11.4 million during the first half of 2003 and
$19.5 million during the first half of 2002.

     Energy and Technology Investments

     We refer to Global Solar, IPS, MicroSat and ITN as our Energy and
Technology Investments.  As described below, as of July 3, 2003 Millennium owns
no interest in ITN.

   - Global Solar - Millennium funded $5.8 million to Global Solar in the first
     half of 2003, and $1.5 million in July 2003.  Millennium's unfunded
     commitment to Global Solar is $2.5 million of a $5 million line of credit
     committed in May 2003.  On July 3, 2003, Millennium exchanged its 9%
     interest in ITN and other consideration for additional shares of Global
     Solar which increased Millennium's ownership to 98%.  Global Solar has a
     $0.5 million research and development funding commitment to ITN in 2004.

                                       42
<PAGE>

   - IPS - Millennium funded $1.5 million to IPS in the first half of 2003.
     Dow Corning Enterprises, Inc. funded a corresponding $1.5 million.
     Millennium has committed to fund an additional $0.5 million to IPS. As of
     June 30, 2003, Millennium owns 72% of IPS and in 2003 Millennium has
     recorded its ratable share of IPS' losses.  IPS has a $0.5 million annual
     research and development funding commitment to ITN through 2004.

   - MicroSat - Millennium reduced its ownership of MicroSat to 35% upon
     finalization of a 2002 Restructure Agreement.  As sole funder, Millennium
     continues to recognize 100% of MicroSat's losses.

   - ITN - On July 3, 2003, Millennium exchanged its 9% interest in ITN and
     other consideration for additional shares of Global Solar which decreased
     Millenniums ownership in ITN to zero.

     Millennium expects to fund an additional $5 million to $10 million to
these entities during the remainder of 2003.  A significant portion of this
funding will be used for research, development and administrative costs and
will be recognized as expense as amounts are spent.

     Other Millennium Investments and Commitments

     Millennium has a $15 million capital commitment to Haddington Energy
Partners II LP (Haddington), a limited partnership which funds energy-related
investments.  During the first half of 2003, Millennium invested approximately
$2 million in Haddington bringing the total funded to $8.1 million of the $15
million commitment.  The remaining $6.9 million is expected to be funded within
the next three years.  A member of the UniSource Energy Board of Directors has
an investment in the limited partnership and is also a managing director of the
general partner of the limited partnership.

     Millennium has a $6 million commitment to a venture capital fund that
focuses on information technology, microelectronics and biotechnology, primarily
within the southwestern U.S.  A member of the UniSource Energy Board of
Directors is a general partner of the company that manages the fund.  At June
30, 2003, Millennium had funded approximately $1 million of this commitment.
Millennium does not expect to provide any additional funds to this investment in
2003.

     During the first half of 2003, Millennium contributed $0.8 million to
TruePricing and has agreed to provide up to an additional $0.4 million in future
funding.  Following this investment Millennium began accounting for TruePricing
under the consolidation method.  Millennium and TEP collectively now own
approximately 55% of the outstanding shares of TruePricing.  Prior to 2003,
Millennium accounted for TruePricing under the equity method.  Millennium, as
sole funder, recognizes 100% of TruePricing's losses.


 UED - UNREGULATED ENERGY BUSINESS

     UED is responsible as project developer for facilitating the Springerville
Generating Station expansion project construction.  If constructed, each of
Units 3 and 4 would consist of a 400 MW coal-fired, base-load generating unit at
the same site as Springerville Units 1 and 2.  This would allow TEP to spread
the fixed costs of the existing common facilities over the additional generating
unit (or units).  Currently, Tri-State is expected to obtain construction
financing for and lease Unit 3.  Upon the completion of construction, TEP
expects to receive annual pre-tax benefits of approximately $15 million in the
form of cost savings, rental payments, transmission revenues, and other fees.
TEP will also benefit from upgraded emissions controls for Units 1 and 2 that
will be paid for by the Unit 3 project.

     As of June 30, 2003, UED has funded approximately $25 million for
development of the project.  In January 2003, UED and Tri-State signed a
Development Cost Agreement to each share 50% of the remaining development costs
of Unit 3, effective from November 6, 2002 until financial close.  UED expects
to provide an additional $3 million in funding for development prior to Tri-
State obtaining the construction financing.  UED expects Tri-State to obtain
construction financing in the third quarter of 2003.  We can make no assurances,
however, about the ultimate timing, or whether this project will proceed.

 FINANCING RISKS

     UniSource Energy and TEP are exposed to risks related to the ability to
obtain financing at reasonable costs for various projects, agreements to which
they are a party, and their debt obligations.  During 2003, UniSource Energy,
TEP and UED will be subject to financing risks and capital market conditions
related to the following:

                                       43
<PAGE>

   - UniSource Energy has entered into two Asset Purchase Agreements to
     purchase the Citizens Arizona electric utility and gas utility assets for
     $220 million plus operating capital adjustments.  We expect the acquisition
     to be funded by a combination of senior unsecured notes issued in a private
     placement by UNS Electric and UNS Gas, bridge financing debt to be issued
     by UniSource Energy, and the remainder from cash at UniSource Energy.  If
     UniSource Energy were unable to obtain financing, and therefore were unable
     to consummate the purchase of these assets, this would constitute a
     material breach under the contracts and termination damages would be
     payable.

