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


                                 FORM 10-Q

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

                For The Quarterly Period Ended September 30, 2002

                                    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 November 7, 2002, 33,574,515 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.  Nature of Operations and Basis of Accounting Presentation.......10
  Note 2.  Regulatory Accounting...........................................10
  Note 3.  Accounting for Derivative Instruments, Trading Activities
             and Hedging Activities........................................11
  Note 4.  Millennium Energy Businesses....................................12
  Note 5.  Business Segments...............................................14
  Note 6.  Capital Leases and Investments in Lease Debt and Equity.........15
  Note 7.  Commitments and Contingencies...................................15
  Note 8.  Wholesale Accounts Receivable and Allowances....................16
  Note 9.  Income Taxes....................................................16
  Note 10. UniSource Energy Earnings Per Share (EPS).......................17
  Note 11. Change in Depreciable Asset Lives...............................18
  Note 12. Coal Contract Termination Fee...................................18
  Note 13. Asset Purchase Agreements.......................................18
  Note 14. New Accounting Pronouncements...................................19
  Note 15. Review by Independent Accountants...............................19

Item 2.  - Management's Discussion and Analysis of Financial Condition
    and Results of Operations
  Overview.................................................................20
  Asset Purchase Agreements................................................21
  Factors Affecting Results of Operations
    Sales to Mining Customers..............................................22
    Competition............................................................22
    Industry Restructuring.................................................23
    Western Energy Markets.................................................25
    Market Risks...........................................................26
    Generating Resources...................................................29
    Future Generating Resources............................................29
  Critical Accounting Policies.............................................30
  Results of Operations....................................................32
  Results of Millennium Energy Businesses..................................36
  Results of UED...........................................................37
  Dividends on Common Stock................................................37

<PAGE>

                             TABLE OF CONTENTS
                                (concluded)

  Liquidity and Capital Resources
    Overall Liquidity......................................................37
    Cash Flows
      UniSource Energy.....................................................38
      TEP..................................................................39
  Investing and Financing Activities
      UniSource Energy.....................................................39
      TEP..................................................................39
      Millennium...........................................................41
      UED..................................................................42
  Safe Harbor for Forward-Looking Statements...............................42

Item 3. - Quantitative and Qualitative Disclosures About Market Risk.......44

Item 4. - Controls and Procedures..........................................44


PART II - OTHER INFORMATION

Item 1. - Legal Proceedings................................................45

Item 5. - Other Information
    Additional Financial Data..............................................46
    Approval of Non-Audit Services.........................................46
    SEC Reports Available on UniSource Energy's Website....................46

Item 6. - Exhibits and Reports on Form 8-K.................................46

Signature Page.............................................................47
Certification Pursuant to Section 302 of the Sarabanes-Oxley Act...........48
Exhibit Index..............................................................52

<PAGE>

                                  DEFINITIONS

The abbreviations and acronyms used in the 2002 Third 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,
                                 a temporary organization required by the ACC
                                 Retail Electric Competition Rules.
Capacity.....................  The ability to produce power; the most power
                                 a unit can produce or the maximum that can
                                 be taken under a contract; measured in MWs.
CISO.........................  California Independent System Operator.
Citizens.....................  Citizens Communications Company.
Common Stock.................  UniSource Energy's common stock, without par
                                 value.
Company or UniSource Energy..  UniSource Energy Corporation.
Cooling Degree Days..........  An index used to measure the impact of weather
                                 on energy usage calculated by subtracting 75
                                 from the average of the high and low daily
                                 temperatures.
CPX..........................  California Power Exchange.
Credit Agreement.............  Credit Agreement between TEP and a syndicate
                                 of banks, dated as of December 30, 1997.
Desert STAR..................  The ISO formed in the southwestern U.S., in
                                 which TEP was a participant.
Emission Allowance(s)........  An Environmental Protection Agency-issued
                                 allowance which permits emission of one ton
                                 of sulfur dioxide.  These allowances can be
                                 bought or sold.
Energy.......................  The amount of power produced over a given
                                 period of time; measured in MWh.
ESP..........................  Energy Service Provider.
FAS 71.......................  Statement of Financial Accounting Standards
                                 No. 71: Accounting for the Effects of
                                 Certain Types of Regulation.
FAS 133......................  Statement of Financial Accounting Standards
                                 No. 133: Accounting for Derivative
                                 Instruments and Hedging Activities.
FERC.........................  Federal Energy Regulatory Commission.
GAAP.........................  Generally Accepted Accounting Principles.
GES..........................  Global Energy Solutions, Inc., was merged
                                 into Global Solar as a result of the letter
                                 agreement signed April 3, 2002.
Global Solar.................  Global Solar Energy, Inc., a company that
                                 develops and manufactures thin-film
                                 photovoltaic cells.  As a result of a letter
                                 agreement signed April 3, 2002, Millennium
                                 will own at least 81% of Global Solar.
IPS..........................  Infinite Power Solutions, Inc., a company that
                                 develops thin-film batteries.  As a result
                                 of a letter agreement signed April 3, 2002,
                                 Millennium will own at least 70% of IPS.
IRS..........................  Internal Revenue Service.
Irvington....................  Irvington Generating Station.
ISO..........................  Independent System Operator.
ITN..........................  ITN Energy Systems, Inc., a company owned 9%
                                 by Millennium, which was formed to provide
                                 research, development, and other services.
kWh..........................  Kilowatt-hour(s).
MEG..........................  Millennium Environmental Group, Inc., a wholly-
                                 owned subsidiary of Millennium, which manages
                                 and trades emission allowances, coal, and
                                 related financial instruments.
MicroSat.....................  MicroSat Systems, Inc., a company owned 35% by
                                 Millennium, 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).
NOPR.........................  Notice of Proposed Rulemaking; a notice issued
                                 by the FERC proposing standard market design
                                 rules for wholesale electricity, transmission,
                                 and ancillary services in the United States.
PG&E.........................  Pacific Gas and Electric Company.
Powertrusion.................  Powertrusion International, Inc.
Revolving Credit Facility....  $100 million revolving credit facility entered
                                 into under the Credit Agreement between a
                                 syndicate of banks and TEP.

<PAGE>

                                  DEFINITIONS
                                  (concluded)

RTO..........................  Regional Transmission Organization.
Rules........................  Retail Electric Competition Rules.
San Juan.....................  San Juan Generating Station.
San Juan Unit 1..............  Unit 1 of the San Juan Generating Station, which
                                 is 50% owned by TEP.
San Juan Unit 2..............  Unit 2 of the San Juan Generating Station, which
                                 is 50% owned by TEP.
SCE..........................  Southern California Edison Company.
Second Mortgage Bonds........  TEP's second mortgage bonds issued under the
                                 Indenture of Mortgage and Deed of Trust, dated
                                 as of December 1, 1992, of TEP to the Bank of
                                 New York, successor trustee, as supplemented.
Settlement Agreement.........  TEP's Settlement Agreement approved by the ACC in
                                 November 1999 that provided for electric retail
                                 competition and transition asset recovery.
Springerville................  Springerville Generating Station.
Springerville Coal Handling
  Facilities Leases..........  Leveraged lease arrangements relating to the coal
                                 handling facilities serving Springerville.
Springerville Common
  Facilities.................  Facilities at Springerville used in common with
                                 Springerville Unit 1 and Springerville Unit 2.
Springerville Unit 1.........  Unit 1 of the Springerville Generating Station.
Springerville Unit 2.........  Unit 2 of the Springerville Generating Station.
SRP..........................  Salt River Project Agricultural Improvement and
                                 Power District.
TEP..........................  Tucson Electric Power Company, the principal
                                 subsidiary of UniSource Energy.
UED..........................  UniSource Energy Development Company, a wholly-
                                 owned subsidiary of UniSource Energy, which
                                 engages in developing generation resources and
                                 other project development services and related
                                 activities.
UniSource Energy.............  UniSource Energy Corporation.
WestConnect..................  The for-profit RTO formed by the reorganization
                                 of Desert STAR, in which TEP is a participant.
WECC.........................  Western Electricity Coordinating Council, the
                                 organization formed upon the merger of the
                                 Western Systems Coordinating Council,
                                 Southwest Regional Transmission Association
                                 and Western Regional Transmission Association.

<PAGE>


                     Report of Independent Accountants


To the Board of Directors and Stockholders of
UniSource Energy Corporation and to the
Board of Directors and Stockholder 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 September
30, 2002, and the related condensed consolidated statements of income for
each of the three-month and nine-month periods ended September 30, 2002 and
2001 and the condensed consolidated statements of stockholders' equity for
the nine-month period ended September 30, 2002, and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 30, 2002 and 2001.  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, 2001, 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, 2002 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, 2001, is fairly stated in
all material respects in relation to the consolidated balance sheet from
which it has been derived.


PricewaterhouseCoopers LLP
Los Angeles, California
November 1, 2002

<PAGE>

                           PART I - FINANCIAL INFORMATION

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

UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                          Three Months Ended
                                                             September 30,
                                                           2002        2001
                                                              (Unaudited)
-------------------------------------------------------------------------------
                                                       - Thousands of Dollars -
Operating Revenues
 Electric Retail Revenues                               $214,432      $212,108
 Electric Wholesale Revenues                              41,125       206,913
 Net Gain (Loss) on TEP Forward Contracts and MEG
  Trading Activities                                         375        (2,916)
 Other Revenues                                            2,614         4,284
-------------------------------------------------------------------------------
    Total Operating Revenues                             258,546       420,389
-------------------------------------------------------------------------------
Operating Expenses
 Fuel                                                     58,422        67,807
 Purchased Power                                          23,345       202,419
 Coal Contract Termination Fee                            11,250             -
 Other Operations and Maintenance                         46,668        42,825
 Depreciation and Amortization                            31,107        30,401
 Amortization of Transition Recovery Asset                10,790         9,627
 Taxes Other Than Income Taxes                            11,753        12,034
-------------------------------------------------------------------------------
    Total Operating Expenses                             193,335       365,113
-------------------------------------------------------------------------------
      Operating Income                                    65,211        55,276
-------------------------------------------------------------------------------
Other Income (Deductions)
 Interest Income                                           5,231         3,566
 Other Income (Deductions)                                  (239)        9,268
-------------------------------------------------------------------------------
    Total Other Income (Deductions)                        4,992        12,834
-------------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                           14,225        14,996
 Interest on Capital Leases                               21,905        22,919
 Other Interest Expense                                    2,047         1,871
-------------------------------------------------------------------------------
    Total Interest Expense                                38,177        39,786
-------------------------------------------------------------------------------
Income Before Income Taxes and
 Cumulative Effect of Accounting Change                   32,026        28,324
 Income Tax Expense                                        9,207        12,776
-------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change      22,819        15,548
Cumulative Effect of Accounting Change - Net of Tax            -             -
-------------------------------------------------------------------------------
Net Income                                              $ 22,819      $ 15,548
===============================================================================
Average Shares of Common Stock Outstanding (000)          33,692        33,472
===============================================================================
Basic Earnings per Share
 Income Before Cumulative Effect of Accounting Change      $0.68         $0.46
 Cumulative Effect of Accounting Change - Net of Tax           -             -
 Net Income                                                $0.68         $0.46
===============================================================================
Diluted Earnings per Share
 Income Before Cumulative Effect of Accounting Change      $0.67         $0.45
 Cumulative Effect of Accounting Change - Net of Tax           -             -
 Net Income                                                $0.67         $0.45
===============================================================================
Dividends Paid per Share                                  $0.125         $0.10
===============================================================================

See Notes to Condensed Consolidated Financial Statements.

<PAGE>


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                          Nine Months Ended
                                                            September 30,
                                                           2002      2001
                                                             (Unaudited)
-------------------------------------------------------------------------------
                                                       - Thousands of Dollars -
Operating Revenues
 Electric Retail Revenues                               $521,064      $518,452
 Electric Wholesale Revenues                             125,911       567,657
 Net Gain (Loss) on TEP Forward Contracts and
  MEG Trading Activities                                     936         4,253
 Other Revenues                                            9,033        11,158
-------------------------------------------------------------------------------
    Total Operating Revenues                             656,944     1,101,520
-------------------------------------------------------------------------------
Operating Expenses
 Fuel                                                    164,937       203,900
 Purchased Power                                          46,909       419,251
 Coal Contract Termination Fee                            11,250             -
 Other Operations and Maintenance                        140,890       147,450
 Depreciation and Amortization                            96,075        88,451
 Amortization of Transition Recovery Asset                20,311        17,464
 Taxes Other Than Income Taxes                            34,704        35,870
-------------------------------------------------------------------------------
    Total Operating Expenses                             515,076       912,386
-------------------------------------------------------------------------------
      Operating Income                                   141,868       189,134
-------------------------------------------------------------------------------
Other Income (Deductions)
 Interest Income                                          14,913        11,293
 Other Income (Deductions)                                    83         5,408
-------------------------------------------------------------------------------
    Total Other Income (Deductions)                       14,996        16,701
-------------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                           42,649        46,672
 Interest on Capital Leases                               65,778        68,307
 Other Interest Expense                                    6,383         4,995
-------------------------------------------------------------------------------
    Total Interest Expense                               114,810       119,974
-------------------------------------------------------------------------------
Income Before Income Taxes and
 Cumulative Effect of Accounting Change                   42,054        85,861
 Income Tax Expense                                       13,661        38,264
-------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change      28,393        47,597
Cumulative Effect of Accounting Change - Net of Tax            -           470
-------------------------------------------------------------------------------
Net Income                                              $ 28,393      $ 48,067
===============================================================================
Average Shares of Common Stock Outstanding (000)          33,665        33,360
===============================================================================
Basic Earnings per Share
 Income Before Cumulative Effect of Accounting Change      $0.84         $1.43
 Cumulative Effect of Accounting Change - Net of Tax           -         $0.01
 Net Income                                                $0.84         $1.44
===============================================================================
Diluted Earnings per Share
 Income Before Cumulative Effect of Accounting Change      $0.83         $1.39
 Cumulative Effect of Accounting Change - Net of Tax           -         $0.01
 Net Income                                                $0.83         $1.40
===============================================================================
Dividends Paid per Share                                  $0.375         $0.30
===============================================================================

See Notes to Condensed Consolidated Financial Statements.

<PAGE>


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                          Nine Months Ended
                                                            September 30,
                                                           2002       2001
                                                             (Unaudited)
-------------------------------------------------------------------------------
                                                       - Thousands of Dollars -
Cash Flows from Operating Activities
  Cash Receipts from Electric Retail Sales              $550,291      $542,747
  Cash Receipts from Electric Wholesale Sales            191,468       575,613
  Interest Received                                       13,018        13,246
  MEG Cash Receipts from Trading Activity                 41,734             -
  MEG Performance Deposits                                 4,632           371
  Other Cash Receipts                                     18,119        15,928
  Fuel Costs Paid                                       (157,179)     (213,890)
  Purchased Power Costs Paid                            (108,875)     (387,877)
  Wages Paid, Net of Amounts Capitalized                 (57,378)      (52,809)
  Payment of Other Operations and Maintenance Costs      (93,984)     (102,544)
  Capital Lease Interest Paid                            (68,329)      (78,861)
  Taxes Paid, Net of Amounts Capitalized                 (69,040)      (68,104)
  Interest Paid, Net of Amounts Capitalized              (52,925)      (56,506)
  Income Taxes Paid                                      (10,416)      (30,259)
  MEG Cash Payments for Trading Activity                 (46,039)            -
  Coal Contract Termination Fee                          (11,250)            -
  Other Cash Payments                                     (7,692)       (5,411)
-------------------------------------------------------------------------------
    Net Cash Flows - Operating Activities                136,155       151,644
-------------------------------------------------------------------------------
Cash Flows from Investing Activities
  Capital Expenditures                                   (81,728)      (95,202)
  Investments in and Loans to Equity Investees           (28,553)      (19,101)
  Proceeds from the Sale of Millennium
   Energy Businesses                                           -        16,631
  Proceeds from the Sale of Real Estate                        -         6,580
  Purchase of Springerville Lease Debt and Equity       (134,989)            -
  Other                                                    4,866        (2,968)
-------------------------------------------------------------------------------
    Net Cash Flows - Investing Activities               (240,404)      (94,060)
-------------------------------------------------------------------------------
Cash Flows from Financing Activities
  Repayments of Long-Term Debt                            (1,879)       (1,871)
  Payments on Capital Lease Obligations                  (19,620)      (25,894)
  Common Stock Dividends Paid                            (12,602)      (10,021)
  Other                                                    2,808         7,744
-------------------------------------------------------------------------------
    Net Cash Flows - Financing Activities                (31,293)      (30,042)
-------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents    (135,542)       27,542
Cash and Cash Equivalents, Beginning of Year             228,154       163,004
-------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period                $ 92,612      $190,546
===============================================================================

SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
-------------------------------------------------------------------------------
Net Income                                              $ 28,393      $ 48,067
Adjustments to Reconcile Net Income to Net Cash Flows
  Depreciation and Amortization Expense                   96,075        88,451
  Depreciation Recorded to Fuel and Other Operations
   and Maintenance Expense                                 4,190         4,442
  Amortization of Transition Recovery Asset               20,311        17,464
  Net Unrealized Gain on TEP Forward Contracts and MEG
   Trading Activities                                     (1,206)       (4,723)
  Amortization of Deferred Debt-Related Costs included
   in Interest Expense                                     1,428         1,507
  Deferred Income Taxes                                   14,521         7,961
  Losses of Unconsolidated Affiliates                      3,888        10,205
  Gain on Sale of Nations Energy's Holdings                    -       (10,737)
  Other                                                   (5,607)      (13,201)
  Changes in Assets and Liabilities which Provided
    (Used) Cash Exclusive of Changes Shown Separately
    Accounts Receivable                                   18,114       (26,024)
    Materials and Fuel                                       705        (1,383)
    Accounts Payable                                     (40,011)       37,971
    Interest Accrued                                      (9,817)      (18,349)
    Taxes Accrued                                          7,728        11,791
    Other Current Assets                                   2,640        (5,213)
    Other Current Liabilities                             (4,263)       (4,274)
    Other Deferred Assets                                 (7,669)       (2,898)
    Other Deferred Liabilities                             6,735        10,587
-------------------------------------------------------------------------------
Net Cash Flows - Operating Activities                   $136,155      $151,644
===============================================================================

See Notes to Condensed Consolidated Financial Statements.

