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, 2001

                                    OR

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

         For the transition period from __________ to __________.



                    Registrant; State of
   Commission       Incorporation; Address;               IRS Employer
   File Number      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 ___

     At August 6, 2001, 33,453,297 shares of UniSource Energy Corporation's
Common Stock, no par value (the only class of Common Stock) were outstanding.

     UniSource Energy Corporation is the holder of 32,139,434 shares of the
outstanding common stock of Tucson Electric Power Company.


<PAGE>
---------------------------------------------------------------------------

This combined Form 10-Q is separately filed by UniSource Energy Corporation
and Tucson Electric Power Company.  Information contained 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. Regulatory Accounting..........................................10
  Note 2. Accounting for Derivative Instruments and Hedging
            Activities...................................................10
  Note 3. Millennium Energy Businesses...................................11
  Note 4. Business Segments..............................................14
  Note 5. Commitments and Contingencies..................................15
  Note 6. Wholesale Accounts Receivable and Allowances...................15
  Note 7. Income Taxes...................................................17
  Note 8. Review by Independent Accountants..............................18
  Note 9. Reclassifications..............................................18

Item 2. -- Management's Discussion and Analysis of Financial
  Condition and Results of Operations
  Overview...............................................................19
  Factors Affecting Results of Operations
    Competition
      Retail.............................................................20
      Wholesale..........................................................21
    Western Energy Markets...............................................22
    Regulatory Matters...................................................25
    Market Risks.........................................................25
    Fuel Supply..........................................................27
    Future Generating Resources..........................................27
  Results of Operations..................................................28
  Results of Millennium Energy Businesses................................31
  Dividends on Common Stock..............................................32
  Liquidity and Capital Resources
    Cash Flows
      UniSource Energy...................................................33
      TEP................................................................33

<PAGE>

                                 TABLE OF CONTENTS
                                   (concluded)


  Investing and Financing Activities
      UniSource Energy...................................................34
      TEP................................................................34
      Millennium -- Unregulated Energy Businesses........................35
  Safe Harbor for Forward-Looking Statements.............................36

Item 3. -- Quantitative and Qualitative Disclosures About
  Market Risk............................................................37

PART II - OTHER INFORMATION

Item 1. -- Legal Proceedings.............................................38
Item 4. -- Submission of Matters to a Vote of Security Holders...........38
Item 5. -- Other Information
  Additional Financial Data..............................................38
Item 6. -- Exhibits and Reports on Form 8-K..............................39
Signature Page...........................................................40
Exhibit Index............................................................41


<PAGE>

                                  DEFINITIONS

The abbreviations and acronyms used in the 2001 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.
AISA.......................  Arizona Independent Scheduling Administrator
                               Association, a temporary organization required
                               by the ACC Retail Electric Competition Rules.
ALJ........................  FERC Administrative Law Judge.
AMT........................  Alternative Minimum Tax.
CDWR.......................  California Department of Water Resources.
CISO.......................  California Independent System Operator.
Common Stock...............  UniSource Energy's common stock, without par
                                value.
Company or UniSource
  Energy...................  UniSource Energy Corporation.
Cooling Degree Days..........Calculated  by  subtracting  75 from the average of
                                high and low daily temperatures.
CPX........................  California Power Exchange.
Credit Agreement...........  Credit Agreement between TEP and the banks,
                               dated as of December 30, 1997.
Desert STAR................  The ISO formed in the southwestern United States,
                               in which TEP is a participant.
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.
FERC.......................  Federal Energy Regulatory Commission.
First Mortgage Bonds.......  First mortgage bonds issued under the First
                               Mortgage Indenture, dated as of April 1, 1941,
                               of Tucson Gas, Electric Light and Power Company
                               to the Chase National Bank of the City of New
                               York, as trustee, as supplemented and amended.
GAAP.......................  Generally Accepted Accounting Principles.
GES........................  Global Energy Solutions, Inc., a majority-owned
                               subsidiary of Millennium, which owns 100% of
                               Global Solar and Infinite Power Solutions.
Global Solar...............  Global Solar Energy, Inc., a wholly-owned
                               subsidiary of GES, which develops and
                               manufactures thin-film photovoltaic cells.
Heating Degree Days........  Calculated by subtracting the average of the high
                               and low daily temperatures from 65.
Infinite Power Solutions...  Infinite Power Solutions, Inc., a wholly-owned
                               subsidiary of GES, which develops thin-film
                               batteries.            .
INICA........................INICA, Inc., formerly ITN Energy Systems, Inc., a
                               Colorado Corporation.
IRS........................  Internal Revenue Service.
ISO........................  Independent System Operator.
ITC........................  Investment tax credit.
kWh........................  Kilowatt-hour(s).
MEH........................  MEH Corporation, a wholly-owned subsidiary of
                               Millennium, which formerly held a 50% interest
                               in NewEnergy.
MicroSat...................  MicroSat Systems, Inc. a company owned 49% by
                               Millenium and 51% by INICA, which was formed to
                               develop and commercialize small-scale satellites.
Millennium.................  Millennium Energy Holdings, Inc., a wholly-owned
                               subsidiary of UniSource Energy.
MW.........................  Megawatt(s).
MWh........................  Megawatt-hour(s).
Nations Energy.............  Nations Energy Corporation, a wholly-owned
                               subsidiary of Millennium, and holder of interests
                               in independent power projects in Curacao and
                               Panama.
NewEnergy..................  NewEnergy, Inc., formerly New Energy Ventures,
                               Inc., a company in which a 50% interest was owned
                               by MEH.
NOL........................  Net Operating Loss carryback or carryforward for
                               income tax purposes.
NTUA.......................  Navajo Tribal Utility Authority.

<PAGE>

                                  DEFINITIONS
                                  (concluded)

PDES.......................  Phelps Dodge Energy Services.
PG&E.......................  Pacific Gas and Electric Company.
Revolving Credit
  Facility.................  $100 million revolving credit facility entered
                               into under the Credit Agreement between a
                               syndicate of banks and TEP.
RTO........................  Regional Transmission Organization.
Rules......................  The ACC Retail Electric Competition Rules.
SCE........................  Southern California Edison Company.
Settlement Agreement.......  TEP's Settlement Agreement approved by the ACC in
                               November 1999 which provided for electric retail
                               competition and transition asset recovery
Springerville..............  Springerville Generating Station.
Springerville Common
  Facilities...............  Facilities at Springerville used in common with
                               Springerville Unit 1 and Springerville Unit 2.
Springerville Unit 1.......  Unit 1 of the Springerville Generating Station.
Springerville Unit 1 Lease.  Leveraged lease arrangement relating to
                               Springerville Unit 1 and an undivided one-half
                               interest in certain Springerville Common
                               Facilities.
TEP........................  Tucson  Electric Power Company, the principal
                               subsidiary of UniSource Energy.
UniSource Energy...........  UniSource Energy Corporation.


<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 of Tucson Electric Power Company
and its subsidiaries (TEP) as of June 30, 2001, and the related
condensed consolidated statements of income for each of the
three-month and six-month periods ended June 30, 2001 and 2000
and the condensed consolidated statements of stockholders'
equity for the six-month period ended June 30, 2001, and the
condensed consolidated statements of cash flows for the six-
month periods ended June 30, 2001 and 2000.  These financial
statements are the responsibility of the Company'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 sheets and statements of capitalization of
the Company and of TEP as of December 31, 2000, and the related
consolidated statements of income, of changes in stockholders'
equity, and of cash flows for the year then ended (not
presented herein), and in our report dated February 1, 2001 we
expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheets as of
December 31, 2000, 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 8, 2001


<PAGE>

                        PART I - FINANCIAL INFORMATION


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

The weather causes seasonal fluctuations in UniSource Energy's sales.  As a
result, quarterly results are not indicative of annual operating results.
The quarterly financial statements that follow are unaudited but reflect all
normal recurring accruals and other adjustments which we believe are
necessary for a fair presentation of the results for the interim periods
presented.  The year-end condensed balance sheet data was derived from
audited financial statements, but does not include disclosures required by
generally accepted accounting principles. Also see Item 2. - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report should be reviewed in conjunction with UniSource
Energy's 2000 Form 10-K.


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                       Three Months Ended
                                                             June 30,
                                                         2001        2000
                                                           (Unaudited)
---------------------------------------------------------------------------
                                                     -Thousands of Dollars-
Operating Revenues
 Electric Retail Sales                                $171,667    $172,891
 Electric Wholesale Sales                              226,206      61,182
 Net Unrealized Gain on Forward Electric Sales and
  Purchases                                              4,477           -
 Other                                                   4,265       2,402
---------------------------------------------------------------------------
    Total Operating Revenues                           406,615     236,475
---------------------------------------------------------------------------
Operating Expenses
 Fuel                                                   65,142      49,960
 Purchased Power                                       179,609      48,298
 Other Operations                                       38,033      30,065
 Maintenance and Repairs                                13,989      15,350
 Depreciation and Amortization                          29,352      27,761
 Amortization of Transition Recovery Asset               5,491       4,679
 Taxes Other Than Income Taxes                          11,963      12,512
 Income Taxes                                           10,449      (3,237)
---------------------------------------------------------------------------
    Total Operating Expenses                           354,028     185,388
---------------------------------------------------------------------------
      Operating Income                                  52,587      51,087
---------------------------------------------------------------------------
Other Income (Deductions)
 Income Taxes                                             (223)     (1,442)
 Interest Income                                         3,812       3,252
 Other Income (Deductions)                              (2,676)         82
---------------------------------------------------------------------------
    Total Other Income (Deductions)                        913       1,892
---------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                         15,904      17,155
 Interest on Capital Leases                             22,682      23,286
 Other Interest Expense                                  1,660       1,879
---------------------------------------------------------------------------
    Total Interest Expense                              40,246      42,320
---------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change    13,254      10,659

Cumulative Effect of Accounting Change - Net of Tax          -           -
---------------------------------------------------------------------------
Net Income                                            $ 13,254    $ 10,659
===========================================================================

Average Shares of Common Stock Outstanding (000)        33,342      32,389
===========================================================================

Basic Earnings per Share
 Income Before Cumulative Effect of Accounting Change $   0.40    $   0.33
 Cumulative Effect of Accounting Change - Net of Tax         -           -
 Net Income                                           $   0.40    $   0.33
===========================================================================
Diluted Earnings per Share
 Income Before Cumulative Effect of Accounting Change $   0.39    $   0.32
 Cumulative Effect of Accounting Change - Net of Tax         -           -
 Net Income                                           $   0.39    $   0.32
===========================================================================
See Notes to Condensed Consolidated Financial Statements.


<PAGE>

UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                         Six Months Ended
                                                             June 30,
                                                         2001       2000
                                                           (Unaudited)
---------------------------------------------------------------------------
                                                     -Thousands of Dollars-
Operating Revenues
 Electric Retail Sales                                $306,344    $304,181
 Electric Wholesale Sales                              369,893     105,962
 Net Unrealized Gain on Forward Electric Sales and
  Purchases                                              7,169           -
 Other                                                   6,874       3,811
---------------------------------------------------------------------------
    Total Operating Revenues                           690,280     413,954
---------------------------------------------------------------------------
Operating Expenses
 Fuel                                                  136,093      93,509
 Purchased Power                                       225,981      65,289
 Other Operations                                       78,457      61,830
 Maintenance and Repairs                                26,168      23,694
 Depreciation and Amortization                          58,050      55,218
 Amortization of Transition Recovery Asset               7,837       5,582
 Taxes Other Than Income Taxes                          23,836      24,925
 Income Taxes                                           24,021      (5,235)
---------------------------------------------------------------------------
    Total Operating Expenses                           580,443     324,812
---------------------------------------------------------------------------
      Operating Income                                 109,837      89,142
---------------------------------------------------------------------------
Other Income (Deductions)
 Income Taxes                                           (1,467)     (1,728)
 Interest Income                                         7,727       6,486
 Other Income (Deductions)                              (3,860)      1,782
---------------------------------------------------------------------------
    Total Other Income (Deductions)                      2,400       6,540
---------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                         31,676      34,029
 Interest on Capital Leases                             45,388      46,552
 Other Interest Expense                                  3,124       4,200
---------------------------------------------------------------------------
    Total Interest Expense                              80,188      84,781
---------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change    32,049      10,901

Cumulative Effect of Accounting Change - Net of Tax        470           -
---------------------------------------------------------------------------
Net Income                                            $ 32,519    $ 10,901
===========================================================================

Average Shares of Common Stock Outstanding (000)        33,304      32,382
===========================================================================

Basic Earnings per Share
 Income Before Cumulative Effect of Accounting Change $   0.97    $   0.34
 Cumulative Effect of Accounting Change - Net of Tax  $   0.01           -
 Net Income                                           $   0.98    $   0.34
===========================================================================
Diluted Earnings per Share
 Income Before Cumulative Effect of Accounting Change $   0.94    $   0.33
 Cumulative Effect of Accounting Change - Net of Tax  $   0.01           -
 Net Income                                           $   0.95    $   0.33
===========================================================================
See Notes to Condensed Consolidated Financial Statements.