   - UED is currently evaluating opportunities to expand the Springerville
     Generating Station by assigning the rights to construct Springerville Units
     3 and 4 to unrelated third parties.  As of June 30, 2003, UED had
     approximately $25 million of capitalized project development costs on its
     balance sheet.  If a third party does not obtain financing for this project
     and as a result, this project does not proceed, the capitalized project
     development costs would immediately be expensed.

   - TEP intends to refinance or extend its 364 day Revolving Credit Facility,
     which expires on November 13, 2003.

 CONTRACTUAL OBLIGATIONS

     There have been no significant changes in our contractual obligations or
other commercial commitments from those reported in our 2002 Annual Report on
Form 10-K, other than those listed below:

   - MEG conducts its emissions and coal trading activities using certain
     contracts which contain provisions whereby MEG may be required to post
     margin collateral due to a change in contract values.  As of June 30, 2003,
     MEG had posted $0.5 million in cash collateral to its trading
     counterparties.
   - MEG has a $5 million bank line of credit for the purpose of issuing LOCs to
     counterparties to support its Emission Allowance and coal marketing and
     trading activities.  As of June 30, 2003, MEG had approximately $4 million
     in outstanding LOCs.  This facility expires in March 2005.
   - In May 2003, TEP entered into two purchased power agreements for periods
     through 2006 as a result of the competitive bidding process required by the
     ACC's Track B order:

       -  PPL EnergyPlus, LLC will supply 37 MW June 2003 through December 2003
          and 75 MW January 2004 through December 2006 under a unit contingent
          contract.
       -  Panda Gila River LP will supply 50 MW on-peak June through September
          of 2003 through 2005 under a unit contingent contract.


 GUARANTEES AND INDEMNITIES

     In the normal course of business, UniSource Energy and certain
subsidiaries, including TEP, enter into various agreements providing financial
or performance assurance to third parties on behalf of certain subsidiaries.
These agreements are entered into primarily to support or enhance the
creditworthiness otherwise attributed to a subsidiary on a stand-alone basis,
thereby facilitating the extension of sufficient credit to accomplish the
subsidiaries' intended commercial purposes.  The most significant of these
guarantees is Millennium's guarantee of approximately $5 million in commodity-
related payments for MEG at June 30, 2003.  To the extent liabilities exist
under the contracts subject to these guarantees, such liabilities are included
in the consolidated balance sheets.

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

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

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<PAGE>

 DIVIDENDS ON COMMON STOCK

     UniSource Energy

     In February 2003, UniSource Energy declared a cash dividend of $0.15 per
share on its Common Stock.  This dividend, totaling approximately $5 million,
was paid March 7, 2003 to shareholders of record at the close of business on
February 21, 2003.  On May 9, 2003, UniSource Energy declared a cash dividend of
$0.15 per share on its Common Stock.  This dividend, totaling approximately $5
million, was paid June 10, 2003 to shareholders of record at the close of
business May 23, 2003.

     UniSource Energy's Board of Directors will review our dividend level on a
continuing basis, taking into consideration a number of factors including our
results of operations and financial condition, general economic and competitive
conditions and the cash flow from our subsidiary companies, TEP, Millennium and
UED.

     TEP

     In May 2003, the TEP Board of Directors declared a dividend of $40 million
to be paid to its shareholders, of which $15 million was paid in June 2003 and
$25 million was paid in July 2003.  On August 4, 2003, TEP's Board of Directors
declared an additional dividend of $11.5 million, which will be paid on August
8, 2003.  UniSource Energy holds substantially all of TEP's common stock.

     TEP can pay dividends if it maintains compliance with the TEP Credit
Agreement and certain financial covenants, including a covenant that requires
TEP to maintain a minimum level of net worth.  As of June 30, 2003, the required
minimum net worth was $302 million.  TEP's actual net worth at June 30, 2003 was
$369 million, and was $339 million as defined in the Credit Agreement.  As of
June 30, 2003, TEP was in compliance with the terms of the Credit Agreement.
Under the terms of the Credit Agreement, dividends and certain investments in
affiliates may not exceed 65% of TEP's net income, so long as the Tranche B LOCs
are outstanding.  See Financing Activities - TEP Credit Agreement, above.

     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 common equity
equals 37.5% of total capitalization (excluding capital lease obligations).  The
Citizens Settlement Agreement, as approved by the ACC, modifies this dividend
limitation so that it will remain in place until TEP's common equity equals 40%
of total capitalization (excluding capital lease obligations).  As of June 30,
2003, TEP's equity ratio on that basis was 24.3%.

     In addition to these limitations, 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 are unclear, we believe
that there is a reasonable basis to pay dividends from current year earnings.
Therefore, TEP declared its 2003 dividends from its year-to-date July 2003
earnings since TEP had an accumulated deficit, rather than positive retained
earnings.