<PAGE>


UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

                                                    September 30,  December 31,
                                                        2002          2001
                                                     (Unaudited)
-------------------------------------------------------------------------------
ASSETS                                               - Thousands of Dollars -
Utility Plant
  Plant in Service                                  $2,571,739      $2,498,046
  Utility Plant Under Capital Leases                   747,095         741,446
  Construction Work in Progress                         63,618          70,992
-------------------------------------------------------------------------------
    Total Utility Plant                              3,382,452       3,310,484
  Less Accumulated Depreciation and Amortization    (1,326,579)     (1,270,089)
  Less Accumulated Depreciation of Capital Lease
   Assets                                             (384,536)       (362,724)
-------------------------------------------------------------------------------
    Total Utility Plant - Net                        1,671,337       1,677,671
-------------------------------------------------------------------------------
Investments and Other Property                         313,751         182,747
-------------------------------------------------------------------------------
Current Assets
  Cash and Cash Equivalents                             92,612         228,154
  Accounts Receivable - Net                             96,666         119,646
  Materials and Fuel                                    43,758          45,052
  Deferred Income Taxes - Current                        7,392          11,165
  Current Regulatory Assets                              9,912          11,392
  Other                                                 29,534          30,891
-------------------------------------------------------------------------------
    Total Current Assets                               279,874         446,300
-------------------------------------------------------------------------------
Regulatory and Other Assets
  Transition Recovery Asset                            311,363         331,674
  Income Taxes Recoverable Through Future Revenues      58,506          64,239
  Other Regulatory Assets                               10,287           9,072
  Other Assets                                          41,450          35,014
-------------------------------------------------------------------------------
    Total Regulatory and Other Assets                  421,606         439,999
-------------------------------------------------------------------------------
Total Assets                                        $2,686,568      $2,746,717
===============================================================================
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
  Common Stock Equity                               $  441,496      $  424,722
  Capital Lease Obligations                            801,750         853,793
  Long-Term Debt                                       800,669         802,804
-------------------------------------------------------------------------------
    Total Capitalization                             2,043,915       2,081,319
-------------------------------------------------------------------------------
Current Liabilities
  Current Obligations Under Capital Leases              43,237          20,158
  Current Maturities of Long-Term Debt                 330,448         330,424
  Accounts Payable                                      44,104          84,011
  Interest Accrued                                      32,482          53,300
  Taxes Accrued                                         42,870          36,633
  Accrued Employee Expenses                             13,784          13,577
  Other                                                 28,348          16,768
-------------------------------------------------------------------------------
    Total Current Liabilities                          535,273         554,871
-------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                    48,522          43,507
  Other                                                 58,858          67,020
-------------------------------------------------------------------------------
    Total Deferred Credits and Other Liabilities       107,380         110,527
-------------------------------------------------------------------------------
Commitments and Contingencies (Note 7)
-------------------------------------------------------------------------------
Total Capitalization and Other Liabilities          $2,686,568      $2,746,717
===============================================================================

See Notes to Condensed Consolidated Financial Statements.

<PAGE>


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

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

Balances at
 December 31, 2001       33,502  $660,123 $(235,401)  $       -      $424,722
-------------------------------------------------------------------------------
Comprehensive Income:
  2002 Year-to-Date Net
   Income                     -         -    28,393           -        28,393
                                                                     ---------
Total Comprehensive
  Income                                                               28,393
                                                                     ---------

  Shares Issued under
   Stock Compensation
   Plans                      8        75         -           -            75
  Shares Distributed by
   Deferred Compensation
   Trust                      3        45         -           -            45
  Shares Issued for
   Stock Options             60       864         -           -           864
  Dividends Declared          -         -   (12,603)          -       (12,603)
-------------------------------------------------------------------------------
Balances at
 September 30, 2002      33,573  $661,107 $(219,611)  $       -      $441,496
===============================================================================

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

See Notes to Condensed Consolidated Financial Statements.

<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                          Three Months Ended
                                                             September 30,
                                                           2002        2001
                                                              (Unaudited)
-------------------------------------------------------------------------------
                                                       - Thousands of Dollars -
Operating Revenues
 Electric Retail Revenues                               $214,432      $212,108
 Electric Wholesale Revenues                              41,125       206,913
 Net Unrealized Gain (Loss) on Forward Electric
  Sales and Purchases                                         85        (2,916)
 Other Revenues                                            1,380         2,105
-------------------------------------------------------------------------------
    Total Operating Revenues                             257,022       418,210
-------------------------------------------------------------------------------
Operating Expenses
 Fuel                                                     58,422        67,807
 Purchased Power                                          23,345       202,419
 Coal Contract Termination Fee                            11,250             -
 Other Operations and Maintenance                         39,712        37,497
 Depreciation and Amortization                            30,203        29,047
 Amortization of Transition Recovery Asset                10,790         9,627
 Taxes Other Than Income Taxes                            11,467        11,736
-------------------------------------------------------------------------------
    Total Operating Expenses                             185,189       358,133
-------------------------------------------------------------------------------
      Operating Income                                    71,833        60,077
-------------------------------------------------------------------------------
Other Income
 Interest Income                                           5,159         3,107
 Interest Income - Note Receivable from UniSource
  Energy                                                   2,352         2,351
 Other Income                                              1,651           349
-------------------------------------------------------------------------------
    Total Other Income                                     9,162         5,807
-------------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                           14,225        14,996
 Interest on Capital Leases                               21,885        22,907
 Other Interest Expense                                    1,931         1,858
-------------------------------------------------------------------------------
    Total Interest Expense                                38,041        39,761
-------------------------------------------------------------------------------
Income Before Income Taxes and
 Cumulative Effect of Accounting Change                   42,954        26,123
 Income Tax Expense                                       16,392        11,683
-------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change      26,562        14,440
Cumulative Effect of Accounting Change - Net of Tax            -             -
-------------------------------------------------------------------------------
Net Income                                              $ 26,562      $ 14,440
===============================================================================

See Notes to Condensed Consolidated Financial Statements.

<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                                                          Nine Months Ended
                                                            September 30,
                                                          2002        2001
                                                             (Unaudited)
-------------------------------------------------------------------------------
                                                      - Thousands of Dollars -
Operating Revenues
 Electric Retail Revenues                             $  521,064    $  518,452
 Electric Wholesale Revenues                             125,911       567,657
 Net Unrealized Gain (Loss) on Forward Electric
  Sales and Purchases                                        807         4,253
 Other Revenues                                            5,179         4,526
-------------------------------------------------------------------------------
    Total Operating Revenues                             652,961     1,094,888
-------------------------------------------------------------------------------
Operating Expenses
 Fuel                                                    164,937       203,900
 Purchased Power                                          46,909       419,251
 Coal Contract Termination Fee                            11,250             -
 Other Operations and Maintenance                        123,605       131,499
 Depreciation and Amortization                            93,048        85,992
 Amortization of Transition Recovery Asset                20,311        17,464
 Taxes Other Than Income Taxes                            33,735        34,955
-------------------------------------------------------------------------------
    Total Operating Expenses                             493,795       893,061
-------------------------------------------------------------------------------
      Operating Income                                   159,166       201,827
-------------------------------------------------------------------------------
Other Income
 Interest Income                                          14,388         8,956
 Interest Income - Note Receivable from UniSource
  Energy                                                   6,978         6,978
 Other Income                                              3,165         2,264
-------------------------------------------------------------------------------
    Total Other Income                                    24,531        18,198
-------------------------------------------------------------------------------
Interest Expense
 Long-Term Debt                                           42,649        46,672
 Interest on Capital Leases                               65,726        68,267
 Other Interest Expense                                    5,856         4,982
-------------------------------------------------------------------------------
    Total Interest Expense                               114,231       119,921
-------------------------------------------------------------------------------
Income Before Income Taxes and
 Cumulative Effect of Accounting Change                   69,466       100,104
 Income Tax Expense                                       27,367        43,719
-------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change      42,099        56,385
Cumulative Effect of Accounting Change - Net of Tax            -           470
-------------------------------------------------------------------------------
Net Income                                            $   42,099    $   56,855
===============================================================================

See Notes to Condensed Consolidated Financial Statements.


<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                          Nine Months Ended
                                                            September 30,
                                                           2002       2001
                                                             (Unaudited)
-------------------------------------------------------------------------------
                                                       - Thousands of Dollars -
Cash Flows from Operating Activities
  Cash Receipts from Electric Retail Sales              $550,291      $542,747
  Cash Receipts from Electric Wholesale Sales            191,468       575,613
  Interest Received                                       12,527        10,736
  Fuel Costs Paid                                       (157,179)     (213,890)
  Purchased Power Costs Paid                            (108,875)     (387,877)
  Wages Paid, Net of Amounts Capitalized                 (45,745)      (46,079)
  Payment of Other Operations and Maintenance Costs      (78,967)      (80,193)
  Capital Lease Interest Paid                            (68,276)      (78,824)
  Taxes Paid, Net of Amounts Capitalized                 (65,526)      (65,403)
  Interest Paid, Net of Amounts Capitalized              (52,902)      (56,531)
  Income Taxes Paid                                      (10,306)      (30,318)
  Coal Contract Termination Fee                          (11,250)            -
  Other                                                       93           690
-------------------------------------------------------------------------------
    Net Cash Flows - Operating Activities                155,353       170,671
-------------------------------------------------------------------------------
Cash Flows from Investing Activities
  Capital Expenditures                                   (72,181)      (78,957)
  Purchase of North Loop Gas Turbine from UED            (14,853)            -
  Proceeds from the Sale of Real Estate                        -         6,580
  Purchase of Springerville Lease Debt and Equity       (134,989)            -
  Other                                                    3,943        (5,950)
-------------------------------------------------------------------------------
    Net Cash Flows - Investing Activities               (218,080)      (78,327)
-------------------------------------------------------------------------------
Cash Flows from Financing Activities
  Repayments of Long-Term Debt                            (1,879)       (1,871)
  Dividends Paid to UniSource Energy                     (10,000)            -
  Payments on Capital Lease Obligations                  (19,384)      (25,802)
  Other                                                    2,194         2,940
-------------------------------------------------------------------------------
    Net Cash Flows - Financing Activities                (29,069)      (24,733)
-------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents     (91,796)       67,611
Cash and Cash Equivalents, Beginning of Year             159,680        88,712
-------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period                $ 67,884      $156,323
===============================================================================

SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
-------------------------------------------------------------------------------
Net Income                                              $ 42,099      $ 56,855
Adjustments to Reconcile Net Income to Net Cash Flows
  Depreciation and Amortization Expense                   93,048        85,992
  Depreciation Recorded to Fuel and Other Operations
   and Maintenance Expense                                 4,190         4,442
  Amortization of Transition Recovery Asset               20,311        17,464
  Net Unrealized Gain on Forward Electric Sales and
   Purchases                                                (807)       (4,723)
  Amortization of Deferred Debt-Related Costs included
   in Interest Expense                                     1,428         1,507
  Deferred Income Taxes                                   25,557        14,805
  Losses of Unconsolidated Affiliates                        279         1,530
  Interest on Note Receivable from UniSource Energy       (6,978)       (6,978)
  Other                                                      701        (1,874)
  Changes in Assets and Liabilities which Provided
    (Used) Cash Exclusive of Changes Shown Separately
    Accounts Receivable                                   20,378       (25,752)
    Materials and Fuel                                     1,338          (757)
    Accounts Payable                                     (39,080)       35,972
    Interest Accrued                                      (9,817)      (18,349)
    Taxes Accrued                                          9,702        10,297
    Other Current Assets                                  (4,981)          665
    Other Current Liabilities                               (420)       (2,721)
    Other Deferred Assets                                 (7,669)       (4,606)
    Other Deferred Liabilities                             6,074         6,902
-------------------------------------------------------------------------------
Net Cash Flows - Operating Activities                   $155,353      $170,671
===============================================================================

See Notes to Condensed Consolidated Financial Statements.

<PAGE>


TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS

                                                     September 30, December 31,
                                                         2002          2001
                                                     (Unaudited)
-------------------------------------------------------------------------------
ASSETS                                                - Thousands of Dollars -
Utility Plant
  Plant in Service                                  $2,571,739      $2,498,046
  Utility Plant Under Capital Leases                   747,095         741,446
  Construction Work in Progress                         63,618          70,992
-------------------------------------------------------------------------------
    Total Utility Plant                              3,382,452       3,310,484
  Less Accumulated Depreciation and Amortization    (1,326,579)     (1,270,089)
  Less Accumulated Depreciation of Capital Lease
   Assets                                             (384,536)       (362,724)
-------------------------------------------------------------------------------
    Total Utility Plant - Net                        1,671,337       1,677,671
-------------------------------------------------------------------------------
Investments and Other Property                         214,251         105,875
-------------------------------------------------------------------------------
Note Receivable from UniSource Energy                   77,110          70,132
-------------------------------------------------------------------------------
Current Assets
  Cash and Cash Equivalents                             67,884         159,680
  Accounts Receivable - Net                            100,166         124,487
  Materials and Fuel                                    41,755          43,682
  Deferred Income Taxes - Current                        7,392           4,603
  Current Regulatory Assets                              9,912          11,392
  Other                                                 13,070           7,814
-------------------------------------------------------------------------------
    Total Current Assets                               240,179         351,658
-------------------------------------------------------------------------------
Regulatory and Other Assets
  Transition Recovery Asset                            311,363         331,674
  Income Taxes Recoverable Through Future Revenues      58,506          64,239
  Other Regulatory Assets                               10,287           9,072
  Other Assets                                          41,450          35,014
-------------------------------------------------------------------------------
    Total Regulatory and Other Assets                  421,606         439,999
-------------------------------------------------------------------------------
Total Assets                                        $2,624,483      $2,645,335
===============================================================================

CAPITALIZATION AND OTHER LIABILITIES
Capitalization
  Common Stock Equity                               $  354,829      $  322,471
  Capital Lease Obligations                            801,083         853,447
  Long-Term Debt                                       800,199         801,924
-------------------------------------------------------------------------------
    Total Capitalization                             1,956,111       1,977,842
-------------------------------------------------------------------------------
Current Liabilities
  Current Obligations Under Capital Leases              42,855          19,971
  Current Maturities of Long-Term Debt                 330,325         330,325
  Accounts Payable                                      50,113          89,193
  Interest Accrued                                      32,482          53,300
  Taxes Accrued                                         41,955          33,744
  Accrued Employee Expenses                             13,410          13,078
  Other                                                 22,754           7,194
-------------------------------------------------------------------------------
    Total Current Liabilities                          533,894         546,805
-------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Deferred Income Taxes - Noncurrent                    79,519          56,906
  Other                                                 54,959          63,782
-------------------------------------------------------------------------------
    Total Deferred Credits and Other Liabilities       134,478         120,688
-------------------------------------------------------------------------------
Commitments and Contingencies (Note 7)
-------------------------------------------------------------------------------
Total Capitalization and Other Liabilities          $2,624,483      $2,645,335
===============================================================================

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       Equity
-------------------------------------------------------------------------------
                                            (Unaudited)
                                      - Thousands of Dollars -

Balances at
 December 31, 2001   $ 653,250 $ (6,357) $(324,422)  $      -       $ 322,471
-------------------------------------------------------------------------------
Comprehensive Income:
  2002 Year-to-Date
   Net Income                -        -     42,099          -          42,099
                                                                     ---------
Total Comprehensive Income                                             42,099
                                                                     ---------
  Dividend Declared          -        -    (10,000)         -         (10,000)
  Other                    259        -          -          -             259
-------------------------------------------------------------------------------

Balances at
 September 30, 2002  $ 653,509 $ (6,357) $(292,323)  $      -       $ 354,829
===============================================================================

See Notes to Condensed Consolidated Financial Statements.