<PAGE>

UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                         Six Months Ended
                                                             June 30,
                                                         2001       2000
                                                            (Unaudited)
---------------------------------------------------------------------------
                                                     -Thousands of Dollars-
Cash Flows from Operating Activities
  Cash Receipts from Electric Retail Sales            $321,752    $315,796
  Cash Receipts from Electric Wholesale Sales          355,693      86,296
  Fuel Costs Paid                                     (143,176)    (88,126)
  Purchased Power Costs Paid                          (181,888)    (51,011)
  Wages Paid, Net of Amounts Capitalized               (36,876)    (33,070)
  Payment of Other Operations and Maintenance Costs    (71,987)    (50,061)
  Capital Lease Interest Paid                          (42,474)    (47,551)
  Taxes Paid, Net of Amounts Capitalized               (51,233)    (48,329)
  Interest Paid, Net of Amounts Capitalized            (33,145)    (36,541)
  Income Taxes Paid                                    (15,175)         (3)
  Interest Received                                      7,819       6,676
  Other                                                  5,145       3,880
---------------------------------------------------------------------------
    Net Cash Flows - Operating Activities              114,455      57,956
---------------------------------------------------------------------------
Cash Flows from Investing Activities
  Capital Expenditures                                 (70,310)    (52,941)
  Investments in and Loans to Millennium
    Energy Businesses                                  (14,333)     (5,443)
  Proceeds from the Sale of Millennium Energy
    Businesses                                               -      19,950
  Proceeds from the Sale of Real Estate                  6,580           -
  Purchase of Springerville Lease Debt                       -     (27,633)
  Other                                                 (2,351)        381
---------------------------------------------------------------------------
    Net Cash Flows - Investing Activities              (80,414)    (65,686)
---------------------------------------------------------------------------
Cash Flows from Financing Activities
  Payments to Retire Long-Term Debt                     (1,225)    (48,103)
  Payments to Retire Capital Lease Obligations         (14,542)    (22,817)
  Common Stock Dividends Paid                           (6,669)     (5,176)
  Other                                                  4,603       1,479
---------------------------------------------------------------------------
    Net Cash Flows - Financing Activities              (17,833)    (74,617)
---------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents    16,208     (82,347)
Cash and Cash Equivalents, Beginning of Year           163,004     145,288
---------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period              $179,212    $ 62,941
===========================================================================

SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
---------------------------------------------------------------------------
Net Income                                            $ 32,519    $ 10,901
Adjustments to Reconcile Net Income to Net
 Cash Flows
  Depreciation and Amortization Expense                 58,050      55,218
  Amortization of Transition Recovery Asset              7,837       5,582
  Net Unrealized Gains on Forward Electric Sale and
   Purchase Contracts                                   (7,639)          -
  Amortization of Deferred Debt-Related Costs Included
   In Interest Expense                                   1,007       1,338
  Deferred Income Taxes                                  9,660       1,680
  Unremitted Losses of Unconsolidated Subsidiaries       5,158       1,868
  Gain on Sale of Nations Energy's Czech Republic
   Interest                                                  -      (2,527)
  Market Value Adjustments Related to Nations Energy         -       1,499
  Other                                                   (345)        660
  Changes in Assets and Liabilities which Provided
   (Used) Cash Exclusive of Changes Shown Separately
    Accounts Receivable                                (19,151)    (35,015)
    Materials and Fuel                                     802       1,012
    Accounts Payable                                    31,422      19,896
    Interest Accrued                                     2,566        (814)
    Taxes Accrued                                       (1,137)        948
    Other Current Assets                                (5,563)     (8,157)
    Other Current Liabilities                           (5,348)         92
    Other Deferred Assets                               (1,153)      3,114
    Other Deferred Liabilities                           5,770         661
---------------------------------------------------------------------------
Net Cash Flows - Operating Activities                 $114,455    $ 57,956
===========================================================================
See Notes to Condensed Consolidated Financial Statements


<PAGE>

UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

                                                     June 30,   December 31,
                                                       2001        2000
                                                           (Unaudited)
---------------------------------------------------------------------------
ASSETS                                            - Thousands of Dollars -
Utility Plant
  Plant in Service                                  $2,404,763  $2,389,587
  Utility Plant Under Capital Leases                   741,446     741,446
  Construction Work in Progress                        122,605      94,789
---------------------------------------------------------------------------
    Total Utility Plant                              3,268,814   3,225,822
  Less Accumulated Depreciation and Amortization    (1,227,487) (1,186,035)
  Less Accumulated Depreciation of Capital Lease
   Assets                                             (348,071)   (333,497)
---------------------------------------------------------------------------
    Total Utility Plant - Net                        1,693,256   1,706,290
---------------------------------------------------------------------------
Investments and Other Property                         151,741     121,811
---------------------------------------------------------------------------
Current Assets
  Cash and Cash Equivalents                            179,212     163,004
  Accounts Receivable                                  134,893     115,742
  Materials and Fuel                                    43,597      44,399
  Deferred Income Taxes - Current                       19,476      17,790
  Other                                                 24,836      19,273
---------------------------------------------------------------------------
    Total Current Assets                               402,014     360,208
---------------------------------------------------------------------------
Regulatory and Other Assets
  Transition Recovery Asset                            345,446     353,283
  Income Taxes Recoverable Through Future Revenues      69,127      73,459
  Other Regulatory Assets                                8,393       7,690
Other Assets                                            48,086      48,643
--------------------------------------------------------------- -----------
    Total Regulatory and Other Assets                  471,052     483,075
---------------------------------------------------------------------------
Total Assets                                        $2,718,063  $2,671,384
===========================================================================

CAPITALIZATION AND OTHER LIABILITIES
Capitalization
  Common Stock Equity                               $  391,604  $  372,169
  Capital Lease Obligations                            853,038     857,829
  Long-Term Debt                                     1,131,170   1,132,395
---------------------------------------------------------------------------
    Total Capitalization                             2,375,812   2,362,393
---------------------------------------------------------------------------
Current Liabilities
  Current Obligations Under Capital Leases              23,090      21,147
  Current Maturities of Long-Term Debt                   1,725       1,725
  Accounts Payable                                      97,313      65,891
  Interest Accrued                                      54,822      63,852
  Taxes Accrued                                         25,674      26,811
  Forward Sale and Purchase Contracts                    7,500           -
  Accrued Employee Expenses                             11,183      14,405
  Other                                                  7,602       8,547
---------------------------------------------------------------------------
    Total Current Liabilities                          228,909     202,378
---------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                    52,197      51,035
  Other                                                 61,145      55,578
---------------------------------------------------------------------------
    Total Deferred Credits and Other Liabilities       113,342     106,613
---------------------------------------------------------------------------
Total Capitalization and Other Liabilities          $2,718,063  $2,671,384
===========================================================================
See Notes to Condensed Consolidated Financial Statements.


<PAGE>

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


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

Balances at
 December 31, 2000       $  655,539  $ (283,370)  $        -    $  372,169
----------------------------------------------------------------------------
Comprehensive Income
 (Loss):
  2001 Year-to-Date Net
   Income                         -      32,519            -        32,519
  Cumulative Effect of
   Accounting Change (net
   of $9,179,000 income
   tax benefit)                   -           -      (13,827)      (13,827)
      Reversal of Previously
       Recorded Unrealized
       Losses (Cumulative
       Effect) for Contracts
       which Settled During
       the Period (net of
       $5,631,000 income tax
       expense)                   -           -        8,481         8,481
  Unrealized Loss on Cash
   Flow Hedges Not Yet
   Settled (net of $2,617,000
   income tax benefit)            -           -       (3,941)       (3,941)
                                                                 -----------

Total Comprehensive Income                                          23,232
                                                                 -----------

  183,900 Shares Issued under
   Stock Compensation Plans   3,095           -            -         3,095
  7,302 Net Shares Purchased
   by Deferred Compensation
   Trust                       (223)          -            -          (223)
  Dividends Declared              -      (6,669)           -        (6,669)
----------------------------------------------------------------------------

Balances at
 June 30, 2001           $  658,411  $ (257,520)  $   (9,287)   $  391,604
============================================================================
See Notes to Condensed Consolidated Financial Statements.


<PAGE>

TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

The weather causes seasonal fluctuations in TEP's sales.  As a result,
quarterly results are not indicative of annual operating results.  The
quarterly financial statements that follow are unaudited but reflect all
normal recurring accruals and other adjustments which we believe are
necessary for a fair presentation of the results for the interim periods
presented.  The year-end condensed balance sheet data was derived from
audited financial statements, but does not include disclosures required by
generally accepted accounting principles.  Also see Item 2. - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report should be reviewed in conjunction with TEP's 2000 Form
10-K.


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                       Three Months Ended
                                                             June 30,
                                                         2001        2000
                                                           (Unaudited)
---------------------------------------------------------------------------
                                                     -Thousands of Dollars-
Operating Revenues
 Electric Retail Sales                                $171,667    $172,891
 Electric Wholesale Sales                              226,206      61,182
 Net Unrealized Gain on Forward Electric Sales and
  Purchases                                              4,477           -
 Other                                                   1,677       1,497
---------------------------------------------------------------------------
    Total Operating Revenues                           404,027     235,570
---------------------------------------------------------------------------
Operating Expenses
 Fuel                                                   65,142      49,960
 Purchased Power                                       179,609      48,298
 Other Operations                                       32,760      26,472
 Maintenance and Repairs                                13,989      15,350
 Depreciation and Amortization                          28,465      27,662
 Amortization of Transition Recovery Asset               5,491       4,679
 Taxes Other Than Income Taxes                          11,696      12,360
 Income Taxes                                           11,986      (2,057)
---------------------------------------------------------------------------
    Total Operating Expenses                           349,138     182,724
---------------------------------------------------------------------------
      Operating Income                                  54,889      52,846
---------------------------------------------------------------------------
Other Income (Deductions)
 Income Taxes                                           (2,753)     (1,933)
 Interest Income                                         3,076       1,966
 Interest Income - Note Receivable from UniSource
  Energy                                                 2,327       2,311
 Other Income                                            1,598         504
---------------------------------------------------------------------------
    Total Other Income (Deductions)                      4,248       2,848
---------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                         15,904      17,155
 Interest on Capital Leases                             22,668      23,273
 Other Interest Expense                                  1,661       1,879
---------------------------------------------------------------------------
    Total Interest Expense                              40,233      42,307
---------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change    18,904      13,387

Cumulative Effect of Accounting Change - Net of Tax          -           -
---------------------------------------------------------------------------
Net Income                                            $ 18,904    $ 13,387
===========================================================================
See Notes to Condensed Consolidated Financial Statements.


<PAGE>

TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                         Six Months Ended
                                                             June 30,
                                                         2001        2000
                                                            (Unaudited)
---------------------------------------------------------------------------
                                                     -Thousands of Dollars-
Operating Revenues
 Electric Retail Sales                                $306,344    $304,181
 Electric Wholesale Sales                              369,893     105,962
 Net Unrealized Gain on Forward Electric Sales and
  Purchases                                              7,169           -
 Other                                                   2,421       2,050
---------------------------------------------------------------------------
    Total Operating Revenues                           685,827     412,193
---------------------------------------------------------------------------
Operating Expenses
 Fuel                                                  136,093      93,509
 Purchased Power                                       225,981      65,289
 Other Operations                                       67,834      55,345
 Maintenance and Repairs                                26,168      23,694
 Depreciation and Amortization                          56,945      55,049
 Amortization of Transition Recovery Asset               7,837       5,582
 Taxes Other Than Income Taxes                          23,219      24,554
 Income Taxes                                           27,181      (3,119)
---------------------------------------------------------------------------
    Total Operating Expenses                           571,258     319,903
---------------------------------------------------------------------------
      Operating Income                                 114,569      92,290
---------------------------------------------------------------------------
Other Income (Deductions)
 Income Taxes                                           (4,855)     (3,889)
 Interest Income                                         5,849       4,002
 Interest Income - Note Receivable from UniSource
  Energy                                                 4,627       4,637
 Other Income                                            1,915       1,017
---------------------------------------------------------------------------
    Total Other Income (Deductions)                      7,536       5,767
---------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                         31,676      34,029
 Interest on Capital Leases                             45,360      46,527
 Other Interest Expense                                  3,124       4,200
---------------------------------------------------------------------------
    Total Interest Expense                              80,160      84,756
---------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change    41,945      13,301

Cumulative Effect of Accounting Change - Net of Tax        470           -
---------------------------------------------------------------------------
Net Income                                            $ 42,415    $ 13,301
===========================================================================
See Notes to Condensed Consolidated Financial Statements.


<PAGE>

TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                         Six Months Ended
                                                             June 30,
                                                         2001       2000
                                                           (Unaudited)
---------------------------------------------------------------------------
                                                     -Thousands of Dollars-
Cash Flows from Operating Activities
  Cash Receipts from Electric Retail Sales            $321,752    $315,796
  Cash Receipts from Electric Wholesale Sales          355,693      86,296
  Fuel Costs Paid                                     (143,176)    (88,126)
  Purchased Power Costs Paid                          (181,888)    (51,011)
  Wages Paid, Net of Amounts Capitalized               (32,853)    (29,157)
  Payment of Other Operations and Maintenance Costs    (56,458)    (43,862)
  Capital Lease Interest Paid                          (42,450)    (47,525)
  Taxes Paid, Net of Amounts Capitalized               (49,741)    (48,082)
  Interest Paid, Net of Amounts Capitalized            (33,145)    (36,541)
  Income Taxes Paid                                    (15,175)         (3)
  Interest Received                                      5,849       4,300
  Other                                                     90          47
---------------------------------------------------------------------------
    Net Cash Flows - Operating Activities              128,498      62,132
---------------------------------------------------------------------------
Cash Flows from Investing Activities
  Capital Expenditures                                 (55,779)    (49,893)
  Proceeds from the Sale of Real Estate                  6,580           -
  Other Investments -Net                                (3,407)       (341)
---------------------------------------------------------------------------
    Net Cash Flows - Investing Activities              (52,606)    (50,234)
---------------------------------------------------------------------------
Cash Flows from Financing Activities
  Payments to Retire Long-Term Debt                     (1,225)    (48,103)
  Payments to Retire Capital Lease Obligations         (14,482)    (22,737)
  Other                                                  2,049       1,122
---------------------------------------------------------------------------
    Net Cash Flows - Financing Activities              (13,658)    (69,718)
---------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents    62,234     (57,820)
Cash and Cash Equivalents, Beginning of Year            88,712      88,402
---------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period              $150,946    $ 30,582
==========================================================================

SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
---------------------------------------------------------------------------
Net Income                                            $ 42,415    $ 13,301
Adjustments to Reconcile Net Income to Net
 Cash Flows
  Depreciation and Amortization Expense                 56,945      55,049
  Amortization of Transition Recovery Asset              7,837       5,582
  Net Unrealized Gains on Forward Electric Sale and
   Purchase Contracts                                   (7,639)          -
  Amortization of Deferred Debt-Related Costs Included
   in Interest Expense                                   1,007       1,338
  Deferred Income Taxes                                 16,354       2,333
  Unremitted Losses of Unconsolidated Subsidiaries         517         733
  Interest on Note Receivable from UniSource Energy     (4,627)     (4,637)
  Other                                                  3,751       3,924
  Changes in Assets and Liabilities which Provided
   (Used) Cash Exclusive of Changes Shown Separately
    Accounts Receivable                                (20,094)    (33,448)
    Materials and Fuel                                   1,431       1,014
    Accounts Payable                                    30,201      19,946
    Interest Accrued                                     2,566        (814)
    Taxes Accrued                                       (1,362)        465
    Other Current Assets                                  (268)     (2,906)
    Other Current Liabilities                           (3,558)     (1,307)
    Other Deferred Assets                               (2,678)        957
    Other Deferred Liabilities                           5,700         602
---------------------------------------------------------------------------
Net Cash Flows - Operating Activities                 $128,498    $ 62,132
===========================================================================
See Notes to Condensed Consolidated Financial Statements.