     Millennium and UED

     Millennium did not pay any dividends to UniSource Energy in 2002 or in the
first half of 2003.  We cannot predict the amount or timing of future dividends
from Millennium.  UED has not paid any dividends to UniSource Energy.


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

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

   - Complete the acquisition of the Arizona electric utility and gas utility
     assets from Citizens described above and thereafter integrate the acquired
     businesses with UniSource Energy's businesses to achieve the strategic and
     financial objectives of the acquisition.
   - Facilitate the construction of Springerville Unit 3, which will allow TEP
     to spread the fixed costs of its Springerville Units 1 and 2 Common
     Facilities over an additional unit.  TEP will also benefit from upgraded
     emission controls for Units 1 and 2 that will be paid for by the Unit 3
     project.
   - Enhance the value of TEP's transmission system while continuing to provide
     reliable access to generation for TEP's retail customers and market access
     for all generating assets.  This will include focusing on completing the
     Tucson - Nogales transmission line, which could eventually be connected to
     Mexico's utility system, and utilize the

                                       45
<PAGE>

     newly completed one mile 500-kV line to enhance TEP's distribution system's
     link to the regional high voltage transmission system.
   - Exercise financial discipline in the management of our existing Millennium
     investments and the evaluation of new investments and business
     opportunities.
   - Improve production and sales of Global Solar's thin-film photovoltaic cells
     and seek strategic partners.
   - Reduce TEP's debt as appropriate, using some of our excess cash flows.
     Although no specific retirements are planned at this time, TEP expects to
     use $30 million to $50 million annually for debt reductions or lease debt
     investments.
   - Efficiently manage TEP's generating resources and look for ways to reduce
     or control our operating expenses in order to maintain and enhance
     profitability.

     To accomplish our goals, we estimate that during the second half of 2003,
TEP will spend approximately $54 million on capital expenditures, Millennium
will provide between $5 million and $10 million of funding to its Energy and
Technology Investments, and we will provide between $2 million and $3 million in
funding to UED.  Our funding to UED will depend upon the timing of the financial
close of the Springerville expansion project.  In addition, we plan to pay $220
million in cash plus operating capital adjustments for the acquisition of the
Arizona electric utility and gas utility assets from Citizens.

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


CRITICAL ACCOUNTING POLICIES
----------------------------

     In preparing financial statements under Generally Accepted Accounting
Principles (GAAP), management exercises judgment in the selection and
application of accounting principles, including making estimates and
assumptions.  UniSource Energy and TEP consider Critical Accounting Policies to
be those that could result in materially different financial statement results
if our assumptions regarding application of accounting principles were
different.  UniSource Energy and TEP describe their Critical Accounting Policies
below.  Other significant accounting policies and recently issued accounting
standards are discussed in the 2002 Annual Report on Form 10-K, Note 1 of Notes
to Consolidated Financial Statements - Nature of Operations and Summary of
Significant Accounting Policies.

     ACCOUNTING FOR RATE REGULATION

     TEP generally uses the same accounting policies and practices used by
unregulated companies for financial reporting under GAAP.  However, sometimes
these principles, such as Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (FAS 71), issued by
the Financial Accounting Standards Board (FASB), 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 allow TEP to currently
charge its customers to recover certain expenses, but instead requires that
these expenses be charged to customers in the future.  In this situation, FAS 71
requires that TEP 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 as expense to the income statement as those charges are recovered
from customers.  Similarly, certain revenue items may be deferred as regulatory
liabilities, which are also eventually amortized to the income statement as
rates to customers are reduced.

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

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

     In November 1999, upon approval by the ACC of TEP's Settlement Agreement
relating to recovery of TEP's transition costs and standard retail rates, TEP
discontinued application of FAS 71 to its generation operations.

     TEP's regulatory assets total $371 million at June 30, 2003, $22 million of
which are not presently included in the rate base and consequently are not
earning a return on investment.

                                       46
<PAGE>

     TEP continues to apply FAS 71 to the distribution and transmission portions
of its business, its regulated operations, and continues to assess whether it
can continue to apply FAS 71 to these operations.  If TEP stopped applying FAS
71 to its remaining regulated operations, it would write off the related
balances of its regulatory assets as an expense on its income statement.  Based
on the balances of TEP's regulatory assets at June 30, 2003, if TEP had stopped
applying FAS 71 to its remaining regulated operations, it would have recorded an
extraordinary loss, after-tax, of approximately $224 million.  While regulatory
orders and market conditions may affect TEP's cash flows, its cash flows would
not be affected if it stopped applying FAS 71 unless a regulatory order limited
its ability to recover the cost of that regulatory asset.

     ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS

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

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

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

     TEP has various transmission and distribution lines that operate under land
leases and rights of way that contain end dates and restorative clauses.  TEP
operates its transmission and distribution lines as if they will be operated in
perpetuity and would continue to be used or sold without land remediation.  As a
result, TEP is not recognizing the costs of final removal of the transmission
and distribution lines in the financial statements.