<PAGE>

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

NOTE 1.  NATURE OF OPERATIONS AND BASIS OF ACCOUNTING PRESENTATION
------------------------------------------------------------------

     UniSource Energy Corporation (UniSource Energy) is an exempt holding
company under the Public Utility Holding Company Act of 1935.  UniSource
Energy has no significant operations of its own, but holds the stock of Tucson
Electric Power Company (TEP), Millennium Energy Holdings, Inc. (Millennium)
and UniSource Energy Development Company (UED).  TEP, a regulated public
utility incorporated in Arizona in 1963, is UniSource Energy's largest
operating subsidiary and represents substantially all of UniSource Energy's
assets.  TEP generates, transmits and distributes electricity.  TEP serves
retail customers in a 1,155 square mile area in Southern Arizona.  TEP also
sells electricity to other utilities and power marketing entities primarily
located in the Western United States.  Millennium holds the energy-related
businesses described in Note 4 and UED's services are described in Note 5.

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

     The accompanying quarterly financial statements of UniSource Energy and
TEP are unaudited but reflect all normal recurring accruals and other
adjustments which we believe are necessary for a fair presentation of the
results for the interim periods presented.  These financial statements are
presented in accordance with the SEC's interim reporting requirements which do
not include all the disclosures required by accounting principles generally
accepted in the United States of America (GAAP) for annual financial
statements.  The year-end condensed balance sheet data was derived from
audited financial statements, but does not include disclosures required by
GAAP for annual financial statements.  This quarterly report should be
reviewed in conjunction with UniSource Energy and TEP's 2001 Form 10-K.

     Weather causes seasonal fluctuations in TEP's sales; therefore, quarterly
results are not indicative of annual operating results.  We have made
reclassifications to the prior year financial statements for comparative
purposes (see Note 3).  These reclassifications had no effect on net income.

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

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

     TEP continues to apply FAS 71 to the distribution and transmission
portions of its business, its regulated operations, and periodically assesses
whether it can continue to apply FAS 71 to these operations.  If TEP stopped
applying FAS 71 to its remaining regulated operations, it would write off the
related balances of its regulatory assets as an expense on its income
statement.  Based on the balances of TEP's regulatory assets at September 30,
2002, if TEP had stopped applying FAS 71 to its remaining regulated
operations, it would have recorded an extraordinary loss, after-tax, of
approximately $236 million.  While regulatory orders and market conditions may
affect TEP's cash flows, its cash flows would not be affected if it stopped
applying FAS 71.

NOTE 3.  ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITES AND HEDGING
ACTIVITIES
------------------------------------------------------------------------------

     On January 1, 2001, TEP recorded a $0.5 million after-tax gain in its
income statement for the cumulative effect of adopting Statement of Financial
Accounting Standards No. 133 (FAS 133), Accounting for Derivative Instruments
and Hedging Activities.  TEP enters into forward contracts to purchase or sell
a specified amount of capacity or energy at a specified price over a given
period of time, typically for one month, three months or one year, within
established limits to take advantage of favorable market opportunities.  Some
of these forward contracts are considered to be derivatives.

     Millennium Environmental Group, Inc. (MEG), a wholly-owned subsidiary of
Millennium, began operations in November 2001 and enters into swap agreements,
options and forward contracts relating to emission allowances and coal.  MEG
follows the accounting guidance for energy-related trading activities under
EITF Issue No. 98-10 (EITF 98-10), Accounting for Contracts Involved in Energy
Trading and Risk Management Activities.  The Emerging Issues Task Force
rescinded EITF 98-10 on October 25, 2002, requiring mark-to-market accounting
in the future for only those energy-related trading contracts within the scope
of FAS 133.   This will have no effect on TEP since TEP is not engaged in
"trading" activities as defined in EITF 98-10, and we do not expect the impact
to MEG to be material to the financial statements.

     Under FAS 133, TEP records unrealized gains and losses on its derivative
forward contracts and adjusts the related assets and liabilities on a monthly
basis to reflect the market prices at the end of the month.  Similarly, under
EITF 98-10, MEG records unrealized gains and losses on its trading activities
and adjusts the related assets and liabilities on a monthly basis to reflect
the market prices at the end of the month.  The market prices used to
determine fair value for these derivative instruments and trading activities
are estimated based on various factors including broker quotes, exchange
prices, over the counter prices and time value.

     In June 2002, new guidance was issued that requires all realized and
unrealized gains and losses on energy-related trading contracts to be shown
net in the income statement whether or not physically settled.  The new
guidance is effective for financial statements issued after July 15, 2002, and
requires financial statements for all comparative periods to be reclassified
to conform to the new presentation.  MEG adopted the new guidance on July 1,
2002 for its trading activity and reclassified its net realized gains and
losses from Other Revenue into a single line in Operating Revenue.  The impact
of MEG adopting the new guidance was immaterial to the financial statements.
The new guidance does not apply to TEP.

     TEP's derivative activity and MEG's trading activity are now reported as
follows:

   - TEP's unrealized gain/loss on forward sales and purchase contracts is a
     component of Operating Revenues;
   - TEP's realized gain/loss on forward sales contracts is a component of
     Electric Wholesale Revenues;
   - TEP's realized gain/loss on forward purchase contracts is a component of
     Purchased Power;
   - MEG's unrealized gain/loss on trading activities is a component of
     Operating Revenues; and
   - MEG's realized gain/loss on trading activities is a component of
     Operating Revenues.

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

                                         Three Months     Nine Months
                                            Ended            Ended
                                              September 30, 2002
        -------------------------------------------------------------
        Emission Allowances Purchased       78,450          284,075
        Emission Allowances Sold           113,375          329,040

     The net pre-tax gain on TEP's forward contracts and MEG's trading
activities for the three and nine months ended September 30, 2002, totaled
approximately $0.4 million and $0.9 million, respectively.  At September 30,
2002, the fair value of TEP's derivative assets and MEG's trading assets
totaled $8.9 million, which is reported in Other Current Assets, and the fair
value of MEG's trading liabilities totaled $5.2 million, which is reported in
Other Current Liabilities.  Our trading assets exceed our trading liabilities
primarily because at September 30, 2002, the fair value of MEG's forward sale
and purchase contracts at a gain (assets) exceeded the fair value of its
forward sale and purchase contracts at a loss (liabilities).

     TEP treated certain forward sale and purchase contracts as cash flow
hedges when it adopted FAS 133.  However, during 2001, new guidance was issued
by the Financial Accounting Standards Board which provided that certain
forward power purchase or sale agreements, including capacity contracts, could
be excluded from the requirements of FAS 133.  TEP implemented this new
guidance in 2001 and determined that the items designated as cash flow hedges
upon adoption could be excluded from the FAS 133 requirements.  Therefore, as
these contracts settled in 2001, TEP reversed the unrealized gain/loss
included in Other Comprehensive Income and recorded the realized gain/loss in
the income statement.  Additional guidance was issued in late 2001 that had no
impact on TEP's accounting for derivatives.  As of September 30, 2002 and
December 31, 2001, TEP had no cash flow hedges and, therefore, its balance in
Accumulated Other Comprehensive Income was zero.

NOTE 4.  MILLENNIUM ENERGY BUSINESSES
-------------------------------------

   ENERGY TECHNOLOGY INVESTMENTS

     We refer to Global Solar Energy, Inc. (Global Solar), Infinite Power
Solutions, Inc. (IPS), MicroSat Systems, Inc. (MicroSat) and ITN Energy
Systems, Inc. (ITN) collectively as Millennium's Energy Technology
Investments.  During the first quarter of 2002, Millennium reallocated a $10
million line of credit commitment from MicroSat to Global Solar and IPS.
During the second quarter of 2002, Millennium committed an additional $10
million in funding to Global Solar.  Millennium's advances to its Energy
Technology Investments totaled $17.1 million during the first nine months of
2002.

     On April 3, 2002, Millennium signed a letter agreement that facilitates
the change in the ownership structure of its Energy Technology Investments to
better align Millennium's ownership interest in these investments with its
business plans.  Millennium retains its preferred shareholder and distribution
status.  Under the letter agreement and related documents, Millennium:

   - increases its ownership of Global Solar from 67% to at least 81%;
   - increases its ownership of IPS from 67% to at least 70%;
   - decreased its ownership of MicroSat from 49% to 35%;
   - decreased its ownership of ITN from 49% to 9%; and
   - provided an additional $1 million in equity contributions to ITN and will
     provide additional contingent capital contributions of up to $0.5
     million. Such contingent contributions are subject to Millennium's
     approval of subsidiary business plans.

     We anticipate that the Energy Technology Investments letter agreement
provisions will be finalized during the fourth quarter of 2002.  Regardless of
ownership percentage, as the current sole funder of the Energy Technology
Investments, Millennium continues to recognize 100% of the losses from
operations of these companies.  Millennium expects to fund between $3 million
and $7 million of its commitments to its Energy Technology Investments in the
fourth quarter of 2002.  Including Millennium's unfunded commitments at
September 30, 2002 of approximately $7 million, Millennium expects to fund
between $11 million and $14 million to these investments in the next twelve
months. A significant portion of the funding under these agreements will be
used for research and development purposes and administrative costs.  As funds
are expended for these purposes Millennium will recognize expense.  Additional
investment commitments may be made to these technology investments depending
on their funding requirements and business outlook.  In addition, Millennium
is seeking external investors for the Energy Technology Investment companies.
If an Energy Technology Investment company receives funding from an external
investor and Millennium is no longer the sole funder of that company,
Millennium will stop recognizing 100% of the losses from operations of that
company and recognize only its percentage share based on its ownership
interest.

     During the third quarter of 2002, Millennium and Dow Corning Corporation
(Dow Corning) signed a letter of intent regarding additional investments in
IPS.  Under the letter of intent, both Millennium and Dow Corning will provide
additional funding to IPS in exchange for preferred shares of IPS.  If the
transaction is consummated, Dow Corning would own approximately 15% of IPS and
would have future rights to preferred stock warrants based on established
milestones.   Millennium would agree to fund an additional $2.5 million in the
form of cash and equipment and maintain a 70% share ownership.

   OTHER MILLENNIUM INVESTMENTS AND COMMITMENTS

     Millennium has a $15 million capital commitment to a limited partnership
which funds energy related investments.  As of September 30, 2002, Millennium
had funded $6 million of this commitment.  The remaining $9 million is
expected to be funded within the next three years.  A member of the UniSource
Energy Board of Directors has an investment in the limited partnership and is
a managing director of the general partner of the limited partnership.

     Millennium has a $5 million capital commitment to a venture capital fund
that will focus on information technology, optics and biotechnology.  During
2002, this venture capital fund merged with another fund that will focus on
investments in Arizona, Southern California, New Mexico, Colorado and Utah.
As a result, Millennium owns approximately 15% of the merged venture.
Millennium will use the cost method to account for this investment.   Before
the merger, Millennium accounted for this investment under the equity method.
Another member of the UniSource Energy Board of Directors is a general partner
of the company that manages the fund.  At September 30, 2002, Millennium had
funded approximately $1 million of the $5 million commitment.  Millennium
expects to fund no more than $1 million in the fourth quarter of 2002.

     Millennium owns a controlling 50.5% interest in Powertrusion
International, Inc. (Powertrusion), a manufacturer of lightweight utility
poles.  During the third quarter of 2002, Millennium provided an additional $2
million of funding to maintain its controlling interest.  In addition, during
the third quarter Millennium began recognizing 100% of Powertrusion's losses,
as it became the sole funder of Powertrusion's operations.  Millennium's
remaining investment in Powertrusion at September 30, 2002 was $1.9 million.

     On April 1, 2002, Millennium invested an additional $2 million in
TruePricing, Inc., a start-up company established to market energy related
products, bringing Millennium's total investment to $3.1 million.
Millennium's net remaining investment, after the results of operations, was
$1.4 million at September 30, 2002.

     On July 15, 2002, Millennium invested $20 million in a company created to
develop up to 800 megawatts (MW) of coal-fired generation in the Sabinas
region of Coahuila, Mexico.  Millennium received a 50% share of Carboelectrica
Sabinas, S. de R.L. de C.V., a Mexican limited liability company (Sabinas).
The other 50% of Sabinas is owned by Altos Hornos de Mexico, S.A. de C.V.
(AHMSA) and certain of its affiliates.  Sabinas also owns approximately 19% of
Minerales de Monclova, S.A. de C.V., an owner of coal reserves and a supplier
of metallurgical coal to the steel industry and thermal coal to the Mexican
electricity commission.  Under certain circumstances, Millennium has the right
to sell its interest in Sabinas to an AHMSA affiliate for $20 million plus an
accrued service fee.  These circumstances include failure of Sabinas to reach
financial closing on the generation project within three years.  Millennium's
put option is secured by collateral with a value currently in excess of $20
million.  UniSource Energy's Chairman and Chief Executive Officer is a member
of the board of directors of AHMSA.

   NATIONS ENERGY CONTINGENCY

     In September 2001, Nations Energy, a wholly-owned subsidiary of
Millennium, sold its 26% equity interest in a power project located in
Curacao, Netherland Antilles to a subsidiary of Mirant Corporation (Mirant).
Nations Energy received $5 million in cash proceeds and recorded an $11
million note receivable from the sale at its net present value of $8 million,
with the discount being amortized to interest income over the five-year life
of the note.  The note is guaranteed by Mirant Americas, Inc., a subsidiary of
Mirant.  Payments on the note receivable are expected as follows:  $2 million
in July 2004, $4 million in July 2005, and $5 million in July 2006.

     In October 2002, the major rating agencies downgraded the ratings of
Mirant and certain of its subsidiaries due to significantly lower operating
cash flow relative to its debt burden coupled with the likelihood that future
operating cash flow levels may weaken further.  Their ratings are now below
investment grade.  As of September 30, 2002, Nations Energy's receivable from
Mirant is approximately $9 million.  We cannot predict what effect the
downgrade of Mirant will have on its ability to make its required payments to
Nations Energy when due, beginning in July 2004.  Nations Energy has not
recorded an allowance for doubtful accounts and we will continue to evaluate
whether any further ratings events or actions by or to Mirant will impact the
collectibility of the receivable.

NOTE 5.  BUSINESS SEGMENTS
--------------------------

     Based on the way we organize our operations and evaluate performance, we
have three reportable business segments:

     (1) TEP, an electric utility business, is UniSource Energy's principal
         business segment.
     (2) Millennium holds interests in unregulated energy businesses (see Note
         4).
     (3) UED, established in 2001, engages in developing generating resources
         and other project development activities.  Prior to September 2002,
         UED owned a 20 MW gas turbine, which it leased to TEP.  In September
         2002, UED sold the turbine to TEP for its net book value of $15
         million.  UED is also responsible for developing the possible
         expansion project at the Springerville Generating Station.

     Significant reconciling adjustments consist of the elimination of
intercompany activity and balances, including:

   - the elimination of intercompany sales between business segments;
   - the elimination of an intercompany note between UniSource Energy and TEP,
     as well as the related interest income and expense; and
   - the elimination of UED's rental income and TEP's rental expense from
     UED's turbine lease to TEP.

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

                               Segments
                      --------------------------
                                                                UniSource
                                                  Reconciling     Energy
                       TEP    Millennium    UED   Adjustments  Consolidated
---------------------------------------------------------------------------
                                      - Thousands of Dollars  -
Income Statement
----------------
Three months ended
 September 30, 2002:
----------------------------------------------------------------------------
  Operating
   Revenues
   - External     $  256,968  $   1,578  $       -  $       -    $  258,546
---------------------------------------------------------------------------
  Operating
   Revenues
   - Intersegment         54      5,622        840     (6,516)            -
---------------------------------------------------------------------------
  Income (Loss)
   Before Income
   Taxes              42,954     (9,428)       852     (2,352)       32,026
---------------------------------------------------------------------------
  Net Income
   (Loss)             26,562     (2,828)       518     (1,433)       22,819
---------------------------------------------------------------------------

Three months ended
 September 30, 2001:
----------------------------------------------------------------------------
  Operating
   Revenues
   - External     $  418,088  $   2,301  $       -  $       -    $  420,389
---------------------------------------------------------------------------
  Operating
   Revenues
   - Intersegment        122      5,741        840     (6,703)            -
---------------------------------------------------------------------------
  Income (Loss)
   Before Income
   Taxes              26,123      3,809        742     (2,350)       28,324
---------------------------------------------------------------------------
  Net Income
   (Loss)             14,440      2,076        446     (1,414)       15,548
---------------------------------------------------------------------------

Nine months ended
 September 30, 2002:
----------------------------------------------------------------------------
  Operating
   Revenues
   - External     $  652,576  $   4,368  $       -  $       -    $  656,944
---------------------------------------------------------------------------
  Operating
   Revenues
   - Intersegment        385     12,578      2,520    (15,483)            -
---------------------------------------------------------------------------
  Income (Loss)
   Before Income
   Taxes              69,466    (22,184)     1,750     (6,978)       42,054
---------------------------------------------------------------------------
  Net Income
   (Loss)             42,099    (10,539)     1,061     (4,228)       28,393
---------------------------------------------------------------------------

Nine months ended
 September 30, 2001:
----------------------------------------------------------------------------
  Operating
   Revenues
   - External     $1,094,539  $   6,981  $       -  $       -    $1,101,520
---------------------------------------------------------------------------
  Operating
   Revenues
   - Intersegment        349      9,554      1,120    (11,023)            -
---------------------------------------------------------------------------
  Income (Loss)
   Before Income
   Taxes and
   Cumulative
   Effect of
   Accounting
   Change            100,104     (8,288)     1,019     (6,974)       85,861
---------------------------------------------------------------------------
  Cumulative
   Effect of
   Accounting
   Change                470          -          -          -           470
---------------------------------------------------------------------------
  Net Income
   (Loss)             56,855     (5,206)       612     (4,194)       48,067
---------------------------------------------------------------------------

Balance Sheet
-------------

Total Assets,
 September 30,
 2002             $2,624,483  $ 127,228  $  30,752  $ (95,895)   $2,686,568
Total Assets,
 December 31,
 2001              2,645,335    176,097     26,895   (101,610)    2,746,717
---------------------------------------------------------------------------

NOTE 6.  CAPITAL LEASES AND INVESTMENTS IN LEASE DEBT AND EQUITY
----------------------------------------------------------------

     TEP purchased a 13% ownership interest in the Springerville Coal Handling
Facilities Leases for $13 million in December 2001 and all $96 million of the
debt related to these capital leases in January 2002.  In March 2002, TEP
terminated the lease related to its equity interest and cancelled the
associated debt.  As a result of the lease termination, TEP recorded a $21
million reduction to the capital lease obligation, a $27 million reduction of
its investment in lease debt, and a $6 million increase in the capital lease
asset, which represents the residual value of TEP's interest in the leased
asset and is carried at cost.   TEP's interest expense is reduced as a result
of these transactions.