<PAGE>

TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

                                                     June 30,  December 31,
                                                       2001       2000
                                                   (Unaudited)
---------------------------------------------------------------------------
ASSETS                                            - Thousands of Dollars -
Utility Plant
  Plant in Service                                  $2,404,763  $2,389,587
  Utility Plant Under Capital Leases                   741,446     741,446
  Construction Work in Progress                        122,605      94,789
---------------------------------------------------------------------------
    Total Utility Plant                              3,268,814   3,225,822
  Less Accumulated Depreciation and Amortization    (1,227,487) (1,186,035)
  Less Accumulated Depreciation of Capital Lease
   Assets                                             (348,071)   (333,497)
---------------------------------------------------------------------------
    Total Utility Plant - Net                        1,693,256   1,706,290
---------------------------------------------------------------------------
Investments and Other Property                          93,355      92,334
---------------------------------------------------------------------------
Note Receivable from UniSource Energy                   70,132      70,132
---------------------------------------------------------------------------
Current Assets
  Cash and Cash Equivalents                            150,946      88,712
  Interest on Note Receivable from UniSource Energy      4,626           -
  Accounts Receivable                                  140,081     116,580
  Materials and Fuel                                    42,416      43,847
  Deferred Income Taxes - Current                       12,348      10,662
  Other                                                  6,853       6,585
---------------------------------------------------------------------------
    Total Current Assets                               357,270     266,386
---------------------------------------------------------------------------
Regulatory and Other Assets
  Transition Recovery Asset                            345,446     353,283
  Income Taxes Recoverable Through Future Revenues      69,127      73,459
  Other Regulatory Assets                                8,393       7,690
Other Assets                                            32,329      31,361
--------------------------------------------------------------- -----------
    Total Regulatory and Other Assets                  455,295     465,793
---------------------------------------------------------------------------
Total Assets                                        $2,669,308  $2,600,935
===========================================================================

CAPITALIZATION AND OTHER LIABILITIES
Capitalization
  Common Stock Equity                               $  329,771  $  295,660
  Capital Lease Obligations                            852,718     857,519
  Long-Term Debt                                     1,131,170   1,132,395
---------------------------------------------------------------------------
    Total Capitalization                             2,313,659   2,285,574
---------------------------------------------------------------------------
Current Liabilities
  Current Obligations Under Capital Leases              22,946      21,031
  Current Maturities of Long-Term Debt                   1,725       1,725
  Accounts Payable                                     104,156      73,955
  Interest Accrued                                      54,822      63,852
  Taxes Accrued                                         24,123      25,485
  Forward Sale and Purchase Contracts                    7,500           -
  Accrued Employee Expenses                             10,992      14,152
  Other                                                  6,542       5,671
---------------------------------------------------------------------------
    Total Current Liabilities                          232,806     205,871
---------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                    61,836      53,980
  Other                                                 61,007      55,510
---------------------------------------------------------------------------
    Total Deferred Credits and Other Liabilities       122,843     109,490
---------------------------------------------------------------------------
Total Capitalization and Other Liabilities          $2,669,308  $2,600,935
===========================================================================
See Notes to Condensed Consolidated Financial Statements.


<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, 2000   $ 651,723 $ (6,357) $(349,706) $      -      $ 295,660
----------------------------------------------------------------------------
Comprehensive
 Income (Loss):
  2001 Year-to-Date
   Net Income                -        -     42,415         -         42,415
  Cumulative Effect of
   Accounting Change
   (net of $9,179,000
   income tax benefit)       -        -          -   (13,827)       (13,827)
     Reversal of Previously
      Recorded Unrealized
      Losses (Cumulative
      Effect) for Contracts
      which Settled During
      the Period (net of
      $5,631,000 income
      tax expense)           -        -          -     8,481          8,481
 Unrealized Loss on
   Cash Flow Hedges
   Not Yet Settled
   (net of $2,617,000
   income tax benefit)       -        -          -    (3,941)        (3,941)
                                                                 -----------
Total Comprehensive Income                                           33,128
                                                                 -----------
Other                      983        -          -         -            983
----------------------------------------------------------------------------

Balances at
 June 30, 2001       $ 652,706 $ (6,357) $(307,291)  $(9,287)     $ 329,771
============================================================================
See Notes to Condensed Consolidated Financial Statements.

<PAGE>


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

NOTE 1.  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 FAS 71, require special
accounting treatment for regulated companies to show the effect of
regulation.  For example, in setting TEP's retail rates, the ACC may
not 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 cover 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 relating to recovery of TEP's transition costs and standard
retail rates, we discontinued application of FAS 71 to our generation
operations.

     We continue to apply FAS 71 to the distribution and transmission
portions of TEP's business, our regulated operations.  We periodically
assess whether we can continue to apply FAS 71 to these operations.
If we stopped applying FAS 71 to TEP's remaining regulated operations,
we would write off the related balances of TEP's regulatory assets as
a charge in our income statement.  Based on the balances of TEP's
regulatory assets at June 30, 2001, if we had stopped applying FAS 71
to TEP's remaining regulated operations, we would have recorded an
extraordinary loss, after-tax, of approximately $254 million.  While
regulatory orders and market conditions may affect our cash flows, our
cash flows would not be affected if we stopped applying FAS 71.



NOTE 2.  ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
---------------------------------------------------------------------

     In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (FAS 133),
Accounting for Derivative Instruments and Hedging Activities.  A
derivative financial instrument or other contract derives its value
from another investment or designated benchmark.  We buy and sell
wholesale power using forward contracts which are considered to be
derivatives.  Under forward contracts, TEP commits 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.  Forward contracts may consist of sales of TEP's excess
generating capacity, purchases to meet our retail and firm energy
commitments, or trading activity, where forward sales and purchases
may be made within established limits to take advantage of favorable
market opportunities.

     There are two types of gains and losses related to forward
contracts:
 - An unrealized gain or loss is the difference between the contract
price and the market price at any interim date until the contract is
settled.
 - A realized gain or loss is the difference between the contract
price and the actual cost of the commodity that was purchased or sold.
Realized gains or losses are recorded in the financial statements at
the settlement date.

     On January 1, 2001, we adopted FAS 133.  The financial statements
for 2000 do not reflect the requirements of FAS 133, as we recorded
realized gains and losses at the contract settlement date.  FAS 133
requires us to recognize derivative instruments on the balance sheet
as either assets or liabilities measured at fair value and to record
the related unrealized gains and losses throughout the contract period
until settlement.  Based on our interpretation of FAS 133 and other
guidance, we have classified our wholesale forward contracts as
follows:

 - Normal Purchases and Sales: Our off-peak forward purchases and
sales generally qualify as normal purchases and sales and are excluded
from the requirements of FAS 133.  The realized gains and losses on
these contracts are reflected in the income statement at the contract
settlement date.
 - Cash Flow Hedge: On-peak forward purchase contracts to meet our
retail and firm commitments, as well as on-peak forward sales
contracts of our excess system capacity are generally classified as
cash flow hedges.  Our on-peak purchases and sales occur daily from 6
a.m. until 10 p.m., Monday through Saturday.  The unrealized gains and
losses related to these forward contracts are included in Other
Comprehensive Income, a component of stockholders' equity.  As the
forward contracts are settled and realized gains or losses are
recorded on the income statement, the unrealized gains and losses are
reversed from Other Comprehensive Income.
 - Trading Activity:  Our trading activity generally consists of
forward on-peak sales and purchases that do not qualify for cash flow
hedge treatment.  The unrealized gains and losses related to these
forward contracts are reflected in the income statement.  As the
forward contracts are settled and realized gains or losses are
recorded, the unrealized gains and losses are reversed.

     On January 1, 2001, we recorded the cumulative effects of
adopting FAS 133 in our financial statements by recognizing all
derivatives at fair value and recording the following amounts on our
forward contracts as of January 1, 2001:

     Income Statement: after-tax unrealized gain of $470,000.
     Balance Sheet:
 - Other Comprehensive Income, a component of stockholders' equity:
after-tax unrealized loss of $14 million, and
 - Forward Sale and Purchase Contracts Liability of $22 million.

     In addition to our forward contracts to buy and sell wholesale
power, we entered into two swap agreements in May 2001 to hedge our
risk of fluctuations in the market price of gas related to
approximately a third of our anticipated gas purchases from June
through October 2001.  These swaps are considered derivatives and are
designated as cash flow hedges.

     Under FAS 133, we record unrealized gains and losses on our
forward contracts and swap agreements and adjust the related liability
on a monthly basis to reflect the market prices at the end of the
month.  The market prices used to determine fair value for forward
contracts are estimated based on various factors including broker
quotes, exchange prices, over the counter prices and time value.
Beginning in the second quarter of 2001, we are reporting the
unrealized gain (loss) on forward sales net of the unrealized (gain)
loss on forward purchases as a component of operating revenues.  In
the first quarter of 2001, we presented the unrealized gain (loss) on
forward sales as a component of operating revenues and the unrealized
(gain) loss on forward purchases as a component of operating expenses.
We have reclassified the first quarter financial statements to conform
to the net presentation, which we believe results in a more indicative
presentation of our actual operating revenues and expenses.

     All cash flow hedge contracts open at June 30, 2001 will be
settled by December 31, 2001, and as a result, the unrealized losses
included in Other Comprehensive Income as of June 30, 2001 will be
reversed from Other Comprehensive Income by year-end and realized
gains or losses will be recorded on the income statement.

     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, we may change the
conclusions that we have reached and, as a result, the accounting treatment
and financial statement impact could change in the future.  In June 2001,
the FASB cleared FAS 133 Implementation Issue No. C15 (Issue C15), Scope
Exceptions: Normal Purchases and Normal Sales Exception for Option-Type
Contracts and Forward Contracts in Electricity. This guidance provides that
power purchase or sales agreements (i.e. both forward contracts and option
contracts), including capacity contracts, for the purchase or sale of
electricity qualify for the FAS 133 normal purchase and sale exception if
certain criteria are met. We are required to comply with Issue C15
beginning July 1, 2001. We are currently in the process of evaluating the
impact, if any, of Issue C15 on our financial statements.


NOTE 3.  MILLENNIUM ENERGY BUSINESSES
-------------------------------------

  ENERGY TECHNOLOGY INVESTMENTS

     At June 30, 2001, Millennium owned 67% of Global Solar Energy,
Inc. (Global Solar) and Infinite Power Solutions, Inc. (Infinite Power
Solutions).  INICA, Inc. (formerly ITN Energy Systems, Inc.), a
privately held company, owned the remaining 33%.  The financial
statements for these entities are consolidated into the financial
statements included in this document.  In 2000 Millennium agreed to
provide $26 million in credit to these entities.   As of June 30,
2001, Millennium had funded approximately $17 million under this
credit commitment, $13 million of which was funded during 2001.

 - Global Solar is a developer and manufacturer of flexible thin-film
photovoltaic cells.  Global Solar began limited production of
photovoltaic cells in 1999.  Target markets for its products include
military, space and commercial applications.

     Global Solar has certain federal government contracts that
require Global Solar to contribute to the research and development
effort under a cost share arrangement.  Global Solar's share of costs
is expensed as incurred or capitalized in accordance with the terms of
the contract.  Global Solar had approximately $0.3 million of
remaining cost share commitment under these contracts at June 30,
2001.

 - Infinite Power Solutions is a developer of thin-film batteries and
was established in 2000.  INICA contributed certain assets and
proprietary and intellectual property relating to thin-film battery
technology.

     During 2001, Millennium and INICA formed and began to provide
funding to the following entities, which are accounted for under the
equity method of accounting:

 - MicroSat Systems Inc. (MicroSat) is a space systems company formed
for the purpose of developing and commercializing small-scale
satellites.  Millennium owns 49% and the remaining 51% is owned by
INICA.  Millennium provided $10 million in equity funding in the six
months ended June 30, 2001, and has agreed to provide an additional
$10 million in credit to the venture.  As of June 30, 2001 no draws
had been made against this line of credit.  INICA contributed
development contracts and proprietary technologies.

     MicroSat has certain federal government contracts that require
MicroSat to contribute to the research and development effort under a
cost share arrangement.  MicroSat's share of costs is expensed as
incurred or capitalized in accordance with the terms of the contract.
MicroSat's remaining cost share commitment under these contracts at
June 30, 2001 was approximately $9 million.

 - A product development company was formed to provide research and
development and other services to Global Energy Solutions, Inc.'s
affiliates, MicroSat and third parties.  Millennium owns 49%, the
remaining 51% is owned by INICA.  Millennium's total equity
contribution of $3 million was made in July 2001 and Millennium has
committed to provide an additional $1 million in credit.  INICA will
contribute certain contracts, technologies and intellectual property,
including its thermal desalinization technology and its former name,
ITN Energy Systems, Inc.

     Millennium expects to fund approximately $15 million to its
various Energy Technology Investments in the second half of 2001.  A
significant portion of the funding under these agreements will be used
for research and development purposes, establishment of the production
line, and other administrative costs.  As funds are expended for
administrative and research and development purposes, we recognize
expense.

  NATIONS ENERGY COMMITMENTS

     Nations Energy, a wholly-owned subsidiary of Millennium, develops
independent power projects in foreign energy markets.  Through its
subsidiaries, Nations Energy has a 26% equity interest in a power
project located in Curacao, Netherland Antilles.  The 160 MW project
is scheduled for completion in 2003.  Once completed, the generating
facility will provide all electricity, steam, desalinated water and
compressed air for use in the oil refinery on the island of Curacao
and electricity for distribution to the community of Curacao.  As of
June 30, 2001, Nations Energy's total investment in this project is $5
million, of which approximately $2 million was contributed in 2001.
In addition, in December 2000, Nations Energy provided a $7 million
deposit to fund scheduled equity contributions through April 2003.
This deposit is held by a financial institution and at June 30, 2001,
$5.4 million of this deposit remained.  Nations Energy holds a $10
million deposit primarily for possible construction overruns.

  OTHER MILLENNIUM INVESTMENTS AND COMMITMENTS

     In July 2000, Millennium made a $15 million capital commitment to
a limited partnership which will fund energy related investments.  As
of June 30, 2001, Millennium had funded $5.7 million under this
commitment, $4.3 million of which was funded in 2001.  The remaining
$9.3 million is expected to be invested within two to three years.  A
member of the UniSource Energy Board of Directors has a minor
investment in the project.  An affiliate of such board member serves
as the general partner.

     In November 2000, Millennium made a $5 million capital commitment
to a venture capital fund that will focus on information technology,
optics and biotechnology in Tucson, Arizona.   A member of the
UniSource Energy Board of Directors owns the company that manages the
fund.  As of June 30, 2001, Millennium had funded $142,000 under this
commitment.  Millennium expects to fund approximately $1 million under
this agreement in 2001.

     In July 1999, MEH sold its 50% ownership in NewEnergy to the AES
Corporation for approximately $50 million in consideration.  As part
of the transaction, two promissory notes were issued by NewEnergy
totaling $22.8 million.  One of the promissory notes in the principal
amount $11.4 million was paid on July 24, 2000 and the remaining
promissory note for $11.4 million was paid on July 23, 2001.



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

     Based on the way we organize our operations and evaluate
performance, we have two reportable business segments.  UniSource
Energy's principal business segment is TEP, an electric utility
business.  The other reportable business segment consists of the
unregulated energy businesses of Millennium (see Note 3).