     Upon adoption of FAS 143 on January 1, 2003, TEP recorded an asset
retirement obligation of $38 million at its net present value of $1.1 million,
increased depreciable assets by $0.1 million for asset retirement costs,
reversed $112.8 million of costs previously accrued for final removal from
accumulated depreciation, reversed previously recorded deferred tax assets by
$44.2 million and recognized the cumulative effect of accounting change as a
gain of $111.7 million ($67.5 million net of tax).  TEP expects that adopting
FAS 143 will result in a reduction to current depreciation expense charged
throughout the year as well because asset retirement costs are no longer
recorded as a component of depreciation expense.  For the first six months of
2003, this amount is approximately $3 million.

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

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

                                       47
<PAGE>

     PAYMENT DEFAULTS AND ALLOWANCES FOR DOUBTFUL ACCOUNTS

     We record an allowance for doubtful accounts when we determine that an
account receivable will not be collected.  As a result of payment defaults made
by market participants in California, TEP's collection shortfall from the CPX
and CISO was approximately $9 million for sales made in 2000 and $7 million for
sales made in 2001.  Prior to 2003 and since December 31, 2001, TEP had an
allowance for doubtful accounts recorded for $8 million, or 50% of these
uncollected amounts based on the amount TEP believed would be collected.  In the
first quarter of 2003, as a result of a FERC order, TEP estimated that $6
million of its $16 million receivable will be collected.  Therefore, in the
first quarter of 2003, TEP increased its reserve by $2.2 million by recording a
reduction of wholesale revenues.  The amount that TEP ultimately collects would
have an impact on earnings if the amount is more or less than the $10 million
TEP has reserved.  If TEP collects all of the $16 million, pre-tax income will
increase by $10 million.  If TEP does not collect any of the $16 million, pre-
tax income will decrease by $6 million.  In addition, TEP has cash collateral of
approximately $1 million on deposit in an escrow account with the CPX, which is
currently unavailable to TEP due to the CPX's bankruptcy stay.

     Additionally, a FERC order recommended that Enron no longer be allowed to
trade and within a few days thereafter, Enron was delisted from its stock
exchange.  As a result, in the first quarter of 2003, TEP increased its reserve
for sales to Enron by $0.4 million, to fully recover its $0.8 million receivable
from Enron.  At June 30, 2003 and December 31, 2002, TEP's reserve for electric
wholesale accounts receivable on its balance sheet was approximately $11 million
and $8 million, respectively.

     CAPITALIZATION OF UED PROJECT DEVELOPMENT COSTS

     UED capitalizes project development costs when it is probable that the
project will be completed and it expects to recover the costs of the project.
At June 30, 2003, capitalized project development costs on UniSource Energy's
balance sheet were approximately $25 million.  If the Springerville expansion
project does not proceed, the capitalized project development costs will be
immediately expensed.

     PENSION AND OTHER POSTRETIREMENT BENEFIT PLAN ASSUMPTIONS

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

     TEP discounted its future pension and other postretirement plan obligations
using a rate of 6.75% at December 31, 2002, compared to 7.25% at December 31,
2001.  TEP determines the discount annually based on the rates currently
available on high-quality, long-term bonds.  TEP looks to bonds that receive one
of the two highest ratings given by a recognized rating agency and are expected
to be available during the period to maturity of the pension benefits.  The
pension liability and future pension expense both increase as the discount rate
is reduced.  A decrease in the discount rate results in an increase in the
Projected Benefit Obligation (PBO) and the service cost component of pension
expense.  Additionally, the recognized actuarial loss is significantly impacted
by a reduction in the discount rate.  Since the PBO increases with the decrease
in discount rate, the obligation is that much larger than would normally occur
due to normal growth of the plan.  This leads to an actuarial loss (or a greater
actuarial loss than would occur in the absence of the discount rate change),
which is amortized over future periods leading to a greater expense.  The
resulting change in the interest cost component of pension expense is dependent
on the effect that the change in the discount rate has on the PBO and will vary
based on employee demographics.  The effect of the lower rate used to calculate
the interest cost is offset to some degree by a larger obligation.  The relative
magnitude of these two changes determines whether interest cost will increase or
decrease. TEP's interest cost increased slightly as a result of the decrease in
the discount rate.  For TEP's pension plans, a 25 basis point decrease in the
discount rate would increase the accumulated benefit obligation by approximately
$3.7 million and the related plan expense for 2003 by approximately $0.6
million.  A similar increase in the discount rate would decrease the accumulated
benefit obligation by approximately $3.5 million and the related plan expense
for 2003 by approximately $0.6 million.  For TEP's plan for other postretirement
benefits, a 25 basis point decrease in the discount rate would increase the
accumulated benefit obligation by approximately $1.5 million and the related
plan expense for 2003 by approximately $0.1 million.  A similar increase in the
discount rate would decrease the accumulated benefit obligation by approximately
$1.5 million and the related plan expense for 2003 by approximately $0.1
million.