     In May 2002, TEP purchased $3 million and in September 2002, TEP
purchased another $33 million of Springerville Unit 1 lease debt.  These
investments are included in Investments and Other Property on TEP's balance
sheet.

NOTE 7.  COMMITMENTS AND CONTINGENCIES
--------------------------------------

   MILLENNIUM COMMITMENTS

     See Note 4 for a description of Millennium's commitments.

   UED COMMITMENTS

     UED and Salt River Project Agricultural Improvement and Power District
(SRP) entered into a Joint Development Agreement in October 2001 to develop
two 400 MW coal-fired units at TEP's existing Springerville Station.  As a
result of recent developments, UED and SRP are modifying the Joint Development
Agreement to provide for the purchase by SRP of a specified amount of power
from Unit 3 and an option for SRP to own Unit 4.  UED and SRP each committed
project development funding for professional services and other third party
costs.  At September 30, 2002, capitalized project development costs on UED's
balance sheet were approximately $16.1 million.  We can make no assurances,
however, about the ultimate timing, or whether UED will proceed with this
project.  If the project does not proceed, the capitalized project development
costs will be immediately expensed.

   TEP CONTINGENCIES

     Springerville Generating Station Complaint
     ------------------------------------------

     On November 13, 2001, the Grand Canyon Trust, an environmental activist
group, filed a complaint in U.S. District Court against TEP for alleged
violations of the Clean Air Act at the Springerville Generating Station.  The
complaint 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.  On
September 10, 2002, the U.S. District Court granted TEP's motion for summary
judgment on one of the primary issues in the case: whether TEP commenced
construction within 18 months and/or by March 19, 1979, after the original
1977 air permit covering Units 1 and 2 was issued.  The case is presently
scheduled for trial in March 2003 on the remaining issues:(a) whether TEP
discontinued construction for a period of 18 months or longer or did not
complete construction in a reasonable period of time, and (b) whether TEP
commenced construction, for purposes of New Source Performance Standard
applicability, by September 18, 1978.  TEP believes the claims are without
merit and will continue to vigorously contest them.

     Litigation Related to San Juan Coal Company
     -------------------------------------------

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

     The San Juan Coal Company has informed Public Service Company of New
Mexico (PNM) that it intends to strongly dispute the litigation.  We cannot
predict the ultimate outcome of this litigation, or whether it will adversely
affect the amount of coal available or cost of coal to San Juan.  We do not
expect resolution of this litigation to be material to TEP as a 19.8% owner of
San Juan.

     Litigation Related to San Juan Generating Station
     -------------------------------------------------

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

NOTE 8.  WHOLESALE ACCOUNTS RECEIVABLE AND ALLOWANCES
-----------------------------------------------------

     At September 30, 2002 and December 31, 2001, TEP's Accounts Receivable on
the balance sheet is net of an $8.4 million allowance for uncollectible
receivables related to 2000 and 2001 sales to the California Power Exchange
(CPX), the California Independent System Operator (CISO) and Enron Corp. and
certain of its affiliates (Enron).  The receivable from the CPX and the CISO
is $16 million and the receivable from Enron is $0.8 million.  This allowance
reflects a 50% reserve on amounts unpaid from the CPX, the CISO and Enron, as
we believe it is probable that TEP will collect at least 50% of this aggregate
outstanding net receivable due to the recent: (a) stabilization of the power
markets, (b) rate increases achieved by Pacific Gas and Electric Company
(PG&E) and Southern California Edison Company (SCE), (c) settlements made by
California utilities with various power providers, and (d) data in filings of
Federal Energy Regulatory Commission (FERC) refund hearings.  SCE publicly
disclosed that on March 1, 2002, it obtained financing and made payments so
that it has no material undisputed obligations that are past due or in
default.  These payments included a payment to the CPX; however, TEP did not
receive a corresponding payment from the CPX.

     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 the CISO, and concerning Enron.  In August
2002, the FERC staff proposed revised calculations to determine amounts due
from the CPX and the CISO, based on concern that natural gas prices were
manipulated.  If we were to apply these proposed adjustments to amounts due to
TEP, TEP could receive as little as $4 million, plus interest, of the amounts
due from the CPX and the CISO.  The FERC has not yet confirmed or rejected the
calculation proposed by its staff.  Under earlier calculations proposed by the
FERC staff, TEP could receive up to $11 million plus interest.  We cannot
predict the outcome of these issues or lawsuits.  We believe, however, that
TEP is adequately reserved for its transactions with the CPX, the CISO and
Enron.

     TEP's Accounts Receivable from Electric Wholesale Revenues, net of
allowances, totaled $27 million at September 30, 2002 and $70 million at
December 31, 2001.  These amounts are included in Accounts Receivable on the
balance sheet.  Excluding the receivables from the CPX, the CISO and Enron, as
described above, substantially all of the September 30, 2002 receivable
balance has been collected as of the date of this filing.

NOTE 9.  INCOME TAXES
---------------------

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

     The valuation allowance of $15.4 million at September 30, 2002, which
reduces the Deferred Tax Asset balance, relates to net operating loss (NOL)
and investment tax credit (ITC) carryforward amounts.  In the future if TEP
determines that TEP would be able to use all or a portion of these amounts on
tax returns, then TEP would reduce the reserve and recognize a tax benefit up
to $15.4 million.  Factors that could cause TEP to recognize the tax benefit
include new or additional guidance through tax regulations, tax rulings, case
law and/or the use of such benefits on future tax returns.

     In the third quarter of 2002, UniSource Energy and TEP recognized a tax
benefit of $1.3 million from the reduction of the valuation allowance based on
future use of ITC carryforward amounts.  Additionally, UniSource Energy
recognized a tax benefit of $1.5 million as a result of final agreement with
the IRS on audit issues and a tax benefit of $1.0 million from recognition of
losses generated by the sale of a Nations Energy foreign entity in the third
quarter of 2002.

     UniSource Energy and TEP's Cumulative Effect of Accounting Change for the
nine months ended September 30, 2001 is net of income tax expense of $312,000
(see Note 3).  The differences between the Income Tax Expense lines on
UniSource Energy and TEP's income statements and the amounts 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      Nine Months Ended
                                    September 30,          September 30,
                                   2002      2001         2002      2001
--------------------------------------------------------------------------
                                         - Thousands of Dollars -
Federal Income Tax Expense at
 Statutory Rate                 $ 11,209  $  9,913     $ 14,719   $ 30,325
  State Income Tax Expense,
   Net of Federal Deduction        1,473     1,387        1,935      4,245
  Depreciation Differences
   (Flow Through Basis)            1,154     1,250        3,463      3,856
  Tax Credits                       (553)        -       (2,472)         -
  Reduction in Valuation
   Allowance - Benefit            (1,300)        -       (1,300)         -
  Reduction in Deferred
   Liability Due to IRS
   Audit Outcomes                 (1,524)        -       (1,524)         -
  Foreign Losses Recognized       (1,007)        -       (1,007)         -
  Other                             (245)      226         (153)       150
  Tax on Cumulative Effect of
   Accounting Change                   -         -            -       (312)
--------------------------------------------------------------------------
Total Federal and State Income
 Tax Expense                    $  9,207  $ 12,776     $ 13,661   $ 38,264
==========================================================================

                                                     TEP
                                   ---------------------------------------
                                   Three Months Ended    Nine Months Ended
                                      September 30,        September 30,
                                     2002      2001        2002      2001
--------------------------------------------------------------------------
                                          - Thousands of Dollars -
Federal Income Tax Expense at
 Statutory Rate                 $ 15,034  $  9,143     $ 24,313   $ 35,310
  State Income Tax Expense,
   Net of Federal Deduction        1,976     1,280        3,195      4,943
  Depreciation Differences
   (Flow Through Basis)            1,154     1,250        3,463      3,856
  Tax Credits                       (553)        -       (2,472)         -
  Reduction in Valuation
   Allowance - Benefit            (1,300)        -       (1,300)         -
  Other                               81        10          168        (78)
  Tax on Cumulative Effect of
   Accounting Change                   -         -            -       (312)
--------------------------------------------------------------------------
Total Federal and State Income
 Tax Expense                    $ 16,392  $ 11,683     $ 27,367   $ 43,719
==========================================================================

NOTE 10.  UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
---------------------------------------------------

     Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding during the period.  Diluted EPS assumes
that proceeds from the hypothetical exercise of stock options and other stock-
based awards are used to repurchase outstanding shares of stock at the average
fair market price during the reporting period.  The numerator in calculating
both basic and diluted earnings per share for each period is net income.  The
following table shows the effects of potential dilutive common stock on the
weighted average number of shares.

                                       Three Months Ended    Nine Months Ended
                                         September 30,         September 30,
                                         2002     2001         2002     2001
------------------------------------------------------------------------------
                                                  - In Thousands -
Denominator:
  Average Shares of Common Stock
   Outstanding                          33,692   33,472       33,665   33,360
  Effect of Dilutive Securities:
   Warrants                                 26      123          102      180
   Options and Stock Issuable
    Under Employee Benefit Plans           397      642          514      676
------------------------------------------------------------------------------
Total Shares                            34,115   34,237       34,281   34,216
=============================================================================

     At September 30, 2002, UniSource Energy had no outstanding warrants;
however, there were 4.6 million warrants outstanding that were exercisable
into TEP common stock at a ratio of five warrants to one common share.  The
dilutive effect is the same as it would be if the warrants were exercisable
into UniSource Energy Common Stock and is reflected in the calculation for all
periods presented.  These warrants expire on December 15, 2002.

NOTE 11.  CHANGE IN DEPRECIABLE ASSET LIVES
-------------------------------------------

     In the second quarter of 2002, TEP increased its estimates of useful
lives from 40 years to 60 years for its Irvington Generating Station gas-fired
generating units and from 25 years to 40 years for its internal combustion
turbines.  These changes in estimates decreased depreciation expense by
approximately $1 million for the third quarter of 2002 and $2 million for the
nine months ended September 30, 2002.  TEP is currently evaluating the
depreciable lives of its other generating stations.

NOTE 12.  COAL CONTRACT TERMINATION FEE
---------------------------------------

     In the third quarter of 2002, TEP terminated a coal supply agreement for
the Irvington Generating Station.  As a result, TEP recorded a pre-tax expense
of $11.3 million and made an $11.3 million payment in the third quarter of
2002.  The additional expense is mitigated by TEP not being required to make a
take-or-pay penalty payment of approximately $3.5 million for the year 2002.
Payment of the termination fee also eliminates payment of $3.5 million per
year of take-or-pay payments in future years.  The termination of this
contract is expected to provide TEP with a pre-tax rate of return in excess of
20%.

NOTE 13.  ASSET PURCHASE AGREEMENTS
-----------------------------------

     On October 29, 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens Communications Company (Citizens) for the purchase by
UniSource Energy of Citizens' Arizona electric utility and gas utility
businesses for a total of $230 million in cash.  The purchase price of each is
subject to adjustment based on the date on which the transaction is closed
and, in each case, on the amount of certain assets and liabilities of the
purchased business at the time of closing.  The purchase price in each
transaction may also be adjusted if there is a casualty loss, governmental
taking, or discovery of substantial additional environmental liabilities, in
each case subject to materiality thresholds, prior to the closing.  UniSource
Energy will assume certain liabilities associated with the purchased assets,
but will not assume Citizens' obligations under the industrial development
revenue bonds issued to finance certain of the purchased assets for which
Citizens will remain the economic obligor.  The asset purchases are expected
to close in the second half of 2003 after the conditions to the consummation
of the transactions, including federal and state regulatory approvals, are
satisfied or waived.

     The closing of the transactions is subject to approval by the ACC, the
FERC and the SEC under the Public Utility Holding Company Act of 1935, as
amended.  The closing is also subject to the filing of the requisite
notification with the Federal Trade Commission and the Department of Justice
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as well as
other customary closing conditions.

     The Asset Purchase Agreements are subject to termination if the closing
has not occurred within 15 months of the date of the Asset Purchase Agreements
(subject to extension in limited circumstances), if a governmental authority
seeks to prohibit the transactions, if required regulatory approvals are not
obtained with satisfactory terms and conditions, or if either party is in
material breach and such breach is not cured.  If one Asset Purchase Agreement
is terminated, the other will also be automatically terminated.  If the Asset
Purchase Agreements are terminated by Citizens due to UniSource Energy's
breach, UniSource Energy must pay to Citizens a $25 million termination fee as
liquidated damages.  If the Asset Purchase Agreements are terminated by
UniSource Energy due to Citizen's breach, Citizens must pay to UniSource
Energy a $10 million termination fee as liquidated damages.  The termination
fees are also payable in certain other limited circumstances.  Under the Asset
Purchase Agreements, UniSource Energy and Citizens will assume joint
responsibility for completing two utility rate cases that Citizens has pending
before the ACC.  UniSource Energy expects to reduce the amount of rate relief
requested due to the discount represented by the purchase price.

     We expect that the purchase price will be financed by funds from
UniSource Energy and its affiliates and debt secured by the purchased assets.
UniSource Energy may also consider financing a portion of the purchase with
new equity, depending on market conditions and other considerations.
UniSource Energy expects to form a new subsidiary to hold the purchased
assets, which subsidiary will maintain a separate rate structure from TEP.

NOTE 14.  NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------

     Statement of Financial Accounting Standards No. 143 (FAS 143), Accounting
for Asset Retirement Obligations, requires entities to record the fair value
of a liability when an asset removal obligation is incurred. We are required
to comply with FAS 143 beginning January 1, 2003.  We are currently in the
process of evaluating the impact of FAS 143 on our financial statements.

     Statement of Financial Accounting Standards No. 146 (FAS 146), Accounting
for Costs Associated with Exit or Disposal Activities, issued in July 2002,
requires entities to record a liability for costs related to exit or disposal
activities when the costs are incurred.  Previous accounting guidance required
the liability to be recorded at the date of commitment to an exit or disposal
plan.  We are required to comply with FAS 146 beginning January 1, 2003.  We
do not expect the adoption of FAS 146 to have a significant effect on our
financial statements.

NOTE 15.  REVIEW BY INDEPENDENT ACCOUNTANTS
-------------------------------------------

     With respect to the unaudited condensed consolidated financial
information of UniSource Energy and TEP for the three-month and nine-month
periods ended September 30, 2002 and 2001, PricewaterhouseCoopers LLP reported
that they have applied limited procedures in accordance with professional
standards for a review of such information.  However, their separate report
dated November 1, 2002 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.

<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), Millennium Energy Holdings, Inc. (Millennium), and UniSource Energy
Development Company (UED).  TEP, an electric utility, has provided electric
service to the community of Tucson, Arizona, for over 100 years.  TEP is
the principal operating subsidiary of UniSource Energy and represents most
of its assets.  Millennium invests in unregulated ventures related
primarily to the energy business, including a developer of thin-film
batteries, a developer of small-scale commercial satellites, and a
developer and manufacturer of thin-film photovoltaic cells.  UED engages in
developing generating resources and other project development activities,
including facilitating the expansion of the Springerville Generating
Station.  We conduct our business in these three primary business
segments-TEP's Electric Utility Segment, the Millennium Energy Businesses
Segment, and the UniSource Energy Development Segment.

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

   - operating results during the third quarter and first nine months of
     2002 compared with the same periods in 2001,
   - changes in liquidity and capital resources during the third quarter
     and first nine months of 2002, and
   - expectations of identifiable material trends which may affect our
     business in the future.

     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.  However, the seasonal
nature of TEP's business causes operating results to vary significantly
from quarter to quarter.  At September 30, 2002, 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.  At September 30, 2002, UED's unregulated business segment
comprised approximately 1% of total assets, but may have a significant
impact on our consolidated net income and cash flows in the future.