     Intersegment revenues are not material.  The only significant
reconciling adjustment is for the elimination of the intercompany note
between UniSource Energy and TEP as well as the related interest
income and expense.  All other intercompany activity and balances have
been eliminated. We disclose selected financial data for our business
segments in the following tables:

----------------------------------------------------------------------
                              Segments
                          -----------------
                                                            UniSource
                                             Reconciling      Energy
                          TEP    Millennium  Adjustments  Consolidated
----------------------------------------------------------------------
                                     - Thousands of Dollars  -
Income Statement
----------------
Three months ended
 June 30, 2001:
  Operating Revenues   $404,027     $ 4,828     $(2,240)     $406,615
----------------------------------------------------------------------
  Net Income (Loss)
  Before Income Taxes    33,643      (7,393)     (2,324)       23,926
----------------------------------------------------------------------
  Net Income (Loss)      18,904      (4,253)     (1,397)       13,254
----------------------------------------------------------------------

Three months ended
 June 30, 2000:
  Operating Revenues   $235,570      $1,609       $(704)     $236,475
----------------------------------------------------------------------
  Net Income (Loss)
  Before Income Taxes    13,263      (2,246)     (2,153)        8,864
----------------------------------------------------------------------
  Net Income (Loss)      13,387      (1,433)     (1,295)       10,659
----------------------------------------------------------------------

Six months ended
 June 30, 2001:
  Operating Revenues   $685,827     $ 8,773     $(4,320)     $690,280
----------------------------------------------------------------------
  Net Income (Loss)
  Before Income Taxes
  and Cumulative Effect
  of Accounting
  Change                 73,981     (11,820)     (4,624)       57,537
----------------------------------------------------------------------
  Cumulative Effect of
  Accounting Change         470           -           -           470
----------------------------------------------------------------------
Net Income (Loss)        42,415      (7,116)     (2,780)       32,519
----------------------------------------------------------------------

Six months ended
 June 30, 2000:
  Operating Revenues   $412,193      $2,663       $(902)     $413,954
----------------------------------------------------------------------
  Net Income (Loss)
  Before Income Taxes    14,071      (2,627)     (4,050)        7,394
----------------------------------------------------------------------
  Net Income (Loss)      13,301          36      (2,436)       10,901
----------------------------------------------------------------------
Balance Sheet
-------------
Total Assets,
 June 30, 2001       $2,669,308    $133,199    $(84,444)   $2,718,063
Total Assets,
 December 31, 2000    2,600,935     167,331     (96,882)    2,671,384
----------------------------------------------------------------------


NOTE 5.  COMMITMENTS AND CONTINGENCIES
--------------------------------------
  TEP COMMITMENTS AND CONTINGENCIES

     Four Corners Generating Station Commitment

     TEP is a 7% owner of Units 4 and 5 of the Four Corners Generating
Station.  The station participation agreement requires that if one of
the participants fails to make its payments for operation of the
station when due, the other station participants must make such
payments on behalf of the defaulting party, in proportion to their
ratable ownership interest in the station, for a period of up to six
months.  During this time the defaulting participant is entitled to
its share of the power generated by the station.  After the grace
period, the defaulting participant must make its payments in arrears
before it would be entitled to its continuing share of power.

     Southern California Edison Company (SCE) is a 48% owner of the
station.  SCE has publicly disclosed that due to the high cost of
wholesale power in California which to date it has not been able to
recover from customers, it may no longer be able to continue to meet
its financial obligations.  SCE has made all of its payments for the
station for periods through July 31, 2001.  However, we are uncertain
whether SCE will be able to continue to make its payments for the
remainder of 2001.  Based on the operating budget for the station for
the year 2001, in the event that SCE were to fail to pay, TEP may be
required to pay on SCE's behalf, for the power SCE receives, an
average amount of $1 million per month for up to six months.  TEP is
unable to predict whether it will be required to make any such
payments on SCE's behalf in the future.

  MILLENNIUM COMMITMENTS

     See Note 3 for a description of Millennium's commitments.

  RESOLUTION OF TEP CONTINGENCIES

     Income Tax Assessments

     In 2000 the IRS issued an income tax assessment for the 1994,
1995 and 1996 tax years.  The audit for such period was settled in the
second quarter of 2001, and after reviewing the impact of the final
assessment on our accrued tax liabilities and the potential for
assessments related to later tax years, no adjustments to the deferred
tax valuation allowance were deemed necessary.


NOTE 6.  Wholesale Accounts Receivable and Allowances
-----------------------------------------------------

     Market prices for wholesale power were significantly higher
during the first two quarters of 2001 and the third and fourth
quarters of 2000 than in the first two quarters of 2000 due to the
rising price of natural gas and a shortage of generation in the
Western Region of the United States.  During January and February
2001, SCE and Pacific Gas & Electric Company (PG&E), two of the
largest utility market participants in California, defaulted on
payments due to the California Power Exchange (CPX) and California
Independent System Operator (CISO) for power consumed in the fourth
quarter of 2000 and the first quarter of 2001.  On January 30, 2001,
the CPX suspended its day-ahead and day-of energy trading and
subsequently ceased operations and filed for bankruptcy.  Beginning in
January 2001, the California Department of Water Resources (CDWR) was
authorized to make energy purchases on behalf of California customers.
PG&E filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code on April 6, 2001.  SCE signed a Memorandum of Understanding with
the CDWR on April 9, 2001, which sets forth a comprehensive plan
calling for legislation, regulatory action and definitive agreements
designed to resolve certain aspects of the energy crisis and restore
SCE's creditworthiness and liquidity.  Although TEP did not make sales
directly to either SCE or PG&E in 2000 or 2001, it did sell
approximately $58 million of power to the CPX and the CISO during 2000
and $7 million in January 2001.  TEP sold $9 million of power to the
CDWR in the first quarter of 2001 and $6 million in the second quarter
of 2001, all of which has been paid according to terms.

     The CPX has withheld some amounts due to parties, including TEP,
that sold power to the CPX in the fourth quarter of 2000 and the first
quarter of 2001.  In addition, under default provisions contained in
the CPX tariff, the CPX has allocated the defaults of CPX participants
to remaining participants based upon the level of trading activity of
each participant during the preceding three-month period.  Not only
have initial defaults of a CPX debtor been charged back to the other
participants, but defaults by other participants on charge-backs have
also been charged back.  TEP has not collected the full amount due for
sales to the CPX and CISO in the fourth quarter of 2000 and the first
quarter of 2001 and TEP has been assessed amounts due as charge-backs.
A number of CPX participants filed suit against the CPX in February
2001, and a preliminary injunction was implemented that precluded the
CPX from issuing any more invoices for charge-backs, attempting to
collect on charge-backs or exercising against collateral.  In April
2001, the FERC ordered the CPX to issue new invoices reflecting the
reversal of the charge-backs on the CPX accounting records.

     Also during 2000, the FERC established certain soft caps on
prices for power sold at the CPX.  The caps did not have a significant
impact on sales to the CPX during the first three quarters of 2000.
However, during the fourth quarter of 2000 and the first quarter of
2001, prices for power in the day-ahead and real-time markets
frequently exceeded the caps established by FERC.  During March 2001,
the FERC issued two orders requiring certain generators that sold
power to California in January and February 2001 to either refund
amounts over specified market prices or provide further data to defend
their transactions.  TEP was not named in either of these orders.

     Other parties in California have indicated an intent to seek
return of revenues earned by wholesale power suppliers which they
determine to be "unlawful profits."  The determination of what would
constitute "unlawful profits" is unclear at the present time.  In June
2001, a FERC administrative law judge (ALJ) convened a conference to
negotiate a voluntary settlement between California and numerous power
generators.  California claims that it was overcharged up to $9
billion for wholesale power purchases since May 2000.  Representatives
from over 100 parties and participants in the Western power market,
including the state of California and power generators, negotiated for
two weeks but failed to reach an agreement.  In July 2001, based on
the ALJ's recommendations, the FERC ordered hearings to determine
refunds/offsets applicable to wholesale sales into the California
Independent System Operator's spot markets for the period from October
2, 2000 to June 20, 2001.  The order established the methodology that
will be used to calculate the amount of refunds.  This methodology
will likely result in refunds substantially lower than the $9 billion
claimed by California. We are unable to predict the length of and
outcome of the FERC hearings and the outcome of any subsequent
lawsuits and appeals that might be filed.  As a participant in the
June 2001 refund proceedings, TEP will be subject to any final refund
orders.  TEP does not expect its refund liability to exceed the $16
million already reserved.

     On February 21, 2001, TEP filed a complaint at the FERC charging
that the State of California, California Governor Gray Davis, and the
CPX violated the Federal Power Act by letting the CDWR seize the
forward contracts of SCE and PG&E at the CPX without prior FERC
approval.  TEP contends that this seizure violates the CPX tariff
which provides for the liquidation of favorable forward positions to
mitigate a market participant's default amount.

     We considered the potential non-payment for certain amounts due
to TEP but not yet paid, the charge-back billings to TEP and the
potential implication of the soft caps if they were extended
retroactively to the CPX and CISO markets when we calculated our
allowances for doubtful accounts and potential refunds for wholesale
transactions for 2000 and 2001.  We have recorded allowances amounting
to approximately $16 million, $7 million of which was recorded in the
first quarter of 2001 and $9 million of which was recorded in the
fourth quarter of 2000.  These allowances reserve in full the unpaid
amounts which are past due to TEP.  We recorded no such allowances in
periods prior to the fourth quarter of 2000.

     Accounts receivable from Electric Wholesale Sales, net of
allowances, totaled $73 million at June 30, 2001 and $64 million at
December 31, 2000.  These amounts are included in Accounts Receivable
on the balance sheet.  These balances, net of the above-mentioned
allowances, have been collected in full as of the date of this filing.


NOTE 7.  INCOME TAXES
---------------------
     The differences between the income tax expense (benefit) and the
amount obtained by multiplying pre-tax income 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,
                                 2001       2000       2001      2000
----------------------------------------------------------------------
                                       - Thousands of Dollars -
Federal Income Tax Expense
 at Statutory Rate            $ 8,374   $  3,102  $ 20,412   $  2,588
  State Income Tax Expense,
   Net of Federal
   Deduction                    1,172        435     2,858        363
  Depreciation Differences
   (Flow Through Basis)         1,356      1,574     2,606      2,135
  Foreign Operations of
   Millennium Energy
   Businesses                      17         62         9     (1,674)
  Reduction in Valuation
   Allowance - Benefit              -     (7,000)        -     (7,000)
  Other                          (247)        32       (85)        81
----------------------------------------------------------------------
Total Federal and State Income
 Tax Expense (Benefit)        $10,672   $ (1,795) $ 25,800   $ (3,507)
======================================================================

                                                   TEP
                                --------------------------------------
                               Three Months Ended     Six Months Ended
                                    June 30,                June 30,
                                2001       2000       2001       2000
----------------------------------------------------------------------
                                       - Thousands of Dollars -
Federal Income Tax Expense
 at Statutory Rate            $11,775   $  4,642  $ 26,167   $  4,925
  State Income Tax Expense,
   Net of Federal Deduction     1,648        650     3,663        689
  Depreciation Differences
   (Flow Through Basis)         1,356      1,574     2,606      2,135
  Reduction in Valuation
   Allowance - Benefit              -     (7,000)        -     (7,000)
  Other                           (40)        10       (88)        21
----------------------------------------------------------------------
Total Federal and State Income
 Tax Expense (Benefit)        $14,739   $   (124) $ 32,348   $    770
======================================================================


     Income tax expense (benefit) included in the income statements
consists of the following:

                                            UniSource Energy
                               ---------------------------------------
                               Three Months Ended     Six Months Ended
                                    June 30,               June 30,
                                2001       2000        2001       2000
----------------------------------------------------------------------
                                       - Thousands of Dollars -
Operating Expenses            $10,449   $ (3,237) $ 24,021    $(5,235)
Other Income (Deductions)         223      1,442     1,467      1,728
Cumulative Effect of
 Accounting Change                  -          -       312          -
----------------------------------------------------------------------
Total Income Tax Expense
 (Benefit)                    $10,672   $ (1,795) $ 25,800   $ (3,507)
======================================================================

                                                  TEP
                               ---------------------------------------
                               Three Months Ended     Six Months Ended
                                    June 30,               June 30,
                                2001       2000        2001       2000
----------------------------------------------------------------------
                                       - Thousands of Dollars -
Operating Expenses            $11,986   $ (2,057) $ 27,181   $ (3,119)
Other Income (Deductions)       2,753      1,933     4,855      3,889
Cumulative Effect of
 Accounting Change                  -          -       312          -
----------------------------------------------------------------------
Total Income Tax Expense
 (Benefit)                    $14,739   $   (124) $ 32,348   $    770
======================================================================

     Due to the financial restructuring, a change in TEP's ownership
occurred for tax purposes in December 1991.  This change limits our
use of the NOL and ITC generated before 1992 under the tax code.  At
December 31, 2000, we had approximately $138 million of NOL and $20
million of ITC subject to the pre-1992 limitation and $164 million of
NOL not subject to the limitation.  Because of the valuation allowance
amounts recorded, we do not expect these annual limitations to have a
material adverse impact on the financial statements.


NOTE 8.  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, 2001 and 2000, 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 8, 2001 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.


NOTE 9.  RECLASSIFICATIONS
--------------------------

     We have made reclassifications to the prior quarter (see Note 2)
and the prior year financial statements for comparative purposes.
These reclassifications had no effect on net income.


<PAGE>

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

     UniSource Energy Corporation (UniSource Energy) is a holding company
that owns the outstanding common stock of Tucson Electric Power Company
(TEP) and Millennium Energy Holdings, Inc. (Millennium).  TEP is an
electric utility which has provided electric service to the community of
Tucson, Arizona, for over 100 years and whose revenues reached $1 billion,
for the first time, in 2000.  Millennium is a holding company that invests
in unregulated ventures related to the energy business.  We conduct our
business in these two primary business segments--TEP's Electric Utility
Segment and the Millennium Energy Businesses Segment.

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

     * operating results during the second quarter and first six months of
       2001 compared with the same periods in 2000,
     * changes in liquidity and capital resources during the second quarter
       and first six months of 2001, and
     * expectations of identifiable material trends which may affect our
       business in the future.

     TEP is the principal operating subsidiary of UniSource Energy and
accounts for substantially all of its assets and revenues.  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 seasonal nature of the electric
utility business causes operating results to vary significantly from
quarter to quarter.  At June 30, 2001, Millennium's unregulated energy-
related affiliates comprised approximately 5% of total assets, but at times
have had a significant impact on our consolidated net income and cash
flows.

     Management's Discussion and Analysis should be read in conjunction
with the Condensed Consolidated Financial Statements, beginning on page 2,
which present the results of operations for the quarters and six month
periods ended June 30, 2001 and 2000.  Management's Discussion and Analysis
explains the differences between periods for specific line items of the
Condensed Consolidated Financial Statements.

OVERVIEW
--------

     UniSource Energy recorded net income of $13.3 million for the second
quarter of 2001, and net income of $32.5 for the first six months of 2001.
This compares with net income of $10.7 million in the second quarter of
2000 and net income of $10.9 million for the first six months of 2000.  The
improvement in second quarter performance over the prior year is primarily
the result of increased wholesale marketing activities.  Wholesale revenues
more than tripled due to sales of available generating capacity, increased
trading activities and significantly higher prices in the western U.S.
energy markets.  Wholesale market prices dropped significantly, however, in
June 2001.  Therefore, results from wholesale marketing activities for the
first half of 2001 may not be indicative of results from these activities
for the remainder of 2001.  See Results of Operations for further detail.