                                       48
<PAGE>

     TEP calculates the market-related value of plan assets using the fair value
of plan assets on the measurement date.  At December 31, 2002, TEP assumed that
its plans' assets would generate a long-term rate of return of 8.75%.  This rate
is lower than the assumed rate of 9.0% used at December 31, 2001.  In
establishing its assumption as to the expected return on plan assets, TEP
reviews the plans' asset allocation and develops return assumptions for each
asset class based on advice from the plans' actuaries that includes both
historical performance analysis and forward looking views of the financial
markets.  Pension expense increases as the expected rate of return on plan
assets decreases.  A 25 basis point decrease in the expected return on plan
assets would increase pension expense for 2003 by approximately $0.3 million.
A similar increase in the expected return on plan assets would decrease pension
expense for 2003 by approximately $0.3 million.

     In recognition of significant increases in health care costs, TEP increased
the initial health care cost trend rate used in valuing its postretirement
benefit obligation to 12.0% at December 31, 2002.  The rate assumed at December
31, 2001 was 8.5%.  Assumed health care cost trend rates have a significant
effect on the amounts reported for health care plans.  A one percentage-point
increase in assumed health care cost trend rates would increase the
postretirement benefit obligation by approximately $5 million and the related
plan expense by approximately $1 million.  A similar decrease in assumed health
care cost trend rates would decrease the postretirement benefit obligation by
approximately $4 million and the related plan expense by approximately $1
million.

     As reported in the 2002 Annual Report on Form 10-K, TEP recorded a minimum
pension liability of $6.7 million at December 31, 2002 primarily because of
current stock market conditions and a reduction in the assumed discount rate.

     Based on the above assumptions, TEP will record pension expense of $8.5
million and other postretirement benefit expense of $6.6 million ratably
throughout 2003.  TEP will make required pension plan contributions of $2.8
million in 2003.  TEP's other postretirement benefit plan is not funded.  TEP
expects to make benefit payments to retirees under the postretirement benefit
plan of approximately $2 million in 2003.

     ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND TRADING ACTIVITIES

     A derivative financial instrument or other contract derives its value from
another investment or designated benchmark.  TEP enters into forward contracts
to purchase or sell a specified amount of capacity or energy at a specified
price over a given period of time, typically for one month, three months, or one
year, within established limits to take advantage of favorable market
opportunities.  The majority of TEP's forward contracts are considered normal
purchases and sales under FAS 133 and, therefore, are not required to be marked
to market.  However, some of these forward contracts are considered to be
derivatives, which TEP marks to market under FAS 133 by recording unrealized
gains and losses and adjusting the related assets and liabilities on a monthly
basis to reflect the market prices at the end of the month.  TEP manages the
risk of counterparty default by performing financial credit reviews, setting
limits monitoring exposures, requiring collateral when needed, and using a
standardized agreement which allows for the netting of current period exposures
to and from a single counterparty.

     Because of the complexity of derivatives, the FASB established a
Derivatives Implementation Group (DIG).  To date, the DIG has issued more than
100 interpretations to provide guidance in applying FAS 133.  As the DIG or the
FASB continues to issue interpretations, TEP may change the conclusions that it
has reached and, as a result, the accounting treatment and financial statement
impact could change in the future.

     MEG enters into swap agreements, options and forward contracts relating to
Emission Allowances and coal.  MEG also marks its trading contracts to market
under FAS 133 by recording unrealized gains and losses on its trading activities
and adjusting the related assets and liabilities on a monthly basis to reflect
the market prices at the end of the month.

     The market prices used to determine fair value for TEP and MEG's derivative
instruments are estimated based on various factors including broker quotes,
exchange prices, over the counter prices and time value.  TEP reports its
unrealized gain/loss on derivative forward sales net of its unrealized gain/loss
on derivative forward purchases as a component of Operating Revenues.  MEG
reports its unrealized gain/loss on trading activities net of its realized gain/
loss on trading activities as a component of Operating Revenues.  The net pre-
tax loss on TEP forward contracts and MEG trading activities for the three and
six months ended June 30, 2003, was $0.2 million and $0.5 million, respectively.
At June 30, 2003, the fair value of TEP's derivative liabilities was $0.1
million and is included in Other Current Liabilities on TEP's balance sheet.  At
June 30, 2003, the fair value of MEG's trading assets, including MEG's Emission
Allowance inventory, was $25.8 million, which is reported in Current Assets, and
the fair value of MEG's trading liabilities was $20.3 million, which is reported
in Current Liabilities.

     See Market Risks - Commodity Price Risk, above.

                                       49
<PAGE>

     UNBILLED REVENUE

     TEP's electric retail revenues include an estimate of MWhs delivered but
unbilled at the end of each period.  The unbilled revenue is estimated by
comparing the actual MWhs consumed to the MWhs billed to our retail customers.
The excess of MWhs consumed over MWhs billed is then allocated to the retail
customer classes based on estimated usage by each customer class.  TEP then
records revenue for each customer class based on the various bill rates for each
customer class.  Due to the seasonal fluctuations of TEP's actual load, the
unbilled revenue amount is greater in the summer months than it is in the winter
months.

     DEFERRED TAX VALUATION

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

     The valuation allowance of $15 million at June 30, 2003, which reduces the
Deferred Tax Asset balance, relates to net operating loss and investment tax
credit carryforward amounts.  In the future, if TEP determines that TEP would be
able to use all or a portion of these amounts on tax returns, then TEP would
reduce the reserve and recognize a tax benefit up to $15 million.  Factors that
could cause TEP to recognize the tax benefit include new or additional guidance
through tax regulations, tax rulings, case law and/or the use of such benefits
on future tax returns.