     Management's Discussion and Analysis should be read in conjunction
with UniSource Energy and TEP's 2001 Form 10-K and with the financial
statements, beginning on page 2, which present the results of operations
for the quarters and nine month periods ended September 30, 2002 and 2001.
Management's Discussion and Analysis explains the differences between
periods for specific line items of the financial statements.

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


OVERVIEW
--------

     UniSource Energy and TEP's net income and UniSource Energy's earnings
per share of Common Stock for the quarters and nine months ended September
30, 2002 and September 30, 2001 are shown in the table below:

                                          UniSource Energy              TEP
                                       Net Income     Earnings       Net Income
-------------------------------------------------------------------------------
                                       -Millions-    -Per Share-     -Millions-

Quarter Ended September 30, 2002         $ 22.8         $ 0.68        $ 26.6
Quarter Ended September 30, 2001           15.5           0.46          14.4

Nine Months Ended September 30, 2002       28.4           0.84          42.1
Nine Months Ended September 30, 2001       48.1           1.44          56.9

     UniSource Energy and TEP's net income for the three months ended
September 30, 2002 increased from the net income reported for the
comparable period in 2001.  The primary reasons for the increases include
the significantly reduced purchased power and fuel expenses incurred by TEP
due to lower electric wholesale activity, the increase in TEP's retail
sales revenue, and $4.2 million in income tax benefits.  A coal contract
termination fee of $6.8 million (after-tax) partially offset the increase
for the quarter.

     UniSource Energy and TEP's net income for the nine months ended
September 30, 2002 decreased from the same period in 2001 as a result of
significant reduction in electric wholesale revenues due to lower wholesale
energy prices, milder weather compared to the prior year, decreased
consumption by TEP's mining customers, an adverse ruling on a coal price
arbitration, and the coal contract termination fee.  These factors were
partially offset by increased consumption by TEP's residential, commercial,
and industrial customers, the $4.2 million in tax benefits recorded in the
third quarter of 2002, and $1.7 million of income tax credits recorded in
the second quarter of 2002.

     Outlook and Strategy
     --------------------

     In recent years, the electric utility industry has undergone
significant regulatory change designed to encourage competition in the sale
of electric generation services.  However, given changing market conditions
including recent events in California related to deregulation and the Enron
Corp. (Enron) bankruptcy, the Arizona Corporation Commission (ACC) is
continuing its review of the Retail Electric Competition Rules (Rules).
Additionally, the Federal Energy Regulatory Commission (FERC) issued
various orders in response to the California energy crisis which have
impacted our businesses.  We continually evaluate our position to develop
strategies to remain competitive and flexible in this changing environment.
Our plans and strategies include the following:

   - Enhance the value of TEP's transmission system while continuing to
     provide reliable access to generation for TEP's retail customers and market
     access for all generating assets.  This will include focusing on completing
     a transmission line to an electric distribution company in Nogales,
     Arizona.  This line could eventually be connected to Mexico's utility
     system.

   - Facilitate the construction of Springerville Unit 3 and Unit 4, which
     will allow TEP to spread the fixed costs of its Springerville Units 1 and 2
     over additional units.  This includes obtaining construction financing in
     early 2003.

   - Facilitate the completion of the Arizona electric utility and gas
     utility asset acquisition from Citizens Communications Company described
     below.

   - Reduce TEP's debt as appropriate, using some of our excess cash flows.

   - Proactively maintain TEP's transmission and distribution system to
     ensure reliable service to its retail customers.

   - Efficiently manage TEP's generating resources and look for ways to
     reduce or control operating costs in order to improve profitability.

   - Actively participate in the formulation of regulatory policies and
     actions.

   - Focus the efforts of Millennium's technology entities to begin larger
     scale production of Global Solar Energy, Inc.'s (Global Solar) thin-film
     photovoltaic cells and to develop thin-film battery technology.  Seek
     strategic partners and investors to achieve commercial operation of these
     businesses.

     To accomplish our goals, we estimate that in the next twelve months,
TEP will spend approximately $119 million on capital expenditures,
Millennium will provide between $11 million and $14 million of funding to its
technology investments, and we will provide between $40 million and $80
million to UED.  Our funding of UED will depend upon the timing of
financial close of the Springerville expansion project and UED's ultimate
ownership percentage.  In addition, we will spend $230 million for the
acquisition of the Arizona electric utility and gas utility assets from
Citizens Communications Company, which we expect to finance from funds from
UniSource Energy and its affiliates and debt secured by the purchased
assets.  UniSource Energy may also consider financing a portion of the
purchase with new equity, depending on market conditions and other
considerations.

     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.


ASSET PURCHASE AGREEMENTS
-------------------------

     On October 29, 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens Communications Company (Citizens) for the purchase
by UniSource Energy of Citizens' Arizona electric utility and gas utility
businesses for a total of $230 million in cash.  The purchase price of each
is subject to adjustment based on the date on which the transaction is
closed and, in each case, on the amount of certain assets and liabilities
of the purchased business at the time of closing.  The purchase price in
each transaction may also be adjusted if there is a casualty loss,
governmental taking, or discovery of substantial additional environmental
liabilities, in each case subject to materiality thresholds, prior to the
closing.  UniSource Energy will assume certain liabilities associated with
the purchased assets, but will not assume Citizens' obligations under the
industrial development revenue bonds issued to finance certain of the
purchased assets for which Citizens will remain the economic obligor.  The
asset purchases are expected to close in the second half of 2003 after the
conditions to the consummation of the transactions, including federal and
state regulatory approvals, are satisfied or waived.

     The closing of the transactions is subject to approval by the ACC, the
FERC and the SEC under the Public Utility Holding Company Act of 1935, as
amended.  The closing is also subject to the filing of the requisite
notification with the Federal Trade Commission and the Department of
Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and
other customary closing conditions.

     The Asset Purchase Agreements are subject to termination if the
closing has not occurred within 15 months of the date of the Asset Purchase
Agreements (subject to extension in limited circumstances), if a
governmental authority seeks to prohibit the transactions, if required
regulatory approvals are not obtained with satisfactory terms and
conditions, or if either party is in material breach and such breach is not
cured.  If one Asset Purchase Agreement is terminated, the other will also
be automatically terminated.  If the Asset Purchase Agreements are
terminated by Citizens due to UniSource Energy's breach, UniSource Energy
must pay to Citizens a $25 million termination fee as liquidated damages.
If the Asset Purchase Agreements are terminated by UniSource Energy due to
Citizen's breach, Citizens must pay to UniSource Energy a $10 million
termination fee as liquidated damages.  The termination fees are also
payable in certain other limited circumstances.

     Under the Asset Purchase Agreements, UniSource Energy and Citizens
will assume joint responsibility for completing two utility rate cases that
Citizens has pending before the ACC.  UniSource Energy expects to reduce
the amount of rate relief requested due to the discount represented by the
purchase price.

     We expect that the purchase price will be financed by funds from
UniSource Energy and its affiliates and debt secured by the purchased
assets.  UniSource Energy may also consider financing a portion of the
purchase with new equity, depending on market conditions and other
considerations.  UniSource Energy expects to form a new subsidiary to hold
the purchased assets, which subsidiary will maintain a separate rate
structure from TEP.


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

   SALES TO MINING CUSTOMERS

     TEP's sales to mining customers depend on a variety of factors,
including changes in supply and demand in the world copper market and the
economics of self-generation.  As the result of low copper prices, TEP's
mining customers have curtailed operations in recent years, and TEP's sales
to mining customers have decreased.  In October 2002, one of TEP's mining
customers notified its employees that it may cease mining operations at one
of its mines at year-end.  Any such reduction in operations would further
decrease sales to mining customers from already decreased levels due to
curtailment.  For the nine months ended September 30, 2002, we earned
approximately $8 million in revenue from sales to this customer.  Any
reduction of this retail revenue would be mitigated by an opportunity for
TEP to sell this generation capacity in the wholesale market or to reduce
generation with resulting fuel costs reductions.  Given these factors, TEP
believes that if this mining customer's operations ceased, TEP's 2003 pre-
tax net income could be up to $3 million less than in 2002.

   COMPETITION

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

     Since January 1, 2001, all of TEP's retail customers have been
eligible to choose an alternate energy supplier.  Although there is one
Energy Service Provider (ESP) certified by the ACC to provide service in
TEP's retail service area, currently none of TEP's retail customers has
opted to receive service from this ESP.

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

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

   INDUSTRY RESTRUCTURING

     TEP's Settlement Agreement and Retail Electric Competition Rules
     ----------------------------------------------------------------

     In December 1996, the ACC adopted the 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.

     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 major provisions of the
Settlement Agreement, as approved, were:

   - Consumer choice for energy supply began in 2000, and by January 1,
     2001 consumer choice was available to all retail customers.

   - After certain rate reductions implemented in 1998 through 2000, TEP's
     retail rates are frozen until December 31, 2008, except under certain
     circumstances.

   - TEP's frozen rates include a fixed Competition Transition Charge
     component designated for the recovery of its transition recovery assets.

   - TEP is required to file a general rate case for its transmission and
     distribution business, including an updated cost-of-service study, by June
     1, 2004.

   - TEP was initially required to transfer its generation and other
     competitive assets to a wholly-owned subsidiary by December 31, 2002.  The
     Settlement Agreement also required that by December 31, 2002, TEP, as the
     Utility Distribution Company, acquire at least 50% of its energy
     requirements through a competitive bidding process, while the remainder
     could be purchased under contracts with TEP's generation subsidiary or
     other energy suppliers.  These requirements were removed by the August 2002
     ACC decision described below in Recent Developments in the Arizona
     Regulatory Environment.

     Approval of the Settlement Agreement caused TEP to discontinue
regulatory accounting under FAS 71 for its generation operations in
November 1999.  See Note 2 of Notes to Condensed Consolidated Financial
Statements.

     Recent Developments in the Arizona Regulatory Environment
     ---------------------------------------------------------

     In January 2002, the ACC began reexamining the circumstances that have
changed since it adopted the Rules in 1996 and revisiting the path to
deregulation of the retail electric market.  On September 10, 2002, the ACC
issued an order that:

   - removed the requirement that TEP transfer its generating assets to a
     subsidiary;

   - reduced the amount of power to be acquired in the competitive bid
     process to only that portion not supplied by TEP's existing resources;

   - postponed until March 2003 the requirement that TEP acquire part of
     its power through a competitive bidding process; and

   - required that TEP and Arizona Public Service Company (APS) develop a
     study process to address concerns about the reliability of must-run power
     plants located within transmission constrained areas.

     TEP cannot predict the outcome or the ultimate resolution of the
remaining issues, which include the development of a competitive bidding
process; ACC oversight of the competitive process; least-cost planning for
the evaluation of bids; demand side management and environmental risk
mitigation issues.  In addition, TEP and APS are each required to file a
needs assessment and procurement proposal with the ACC, which will be used
to determine the minimum amount of power, the timing, and the form of
procurement subject to the competitive bidding process.

     As part of its reexamination of the Rules, the ACC had planned to
address the requirement for Arizona electric utilities to participate in
the Arizona Independent Scheduling Administrator (AISA) organization.  The
Rules originally required the formation and implementation of the AISA;
however, the ACC opened a docket in July 2001 to revisit this obligation.
This issue is pending and will be addressed separately from the issues
identified above.

     The status of the Rules and the ability of ESPs to continue to sell
competitive services may also be subject to change due to court
proceedings.  Several parties, including certain rural electric
cooperatives, filed lawsuits in Maricopa County Superior Court challenging
the Rules.  In November 2000, the Court found the Rules to be
unconstitutional and unlawful. The decision was appealed to the Court of
Appeals, and implementation of the judgment was stayed and the Rules remain
in effect pending the outcome of the appeals.  TEP cannot predict the
effect of the court decision or 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.

     Election of ACC Commissioners
     -----------------------------

     The ACC currently includes three commissioners: William A. Mundell,
Jim Irvin and Marc Spitzer.  In the November 2000 election, the Arizona
voters approved an amendment to the Arizona Constitution that expands the
ACC membership to five commissioners beginning January 2003.  The amendment
also expands the term of office from a single six-year term to up to two
four-year terms, with a two-year term phase-in period for the newly elected
commissioners.

     In the November 2002 general election, the Arizona voters elected Mike
Gleason and Jeff Hatch-Miller to the two additional seats created by the
amendment.  The voters also re-elected Jim Irvin to an additional term.  As
of January 2003, the following commissioners will be in office.

     Commissioner                Party           Term(s)
     ------------                -----           -------
     William A. Mundell          Republican      1999-2004
     Jim Irvin                   Republican      1997-2002 and 2003-2006
     Marc Spitzer                Republican      2001-2006
     Mike Gleason                Republican      2003-2004
     Jeff Hatch-Miller           Republican      2003-2004


     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 not-for-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.  In October 2001, TEP and three other southwestern utilities filed
agreements and operating protocols with the FERC to form a new, for profit
RTO to be known as WestConnect to replace Desert STAR.  See Item 1 -
Business - Transmission Access in the 2001 Form 10-K.

     On July 31, 2002, the FERC issued a Notice of Proposed Rulemaking
(NOPR) proposing standard market design rules that would significantly
alter the markets for wholesale electricity and transmission and ancillary
services in the United States.  See FERC Matters below.

     On October 10, 2002, the FERC issued an order approving, in part, the
WestConnect RTO Proposal.  The FERC conditionally approved, subject to
modification, the proposed governance structure, interconnection process,
congestion management program, and planning and expansion program.  The
FERC approved the proposal for voluntary conversion of existing contracts;
the market approach for providing ancillary services; the proposal for
monitoring the market and maintaining short-term reliability; and formula
rates for grid charges.  The WestConnect participants are evaluating the
modifications suggested by the FERC order and the implications of the
standard market design NOPR provisions.

     On April 18, 2002, the Western Systems Coordinating Council, Southwest
Regional Transmission Association, and Western Regional Transmission
Association merged to form the Western Electricity Coordinating Council
(WECC).  On September 12, 2002, the FERC issued an order approving this
organization.  The new organization, WECC, will continue to be responsible
for coordinating and promoting electric system reliability and will support
efficient competitive power markets in the Western Interconnection.  WECC's
interconnection-wide focus is intended to complement current efforts to
form RTOs in various parts of the West.

   WESTERN ENERGY MARKETS

     As a participant in the western U.S. wholesale power markets, TEP is
directly and indirectly affected by changes affecting these markets and
market participants.  During 2000 and 2001, these markets experienced
unprecedented price volatility, bankruptcies and payment defaults by
several of its largest participants, and increased attention and
intervention by regulatory agencies concerned with the outcomes of
deregulation of the electric power industry.

     Rates and Market Prices
     -----------------------

     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.  The average market price for around-the-
clock energy based on the Dow Jones Palo Verde Index decreased significantly
in 2002 compared with 2001, as shown below.

Average Market Price for Around-the-Clock Energy            MWh
---------------------------------------------------------------
   Quarter ended September 30, 2002                       $  28
   Quarter ended September 30, 2001                          40

   Nine months ended September 30, 2002                      25
   Nine months ended September 30, 2001                     117

     Beginning in June 2000 and continuing through May 2001, the average
market price for around-the-clock energy in the western U.S. energy market
increased to unprecedented levels due to a number of factors, including
unusually high natural gas prices, decreased hydropower supply, increased
demand and insufficient generation to meet the increased demand.  Prices
began a steady decline in June 2001, and now have reached levels that are
more consistent with historical prices.  As of October 31, 2002, the
average forward around-the-clock market price for the balance of the year
2002 was approximately $32 per MWh, based on the Dow Jones Palo Verde
Index.  As a result, TEP's wholesale revenues have been significantly lower
in 2002 than in 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 the remainder of 2002.

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

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

     Payment Defaults and Allowances for Doubtful Accounts
     -----------------------------------------------------

     See Critical Accounting Policies - Payment Defaults and Allowances for
Doubtful Accounts, below and Note 8 of Notes to Condensed Consolidated
Financial Statements.

     FERC Matters
     ------------

     As described more fully in the 2001 Form 10-K, the FERC ordered
hearings and issued several orders during 2000 and 2001 to mitigate
volatile energy prices in the western U.S. and to address the energy
emergency in California.  Certain soft price caps on power sold to the
California Independent System Operator (CISO) were enacted in 2000, and
were later replaced in 2001 with an order for price mitigation applicable
to certain wholesale power sales to California and throughout the entire
western U.S. which applied through September 30, 2002.  The FERC replaced
this price mitigation order with a firm price cap in July 2002, effective
through September 30, 2002.  The FERC extended the firm price cap for 30
days, until October 30, 2002, and established a new market power mitigation
plan that is effective October 31, 2002.  TEP does not expect the FERC
orders to have a significant impact on its wholesale power sales.

     Also, as described more fully in the 2001 Form 10-K, the FERC issued
several orders specifying the methodology to calculate refunds/offsets
applicable to wholesale sales into the CISO's and the California Power
Exchange's (CPX) spot markets for the period from October 2, 2000 to June
20, 2001.  The administrative hearing before a FERC judge to determine the
amount of refunds/offsets, based on the FERC-specified methodology, is in
progress.  In August 2002, the FERC staff proposed revised calculations to
determine amounts due from the CPX and the CISO, based on concern that
natural gas prices were manipulated.  If we were to apply these proposed
adjustments to amounts due to TEP, TEP could receive as little as $4
million, plus interest, of the amounts due from the CPX and the CISO.  The
FERC has not yet confirmed or rejected the calculation proposed by its
staff.  Under earlier calculations proposed by the FERC staff, TEP could
receive up to $11 million plus interest.