     OUTLOOK AND STRATEGY

     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:

  *  Continue to maintain our transmission and distribution system to
     reliably serve our retail customers.
  *  Efficiently manage our generating resources and add capacity as
     necessary to serve our retail customers.  We have added peaking resources
     in the Tucson area to support expected growth in 2001.
  *  Evaluate the expansion of the Springerville Generating Station by
     constructing Springerville Units 3 and 4.  This additional generating
     capacity would provide energy under long-term contracts to potential
     wholesale power purchasers in Arizona and New Mexico and allow us to spread
     the fixed costs of the existing common facilities over two additional
     generating units.
  *  Take advantage of opportunities to sell in the wholesale power markets
     while carefully managing the risks associated with such activities.
  *  Look for ways to reduce or control operating costs in order to improve
     profitability.  Because our Settlement Agreement provides for a retail rate
     cap through 2008, we can benefit from cost savings and from expected growth
     in our retail customer base.
  *  Continue to use some of our cash flows to de-leverage TEP.  In
     addition to our required debt retirements of $51 million, in the last three
     years we prepaid approximately $34 million in First Mortgage Bonds and
     invested $54 million in Springerville Unit 1 lease debt.  We will continue
     to look for opportunities to retire or refinance higher coupon debt and
     make additional investments in lease obligations.
  *  Make ongoing investments in our technology affiliates.  Although we
     will record certain development expenses and experience some losses in
     these investments, we believe that over time these ventures will be
     profitable.

     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.


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

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

     RETAIL
     ------

     The electric utility industry is undergoing significant regulatory
change designed to encourage competition in the sale of electricity and
related services.  As of January 1, 2001, all of TEP's retail customers
became eligible to choose an alternate energy supplier.  Currently, there
is one certified energy service provider (ESP) in TEP's retail service
area.  Currently, none of TEP's customers are being served by ESPs.  It is
possible, however, that with open access in our retail service territory,
customers may elect to purchase their energy requirements from ESPs in the
future.  TEP also competes against gas service suppliers and others who
provide energy services.

     TEP will continue to serve certain large retail customers under
contracts negotiated by TEP.  TEP has contracts with two major mining
customers.  One of these contracts extends to 2006, with pricing tied,
within a range, to the price of copper.  TEP's other major mining customer
publicly announced in March 2001 that because of certain economic
conditions, it plans to curtail production at its facilities in TEP's
service area during August and September 2001.  TEP believes that it will
be able to use this excess capacity to service its retail load during this
peak energy demand period, or sell into the wholesale market.    TEP has
also entered into several load management agreements with certain large
retail customers for its summer peak demand period.

     TEP'S SETTLEMENT AGREEMENT AND RETAIL ELECTRIC COMPETITION RULES

     In December 1996, the ACC adopted the Retail Electric Competition
Rules that provided a framework for the introduction of retail electric
competition in Arizona.  These Rules, as amended and modified, were
approved by the ACC in September 1999.  For TEP, the Rules became effective
in January 2000, and consumer choice was available to all customers by
January 1, 2001.  However, certain conditions had to be met before
electricity could be sold competitively in TEP's service territory.
Examples of these include ACC approval of TEP's direct access tariffs, ACC
certification of ESPs, and execution of and compliance with direct access
service agreements by ESPs and TEP.

     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.  The Settlement Agreement provides,
among other things, that TEP cap its retail rates until December 31, 2008,
except under certain circumstances.  These include the impact of (a)
termination of the Fixed Competitive Transition Charge component of retail
rates as a result of the early collection of $450 million of transition
recovery assets; (b) changes in transmission charges due to regional
transmission organizations; and (c) a transmission and distribution rate
filing required in June 2004 which may result in lower rates.  The
Settlement Agreement also requires TEP to transfer its generating and other
competitive assets to a subsidiary by December 31, 2002.

     The status of the Rules and the ability of ESPs to continue to sell
competitive services may be subject to change due to recent court
proceedings.  Several parties, including certain rural electric
cooperatives (Cooperatives), filed lawsuits in Maricopa County Superior
Court challenging the Rules, contending, among other things, that allowing
marketplace competition to determine rates violated the ACC's
constitutional duty to set rates.  In November 2000, the Court found the
Rules to be unconstitutional and unlawful due to the failure of the Rules
to establish a fair value rate base for competitive electric service
providers and because certain of the Rules were not submitted for
certification to the Arizona Attorney General.  The Court also invalidated
all ACC orders granting certificates of convenience and necessity to
competitive electric service providers in Arizona.

     The ACC, RUCO (Residential Utility Consumer Office) and certain large
industrial customers have appealed the decision to the Court of Appeals.
In addition, the Cooperatives have filed a notice of cross appeal of
certain aspects of the decision.  Implementation of the judgment is stayed
and the Rules remain in effect pending the outcome of the appeals.

     TEP cannot predict the effect of the recent court decision on the
outcome of the appeals to which it is a party or the effect of the
judgment, if affirmed upon appeal, on the introduction of retail electric
competition in Arizona.

     WHOLESALE
     ---------

     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.  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 United States;
  *  limited availability of capacity throughout the western United States;
  *  restructuring of the electric utility industry in Arizona, California
     and other western states;
  *  the reduced availability and high prices of natural gas;
  *  precipitation, which affects hydropower availability;
  *  transmission constraints; and
  *  environmental restrictions and the cost of compliance.

     The average market price for around-the-clock energy based on the Dow
Jones Palo Verde Index increased significantly in 2000 compared with 1999
and in the quarter and six months ended June 30, 2001 compared with 2000 as
shown below.

     Average Market Price for around-the-clock energy        MWh
         Year ended December 31, 2000                       $ 87
         Year ended December 31, 1999                         26

         Quarter ended June 30, 2001                         135
         Quarter ended June 30, 2000                          65

         Six months ended June 30, 2001                      156
         Six months ended June 30, 2000                       46

     In June 2001, however, market prices for electricity began to fall
significantly, and by June 30, spot and forward energy prices were all
below $100 per MWh.  This reduction was due to a number of factors,
including more generation online in the Western U.S., lower natural gas
prices, mild June temperatures in California, and finally, the
implementation of the FERC-ordered price mitigation plan beginning June 20,
2001.  See Western Energy Markets, below.  As of August 2001, we estimate
the average forward around-the-clock market price for the balance of 2001
to be approximately $40 per MWh.  This compares with our prior estimate of
$226 per MWh for the same five-month period based on the forward price curve
in effect at April 30, 2001.

     We cannot predict whether these lower prices will continue, or whether
changes in various factors that influence demand and capacity will cause
prices to rise again during 2001.

     NEW LONG-TERM WHOLESALE POWER CONTRACT

     In the first quarter of 2001, TEP signed a five-year wholesale
contract to supply 60 MW of electricity to Phelps Dodge Energy Services
(PDES).  The contract calls for TEP, beginning in March 2001, to supply the
power at all times except during TEP's peak customer energy demand period,
from July through September of each year.  It also gives PDES the option of
receiving the power at several of its operations outside TEP's service
territory in Arizona and New Mexico.  Under the contract, TEP can interrupt
delivery of power if the utility experiences significant loss of any
electric generating resources.  TEP expects the contract to generate
revenues of about $30 million annually through 2006.

     TRANSMISSION ACCESS

     In 1997, TEP, and other transmission owners and users located in the
southwestern U.S., began to investigate the feasibility of forming an
Independent System Operator (ISO) for the region.  As a result, they formed
a non-profit corporation named Desert STAR in September 1999.  In December
1999, the FERC issued FERC Order 2000, which established timelines for all
transmission owning entities to join a Regional Transmission Organization
(RTO) and defined the minimum characteristics and functions of an RTO.  An
ISO would satisfy the RTO requirements and would be responsible for
ensuring transmission reliability and nondiscriminatory access to the
regional transmission grid.  Over 140 entities have become members of
Desert STAR.

     In June 2001, Desert STAR and seven southwestern electric utilities,
including TEP, submitted an informational filing with the FERC outlining
their proposal for an RTO encompassing about 380,000 square miles in
Arizona, New Mexico, Colorado, eastern Wyoming, western Texas, southern
Nevada and southern California.  The proposed area includes 26,000 miles of
transmission lines rated at 115 kV and above, which carries a peak load of
about 28,000 MW.  In the filing, Desert STAR and the filing utilities
indicated that the transmission owners are considering a change from Desert
STAR's current non-profit structure to a for-profit limited liability
company, which would require FERC approval.  Desert STAR estimates that
operations will commence in late 2003.  The reorganization of Desert STAR
as an RTO will be subject to approval by the FERC and state regulatory
authorities in the region.

     On July 11, 2001, the FERC ordered existing independent system
operators to consolidate into four regional transmission operators:
Northeast, Southeast, Midwest and West.  The Western region would consist
of the 11 Western states.  We are unsure at this time what effect this
ruling would have on Desert STAR.

     The ACC Retail Electric Competition Rules also require the formation
and implementation of an Arizona Independent Scheduling Administrator
Association (AISA).  The purpose of the AISA is to oversee the application
of operating protocols to ensure statewide consistency for transmission
access.  The AISA is anticipated to be a temporary organization until the
implementation of an ISO or RTO.  TEP participated in the creation of the
AISA, a not-for-profit entity, and the compliance filing at the FERC for
approval of its rates and protocols for operation.  In June 2001, the FERC
accepted the compliance filing and conditionally accepted service
agreements filed by the AISA under its tariff, effective May 3, 2001.
However, the FERC denied a request for rehearing of its conclusion that
retail customers choosing to remain with the incumbent supplier under
bundled retail Standard Offer rates approved by the ACC will be taking
unbundled retail transmission service under the jurisdiction of the FERC.
The ACC has appealed this decision, and the AISA has intervened on behalf
of the ACC.  The case is pending before the Ninth Circuit Court of Appeals.
In July 2001, TEP began assessing customers a fee to help fund the AISA.
TEP continues to participate with the other Affected Utilities in
developing the AISA's structure and protocols in response to retail
competition.

     On July 24, 2001, the ACC Commissioners initiated a 90-day comment
period to provide stakeholders the opportunity to comment on a list of
issues related to the AISA.  Among the issues to be discussed, is a
proposal by one of the Commissioners to end the obligation of Arizona
utilities to fund and participate in the AISA because the AISA has
fulfilled its obligation to develop transmission operating protocols.

  WESTERN ENERGY MARKETS
  ----------------------

     Due to high market prices and various factors influencing supply and
demand (as detailed above), the California energy markets, as administered
by the CPX and the CISO, became dysfunctional during 2000.  These high
prices and extraordinary market conditions have affected not only
California, but the entire Western Region of the United States and Canada.
During January and February 2001, SCE and PG&E, two of the California
utilities that are the largest market participants, defaulted on payments
due to the CPX and CISO for power consumed in the fourth quarter of 2000
and the first quarter of 2001.  On January 30, 2001, the CPX suspended its
day-ahead and day-of energy trading and subsequently ceased operations and
filed for bankruptcy.  Beginning in January 2001, the California Department
of Water Resources (CDWR) was authorized to make energy purchases on behalf
of California customers.  PG&E filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code on April 6, 2001.  SCE signed a Memorandum of
Understanding (MOU) with the CDWR on April 9, 2001, which sets forth a
comprehensive plan calling for legislation, regulatory action and
definitive agreements designed to resolve certain aspects of the energy
crisis and restore SCE's creditworthiness and liquidity.

     Although TEP did not make sales directly to either of these utilities
in 2000 or 2001, it did make sales to the CPX and CISO and therefore is
affected by the defaults noted above.  We cannot predict the outcome of
either the PG&E bankruptcy or the implementation of the SCE MOU and the
effect on TEP's ability to collect the full amounts it is owed by the CPX
and CISO.

     PAYMENT DEFAULTS AND ALLOWANCES FOR DOUBTFUL ACCOUNTS

     TEP sold approximately $58 million of power to the CPX and CISO during
2000 and $7 million during January of 2001.  As a result of payment
defaults by market participants, TEP's collection shortfall was
approximately $9 million for sales made in 2000 and $7 million for sales
made in 2001.  We recorded an allowance for doubtful accounts and potential
refunds for wholesale transactions for the full amount of these uncollected
amounts in the fourth quarter of 2000 and the first quarter of 2001.
Reserves for potential non-payment of amounts due to TEP for sales to the
CPX and CISO during 2000 and 2001 total $16 million.  TEP sold $6 million
of power to the CDWR in the second quarter of 2001, and a total of $15
million of power for the first six months of 2001, all of which has been
paid according to terms.

     Under default provisions contained in the CPX tariff, the CPX
allocated the defaults of CPX participants to remaining participants based
upon the level of trading activity of each participant during the preceding
three-month period.  Not only were initial defaults of a CPX debtor charged
back to the other participants, but defaults by other participants on
charge-backs have also been charged back.  A number of CPX participants
filed suit against the CPX in February 2001, and a preliminary injunction
was implemented that precluded the CPX from issuing any more invoices for
charge-backs, attempting to collect on charge-backs or exercising against
collateral.  In April 2001, the FERC ordered the CPX to issue new invoices
reflecting the reversal of the charge-backs on the CPX accounting records.
As noted above, the CPX has ceased operations and filed for bankruptcy.
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
bankruptcy stay.

     DEPARTMENT OF ENERGY ORDERS

     On December 14, 2000, the Secretary of Energy issued an order designed
to address the electric emergency in California.  The order required
entities, including TEP, to "sell electricity to the California ISO that is
available in excess of electricity needed by each entity to render service
to its firm customers."  This order was extended several times due to the
continuation of the emergency situation.  The order was allowed to expire
on February 7, 2001.  Another emergency order requiring four generators
(not including TEP) to continue to sell power was extended through March
16, 2001.

     During January 2001, TEP sold approximately $7 million of energy to
the CPX and the CISO.  Since January 12, however, planned generator
maintenance and increased firm customer demand resulted in a decrease of
excess energy available for sale from TEP to California.  Furthermore, the
most critical energy shortages have been in Northern California.  Due to
transmission constraints, energy cannot be moved from the South, where our
generation is located, to the North.  Therefore, requests for power under
the Department of Energy orders were minimal after January 12.

     FERC MATTERS

     On February 21, 2001, TEP filed a complaint at the FERC charging that
the State of California, California Governor Gray Davis, and the CPX
violated the Federal Power Act by letting the CDWR seize the forward
contracts of SCE and PG&E at the CPX without prior FERC approval.  TEP
contends that this seizure violates the CPX tariff which provides for the
liquidation of favorable forward positions to mitigate a market
participant's default amount.  TEP's complaint requests the FERC to: void
the seizure of these assets by Governor Davis; require the State of
California to pay fair market value for the contracts or assume the
wholesale power liabilities of PG&E and SCE to the PX; and declare that the
wholesale rates produced under the CPX tariffs are just and reasonable and
should be collected from the utilities' retail customers.  This complaint
is pending at the FERC.

     During March 2001, the FERC issued two orders requiring certain
generators that sold power to California in January and February 2001 to
either refund amounts over specified market prices or provide further data
to defend their transactions.  TEP was not named in either of these orders.