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

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

   - FIN 46, Consolidation of Variable Interest Entities, issued January 2003,
     expands upon existing guidance that addresses when a company should include
     in its financial statements the assets and liabilities of another entity.
     The primary objectives of FIN 46 are to provide guidance on the
     identification of entities for which control is achieved through means
     other than through voting rights (variable interest entities) and to
     determine when and which business enterprise should consolidate the
     variable interest entity (primary beneficiary).  FIN 46 requires that both
     the primary beneficiary and all other enterprises with a significant
     variable interest make additional disclosures.  The transitional disclosure
     requirements of FIN 46 are effective immediately.  The effective date of
     the consolidation requirements of FIN 46 depends on the date the variable
     interest entity was created.  FIN 46 is effective for all variable interest
     entities created after January 31, 2003.  For variable interest entities
     created before February 1, 2003, the provisions of FIN 46 are to be applied
     to a variable interest entity for interim reporting periods beginning after
     June 30, 2003.  We do not currently expect the impact of FIN 46 to be
     material to the financial statements.

   - FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging
     Activities, was issued by the FASB in April 2003.  FAS 149 amends and
     clarifies accounting for derivative instruments, including certain
     derivative instruments embedded in other contracts, and for hedging
     activities under FAS 133.  FAS 149 is effective for contracts entered into
     or modified after June 30, 2003, except as stated below, and for hedging
     relationships designated after June 30, 2003.  The guidance should be
     applied prospectively.  The provisions of FAS 149 that relate to FAS 133
     Implementation Issues that have been effective for fiscal quarters that
     began prior to June 15, 2003, should continue to be applied in accordance
     with their respective effective dates.  Due to TEP and MEG's limited amount
     of derivative activity, we do not expect the adoption of FAS 149 to have a
     significant effect on UniSource Energy or TEP's financial statements.

   - FAS 150, Accounting for Certain Financial Instruments with
     Characteristics of both Liabilities and Equity, was issued by the FASB in
     May 2003.  FAS 150 improves the accounting for certain financial
     instruments that, under previous guidance, issuers could account for as
     equity.  FAS 150's guidance requires that those instruments be classified
     as liabilities.  FAS 150 is effective immediately for financial instruments
     entered into or modified after May 31, 2003 and to all other financial
     instruments that exist beginning July 1, 2003.  Although we currently have
     no financial instruments recorded in equity that are required to be
     reported as liabilities, should we enter into any such financial
     instruments, we will comply with FAS 150 after the effective date.

                                       50
<PAGE>

     Additionally, the Emerging Issues Task Force (EITF) published Issue No.
01-08, Determining Whether An Arrangement Contains a Lease (EITF 01-08) in May
2003.  EITF 01-08 discusses how to determine whether an arrangement contains a
lease and states that the evaluation of whether an arrangement conveys the right
to use property, plant, or equipment should be based on the substance of an
arrangement and that the property that is the subject of a lease must be
specified (explicitly or implicitly) either at inception of the arrangement or
at the beginning of the lease term.  EITF 01-08 is effective for new
arrangements entered into after June 1, 2003 or arrangements modified after June
1, 2003.  We are currently in the process of evaluating the impact of EITF 01-08
on UniSource Energy and TEP's financial statements.  Since June 1, 2003, we have
not entered into any new arrangements, or modified any arrangements that would
fall under this EITF.


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

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

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

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

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

     3.   Changes in economic conditions, demographic patterns and weather
          conditions in our retail service areas.

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

     5.   The creditworthiness of the entities with which we transact business
          or have transacted business.

     6.   Changes affecting our cost of providing electrical and gas service
          including changes in fuel costs, generating unit operating
          performance, scheduled and unscheduled plant outages, interest rates,
          tax laws, environmental laws, and the general rate of inflation.

     7.   Changes in governmental policies and regulatory actions with respect
          to financing and rate structures.

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

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

    10.   Market conditions and technological changes affecting UniSource
          Energy's unregulated businesses.

                                       51
<PAGE>

    11.   Regulatory and other conditions to the closing of the acquisition of
          Citizens' Arizona electric and gas utility assets and the ability to
          obtain the financing necessary to close the acquisition.

    12.   Unanticipated changes in future liabilities relating to employee
          benefit plans due to changes in market values of its retirement plan
          assets and health care costs.

    13.   The outcome of any ongoing litigation.

    14.   Ability to obtain financing through debt and/or equity issuance, which
          can be affected by various factors, including interest rate
          fluctuations and capital market conditions.

    15.   Whether the proposed Springerville Generating Station expansion
          proceeds; the role of third parties in such expansion; and the terms
          of the ownership, operating and power purchase arrangements ultimately
          utilized.


ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------

     The information contained in this Item updates, and should be read in
conjunction with, information included in Part II, Item 7A in UniSource Energy
and TEP's Annual Report on Form 10-K for the year ended December 31, 2002, in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Items 1 and 2 of this Form 10-Q.