     On May 8, 2002, the FERC issued a data request regarding potential
manipulation of electric and natural gas prices in California energy
markets.  The FERC requested specific data and information with respect to
certain trading strategies in which companies may have engaged.  This
request was made to all sellers of wholesale electricity and/or ancillary
services, including TEP, to the CISO and/or the CPX during the period 2000
and 2001.  In May 2002, TEP responded to the FERC, certifying that TEP did
not engage in any of the trading activities listed in the data request
during 2000 and 2001.  TEP also certified that it had not in the past, nor
does it now, model or forecast California's energy markets and did not
purchase energy from, or sell energy to any company as part of a megawatt
laundering transaction during the period 2000-2001.  FERC then issued a
follow-up data request with respect to "wash" trades.  TEP responded by
certifying that it had not engaged in any wash trades during the period
2000-2001.

     We are not able to predict the length and outcome of the FERC hearings
and the outcome of any subsequent lawsuits and appeals that might be filed.
As a participant in the June 2001 refund proceedings, TEP will be subject
to any final refund orders.  TEP does not expect its refund liability, if
any, to have a significant impact on the financial statements.  See
Critical Accounting Policies - Payment Defaults and Allowances for Doubtful
Accounts, below.

     There are several other outstanding legal issues, complaints, and
lawsuits concerning the California energy crisis related to the FERC,
wholesale power suppliers, Southern California Edison Company (SCE),
Pacific Gas & Electric Company (PG&E), the CPX and the CISO, and to Enron.
We cannot predict the outcome of these issues or lawsuits.  We believe,
however, that TEP is adequately reserved for its transactions with the CPX,
the CISO and Enron.  See Note 8 of Notes to Condensed Consolidated
Financial Statements.

     The NOPR which the FERC issued on July 31, 2002 proposed standard
market design rules that would significantly alter the markets for
wholesale electricity and transmission and ancillary services in the United
States.  The new rules would establish a generation adequacy requirement
for "load-serving entities" and a standard platform for the sale of
electricity and transmission services.  Under the new rules, Independent
Transmission Providers would administer spot markets for wholesale power,
ancillary services and transmission congestion rights, and electric
utilities, including TEP, would be required to transfer control over
transmission facilities to the applicable Independent Transmission
Provider.  The NOPR was open for a 75-day comment period for the majority
of the rules, with comments on some specific issues in the Western market
due on January 15, 2003.  Final rules are expected to be issued in 2003.
Once the final rules are issued, a phased compliance schedule will begin.
TEP is currently in the process of determining the impact the proposed
rules would have on its operations.

     SCE Power Exchange Agreement
     ----------------------------

     A ten-year power exchange agreement between TEP and SCE requires SCE
to provide firm system capacity of 110 MW to TEP during the summer months.
TEP is then obligated to return to SCE in the winter months the same amount
of energy that TEP received from SCE during the preceding summer.  The
agreement expires in 2005.  SCE fully met its obligations throughout the
third quarter of 2002.

   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 2001 Form 10-K.

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

     Risk Management Committee
     -------------------------

     We have a Risk Management Committee responsible for the oversight of
commodity price risk and credit risk related to the wholesale energy
marketing activities of TEP and the emissions allowance and coal trading
activities of Millennium Environmental Group, Inc. (MEG).  Our Risk
Management Committee consists of officers with responsibility for finance,
accounting, legal, wholesale marketing, and the generation operations of
UniSource Energy.  To limit TEP and MEG's exposure to commodity price risk,
the Risk Management Committee sets forward contract and trading policies
and limits, which are reviewed frequently to respond to constantly changing
market conditions.  To limit TEP and MEG's exposure to credit risk in these
activities, the Risk Management Committee approves credit policies and
limits and reviews counterparty credit exposure on a monthly basis.

     Commodity Price Risk
     --------------------

     We are exposed to commodity price risk primarily relating to changes
in the market price of electricity, natural gas, coal and emissions
allowances.  To manage its exposure to energy price risk, TEP enters into
forward contracts to buy or sell energy at a specified price and future
delivery period.  Generally, TEP commits to future sales based on expected
excess generating capability, forward prices and generation costs, using a
diversified market approach to provide a balance between long-term, mid-
term and spot energy sales.  Similarly, TEP enters into forward purchases
during its summer peaking period to ensure it can meet its load and reserve
requirements and account for other contract and resource contingencies.
These positions are managed on both a volumetric and dollar basis and are
closely monitored using risk management policies and procedures with
oversight by the Risk Management Committee.  For example, the risk
management policies provide that TEP should not take a short position in
the third quarter and will have supply backing up all forward sales
positions.

     TEP also enters into limited forward purchases and sales to optimize
its resource portfolio and take advantage of locational differences in
price.  Some of these forward contracts are considered to be derivatives
under Statement of Financial Accounting Standards No. 133 (FAS 133),
Accounting for Derivative Instruments and Hedging Activities.  TEP marks
its derivative forward contracts to market on a daily basis using actively
quoted prices obtained from brokers for power traded over-the-counter at
Palo Verde and at other southwestern U.S. trading hubs.  As of September
30, 2002, all of TEP's derivative forward contracts were for settlement
within twelve months.  TEP's risk management policies restrict forward
positions to mature no longer than the end of the next calendar year.
Because of the short-term duration of these positions, we believe that the
market is liquid and that the various broker quotations used to calculate
the mark-to-market values represent accurate measures of the fair values of
these positions.  To adjust the value of its derivative forward contracts
to fair value on its income statement, TEP recorded an unrealized gain of
$0.1 million in the third quarter of 2002, and an unrealized gain of $0.8
million for the nine months ended September 30, 2002.  TEP had a cumulative
unrealized loss of $0.5 million on its December 31, 2001 balance sheet and
a cumulative unrealized gain of $0.3 million on its September 30, 2002
balance sheet.  These small dollar amounts demonstrate the limited
derivative forward contract activities conducted by TEP and the limited
impacts on TEP's operating results and financial condition.

     TEP uses a sensitivity analysis to measure the impact of an
unfavorable change in market prices on the fair value of its derivative
forward contracts.  As of September 30, 2002, a 10% unfavorable change in
the market prices of electric power from quarter-end levels would have
decreased the fair value of these instruments by less than $1 million.
Beginning in 2001, changes in the fair value of these derivative
instruments are measured in TEP's financial statements in accordance with
FAS 133.  See Critical Accounting Policies - Accounting for Derivative
Instruments and Hedging Activities, below and Note 3 of Notes to Condensed
Consolidated Financial Statements.

     During the fourth quarter of 2001, MEG began managing and trading
emission allowances, coal and related financial instruments.  We manage the
market risk of this new line of business by setting notional limits by
product, as well as limits to the potential change in fair market value
under a hypothetical 33% change in price or volatility.  We closely monitor
MEG's trading activities, including swap agreements, options and forward
contracts, using risk management policies and procedures with oversight by
the Risk Management Committee.  MEG marks its trading positions to market
on a daily basis using actively quoted prices obtained from brokers and
options pricing models for positions that extend through 2004.  As of
September 30, 2002, the fair value of MEG's trading assets totaled $8.6
million and the fair value of MEG's trading liabilities totaled $5.2
million.  These amounts include a cumulative unrealized gain of $0.4
million to adjust to fair market value as of September 30, 2002.

     TEP is generally subject to increased commodity price risk during the
third quarter of each year, due to the seasonal nature of its business as a
summer-peaking utility.  To mitigate the risk of unexpected losses of
generation resources due to unplanned outages or natural disasters or
unavailability of other power resources, TEP purchased 50 MW of energy on a
forward basis to protect its retail customers from power interruptions for
the summer of 2002.  TEP also relied upon two new peaking units which went
in service in June 2001, interruptible contracts, and reserve sharing
arrangements with other utilities as resources.  Under the terms of its
Settlement Agreement, TEP's retail rates are frozen through December 31,
2008, except under certain circumstances.  As such, TEP cannot recover
increased purchased power costs without further ACC action.  See Factors
Affecting Results of Competition - Industry Restructuring, above.

     TEP also purchases coal and natural gas in the normal course of its
business to fuel its generating plants.  The majority of its coal supplies
are purchased under long-term contracts, which result in very predictable
prices.  TEP usage of natural gas to fuel generating plants has historically
comprised less than 5% of its generation output and 2% of its total fuel
costs. This historical natural gas usage has been to meet the summer peak
demands of our firm electric wholesale and retail customers and transmission
import requirements.  Natural gas usage to meet these demands is expected
to increase at approximately 1% - 2% of total generation output per year.
Due to its limited and historically seasonal usage of natural gas for firm
electric wholesale and retail customers, TEP typically purchases its gas
needs in the spot and short-term markets.  During the last two years,
however, significantly more natural gas was used for generation purposes.
In the third quarter of 2002, natural gas fueled 9% of our total generation
output and resulted in $12 million of fuel expense, compared with 10% gas
usage and $20 million in expense in the third quarter of 2001.  For the
first nine months of 2002, natural gas fueled 7% of our total generation
output and resulted in $26 million in fuel expense, compared with 10% and
$69 million for the same period in 2001.  The increased usage and costs
during 2001 are primarily the result of strong wholesale power markets and
higher natural gas prices in the first half of 2001.

     TEP is assured of its gas supply as a retail customer of the local gas
supplier.  TEP periodically negotiates its contract with its gas supplier
to establish terms relating to pricing and scheduling of gas delivery.  TEP
entered into fixed price gas purchase agreements in May and July 2002 to
hedge its risk of fluctuations in the market price of gas for June through
October of 2002.  The agreements covered approximately 30% of TEP's
anticipated gas purchases for that period.  TEP will be renegotiating its
gas supply and transportation agreement with its supplier due to recent
FERC action in El Paso Natural Gas Pipeline's allocation process.  TEP's
supplier is affected by this action, which converts it from a full
requirements to a contract demand customer.  TEP does not anticipate any
material difference in operational or economic terms in the new agreement,
which is estimated to begin May 1, 2003.

     In the third quarter of 2002, TEP terminated a coal supply agreement
for the Irvington Generating Station (Irvington), paying a contract
termination fee of $11.3 million.  The additional expense will be mitigated
by TEP not being required to make a take-or-pay penalty payment of
approximately $3.5 million per year in 2002 and in future years.  The
termination of this contract is expected to provide TEP with a pre-tax rate
of return in excess of 20%.

     As a result of TEP's 50% ownership of San Juan Generating Units 1 and
2, TEP may be affected by litigation involving the San Juan Coal Company,
coal supplier to the San Juan Generating Station.  See Note 7 of Notes to
Condensed Consolidated Financial Statements - TEP Contingencies. We cannot
predict the ultimate outcome of this litigation, or whether it will
adversely affect the amount of coal available or cost of coal to San Juan.
We do not expect resolution of this litigation to be material to TEP as a
19.8% owner of San Juan in total.

     Credit Risk
     -----------

     UniSource Energy is exposed to credit risk in its energy-related
forward contract and trading activities related to potential nonperformance
by counterparties.  We manage 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 affected
by payment defaults by SCE and PG&E for amounts owed to the CPX and the
CISO.  In the fourth quarter of 2001, Enron defaulted on amounts owed to
TEP for energy sales.

     We calculate counterparty credit exposure by adding any outstanding
receivable (net of amounts payable if a netting agreement exists) to the
mark-to-market value of any forward contracts.  As of September 30, 2002,
TEP's total credit exposure related to its wholesale forward contract
activities (excluding defaulted amounts owed by the CPX, the CISO and
Enron), was less than $7 million, and MEG's total credit exposure related
to its trading activities was less than $6 million.  TEP and MEG's credit
exposure is diversified across approximately 32 counterparties.  Less than
$1 million of exposure is to non-investment grade companies.

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

     In October 2002, the major rating agencies downgraded the ratings of
Mirant and certain of its subsidiaries due to significantly lower operating
cash flow relative to its debt burden coupled with the likelihood that
future operating cash flow levels may weaken further.  Their ratings are now
below investment grade.  As of September 30, 2002, Nations Energy's
receivable from Mirant is approximately $9 million.  We cannot predict what
effect the downgrade of Mirant will have on its ability to make its
required payments to Nations Energy when due, beginning in July 2004.
Nations Energy has not recorded an allowance for doubtful accounts and we
will continue to evaluate whether any further ratings events or actions by
Mirant will impact the collectibility of the receivable.

   GENERATING RESOURCES

     Water Supply
     ------------

     Drought conditions in the Four Corners region, combined with water
usage in upper New Mexico, have resulted in decreasing water levels in the
lake that indirectly supplies water to the San Juan and Four Corners
generating stations.  The U.S. Bureau of Reclamation projects that, based
on historical factors and seasonal usage, there should be adequate capacity
in the lake for all water users.  However, under worst case conditions, the
decreasing water levels may result in a water shortage that could affect
the operations of the generating stations beginning in 2003 and extending
into later years.  TEP and the other owners of the generating stations are
evaluating alternatives to minimize the effect of a possible water
shortage.  Alternatives under discussion include water conservation efforts
in the region and the purchase of water rights.  TEP cannot predict the
ultimate outcome of the drought, or whether it will adversely affect the
amount of power available from the San Juan and Four Corners generating
stations.

   FUTURE GENERATING RESOURCES

     Springerville Generating Station Expansion
     ------------------------------------------

     As reported in the 2001 Annual Report on Form 10-K, UED and Salt River
Project Agricultural Improvement and Power District (SRP) signed a joint
development agreement in October 2001, which set forth certain terms
associated with the ownership and development of two new coal-fired
electric generating units (Springerville Units 3 and 4).  The arrangement
contemplated that SRP would effectively obtain 50% (or approximately 400
MW) of the interest in the total output of the project.  The balance of the
electric output was expected to be sold to other regional power companies,
possibly including TEP.  As a result of recent developments, UED and SRP
are modifying the joint development agreement to provide for the purchase
by SRP of a specified amount of power from Unit 3 and an option for SRP, at
a later date, to own Unit 4.  An agreement in principle on the revised
terms has been reached and the parties are in the process of preparing an
amendment to the agreement.  With respect to Unit 3, the entire output of
400 MW is now expected to be sold under power purchase arrangements with
regional power companies, including TriState Generation and Transmission
Association (TriState), SRP and TEP.  It is currently expected that TEP
would purchase up to 100 MW of capacity.

     We presently anticipate that power purchase agreements with other
project off-takers, the engineering, procurement and construction contract,
and other required project agreements will be finalized during the fourth
quarter of 2002 and that the construction financing will be in place by
early 2003.  Upon financial close, we expect that construction will begin
shortly thereafter, with commercial operation of Unit 3 expected to occur
in late 2005 or early 2006.  We can make no assurances, however, about the
ultimate timing, or whether UED will proceed with this project.  See Note 7
of Notes to Condensed Consolidated Financial Statements - UED Commitments.

     Springerville was originally designed for four units.  If constructed,
each of Units 3 and 4 would consist of a 400 MW coal-fired, base-load
generating unit at the same site as Springerville Units 1 and 2, and would
allow TEP to spread the fixed costs of the existing common facilities over
the additional generating unit (or units).  The revised project scope and
schedule are currently being refined in connection with the terms of an
engineering, procurement, and construction contract.  UED is also
continuing the permitting process, evaluating financing alternatives, and
negotiating with other potential long-term power purchasers in addition to
SRP and TriState.

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

     TEP worked with the Environmental Protection Agency and the Arizona
Department of Environmental Quality (ADEQ) to determine mutually acceptable
levels of emissions for all four units to accomplish significant emission
reductions from current levels.  The ADEQ issued a final permit on April
29, 2002.  If constructed, Springerville Units 3 and 4 will be equipped
with modern emissions control technology, and the emissions controls on
Units 1 and 2 will be upgraded.  Sulfur dioxide emissions from all four
units will be up to 55 percent less than those currently produced from the
two existing units, while nitrogen oxide emissions will be up to 39 percent
less.  TEP also volunteered to undertake some operational changes on the
existing units to reduce emissions as early as July 2003, rather than
waiting until the expansion project is scheduled for completion.

     Environmental activist groups have expressed concerns regarding the
construction of any new units.  Such concerns have been expressed during
the permitting and ACC proceedings and may extend to other forums and to
issues apart from the proposed construction.  On November 13, 2001, the
Grand Canyon Trust, an environmental activist group, filed a complaint in
U.S. District Court against TEP for alleged violations of the Clean Air Act
at the Springerville Generating Station.  The complaint 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.  On September
10, 2002, the U.S. District Court granted TEP's motion for summary judgment
on one of the primary issues in the case: whether TEP commenced
construction within 18 months and/or by March 19, 1979, after the original
1977 air permit covering Units 1 and 2 was issued.  The case is presently
scheduled for trial in March 2003 on the remaining issues: (a) whether TEP
discontinued construction for a period of 18 months or longer or did not
complete construction in a reasonable period of time, and (b) whether TEP
commenced construction, for purposes of New Source Performance Standard
applicability, by September 18, 1978.  TEP believes the claims are without
merit and will continue to vigorously contest them.