     On June 19, 2001, the FERC issued an order adopting a price mitigation
plan applicable to certain wholesale power sales in California and
throughout the western United States during the period June 20, 2001
through September 30, 2002.  This order applies to spot market (day-ahead
and hour-ahead) transactions in the western United States when operating
reserves fall below 7.5% in California and the CISO calls a Stage 1 alert.
The market price is then capped at the operating cost of the highest cost
unit in operation during the Stage 1 alert.  The price during non-Stage 1
periods is based on 85% of the price established during the most recent
Stage 1 alert.  Sellers that do not wish to establish rates on the basis of
this price mitigation plan may propose cost-of-service rates covering all
of their generating units in the Western Systems Coordinating Council for
the duration of the mitigation plan.  Since the adoption of this plan,
wholesale market prices in the West have continued to drop.

     On June 25, 2001, a FERC administrative law judge (ALJ) convened a
conference to negotiate a voluntary settlement between California and
numerous power generators.  California claims that it was overcharged up to
$9 billion for wholesale power purchases since May 2000.  Representatives
from over 100 parties and participants in the Western power market, including
the state of California and power generators, negotiated for two weeks but
failed to reach an agreement.

     In July 2001, based on the ALJ's recommendations, the FERC ordered
hearings to determine refunds/offsets applicable to wholesale sales into the
California ISO's spot markets for the period from October 2, 2000 to June
20, 2001.  The order established the methodology that will be used to calculate
the amount of refunds.  The FERC methodology specified that the price-mitigation
formula contained in its June 19, 2001 order be applied to the period from
October 2, 2000 through June 20, 2001.  This methodology will likely result in
refunds substantially lower than the $9 billion claimed by California.  We are
not able to predict the length of and outcome of the FERC hearings and the
outcome of any subsequent lawsuits and appeals that might be filed.  As a
participant in the June 2001 refund proceedings, TEP will be subject to any
final refund orders.  TEP does not expect its refund liability to exceed the
approximately $16 million already reserved.  See Western Energy Markets, Payment
Defaults and Allowances for Doubtful Accounts above.

     There are several other outstanding legal issues, complaints, and lawsuits
concerning the California energy crisis related to the FERC, wholesale power
suppliers, SCE, PG&E, the CPX and CISO.  New events and issues related to the
California energy crisis arise each day, and we cannot predict the outcome of
these issues or lawsuits.  We believe, however, that we are adequately reserved
for our transactions with the CPX and CISO.  See Note 6 of Notes to Financial
Statements.

     SCE POWER EXCHANGE AGREEMENT

     As part of a 1992 litigation settlement, TEP and SCE agreed to a ten-
year power exchange agreement.  The agreement began in May 1995 and
requires SCE to provide firm system capacity of 110 MW to TEP during summer
months.  TEP is obligated to return to SCE in the winter months the same
amount of energy that it received during the preceding summer.  For
example, in the summer of 2000 TEP received approximately 140,000 MWh from
SCE and returned the same amount during the winter months from November
2000 to February 2001.  Since 1995, TEP has relied upon the 110 MW provided
under this agreement as a firm source of energy to supply its retail load
during the peak summer months.  During the summer of 2000 there were two
days when power emergencies were called in California and SCE did not
deliver energy to TEP.  This caused TEP to have to purchase power for
several peak hours of the day at high spot power prices.  TEP believes the
agreement requires SCE to purchase power for TEP's benefit under those
circumstances, and during subsequent power alerts, SCE did purchase and
provide power to TEP under the agreement.  As of July 31, 2001, SCE has
delivered energy to TEP as required by the terms of this agreement, except
for limited occasions.

     The continuing energy crisis in California and the deteriorating
financial condition of SCE has created uncertainty as to the ongoing
availability of this power for TEP.  In the event that this resource is not
available to TEP in 2001 and 2002, TEP would need to seek alternative
sources of capacity and energy at prices that may be in excess of the cost
of this resource.  To the extent possible, TEP would rely upon the new
peaking units which went in-service in June 2001, interruptible contracts,
load-shifting by large industrial customers, and reserve sharing
arrangements with other utilities as resources before purchasing power on
the spot markets.  Further, in May and June 2001, TEP purchased power under
forward contracts to mitigate the risk of the loss of this or other
resources to meet its summer peaking needs through September.

     To the extent that TEP takes less power during the summer than the
maximum allowed under the contract, TEP's obligation to return power in the
winter to SCE would be decreased by a similar amount.  TEP could then sell
this power into the wholesale energy markets.

     FOUR CORNERS GENERATING STATION COMMITMENT

     TEP is a 7% owner of Units 4 and 5 of the Four Corners Generating
Station.  The station participation agreement requires that if one of the
participants fails to make its payments for operation of the station when
due, the other station participants must make these payments on behalf of
the defaulting party, in proportion to their ratable ownership interest in
the station, for a period of up to six months.  During this time, the
defaulting participant is entitled to its share of the power generated by
the station.  After the grace period, the defaulting participant must make
its payments in arrears before it would be entitled to its continuing share
of power.

     SCE is a 48% owner of the station.  SCE has publicly disclosed that
due to the high cost of wholesale power in California, which to date it has
not been able to recover from customers, it may no longer be able to
continue to meet its financial obligations.  SCE has made all of its
payments for the operation of the station through July 31, 2001.  However,
we are uncertain whether SCE will be able to continue to make its payments
for the remainder of 2001.  Based on the operating budget for the station
for the year 2001, in the event that SCE were to fail to pay, TEP may be
required to pay on SCE's behalf, for the power SCE receives, an average
amount of $1 million per month for up to six months.  TEP is unable to
predict whether it will be required to make any such payments on SCE's
behalf in the future.

  REGULATORY MATTERS
  ------------------

     TEP generally uses the same accounting policies and practices used by
unregulated companies for financial reporting under GAAP.  However,
sometimes these principles, such as FAS 71, require special accounting
treatment for regulated companies to show the effect of regulation.  For
example, in setting TEP's retail rates, the ACC may not 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 cover 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
relating to recovery of TEP's transition costs and standard retail rates,
we discontinued application of FAS 71 to our generation operations.

     We continue to apply FAS 71 to the distribution and transmission
portions of TEP's business, our regulated operations.  We periodically
assess whether we can continue to apply FAS 71 to these operations.  If we
stopped applying FAS 71 to TEP's remaining regulated operations, we would
write off the related balances of TEP's regulatory assets as a charge in
our income statement.  Based on the balances of TEP's regulatory assets at
June 30, 2001, if we had stopped applying FAS 71 to TEP's remaining
regulated operations, we would have recorded an extraordinary loss, after
tax, of approximately $254 million.  While regulatory orders and market
conditions may affect our cash flows, our cash flows would not be affected
if we stopped applying FAS 71.

  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 2000 Form 10-K.

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

     COMMODITY PRICE RISK

     TEP is exposed to commodity price risk primarily relating to changes
in the market price of electricity, as well as changes in fuel costs
incurred to generate electricity.  TEP enters into forward contracts to buy
or sell energy at a specified price at a future date.  These contracts are
considered to be derivative commodity instruments.  Generally, TEP commits
to future sales based on expected excess generating capability.  However,
rather than producing additional power, TEP may enter into a forward
purchase contract to satisfy the forward sales contract if the market
prices are favorable.  The forward sales contracts that are satisfied with
forward purchase contracts do not require any physical delivery of energy
by TEP.  However, to take advantage of anticipated market opportunities,
TEP is at various times in a net open position.  A net open position means
it has either committed to sell more electricity than it has purchase
contracts to cover or it has committed to purchase more power than it needs
for its selling commitments.  To limit exposure to price risk, TEP has
trading policies with limits as to total open positions.  TEP continually
reviews its trading policies and limits to respond to the constantly
changing market conditions.

     TEP measures its market risk related to its commodity exposure by
using a sensitivity analysis.  The market prices used to determine fair
value are estimated based on various factors including broker quotes,
exchange prices, over the counter prices and time value.  As of June 30,
2001, an increase of 10% in the market prices of electric power from
quarter-end levels would have decreased the fair value of its derivative
commodity instruments by less than $1 million.  Beginning in 2001, changes
in the fair value of these derivative instruments are measured in our
financial statements in accordance with FAS 133.  See Note 2 of Notes to
Financial Statements and Accounting for Derivative Instruments and Hedging
Activities, below.

     TEP may have increased commodity price risk during 2001 and 2002, due
to a potential need to replace a power resource previously available to it
during the summer peak usage periods.  See Western Energy Markets, SCE
Power Exchange Agreement, above.  In the event that this resource were
unavailable to TEP, or if other unexpected losses of generation resources
were to occur due to unplanned outages or natural disasters, TEP would need
to seek alternative sources of capacity and energy at prices likely to be
significantly in excess of the cost of these resources.  To the extent
possible, TEP would rely upon the new peaking units which went in-service
in June and July 2001, interruptible contracts, load-shifting by large
industrial customers, and reserve sharing arrangements with other utilities
as resources before purchasing power on the spot markets.  Further, in May
and June 2001, TEP purchased power under forward contracts to mitigate the
risk of the loss of resources to meet its summer peaking needs through
September.  The price of this purchased power exceeds our generation costs.
Under the terms of its Settlement Agreement, TEP's retail rates are frozen
through December 31, 2008, except under certain circumstances.  As such,
TEP would not be able to recover any such increased purchased power costs
without further action by the ACC.  See Competition, Retail above.

     TEP also purchases coal and natural gas in the normal course of
business for fuel for its generating plants.  TEP acquires its coal under
long-term coal supply contracts.  Purchases of gas historically provided
fuel for only 3-4% of total generation.  During the quarter ended June 30,
2001, approximately 12% of TEP's generation was fueled by natural gas.
Market prices of natural gas also increased significantly in the second
quarter 2001 and the first six months of 2001, compared with the prior
year.  The increased market prices, combined with increased usage, caused
gas costs to comprise 32% of total fuel expense for the quarter ended June
30, 2001 and 36% for the first six months of 2001.  In contrast,
approximately 9% of TEP's generation was gas-fueled in the second quarter
of 2000.  Gas comprised 23% of total fuel expense in the second quarter and
12% in the first six months of 2000.  The sustained high levels of
wholesale energy prices in the first six months of 2001 made it profitable
for TEP to run its gas-fired generating units to sell into the wholesale
market.  TEP is assured of its gas supply as a retail customer of the local
gas supplier in the region.  TEP periodically negotiates its contract with
its gas supplier to establish terms relating to pricing and scheduling of
gas delivery.  See Fuel Supply below.  TEP also entered into two swap
agreements in May 2001 to hedge our risk of fluctuations in the market
price of gas related to approximately a third of our anticipated gas
purchases from June through October 2001.

     CREDIT RISK

     TEP is exposed to credit risk in its energy trading activities related
to potential nonperformance by counterparties.  TEP manages the risk of
counterparty default by performing financial credit reviews and setting
limits and 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.  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 impacted by payment defaults by SCE and PG&E for
amounts owed to the CPX and CISO.

     TEP sold approximately $58 million of power to the CPX and CISO during
2000 and $7 million during January of 2001.  As a result of payment
defaults by SCE and PG&E, TEP's collection shortfall was approximately $9
million for sales made in 2000 and $7 million for sales made in 2001.  We
recorded an allowance for doubtful accounts for the full amount of these
uncollected amounts in the fourth quarter of 2000 and the first quarter of
2001.  We recorded no such allowances in years prior to 2000.  See Western
Energy Markets, Payment Defaults and Allowances for Doubtful Accounts,
above.  Based on a review of its credit exposures at June 30, 2001, TEP
does not anticipate any nonperformance by any of its other counterparties
and did not record any additional reserves in the second quarter of 2001.

     ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting
for Derivative Instruments and Hedging Activities.  A derivative financial
instrument or other contract derives its value from another investment or
designated benchmark.  We buy and sell wholesale power using forward
contracts which are considered to be derivatives.  See Note 2 of Notes to
Financial Statements.

     On January 1, 2001, we recorded the cumulative effects of adopting FAS
133 in our financial statements by recognizing all derivatives at fair
value and recording the following amounts on our forward contracts as of
January 1, 2001:

     Income Statement: after-tax unrealized gain of $470,000.
     Balance Sheet:
     *  Other Comprehensive Income, a component of stockholders' equity: after-
        tax unrealized loss of $14 million, and
     *  Forward Sale and Purchase Contracts Liability of $22 million.

     In addition to our forward contracts to buy and sell wholesale power,
we entered into two swap agreements in May 2001 to hedge our risk of
fluctuations in the market price of gas related to approximately a third of
our anticipated gas purchases from June through October 2001.  These swaps
are considered derivatives and are designated as cash flow hedges.  Under
FAS 133, we record unrealized gains and losses on our forward contracts and
swap agreements and adjust the related liability on a monthly basis to
reflect the market prices at the end of the month.  The net unrealized
gain/loss on forward sales and purchases related to TEP's energy trading
activity is recorded in Total Operating Revenues.  All cash flow hedge
contracts open at June 30, 2001 will be settled by December 31, 2001, and
as a result, the unrealized losses included in Other Comprehensive Income
as of June 30, 2001 will be reversed from Other Comprehensive Income by
year-end and realized gains or losses will be recorded on the income
statement.

  FUEL SUPPLY
  -----------

     TEP and its local gas supplier completed negotiations for a new
Special Gas Procurement Agreement to replace the agreement that expired on
May 31, 2001.  This agreement provides for all of TEP's natural gas
commodity and transportation needs for use in power generation and has an
initial five year term.  The agreement will automatically continue after
the initial term unless one party gives notice of termination at least 90
days prior to the anniversary date of the agreement.  The ACC approved the
agreement, effective June 28, 2001.

  FUTURE GENERATING RESOURCES
  ---------------------------

     TEP

     TEP determined that additional peaking resources would be needed in
Tucson beginning in 2001 to improve local system reliability.  TEP
purchased a 75 MW gas turbine and Millennium purchased a 21 MW gas turbine
to address this need.  The generators came online in June to meet summer
peaking needs.  These units increase UniSource Energy's net generating
capability to approximately 2,000 MW.  TEP's generating needs in the short
and intermediate term will be for additional peaking resources, not for
base-load generating capacity.  TEP will continue to add peaking resources
in the Tucson area as needed, based upon our forecasts of retail and firm
wholesale load.

     MILLENNIUM

     In recognition of the strong retail growth in Arizona and New Mexico,
as well as existing and projected base-load generation capacity needs in
the western region, we are evaluating the expansion of the coal-fired
Springerville Generating Station by constructing Springerville Units 3 and
4.  Springerville was originally designed for four units.  Units 3 and 4
would consist of two 380 MW coal-fired base-load generating units at the
same site as Springerville Units 1 and 2, and would allow us to spread the
fixed costs of the existing common facilities over two additional
generating units.  We are developing the project scope and schedule and
defining the terms of an engineering, procurement, and construction
contract.  We are also continuing the permitting process, evaluating
alternative financing plans, and negotiating with potential equity
participants and long-term power purchasers.