     See Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations, Factors Affecting Results of Operations, Market
Risks.

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

  (a)  Evaluation of Disclosure Controls and Procedures

       As of June 30, 2003, the principal executive officer and principal
       financial officer of UniSource Energy and TEP have evaluated the
       effectiveness of the design and operation of UniSource Energy's and
       TEP's disclosure controls and procedures (as defined in Rules 13a-15(e)
       and 15d-15(e) of the Securities Exchange Act of 1934, as amended
       (Exchange Act)).  Based upon that evaluation, the principal executive
       officer and principal financial officer of UniSource Energy and TEP
       have concluded that such disclosure controls are effective in timely
       alerting them to any material information relating to UniSource
       Energy's and TEP's reports filed or submitted with the SEC under the
       Exchange Act.

  (b)  Changes in Internal Control Over Financial Reporting

       There has been no change in UniSource Energy's or TEP's internal control
       over financial reporting that occurred during UniSource Energy's or TEP's
       most recent fiscal quarter that has materially affected, or is reasonably
       likely to affect, UniSource Energy's or TEP's internal control over
       financial reporting.

                                       52
<PAGE>

PART II - OTHER INFORMATION


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

     Springerville Generating Station Complaint

     Environmental activist groups have expressed concerns regarding the
construction of any new units at the Springerville Generating Station.  In
January 2003, environmental activist groups appealed an ACC Order affirming the
ACC's approval of the expansion at Springerville Generating Station to the
Superior Court of the State of Arizona.

     Additionally, in November 2001, the Grand Canyon Trust (GCT), an
environmental activist group, filed a complaint in U.S. District Court against
TEP for alleged violations of the Clean Air Act at the Springerville Generating
Station.  The complaint alleged that more stringent emission standards should
apply to Units 1 and 2 and that new permits and the installation of additional
facilities meeting Best Available Control Technology standards are required for
the continued operation of Units 1 and 2 in accordance with applicable law.  In
2002, the U.S. District Court granted TEP's motion for summary judgment on one
of the primary issues in the case: whether TEP commenced construction within 18
months and/or by March 19, 1979, after the original 1977 air permit covering
Units 1 and 2 was issued.  The Court found that TEP had commenced construction
of the Springerville Generating Station in the time periods required by the
original permits.  There were two remaining allegations: that (a) TEP
discontinued construction for a period of 18 months or longer and did not
complete construction in a reasonable period of time, and (b) TEP did not
commence construction, for purposes of New Source Performance Standard
applicability, by September 18, 1978.  On March 4, 2003, the U.S. District Court
determined that the GCT had not commenced the case on a timely basis and
dismissed the case.  The GCT has appealed this decision to the U.S. Court of
Appeals.  TEP believes these claims are without merit and intends to vigorously
contest them.

     Litigation Related to San Juan Coal Company

     On July 30, 2002, Dugan Production Corp. (Dugan) filed a lawsuit against
the San Juan Coal Company, the coal supplier to the San Juan Generating Station
(San Juan).  TEP owns 50% of San Juan Units 1 and 2, which equates to 19.8% of
the total San Juan Station.  Public Service Company of New Mexico (PNM) operates
the San Juan Station.  The San Juan Coal Company, through leases with the
federal government and the State of New Mexico, owns coal interests with respect
to an underground mine.  Dugan, through leases with the federal government, the
State of New Mexico and certain private parties, claims to own certain oil and
gas interests in portions of the land used for the underground mine.  Dugan
alleges that San Juan Coal Company's underground coal mining operations have or
will interfere with Dugan's gas production and will reduce the amount of natural
gas that Dugan would otherwise be entitled to recover.  Dugan seeks a
declaration by the court that the rights under its leases are senior and
superior to the rights of the San Juan Coal Company and seeks to prohibit the
underground mining of coal from a portion of the land used for the underground
mine as described above.  Dugan also seeks monetary damages.

     The San Juan Coal Company has informed PNM that it intends to strongly
dispute the litigation.  A mediator is currently working with the parties to
resolve the dispute.  TEP cannot predict the ultimate outcome of this
litigation, or whether it will adversely affect the amount of coal available or
cost of coal to San Juan.  TEP does not expect resolution of this litigation to
be material to TEP as a 19.8% owner of San Juan.

     Litigation Related to San Juan Generating Station

     On May 16, 2002, the GCT and the Sierra Club filed a citizen lawsuit under
the Clean Air Act in federal district court in New Mexico against PNM as
operator of San Juan.  The lawsuit, which alleges two violations of the Clean
Air Act and related regulations and permits, seeks penalties as well as
injunctive and declaratory relief and is presently scheduled for trial in the
third quarter of 2003.  Based on its investigation to date, PNM has stated that
it firmly believes that the allegations are without merit, and vigorously
disputes the allegations.  Only one of those allegations relates to a unit in
which TEP owns an interest.  While TEP is unable to predict the ultimate outcome
of the lawsuit, TEP does not believe the outcome will be material to TEP.