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

     In preparing financial statements under GAAP, management exercises
judgment in the selection and application of accounting principles,
including making estimates and assumptions.  We consider Critical
Accounting Policies to be those that could result in materially different
financial statement results if our assumptions regarding application of
accounting principles were different.  We describe our Critical Accounting
Policies below.  Other significant accounting policies are discussed in the
2001 Form 10-K, Note 1 - Nature of Operations and Summary of Significant
Accounting Policies.  Recently issued accounting standards are discussed in
Note 14 of Notes to Condensed Consolidated Financial Statements - New
Accounting Pronouncements.

     Accounting for Rate Regulation
     ------------------------------

     TEP generally uses the same accounting policies and practices used by
unregulated companies for financial reporting under GAAP.  However,
sometimes these principles, such as 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 TEP's Settlement
Agreement relating to recovery of TEP's transition costs and standard
retail rates, TEP stopped applying FAS 71 to its generation operations.

     TEP continues to apply FAS 71 in accounting for the distribution and
transmission portions of its business, its regulated operations, and
periodically assesses whether it can continue to apply FAS 71 to these
operations.  If TEP stopped applying FAS 71 to its remaining regulated
operations, it would write off the related balances of its regulatory
assets as an expense on its income statement.  Based on the balances of
TEP's regulatory assets at September 30, 2002, if TEP had stopped applying
FAS 71 to its remaining regulated operations, it would have recorded an
extraordinary loss, after-tax, of approximately $236 million.  While
regulatory orders and market conditions may affect TEP's cash flows, its
cash flows would not be affected if it stopped applying FAS 71.

     Accounting for Derivative Instruments, Trading Activities and Hedging
     Activities
     ---------------------------------------------------------------------

     On January 1, 2001, TEP adopted FAS 133.  A derivative financial
instrument or other contract derives its value from another investment or
designated benchmark.  When TEP adopted FAS 133, some of the forward
contracts that it used to buy and sell wholesale power were considered to
be derivatives based on the accounting guidance at that time.  Other
contracts qualified for hedge accounting.

     Because of the complexity of derivatives, the FASB established a
Derivatives Implementation Group (DIG).  During 2001, the DIG issued new
guidance, which changed the contracts that qualified as derivatives under
FAS 133.  To date, the DIG has issued more than 100 interpretations to
provide guidance in applying FAS 133.  As the DIG or the FASB continues to
issue interpretations, TEP may change the conclusions that it has reached
and, as a result, the accounting treatment and financial statement impact
could change in the future.

     Under FAS 133, TEP records unrealized gains and losses on its
derivative forward contracts and adjusts the related assets and liabilities
on a monthly basis to reflect the market prices at the end of the month.
Similarly, in accordance with the accounting guidance for energy-related
trading activities, MEG records unrealized gains and losses on its trading
activities and adjusts the related assets and liabilities on a monthly
basis to reflect the market prices at the end of the month.  The market
prices used to determine fair value for these derivative instruments and
trading activities are estimated based on various factors including broker
quotes, exchange prices, over the counter prices and time value.  TEP
reports its unrealized gain/loss on forward sales net of its unrealized
gain/loss on forward purchases as a component of Operating Revenues.  MEG
reports its unrealized gain/loss on trading activities net of its realized
gain/loss on trading activities as a component of Operating Revenues.  The
net pre-tax gain on TEP forward contracts and MEG trading activities for
the three and nine months ended September 30, 2002, were approximately $0.4
million and $0.9 million, respectively.  At September 30, 2002, the fair
value of TEP's derivative assets and MEG's trading assets totaled $8.9
million, which is reported in Other Current Assets, and the fair value of
MEG's trading liabilities totaled $5.2 million, which is reported in Other
Current Liabilities.

     See Note 3 of Notes to Condensed Consolidated Financial Statements.

     Payment Defaults and Allowances for Doubtful Accounts
     -----------------------------------------------------

     We record an allowance for doubtful accounts when we determine that an
account receivable will not be collected.  At September 30, 2002 and
December 31, 2001, TEP's Accounts Receivable on the balance sheet is net of
an $8.4 million allowance for uncollectible receivables related to 2000 and
2001 sales to the CPX, the CISO and Enron.  This allowance reflects a 50%
reserve on amounts unpaid from the CPX, the CISO and Enron, as TEP believes
it is probable that it will collect at least 50% of this aggregate
outstanding net receivable due to the recent (a) stabilization of the power
markets, (b) rate increases achieved by PG&E and SCE, (c) settlements made
by California utilities with various power providers, and (d) data in
filings of FERC refund hearings.

     SCE publicly disclosed that on March 1, 2002, it obtained financing
and made payments so that it has no material undisputed obligations that
are past due or in default.  These payments included a payment to the CPX;
however, TEP did not receive a corresponding payment from the CPX.  In
August 2002, the FERC staff proposed revised calculations to determine
amounts due from the CPX and the CISO, based upon concern that natural gas
prices were manipulated.  If we were to apply these proposed adjustments to
amounts due to TEP, TEP could receive as little as $4 million plus interest
of the amounts due from the CPX and the CISO.  The FERC has not yet
confirmed or rejected the calculation proposed by its staff.  Under earlier
calculations proposed by the FERC staff, TEP could receive up to $11
million plus interest.  In addition, TEP has cash collateral of
approximately $1 million on deposit in an escrow account with the CPX,
which is currently unavailable to TEP due to the bankruptcy stay.

     In addition to TEP's net receivable exposure of $0.8 million to Enron,
at December 31, 2001, TEP had forward electricity sales contracts with
Enron for periods through June 30, 2002 with an estimated mark-to-market
value of approximately $1 million.  The unrealized gains associated with
these contracts were removed from TEP's revenues as of December 31, 2001.
TEP has filed a claim in Enron's bankruptcy proceedings for its receivable
and for the mark-to-market value of defaulted forward contracts.

     The amount that TEP ultimately collects from the CPX, the CISO and
Enron would have an impact on its earnings if the amount is more or less
than the $8.4 million TEP has reserved.  If TEP collects all of the $16.8
million, its pre-tax income will increase by $8.4 million.  If TEP does not
collect any of the $16.8 million, its pre-tax income will decrease by $8.4
million.  We also believe that TEP is due interest on the amounts it is
owed; however, TEP has not accrued such amounts.

     Capitalization of UED Project Development Costs
     -----------------------------------------------

     UED capitalizes project development costs when it is probable that the
project will be completed and it expects to recover the costs of the
project.  UED and SRP entered into a Joint Development Agreement in October
2001 to develop two 400 MW coal-fired units at TEP's existing Springerville
Station.  As a result of recent developments, UED and SRP are modifying the
Joint Development Agreement to provide for the purchase by SRP of a
specified amount of power from Unit 3 and an option for SRP to own Unit 4.
See Future Generating Resources above.  UED and SRP each committed project
development funding for professional services and other third party costs.
At September 30, 2002, capitalized project development costs on UED's
balance sheet were approximately $16.1 million.  If the project does not
proceed, the capitalized project development costs will be immediately
expensed.

     Unbilled Revenue
     ----------------

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

     Deferred Tax Valuation Allowance
     --------------------------------

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

     The valuation allowance of $15.4 million at September 30, 2002, which
reduces the Deferred Tax Asset balance, relates to net operating loss and
investment tax credit carryforward amounts.  In the future if TEP
determines that TEP would be able to use all or a portion of these amounts
on tax returns, then TEP would reduce the reserve and recognize a tax
benefit up to $15.4 million.  Factors that could cause TEP to recognize the
tax benefit include new or additional guidance through tax regulations, tax
rulings, case law and/or the use of such benefits on future tax returns.


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

     UniSource Energy recorded net income of $22.8 million, or $0.68 per
average share of Common Stock in the third quarter of 2002, compared with
net income of $15.5 million or $0.46 in the third quarter of 2001.  Net
income for the first nine months of 2002 was $28.4 million, or $0.84 per
share in the first nine months of 2002, compared with net income of $48.1
million or $1.44 per share in the first nine months of 2001.

     TEP's significantly reduced purchased power and fuel expense increased
net income for the quarter ended September 30, 2002.  Additionally,
electric retail revenues increased due to increased consumption by TEP's
residential, commercial and industrial customers, which more than offset
decreased sales to mining customers for the quarter.  A tax benefit of $4.2
million from the reduction of the valuation allowance, the recognition of
foreign tax losses, and the favorable settlement of an IRS audit issue also
contributed to the increased net income.  A coal contract termination fee
of $6.8 million (after-tax) partially offset the increase for the quarter.

     The significant reduction in electric wholesale revenues due to lower
wholesale energy prices and sales activity decreased net income for the
nine months ended September 30, 2002.  Other factors which contributed to
the decrease included milder weather compared to the prior year, decreased
consumption by TEP's mining customers, an adverse ruling on a coal price
arbitration, and the coal contract termination fee.  These factors were
somewhat offset in the first nine months of 2002 by increased consumption
by TEP's residential, commercial, and industrial customers.  A tax benefit
of $5.9 million from the reduction of the valuation allowance, the
recognition of foreign tax losses, the favorable settlement of an IRS audit
issue, and the recognition of income tax credits in the second quarter of
2002 also contributed to the increased net income for the nine months ended
September 30, 2002.

     Contribution By Business Segment
     --------------------------------

     The table below shows the contributions to our consolidated after-tax
net income by our three business segments, as well as parent company
expenses, for the third quarter and first nine months of 2002 and 2001:

                                       Three Months Ended     Nine Months Ended
                                          September 30,          September 30,
                                        2002       2001        2002       2001
--------------------------------------------------------------------------------
                                          - Millions of Dollars -
     Business Segment
       TEP                            $ 26.6     $ 14.4      $ 42.1     $ 56.9
       Millennium                       (2.8)       2.1       (10.5)      (5.2)
       UED                               0.5        0.4         1.0        0.6
       UniSource Energy Standalone (1)  (1.5)      (1.4)       (4.2)      (4.2)
--------------------------------------------------------------------------------
         Consolidated Net Income      $ 22.8     $ 15.5      $ 28.4     $ 48.1
================================================================================

     (1) Represents interest expense (net of tax) on the note payable from
         UniSource Energy to TEP.

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

     Utility kWh Sales and Revenues
     ------------------------------

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

     TEP experienced a significant decrease in wholesale energy sales and
revenues during the third quarter and first nine months of 2002.  Market
demand in the western region declined primarily as a result of mild
temperatures, and market prices fell as a result of increased capacity in
the region and declining natural gas prices, as well as reduced demand.
TEP's electric wholesale sales consist primarily of four types of sales:

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

     (2) Forward contracts to sell energy for periods through the end of the
         next calendar 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-month or one-year
         periods.

     (3) Short-term economy energy sales in the daily or hourly markets at
         fluctuating spot market prices and other non-firm energy sales.

     (4) Sales of transmission service.

     Comparisons of TEP's kilowatt-hour sales delivered and the corresponding
electric revenues for the third quarter and first nine months
of 2002, compared with the same periods in 2001, are shown below:

<TABLE>
<CAPTION>

                                                 Sales                        Operating Revenue
-------------------------------------------------------------------------------------------------------
                                                          Percent                             Percent
Three Months Ended September 30,        2002      2001     Change         2002       2001      Change
-------------------------------------------------------------------------------------------------------
                                           - Millions of kWh -                - Millions of Dollars -
<S>                                    <C>      <C>       <C>           <C>       <C>          <C>
Electric Retail Sales                  2,476     2,485     (0.4%)       $ 214.4   $  212.1       1.1%
-------------------------------------------------------------------------------------------------------
Electric Wholesale Sales Delivered:
  Forward Contracts                      105       819    (87.2%)           3.4      146.1     (97.7%)
  Long-term Contracts                    213       294    (27.6%)          12.1       11.1       9.0%
  Short-term Sales and Other             706       367     92.4%           24.2       48.2     (49.8%)
  Transmission                             -         -        -             1.4        1.5      (6.7%)
-------------------------------------------------------------------------------------------------------
Total Electric Wholesale Sales         1,024     1,480    (30.8%)          41.1      206.9     (80.1%)
------------------------------------------------------------------------------------------------------.
        Total                          3,500     3,965    (11.7%)       $ 255.5   $  419.0     (39.0%)
=======================================================================================================

<CAPTION>

                                                 Sales                        Operating Revenue
-------------------------------------------------------------------------------------------------------
                                                          Percent                             Percent
Nine Months Ended September 30,         2002      2001     Change         2002       2001      Change
-------------------------------------------------------------------------------------------------------
                                           - Millions of kWh -               - Millions of Dollars -
<S>                                    <C>      <C>       <C>           <C>       <C>          <C>
Electric Retail Sales                  6,254     6,373     (1.9%)       $ 521.1   $  518.4       0.5%
-------------------------------------------------------------------------------------------------------
Electric Wholesale Sales Delivered:
  Forward Contracts                      609     2,490    (75.5%)          19.8      348.3     (94.3%)
  Long-term Contracts                    685       933    (26.6%)          38.1       38.1       0.0%
  Short-term Sales and Other           1,916     1,415     35.4%           65.1      177.7     (63.4%)
  Transmission                             -         -        -             2.9        3.6     (19.4%)
-------------------------------------------------------------------------------------------------------
Total Electric Wholesale Sales         3,210     4,838    (33.7%)         125.9      567.7     (77.8%)
-------------------------------------------------------------------------------------------------------
        Total                          9,464    11,211    (15.6%)       $ 647.0   $1,086.1     (40.4%)
=======================================================================================================

</TABLE>

     TEP's kWh sales to retail customers decreased 0.4% in the third
quarter of 2002 compared with the same period in 2001, despite a 2.5%
increase in retail customers.  Sales to mining customers decreased by 27%
due to cutbacks in production by both of TEP's large mining customers in
response to lower copper prices.  This reduction in sales was partially
offset by a 2.5% increase in sales to residential, commercial and
industrial customers.  Revenues from sales to retail customers increased
1.1% in the third quarter of 2002, reflecting the increased kWh sales to
non-mining customers.  For the first nine months of 2002, retail kWh sales
decreased by 1.9%, while revenues increased slightly compared with the same
period in 2001, primarily due to a favorable change in sales mix with
decreased sales to mining customers, partially offset by increased sales to
residential, commercial and other industrial customers.

     Electric wholesale sales decreased by 31%, while revenues decreased by
80% in the third quarter of 2002, compared with 2001.  For the first nine
months of 2002, kWh electric wholesale sales decreased by 34% and revenues
decreased by 78% compared with the same period in 2001.  The decrease in
revenues in the third quarter and first nine months of 2002 resulted from
decreased sales activity and the sharp decline in market prices from those
in the same periods of 2001.  Electric wholesale sales for the third
quarter 2002 decreased 456,000 MWh while the average market price for
around-the-clock energy decreased $12 per MWh, compared with the same
period in 2001.  In the nine months ended September 30, 2002, electric
wholesale sales decreased 1,628,000 MWh, while the average around-the-clock
market price decreased $92 per MWh, compared with 2001.  Sales and revenues
from forward contracts experienced the largest declines, reflecting lower
demand and market prices.  Short-term sales were higher, however, due to
sales of excess energy in the daily and hourly markets.  Despite the higher
short-term sales volumes, revenues from short-term sales were significantly
lower in 2002 due to the lower average market prices.  Factors contributing
to the lower market prices included more generation online in the western
U.S., lower natural gas prices, increased hydropower supply, and weaker
demand.

     Fuel and Purchased Power Expenses
     ---------------------------------

     Fuel expense at TEP's generating plants decreased by $9 million, or
14%, in the quarter ended September 30, 2002 compared with the same quarter
in 2001 due to decreased natural gas usage for generation and lower gas
purchase prices.  Contributing to higher gas purchase prices in 2001 was
approximately $5 million in costs associated with two gas swap agreements
entered into in May 2001 to hedge the risk of price fluctuation.  The
average cost of fuel per kWh generated for the third quarter of 2002 and
2001 was 1.84 cents and 2.17 cents, respectively.  Fuel expense decreased
by $39 million, or 19%, for the nine months ended September 30, 2002,
compared with the same period in 2001, for the same reasons described
above.  Fuel expense for the first nine months of 2002 included $2.3
million related to an arbitration ruling that increased the price of coal
purchased between 1997 and May 2002 for the Navajo Generating Facility.
TEP owns 7.5% of the Navajo facility.  The increased coal prices
established by the arbitration ruling will increase fuel expense by
approximately $0.4 million per year in the future.  The average cost of
fuel per kWh generated for the first nine months of 2002 and 2001 was 1.89
cents and 2.23 cents, respectively.  See Market Risks - Commodity Price
Risk, above.

     TEP recorded a $11.3 million (pre-tax) charge in the third quarter of
2002 as a result of terminating an Irvington coal supply agreement.  This
expense was mitigated by the reversal in July 2002 of the $2.4 million
accrued portion of the total 2002 take-or-pay penalty of $3.5 million.  See
Market Risks - Commodity Price Risk, above.