     The ACC approved construction of a third and fourth unit at the
Springerville Generation Station in 1977 and 1987, respectively, providing
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.  In July 2001, TEP filed an application asking the ACC to
schedule a hearing addressing the need for the fourth electric generating
unit.  TEP is also currently involved in discussions with the U.S.
Environmental Protection Agency and Arizona Department of Environmental
Quality to determine specific levels of acceptable emissions at
Springerville.  Current plans call for total emissions from all four units
to be less than the emissions from Units 1 and 2 today.

     Environmental activist groups have expressed concerns regarding the
construction of Units 3 and 4.  Such concerns have been expressed in the
permitting and ACC proceedings and may extend to other forums and to issues
apart from the proposed construction.  One such group has sent the Company
a notice of intent to sue for alleged violations of the Clean Air Act at
the Springerville Generating Station.  The notice alleges 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.  If any such
action were commenced, the Company would vigorously contest such claims.

     We anticipate that power purchase agreements with project off-takers
and the engineering, procurement and construction contract will be signed
in the next few months.  We expect that construction would begin by the
first quarter of 2002, with commercial operation of Unit 3 expected to
occur in late 2004, followed six months later by Unit 4.  We can make no
assurances, however, about the ultimate timing, or whether we will proceed
with this project.  See also Future Generating Resources, Millennium in the
2000 Form 10-K.


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

     UniSource Energy recorded net income of $13.3 million or $0.40 per
average share of Common Stock in the second quarter of 2001 and net income
of $32.5 million or $0.98 per share in the first six months of 2001.  This
compares with net income of $10.7 million or $0.33 per average share of
Common Stock in the second quarter of 2000 and net income of $10.9 million
or $0.34 per share in the first six months of 2000.

     The primary factor affecting the results of operations in both the
second quarter and first six months of 2001 was strong results from
wholesale marketing activities at TEP.  Wholesale revenues more than
tripled due to sales of available generating capacity, increased trading
activities and significantly higher prices in the Western U.S. energy
markets.  Wholesale market prices dropped significantly, however, in June
2001.  Therefore, results from wholesale marketing activities for the first
half of 2001 may not be indicative of results from these activities for the
remainder of 2001.

  CONTRIBUTION BY BUSINESS SEGMENT

     The table below shows the contributions to our consolidated after-tax
earnings by our two business segments, as well as parent company expenses
and inter-company eliminations, for the second quarter and first six months
of 2001 and 2000:

                                      Three Months Ended      Six Months Ended
                                           June 30,                June 30,
                                       2001       2000         2001       2000
-------------------------------------------------------------------------------
                                              - Millions of Dollars -
Business Segment
  TEP                                $ 18.9     $ 13.4       $ 42.4     $ 13.3
  Millennium                           (4.3)      (1.4)        (7.1)       0.0
  Parent Company and Inter-Company
    Eliminations                       (1.3)      (1.3)        (2.8)      (2.4)
-------------------------------------------------------------------------------
    Consolidated Net Income          $ 13.3     $ 10.7       $ 32.5     $ 10.9
===============================================================================

     Parent company results include the after-tax interest expense accrued
on a note payable from UniSource Energy to TEP.  This note was provided to
TEP in exchange for the stock of Millennium in January 1998.  TEP's results
include interest income from this note.

     TEP's electric utility business accounts for substantially all of
UniSource Energy's assets and revenues. 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 energy
businesses are discussed in Results of Millennium Energy Businesses below.

  NEW ACCOUNTING STANDARD

     On January 1, 2001, we adopted FAS 133, Accounting for Derivative
Instruments and Hedging Activities.  As a result, TEP began recognizing
unrealized gains and losses related to forward sale and purchase energy
contracts in its income statement in the first quarter of 2001.  The net
unrealized gain/loss on forward sales and purchases related to TEP's energy
trading activity is recorded in Total Operating Revenues.  The net
unrealized gain (pre-tax) for the second quarter ended June 30, 2001 was $4
million and for the first six months was $7 million.  See Note 2 of Notes
to Financial Statements.

     The analysis of electric wholesale sales and purchased power costs
below excludes the impact of these unrealized gains and losses required to
be recorded by FAS 133.

  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 sales are affected by market prices in the
wholesale energy market, competing sources of energy and capacity in the region.

     TEP continued to experience significant growth in wholesale energy
sales and revenues during the second quarter and first six months of 2001,
primarily due to significantly higher regional market prices and
opportunities to sell its excess generating capacity to California and
other western wholesale market participants during the first five months of
the year.  These revenues more than tripled in the second quarter of 2001
compared with the second quarter of 2000, and comprised 57% of total
revenues.  TEP's electric wholesale sales consist primarily of four types
of sales:

     (1)  Sales of firm capacity under long-term contracts for periods of more
          than one year.  TEP currently has long-term contracts with two
          entities to sell firm capacity: Salt River Project and the NTUA.
     (2)  Forward contracts to sell energy for periods of up to one year.
          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 months or one year periods.  Forward
          contracts may consist of sales of TEP's excess generating capacity,
          or may represent trading activity, where forward sales and purchases
          may be made within established limits to take advantage of favorable
          market opportunities.
     (3)  Short-term economy energy sales in the daily or hourly markets at
          fluctuating spot market prices and other non-firm energy sales,
          including sales under a long-term interruptible contract with PDES
          entered into by TEP in March 2001.
     (4)  Sales of transmission service.

Comparisons of TEP's kilowatt-hour sales delivered and the corresponding
electric revenues for the second quarter and first six months of 2001 are
shown below:

<TABLE>
<CAPTION>

                                                 Sales                       Operating Revenue
--------------------------------------------------------------------------------------------------
                                                          Percent                          Percent
Three Months Ended June 30,             2001     2000     Change       2001       2000     Change
--------------------------------------------------------------------------------------------------
                                           - Millions of kWh -          - Millions of Dollars -
<S>                                     <C>      <C>      <C>          <C>        <C>      <C>
Electric Retail Customers              2,120    2,127     (0.3%)    $ 171.7    $ 172.9     (0.7%)
--------------------------------------------------------------------------------------------------
Electric Wholesale Sales Delivered:
  Long-term Contracts                    305      255     19.6%        10.5       12.9    (18.6%)
  Forward Contracts                    1,053      365    188.5%       153.0       11.5      N/M
  Short-term Sales and Other             596      606     (1.7%)       61.5       35.9     71.3%
  Transmission                             -        -        -          1.2        0.9     33.3%
--------------------------------------------------------------------------------------------------
Total Electric Wholesale Sales         1,954    1,226     59.4%       226.2       61.2    269.6%
--------------------------------------------------------------------------------------------------
        Total                          4,074    3,353     21.5%     $ 397.9    $ 234.1     70.0%
==================================================================================================

<CAPTION>

                                                 Sales                      Operating Revenue
--------------------------------------------------------------------------------------------------
                                                          Percent                          Percent
Six Months Ended June 30,               2001     2000     Change       2001       2000     Change
--------------------------------------------------------------------------------------------------
                                           - Millions of kWh -          - Millions of Dollars -
<S>                                     <C>      <C>      <C>          <C>        <C>      <C>
Electric Retail Customers              3,889    3,849      1.0%     $ 306.3    $ 304.2      0.7%
--------------------------------------------------------------------------------------------------
Electric Wholesale Sales Delivered:
  Long-term Contracts                    639      588      8.7%        27.0       26.0      3.8%
  Forward Contracts                    1,671      839     99.2%       202.1       24.0    742.1%
  Short-term Sales and Other           1,179    1,291     (8.7%)      138.7       54.3    155.4%
  Transmission                             -        -        -          2.1        1.7     23.5%
--------------------------------------------------------------------------------------------------
Total Electric Wholesale Sales         3,489    2,718     28.4%       369.9      106.0    249.0%
--------------------------------------------------------------------------------------------------
        Total                          7,378    6,567     12.3%     $ 676.2    $ 410.2     64.8%
==================================================================================================

</TABLE>

     TEP's kWh sales to retail customers decreased 0.3% in the second
quarter of 2001 compared with the same period in 2000, despite an increase
of 2.5% in retail customers and slightly warmer temperatures.  Cooling
Degree Days increased from 484 to 498 days in the second quarter of 2001.
The retail kWh sales decrease is due to a 5.4% decrease in sales to mining
customers, which was offset, in part, by a 3.1% increase in sales to
commercial customers.  The decrease in mining sales is due to cutbacks in
production by one of our mining customers in response to supply and demand
factors in the world copper market and reductions in demand for copper.
Retail revenues also decreased slightly in the second quarter of 2001
compared with the same period in 2000, reflecting the decreased kWh sales
and the effect of a 1.0% across-the-board rate reduction effective July 1,
2000.  For the first six months of 2001, retail kWh sales and revenues
increased slightly compared with the same period in 2000 due to the higher
kWh sales and revenues in the first quarter of 2001.

     Kilowatt-hour electric wholesale sales increased by 59% in the second
quarter of 2001 compared with 2000, while revenues from electric wholesale
sales increased by 270% in the same period.  The largest increase in
revenues was in sales under forward contracts.  For the first six months of
2001, kilowatt-hour electric wholesale sales increased by 28% and the sales
revenues increased by 249%, compared with the same period in 2000, again
with the largest increase in sales under forward contracts.  The higher
volumes and revenues under forward contracts represent increased purchase
and resale transactions.  Short-term economy sales in the daily and hourly
markets also increased as sustained higher market prices made it economical
for TEP to run its gas generation units to produce energy to sell to other
regional utilities and marketers.  Factors contributing to the higher
market prices include increased demand due to population and economic
growth in the region, higher natural gas prices, dysfunction in the
California marketplace, increased maintenance outages due to higher than
normal operating levels, lower availability of hydropower resources,
transmission constraints, and environmental constraints.

  FUEL AND PURCHASED POWER EXPENSES

     Fuel expense at TEP's generating plants increased by $15 million or
30% primarily because of higher natural gas prices and increased usage of
gas generation to meet increased kWh sales.  This includes gas expense for
the new gas-fired peaking units, which went in-service in June 2001.  Also,
scheduled maintenance outages at Springerville during the second quarter of
2000 resulted in lower fuel expense compared with the second quarter of
2001.  The average cost of fuel per kWh generated was 2.12 cents for second
quarter 2001 and 1.90 cents for second quarter 2000.  For the six months
ended June 30, 2001, Fuel expense increased $43 million, a 46% increase.
The average cost of fuel per kWh generated for the first six months of 2001
and 2000 was 2.26 cents and 1.73, respectively.

     Purchased Power expense increased by $131 million in the second
quarter of 2001 over the same period in 2000 because of higher wholesale
energy prices, increased purchases in the forward and spot energy markets
for trading purposes, under agreements to resell to wholesale customers,
and to support retail load.  Forward purchases of energy to support retail
load during June 2001 were made at prices significantly above our cost of
generation.  For the six months ended June 30, 2001, Purchased Power
expense increased $161 million, a 246% increase over the same period in
2000.

  OTHER OPERATING EXPENSES

     Other Operations expense increased $6 million, or 24%, in the second
quarter of 2001 compared with the same period in 2000 primarily because of
an additional $3 million in administrative expense for post-retirement
medical and other benefits.  Other Operations expense increased $12 million
for the first six months of 2001 for the reasons mentioned above and due to
reserves recorded in the first quarter of 2001 to cover our credit exposure
for risk of non-payment from electric wholesale sales to California made in
January 2001.  See Note 6 of Notes to Financial Statements.

     Maintenance Expense was lower in the second quarter of 2001 compared
with the same quarter of 2000 due to the scheduled maintenance outage at
Springerville Unit 1 in the spring of 2000.  Maintenance expense increased
by $2.5 million or 10% for the first six months of 2001 compared with the
first six months of 2000 because of scheduled maintenance at the Irvington,
Springerville Unit 2 and San Juan Unit 2 generating plants in the first
quarter of 2001.

     Income Taxes increased $14 million in the second quarter of 2001 and
$30 million in the first six months compared with the same periods in 2000.
Higher pre-tax income in both periods and the recognition of $6 million in
tax benefits in the second quarter of 2000 from the resolution of various
IRS audit issues contributed to the increases.  See Note 7 of Notes to
Financial Statements.

  OTHER INCOME (DEDUCTIONS)

     TEP's income statements for the quarters ended June 30, 2001 and 2000
each include $2 million of interest income on the promissory note TEP
received from UniSource Energy in exchange for the transfer of its stock in
Millennium.  On UniSource Energy's consolidated income statement, this
income is eliminated as an inter-company transaction.

     Other interest income for the quarter and six months ended June 30,
2001 was higher than the same periods in 2000 due to higher average cash
balances and increased interest income on investments in Springerville Unit
1 lease debt.  See Liquidity and Capital Resources below.

     Other income for the second quarter of 2001 also included a $1 million
pre-tax gain from the sale of real estate in April 2001.

  INTEREST EXPENSE

     Interest Expense for the second quarter and first six months of 2001
decreased by $2 million and $5 million, respectively compared with the same
periods in 2000.  These reductions were primarily due to lower amortization
of losses on reacquired debt and decreases in the average interest rate on
long-term variable rate tax-exempt debt.


RESULTS OF MILLENNIUM ENERGY BUSINESSES
---------------------------------------

     The table below provides a breakdown by Millennium-owned subsidiaries
of the after-tax net income and losses recorded by the Millennium Energy
Businesses for the quarter and six months ended June 30, 2001 compared with
the same periods in 2000.

                                    Three Months Ended        Six Months Ended
                                          June 30,                 June 30,
                                      2001       2000           2001      2000
-------------------------------------------------------------------------------
                                               - Millions of Dollars -

Energy Technology Investments       $ (3.2)    $ (1.3)       $ (5.3)   $ (1.8)
Nations Energy                        (0.1)      (0.7)         (0.2)      0.9
Other                                 (1.0)       0.6          (1.6)      0.9
-------------------------------------------------------------------------------
Total Millennium                    $ (4.3)    $ (1.4)       $ (7.1)    $ 0.0
===============================================================================

     ENERGY TECHNOLOGY INVESTMENTS

     Millennium recorded a net loss of $3.2 million related to its Energy
Technology Investments in the second quarter and a net loss of $5.3 million
for the first six months of 2001.  The major factors contributing to these
losses are Global Solar's increased development efforts of its solar
modules and Infinite Power Solutions' expenditures to develop thin-film
solid state rechargeable batteries.  See Note 3 of Notes to Financial
Statements.

     NATIONS ENERGY

     Nations Energy recorded small net losses in both the second quarter
and first six months of 2001 compared with a net loss of $0.7 million in
the quarter ended June 30, 2000 and a net profit of $0.9 million in the six
months ended June 30, 2000.  Nations Energy's earnings in the first six
months of 2000 included a $1.5 million after-tax gain on the sale of a
minority interest in a power project in the Czech Republic, offset by a
$1.5 million decrease in the market value of its Panama investment.

     OTHER MILLENNIUM INVESTMENTS

     The net loss shown in the "Other" line item in the second quarter and
first six months of 2001 relates primarily to a $2.4 million after-tax loss
from Millennium's investment in MicroSat, partially offset by approximately
$0.5 million in after-tax interest income on Millennium investments and
Millennium stand alone tax benefits of $0.9 million.  The net gain in the
second quarter and first six months of 2000 reflects interest income on
Millennium investments.