                                       53
<PAGE>

ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------------------------------------

UniSource Energy conducted its annual meeting of shareholders on May 9, 2003.
At that meeting, the shareholders of UniSource Energy elected members of the
Board of Directors.

The total votes were as follows:

                                                 AGAINST OR
      NOMINEE                       FOR           WITHHELD
     ---------                     -----         ----------
 Lawrence J. Aldrich             24,860,496       4,862,964
 Larry W.  Bickle                24,817,589       4,905,871
 Elizabeth T. Bilby              29,068,046         655,414
 Harold W. Burlingame            29,097,601         625,859
 John L.  Carter                 29,376,866         346,594
 Robert A.  Elliott              29,369,495         353,965
 Daniel W. L. Fessler            29,395,135         328,325
 Kenneth  Handy                  29,083,520         639,940
 Warren Y.  Jobe                 29,096,858         626,602
 James S. Pignatelli             29,249,795         473,665


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

 ADDITIONAL FINANCIAL DATA

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

                                          6 Months Ended     12 Months Ended
                                              June 30,            June 30,
                                                2003                2003
                                                ----                ----
     Ratio of Earnings to Fixed Charges         1.11%               1.45%


 APPROVAL OF NON-AUDIT SERVICES

     On August 4, 2003 the Audit Committee of the Board of Directors of
UniSource Energy pre-approved an increase in the dollar amount to $500,000 for
PricewaterhouseCoopers LLP to perform audit related services of the gas and
electric asset balances and results of operations for Citizens Communications
Company, located in Arizona.

 SEC REPORTS AVAILABLE ON UNISOURCE ENERGY'S WEBSITE

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

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

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

                                       54
<PAGE>

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

(a)  Exhibits.

       See Exhibit Index.

(b)  Reports on Form 8-K.

   - UniSource Energy and TEP Form 8-K, dated July 10, 2003 regarding the ACC
     order approving the acquisition by UniSource Energy of the Citizens Arizona
     gas and electric assets, and the Citizens Settlement Agreement.
   - UniSource Energy and TEP Form 8-K dated July 22, 2003 regarding the
     amendment and modification to the Citizens Asset Purchase Agreements.
   - UniSource Energy and TEP Form 8-K, dated July 30, 2003 furnished pursuant
     to Item 12 "Disclosure of Results of Operations and Financial Condition",
     announcing second quarter 2003 earnings for UniSource Energy and TEP.

                                       55
<PAGE>

                                   SIGNATURES


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


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


Date:  August 8, 2003                       /s/  Kevin P. Larson
                                        ----------------------------
                                                 Kevin P. Larson
                                            Vice President and Principal
                                                 Financial Officer



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


Date:  August 8, 2003                       /s/  Kevin P. Larson
                                        -----------------------------
                                                 Kevin P. Larson
                                            Vice President and Principal
                                                 Financial Officer

                                       56
<PAGE>

                                 EXHIBIT INDEX

     10(a) - Amendment No. 3 dated as of June 1, 2003, to Lease Agreements,
           dated as of December 1, 1985, between TEP and San Carlos, jointly and
           severally, as Lessee, and Wilmington Trust Company and William J.
           Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust
           Agreement with Philip Morris Capital Corporation as Owner
           Participant.
     10(b) - Amendment No. 3 dated as of June 1, 2003, to Lease Agreements,
           dated as of December 1, 1985, between TEP and San Carlos, jointly and
           severally, as Lessee, and Wilmington Trust Company and William J.
           Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust
           Agreement with IBM Credit, LLC as Owner Participant.
     10(c) - Amendment No. 3 dated as of June 1, 2003, to Lease Agreements,
           dated as of December 1, 1985, between TEP and San Carlos, jointly and
           severally, as Lessee, and Wilmington Trust Company and William J.
           Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust
           Agreement with Emerson Finance Co. as Owner Participant.
     10(d) - Amendment No. 3 dated as of June 1, 2003, to Tax Indemnity
           Agreement, dated as of December 1, 1985, between TEP and San Carlos,
           jointly and severally, as Lessee, and Philip Morris Capital
           Corporation as 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 Co-Trustee, respectively,
           together as Lessor.
     10(e) - Amendment No. 3 dated as of June 1, 2003, to Tax Indemnity
           Agreement, dated as of December 1, 1985, between TEP and San Carlos,
           jointly and severally, as Lessee, and IBM Credit, LLC as 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 Co-Trustee, respectively, together as Lessor.
     10(f) - Amendment No. 3 dated as of June 1, 2003, to Tax Indemnity
           Agreement, dated as of December 1, 1985, between TEP and San Carlos,
           jointly and severally, as Lessee, and Emerson Finance Co. as 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 Co-Trustee, respectively, together as Lessor.
     12 -  Computation of Ratio of Earnings to Fixed Charges - TEP.
     15 -  Letter regarding unaudited interim financial information.
     31(a) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act -
           UniSource Energy, by James S. Pignatelli.
     31(b) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act -
           UniSource Energy, by Kevin P. Larson.
     31(c) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act -
           TEP, by James S. Pignatelli.
     31(d) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act -
           TEP, by Kevin P. Larson.
     32 -  Statements of Corporate Officers (pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002).

                                       57