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

     UNISOURCE ENERGY

     On May 11, 2001 UniSource Energy declared a cash dividend in the
amount of $0.10 per share on its Common Stock.  This dividend, totaling
approximately $3 million, was paid June 8, 2001 to shareholders of record
at the close of business May 25, 2001.  On August 2, 2001, UniSource Energy
declared a cash dividend in the amount of $0.10 per share on its Common
Stock, payable September 10, 2001 to shareholders of record at the close of
business August 15, 2001.

     UniSource Energy's Board of Directors reviews our dividend policy 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
and Millennium.

     TEP

     In December 2000, TEP declared and paid a dividend of $30 million to
UniSource Energy.

     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,
2001, the required minimum net worth was $250 million.  TEP's actual net
worth at June 30, 2001 was $330 million.  As of June 30, 2001, TEP was in
compliance with the terms of the Credit Agreement.  See Investing and
Financing Activities, TEP Credit Agreement, below.

     The ACC Holding Company Order states that TEP may not pay dividends to
UniSource Energy in excess of 75% of its earnings until TEP's equity ratio
equals 37.5% of total capital (excluding capital lease obligations).  As of
June 30, 2001, TEP's equity ratio on that basis was 22.6%.

     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 December 2000 dividend from 2000
earnings since TEP had an accumulated deficit, rather than positive
retained earnings.


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

  CASH FLOWS
  ----------

     UNISOURCE ENERGY

     Consolidated cash and cash equivalents increased from the June 30,
2000 balance of $63 million to $179 million at June 30, 2001.  For the
twelve-month period ended June 30, 2001, cash generated from operating
activities exceeded consolidated net cash outflows for investing and
financing.

     Net cash flows from operating activities increased by $56 million in
the first six months of 2001 compared with the same period in 2000.  The
net increase resulted primarily from the following factors:

  *  $89 million increase in cash receipts from sales to wholesale and
     retail customers, net of increased fuel and purchased power costs paid;
     offset by
  *  $22 million increase in operations and maintenance costs paid;
  *  $15 million increase in income taxes paid.

     Net cash used for investing activities totaled $80 million during the
first six months of 2001 compared with $66 million during the same period
in 2000.  Capital expenditures were $17 million higher in 2001, and
included $15 million incurred by Millennium in relation to the purchase of
a gas turbine, which was placed in-service in June 2001.  Investments in
and loans to Millennium Energy Businesses also increased by $9 million
offset by $7 million in proceeds from the sale of real estate in 2001.
Other significant investing activities in 2000 included: (i) the $28
million purchase of Springerville Unit 1 Lease debt by Millennium and (ii)
Nations Energy's $20 million in proceeds from the sale of its interest in
the Czech Republic power project.

     Net cash used for financing activities totaled $18 million in the
first six months of 2001 compared with $75 million during the same period
in 2000.  In 2001, the major uses of cash for financing activities were $15
million in scheduled payments that retired capital lease obligations, and
$7 million in dividends paid.  In 2000, $47 million of TEP's maturing
12.22% Series first Mortgage Bonds were retired on June 1, 2000, $23
million in capital lease obligations were retired, and $5 million in
dividends paid.

     UniSource Energy's consolidated cash balance, including cash
equivalents, at August 6, 2001 was approximately $167 million.  We invest
cash balances in high-grade money market securities with an emphasis on
preserving the principal amounts invested.

     TEP

     Cash and cash equivalents increased from the June 30, 2000 balance of
$31 million to $151 million at June 30, 2001.  For the twelve-month period
ended June 30, 2001, net cash inflows from operating activities exceeded
net cash outflows from investing and financing activities.

     The reasons for the changes in TEP's statement of cash flows are
incorporated above in the analysis of the changes in UniSource Energy's
consolidated cash flows.

     TEP's consolidated cash balance, including cash equivalents, at August
6, 2001 was approximately $132 million.

     TEP expects to generate enough cash flow during the next 12 months to
fund continuing operating activities, capital expenditures, required debt
maturities, and to pay dividends to UniSource Energy.  However, TEP's cash
flows may vary due to changes in wholesale market conditions, changes in
short-term interest rates and other factors.  If cash flows were to fall
short of our expectations, or if monthly cash requirements temporarily
exceed available cash balances, TEP would borrow from the Revolving Credit
Facility.


INVESTING AND FINANCING ACTIVITIES
----------------------------------

  UNISOURCE ENERGY
  ----------------

     During the next 12 months, UniSource Energy expects to use cash to
fund investments in Millennium's unregulated energy businesses and to pay
dividends to shareholders.  We expect our sources of cash to be dividends
from our subsidiaries, primarily TEP.  Although no specific offerings are
currently contemplated, UniSource Energy may also issue debt and/or equity
securities from time to time.  If available cash falls short of
expectations, we would reevaluate the investment requirements of
Millennium's unregulated energy businesses and/or seek additional financing
for, or investments in, those businesses by unrelated parties.

  TEP
  ---

     CAPITAL EXPENDITURES

     TEP's capital expenditures for the three months and six months ended
June 30, 2001 were $27 million and $56 million, respectively.  TEP's
capital budget for the year ending December 31, 2001 is approximately $99
million.  These authorized expenditures include costs for TEP to comply
with current federal and state environmental regulations.  All of these
estimates are subject to continuing review and adjustment.  Actual
construction expenditures may be different 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 Communications Company (Citizens)
entered into a project development agreement for the construction of a
transmission line from Tucson to Nogales, Arizona.  TEP has presented
environmental impact testimony to the Arizona Power Plant and Transmission
Line Siting Committee as a first step towards gaining approval for the
location of the line.  Additional hearings will be held in mid-August.  The
proposed line is planned to be in-service by December 31, 2003.
Construction costs will range from $20 million to $70 million, depending on
the size of the line to be built.  This project could provide an
opportunity for TEP to interconnect with Mexico, providing further
reliability and market opportunities in the region.

     The estimated expenditures of $99 million for the year 2001 do not
include any amounts for the new transmission line described above, or for
the potential expansion of the Springerville Generating Station.
Springerville generation expenditures are expected to be made by another
UniSource Energy subsidiary.  See Investing and Financing Activities,
Millennium, below.

     TEP CREDIT AGREEMENT

     As of June 30, 2001 and as of August 6, 2001, TEP had no borrowings
outstanding under its $100 million Revolving Credit Facility.

     TEP is required by its Credit Agreement to maintain certain financial
covenants including (a) a minimum Consolidated Tangible Net Worth equal to
the sum of $133 million plus 40% of cumulative Consolidated Net Income
since January 1, 1997, (b) a minimum Cash Coverage Ratio ranging from 1.50
in 2001 and increasing to 1.55 in 2002, and (c) a maximum Leverage Ratio
ranging from 6.40 in 2001 and decreasing to 6.20 in 2002.  TEP is in
compliance with each of these covenants.

  MILLENNIUM -- UNREGULATED ENERGY BUSINESSES
  -------------------------------------------

     During the past few years, some of the unregulated energy businesses
of Millennium have required significant amounts of capital.  During 1999
and 2000, however, we took the opportunity to realize the value from
certain of these more capital intensive investments and focus on emerging
energy production and storage technologies.  We expect this trend to
continue in 2001 as we look to sell our interests in our remaining Nations
Energy investments and continue to make investments in our technology
companies.

     Below we provide an update on our significant investments, commitments
and investment proceeds in the quarter ended June 30, 2001 and the first
six months of 2001.

     SALE OF NEWENERGY, INC.

     On July 23, 1999, MEH sold its 50% ownership in NewEnergy to the AES
Corporation for approximately $50 million in consideration.  As part of the
transaction, two promissory notes were issued by NewEnergy totaling $22.8
million.  One of the promissory notes in the principal amount $11.4 million
was paid on July 24, 2000 and the remaining promissory note for $11.4
million was paid on July 23, 2001.

     INVESTMENTS IN ENERGY TECHNOLOGIES

     Under a September 2000 agreement reached with INICA, Inc., formerly
ITN Energy Systems, Inc., Millennium agreed to certain equity and credit
commitments:

  *  a $20 million credit line to Global Solar,
  *  a $6 million credit line to Infinite Power Solutions,
  *  a $10 million equity commitment and a $10 million credit line to
       MicroSat, and
  *  a $3 million equity commitment and a $1 million credit line to the
       product development subsidiary.

     As of June 30, 2001, Millennium had funded approximately $17 million
of its combined $26 million commitment to Global Solar and Infinite Power
Solutions, $13 million of which was funded during 2001.  In the six months
ended June 30, 2001, Millennium provided $10 million in equity funding to
MicroSat.  MicroSat had not drawn against its $10 million credit line as of
June 30, 2001.  In July 2001, Millennium completed funding its $3 million
equity commitment to the product development subsidiary.  Millennium
expects to fund approximately $15 million to its various Energy Technology
Investments in the second half of 2001.  A significant portion of the
funding under these agreements will be used for research and development
purposes, establishment of the production line, and other administrative
costs.  We recognize expense as these funds are expended for administrative
and research and development purposes.

     NATIONS ENERGY COMMITMENTS

     Nations Energy, through its subsidiaries, has a 26% equity interest in
a 160 MW power project located in Curacao, Netherland Antilles, which is
scheduled for completion in 2003.  Nations Energy contributed approximately
$2 million to this project in the six months ended June 30, 2001, bringing
its total investment in the project as of June 30, 2001 to $5 million.  In
addition, in December 2000, Nations Energy provided a $7 million deposit to
fund scheduled equity contributions through April 2003.  As of June 30,
2001, $5.4 million of this deposit remained.  Nations Energy holds a $10
million deposit primarily for possible construction overruns.

     Currently, we do not intend to make any material investments in new
projects through Nations Energy and we continue to review options for the
sale of Nations Energy's remaining assets.

     OTHER INVESTMENTS AND COMMITMENTS

     In July 2000, Millennium made a $15 million capital commitment to a
limited partnership which will fund energy related investments.  As of June
30, 2001, Millennium has funded $5.7 million under this commitment, $4.3
million of which was funded in 2001.  The remaining $9.3 million is
expected to be invested within two to three years.  A member of the
UniSource Energy Board of Directors has a minor investment in the project.
An affiliate of this board member serves as the general partner.

     In November 2000, Millennium made a $5 million capital commitment to a
venture capital fund that will focus on information technology, optics and
biotechnology in Tucson, Arizona.  A member of the UniSource Energy Board
of Directors owns the company that manages the fund.  As of June 30, 2001
Millennium had funded $142,000 under this commitment.  Millennium expects
to fund approximately $1 million under this agreement in 2001.

     We are evaluating the expansion of the coal-fired Springerville
Generating Station by constructing Springerville Units 3 and 4.
Springerville was originally designed for four units.  Units 3 and 4 would
consist of two 380 MW coal-fired base load generating units at the same
site as Springerville Units 1 and 2, and would allow us to spread the fixed
costs of the existing common facilities over the two additional generating
units.  We are developing the project scope and schedule and defining the
terms of an engineering, procurement, and construction contract.  We are
also continuing the permitting process, evaluating alternative financing
plans, and negotiating with potential equity participants and long-term
power purchasers.

     Environmental activist groups have expressed concerns regarding the
construction of Units 3 and 4.  Such concerns have been expressed in the
permitting and ACC proceedings and may extend to other forums and to issues
apart from the proposed construction.  One such group has sent the Company
a notice of intent to sue for alleged violations of the Clean Air Act at
the Springerville Generating Station.  The notice alleges 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.  If any such
action were commenced, the Company would vigorously contest such claims.

     We anticipate that power purchase agreements with project off-takers
and the engineering, procurement and construction contract will be signed
in the next few months.  Construction is expected to begin by the first
quarter of 2002, with commercial operation of Unit 3 expected to occur in
late 2004, followed six months later by Unit 4.  Total construction costs
for this project are expected to range from $800 million to $900 million
from 2002 to 2005, and total project costs, which include construction
costs, various development costs and interest during construction, are
expected to exceed $1 billion.  We can make no assurances, however, about
the ultimate timing, or whether we will proceed with this project.


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 TEP's retail service area.

     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 West, including
        hydroelectric resources, weather, natural gas prices and the impact
        of utility restructuring and generation divestitures in various
        states, as well as federal price controls.

     5. The creditworthiness of the entities to which TEP sells capacity and
        energy.

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

     7. Changes in governmental policies and regulatory actions with respect
        to financings 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 UniSource Energy or TEP.

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


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's and TEP's Annual Report on Form 10-K for the year ended December
31, 2000, 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.


<PAGE>

                        PART II - OTHER INFORMATION

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

None.


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

     UniSource Energy conducted its annual meeting of shareholders
on May 11, 2001.  At that meeting, the shareholders of UniSource
Energy elected members of the Board of Directors.

     The total votes were as follows:


Election of Directors
                                      Against                    Broker
                          For       or Withheld    Abstain     Non-Votes
                          ---       -----------    -------     ---------

Lawrence J. Aldrich   30,404,808      609,133      202,394         --
Larry W. Bickle       30,404,726      609,215      202,476         --
Elizabeth T. Bilby    30,582,316      431,625       24,886         --
Harold W. Burlingame  30,600,953      412,988        6,249         --
Jose L. Canchola      30,569,632      444,309       37,570         --
John L. Carter        30,589,472      424,469       17,730         --
Daniel W. L. Fessler  30,318,579      695,362      288,623         --
James S. Pignatelli   30,599,378      414,563        7,824         --
Martha R. Seger       30,566,210      447,731       40,992         --
H. Wilson Sundt       30,579,361      434,580       27,841         --


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

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

In its August 2, 2001 meeting, the UniSource Energy Board of Directors
elected two additional Board members.  The following new directors began
their term, effective August 2, 2001.

  *  Kenneth Handy - Business consultant; retired Vice President and CFO of
     The Permanente Medical Group, Inc. (Kaiser Permanente Medical Care
     Program).  Age 63.

  *  Warren Y. Jobe - Retired Senior Vice President of Southern Company and
     Executive Vice President of Georgia Power Company.  Age 60.


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,
                                             2001               2001
                                       --------------     ---------------

    Ratio of Earnings to Fixed Charges      1.95                1.88


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

(a)  Exhibits.

     -- See Exhibit Index.

(b)  Reports on Form 8-K.

      None.


<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 subsidiary.


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


Date:  August 13, 2001                  /s/    Kevin Larson
                                     ----------------------------
                                               Kevin Larson
                                      Vice President and Principal
                                             Financial Officer



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


Date:  August 13, 2001                  /s/    Kevin Larson
                                     -----------------------------
                                               Kevin Larson
                                      Vice President and Principal
                                             Financial Officer


<PAGE>

                               EXHIBIT INDEX

     11 - Statement re: computation of per share earnings - UniSource
          Energy.
     12 - Computation of Ratio of Earnings to Fixed Charges - TEP.
     15 - Letter regarding unaudited interim financial information.