     Purchased Power expense decreased by $179 million, or 88%, in the
third quarter of 2002 compared with the same period in 2001 due principally
to decreased volume of wholesale forward contract activity and
significantly lower wholesale prices.  In the third quarter of 2001, TEP
incurred approximately $12 million in additional costs from several
expensive forward purchase contracts that were entered into in May 2001 to
assure service reliability in the summer months.  TEP paid an average price
of $186 per MWh for those forward contracts in 2001.  TEP entered into
similar contracts in 2002 at an average price of $37 per MWh.  Forward
purchase contract activity decreased corresponding with the reduction in
forward sales activity discussed above.  For the nine months ended
September 30, 2002, Purchased Power expense decreased $372 million, an 89%
decrease from the same period in 2001, for the same reasons.

     Other Operating Expenses
     ------------------------

     Other Operations and Maintenance expense increased $2 million, or 6%,
for the third quarter of 2002 compared with the same quarter in 2001, due
primarily to increased pension and post-retirement medical benefit costs.
In the first nine months of 2002, however, Other Operations and Maintenance
expense decreased by $8 million, or 6%, due to the following: (i) a $2
million decrease in maintenance expenses related to scheduled outages at
the San Juan Unit 2 and the Springerville Unit 1 generating plants; (ii) $2
million in scheduled repairs in 2001 to the Irvington Unit 3 turbine
generator and contracting fees at North Loop generating plant; (iii) a $1
million decrease in post-retirement medical and other benefits; and (iv) a
$5 million decrease in bad debt expense.  Bad debt expense was $5 million
higher in 2001 in recognition of TEP's credit exposure for risk of non-
payment from electric wholesale sales to California made in January 2001.
TEP recorded no such reserves in 2002.  See Note 8 of Notes to Condensed
Consolidated Financial Statements.

     Depreciation and amortization expense increased $7 million, or 8%, in
the first nine months of 2002, compared with the same period in 2001.
Depreciation expense increased due to accrued depreciation of photovoltaic
investments at TEP and a $125 million increase in the depreciable asset
base, which represents: (i) new line extensions to support new business,
(ii) the addition of a 75 MW gas turbine placed in-service in June 2001,
and (iii) routine improvements to TEP's system.  These increases were
partially offset by reduced depreciation resulting from a change in the
second quarter of 2002 to increase the estimated useful lives of gas-fired
generating units and internal combustion turbines located in Tucson.  See
Note 11 of Notes to Condensed Consolidated Financial Statements.

     Other Income
     ------------

     TEP's income statements for the quarters ended September 30, 2002 and
2001 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 intercompany transaction.

     TEP's Interest Income for the third quarter and first nine months of
2002 was $2 million and $5 million higher, respectively, compared with the
same periods in 2001, due to TEP's $132 million investments in lease debt
in 2002.  See Liquidity and Capital Resources, below, and Note 6 of Notes
to Condensed Consolidated Financial Statements.

     Interest Expense
     ----------------

     Interest Expense for the third quarter and first nine months of 2002
decreased by $2 million and $6 million, respectively, compared with the
same periods in 2001, primarily due to decreases in the average interest
rate on long-term variable rate tax-exempt debt and reduced capital lease
obligations in 2002.

     Income Tax Expense
     ------------------

     Income taxes increased $5 million, or 40%, for the third quarter of
2002 compared with the same period in 2001, primarily due to increased pre-
tax income partially offset by a $4.2 million tax benefit from the
reduction of the valuation allowance, and the favorable settlement of an
IRS audit issue.  Income taxes decreased $16 million, or 37%, for the first
nine months of 2002, compared with the same period in 2001, primarily due
to lower pre-tax income, $1.7 million of tax credits recognized in the
second quarter of 2002, as well as the third quarter 2002 tax benefits
described above.


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

     The table below provides a breakdown of the after-tax net income
(loss) recorded by Millennium Energy Businesses:

                                  Three Months Ended       Nine Months Ended
                                     September 30,           September 30,
                                    2002       2001         2002        2001
------------------------------------------------------------------------------
                                           - Millions of Dollars -

Energy Technology Investments     $ (4.3)    $ (3.0)     $ (10.4)    $ (10.8)
Nations Energy                       1.3        5.2          0.5         5.0
Other                                0.2       (0.1)        (0.6)        0.6
------------------------------------------------------------------------------
Total Millennium                  $ (2.8)    $  2.1      $ (10.5)     $ (5.2)
==============================================================================

     Energy Technology Investments
     -----------------------------

     Millennium's Energy Technology Investments include Global Solar,
Infinite Power Solutions, Inc. (IPS), MicroSat Systems, Inc. (MicroSat) and
ITN Energy Systems, Inc. (ITN).  The major factors contributing to the
losses in 2002 and 2001 are development efforts of solar modules by Global
Solar, expenditures to develop thin-film and solid-state rechargeable
batteries by IPS, research and development work performed by ITN and
contract work performed by MicroSat on satellite development.  See Note 4
of Notes to Condensed Consolidated Financial Statements.

     Nations Energy
     --------------

     Nations Energy's third quarter 2002 net results primarily represent
recorded tax benefits recognized from the sale of foreign property.  In
2001, Nations Energy's third quarter after-tax net income of $5.2 million
was the result of the sale of its investment in a power project in Curacao
to a subsidiary of Mirant.  See Note 4 of Notes to Condensed Consolidated
Financial Statements - Nations Energy Contingency.

     Other Millennium Investments
     ----------------------------

     Other Millennium Investments results include the operations of the
remainder of Millennium's equity method and consolidated investees,
including Powertrusion International, Inc. (Powertrusion), MEG, and
Southwest Energy Solutions.

     The net loss for the nine months ended September 30, 2002 is primarily
the result of after-tax losses from Powertrusion approximating $1.5 million
and from other investees approximating $1.1 million.  These losses were
largely offset by interest earned on deposits and recognition of a third
quarter 2002 tax benefit of $1.5 million.  This benefit was the result of
final resolution of IRS audit issues.


RESULTS OF UED
--------------

     UED, established in February 2001, recorded a net profit of $0.5
million for the quarter ended September 30, 2002 and $1.0 million for the
first nine months of 2002.  Until September 2002, UED owned a 20 MW gas
turbine, which it leased to TEP under an operating lease arrangement.  In
September 2002, UED sold its gas turbine to TEP at its $15 million net book
value.  Prior to the sale, UED's income represented rental income, less
expenses, under the operating lease.  This rental income is eliminated from
UniSource Energy's after-tax earnings as an intercompany transaction.

     UED is developing the expansion of the Springerville Generating
Station.  As of September 30, 2002, the capitalized costs on UED's balance
sheet were approximately $16.1 million.  If the project does not proceed,
the capitalized project development costs will be immediately expensed.
See Future Generating Resources and Critical Accounting Policies -
Capitalization of UED Project Development Costs, above.


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

     UniSource Energy
     ----------------

     On August 1, 2002, UniSource Energy declared a cash dividend of $0.125
per share on its Common Stock.  This dividend, totaling approximately $4
million, was paid September 10, 2002 to shareholders of record at the close
of business August 16, 2002.  On November 8, 2002, UniSource Energy
declared a cash dividend in the amount of $0.125 per share on its Common
Stock, payable December 10, 2002 to shareholders of record at the close of
business November 22, 2002.

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

     TEP
     ---

     On August 1, 2002, TEP declared a cash dividend in the amount of $10
million, which it paid to UniSource Energy on August 5, 2002.  In December
2001, TEP declared and paid a dividend of $50 million.  UniSource Energy is
the primary holder of TEP's common stock.

     TEP can pay dividends if it maintains compliance with the TEP Credit
Agreement and certain financial covenants, including a covenant that
requires TEP to maintain a minimum level of net worth.  As of September 30,
2002, the required minimum net worth was $280 million.  TEP's actual net
worth at September 30, 2002 was $355 million.  As of September 30, 2002,
TEP was in compliance with the terms of the Credit Agreement.  See
Investing and Financing Activities - TEP Bank 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
September 30, 2002, TEP's equity ratio on that basis was 24%.

     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, TEP
believes that there is a reasonable basis to pay dividends from current
year earnings.  Therefore, TEP declared its August 2002 dividend from year
to date 2002 earnings and its December 2001 dividend from 2001 earnings
since TEP had an accumulated deficit, rather than positive retained
earnings.


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

   OVERALL LIQUIDITY

     Our primary source of liquidity is our cash flow from operations,
which exceeded $200 million in both 2000 and 2001.  These cash flows are
derived primarily from retail and wholesale energy sales at TEP, net of the
related payments for fuel and purchased power.  In 2000 and 2001, our cash
flows benefited from higher margins on wholesale energy sales in the
western U.S. power markets.  This enabled us to increase our cash levels
from $145 million at year-end 1999 to $228 million at year-end 2001.  We
have used our available cash to fund capital expenditures, primarily at
TEP, to make investments in our energy technology affiliates, to pay
dividends to shareholders, and to reduce leverage at TEP by repaying high
coupon debt and investing in lease debt.  For example, TEP purchased $132
million of principal amount of Springerville lease debt during the nine
months ended September 30, 2002.  See Investment in Springerville Lease
Debt and Equity, below.

     As we expected, the wholesale energy market conditions have not been
as favorable in 2002, with market prices and margins lower than we saw in
the previous two years.  Another factor that could continue to affect our
cash flows from operations is reduced energy demand by TEP's large mining
customers.  As we have reported elsewhere in this document, TEP's two major
mining customers have reduced operations during the last few years due to
lower copper prices.  We expect this trend to continue.  As we entered
2002, we expected a 40 MW load reduction to TEP's system peak demand
related to these mining customers.  While this load reduction by TEP's
mining customers did occur, TEP experienced increased consumption by its
other retail customers, which caused TEP to reach a new peak demand in June
2002.  We cannot predict, however, whether continued higher consumption by
TEP's other retail customers will offset the decreased mining load.

     In the event that we experience lower cash from operations due to
these, or other events, we will adjust our discretionary uses of cash
accordingly.  We believe, however, that we will continue to have sufficient
cash flow to cover our capital needs, as well as required debt payments and
dividends to shareholders.  Furthermore, we believe that even with lower
wholesale energy prices and lower demand from mining customers, we will
have sufficient excess cash flow to continue to make annual discretionary
debt reductions or lease debt investments at TEP in the range of $30 - $50
million. TEP's $100 million Revolving Credit Facility provides us with
another major source of liquidity.  TEP has borrowed under this facility
only one time for a period of approximately one month during the past four
years.  At September 30, 2002, there were no outstanding borrowings under
this facility.  If TEP encountered temporary cash needs during the course
of the year, it would borrow from this Revolving Credit Facility.

     The Revolving Credit Facility is part of TEP's Bank Credit Agreement,
which matures on December 30, 2002.  The Credit Agreement also includes a
$341 million Letter of Credit Facility (LOC) which supports $329 million of
tax-exempt variable rate bonds.  If TEP fails to extend or replace the LOCs
or to otherwise refinance the bonds prior to the expiration date, the bonds
would be subject to mandatory redemption in December 2002.  Therefore, the
$329 million in bonds have been classified as current liabilities on TEP's
balance sheet as of September 30, 2002 and December 31, 2001.  TEP is
negotiating with its banks and believes that it will be able to complete a
new credit agreement prior to the date the bonds would be required to be
redeemed.  If the new agreement is completed, the $329 million in tax-
exempt variable rate bonds will be classified as Long-Term Debt.  TEP
expects that the amount of the Revolving Credit Facility will be reduced
from $100 million to $60 million in the new credit agreement.  See
Investing and Financing Activities - TEP Bank Credit Agreement, below.

     During the second quarter of 2002, MEG obtained a $5 million line of
credit from a bank for the purpose of issuing letters of credit to
counterparties to support its emissions allowance and coal trading
activities.  At September 30, 2002, MEG had $2 million in outstanding
letters of credit.

     There have been no other significant changes in our contractual
obligations or other commercial commitments from those reported in our 2001
Annual Report on Form 10-K.

     CASH FLOWS

     UniSource Energy
     ----------------

     Consolidated cash and cash equivalents decreased from the September
30, 2001 balance of $191 million to $93 million at September 30, 2002.  For
the twelve-month period ended September 30, 2002, net cash outflows for
investing and financing activities exceeded the cash generated from
operating activities.

     Net cash flows from operating activities decreased by $15 million in
the first nine months of 2002 compared with the same period in 2001.  The
net decrease resulted primarily from the following factors:

   - $41 million decrease in cash receipts from sales to wholesale and
     retail customers, net of fuel and purchased power costs paid; and

   - $11 million cash payment to terminate an Irvington coal supply
     agreement in September 2002; offset by

   - $11 million decrease in capital lease interest paid as a result of
     lower lease obligation balances and lower interest rates on variable rate
     lease debt; and

   - $20 million decrease in income taxes paid due to lower pre-tax income.

     Net cash used for investing activities totaled $240 million in the
first nine months of 2002, compared with $94 million during the same period
in 2001.  TEP spent $101 million to purchase and hold outstanding
Springerville Coal Handling Facilities Lease debt in January 2002 and $37
million to purchase and hold outstanding Springerville Unit 1 lease debt in
May and September 2002.  See Investment in Springerville Lease Debt and
Equity, below.  Capital expenditures were $13 million higher in 2001 than
in 2002 due to UED's $15 million purchase of a 20 MW gas turbine in 2001.
Investments in and loans to Millennium Energy Businesses increased $10
million in 2002.  Significant investing activities in 2001 included: (i)
$11 million in proceeds from the final payment of a promissory note related
to the sale of NewEnergy, Inc.; (ii) $5 million in proceeds from the sale
of Nations Energy's interest in the Curacao project; and (iii) $7 million
in proceeds from the sale of real estate.

     Net cash used for financing activities totaled $31 million in the
first nine months of 2002, compared with $30 million in the same period in
2001.  In 2002, UniSource Energy paid approximately $20 million to retire
capital lease obligations and $13 million in dividends.

     UniSource Energy's consolidated cash balance, including cash
equivalents, at November 7, 2002 was approximately $114 million.  We invest
cash in high-grade money market securities with an emphasis on preserving
the principal amounts invested.

     TEP
     ---

     Cash and cash equivalents decreased from the September 30, 2001
balance of $156 million to $68 million at September 30, 2002.  For the
twelve-month period ended September 30, 2002, net cash outflows for
investing and financing activities exceeded the cash generated from
operating 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.  In addition, however, TEP's net cash used for
investing activities included a $15 million payment to UED for the purchase
of its 20 MW gas turbine in September 2002.  This payment is eliminated from
the UniSource Energy cash flow statement as an intercompany transaction.

     TEP's consolidated cash balance, including cash equivalents, at
November 7, 2002 was approximately $89 million.


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

   UNISOURCE ENERGY

     During the next 12 months, UniSource Energy expects to use cash to
fund investments in Millennium and UED'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 seek to
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

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

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

     TEP's capital expenditures for the three months and nine months ended
September 30, 2002 were $25 million and $72 million, respectively.  TEP's
forecast for capital expenditures for the year ending December 31, 2002 was
originally expected to be approximately $124 million, including expected
expenditures in 2002 for the construction of a 62-mile transmission line
from Tucson to Nogales, Arizona.  This forecast has been adjusted downward
to approximately $105 million to reflect a change in the timing of the
expenditures for the 62-mile transmission line.  These expenditures include
costs for TEP to comply with current federal and state environmental
regulations.  Actual construction expenditures may differ from these
estimates due to changes in business conditions, construction schedules,
environmental requirements and changes to TEP's business arising from
retail competition.  TEP plans to fund these expenditures through
internally-generated cash flow.

     In January 2001, TEP and Citizens entered into a project development
agreement for the joint construction of the 62-mile transmission line.  In
January 2002, the ACC approved the location and construction of the
proposed 345 kV line, almost half of which runs through a national forest.
A drought-caused closure of the forest in June 2002 has delayed the
progress on the environmental impact study required for Federal project
approval.  A U.S. Department of Energy (DOE) and Forest Service record of
decision is expected to occur in the third or fourth quarter of 2003, and
construction could begin in the fourth quarter of 2003, with completion
expected by the second or third quarter of 2004.  Construction costs are
expected to be approximately $70 million.  TEP has also applied to the DOE
for a Presidential Permit that would allow building an extension of the
line across the international border with Mexico to interconnect with
Mexico's utility system, providing further reliability and market
opportunities in the region.

     The estimated expenditures listed above do not include any amounts for
the potential expansion of the Springerville Generating Station.
Springerville generation expenditures are expected to be made by UED.  See
Investing and Financing Activities - UED, below.

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

     TEP has a $441 million Credit Agreement with a number of banks which
matures on December 30, 2002.  The agreement consists of a $100 million
Revolving Credit Facility and a $341 million Letter of Credit Facility.
The Revolving Credit Facility is used to provide liquidity for general
corporate purposes.  The Letter of Credit Facility supports $329 million
aggregate principal amount of tax-exempt variable rate debt.  The
facilities are secured by $441 million in aggregate principal amount of
Second Mortgage Bonds.  The Credit Agreement contains a number of
restrictive covenants including restrictions on additional indebtedness,
liens, sale of assets or mergers and sale-leasebacks.  The Credit Agreement
also contains several 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 of 1.55 in 2002, and (c) a maximum Leverage Ratio of
6.20 in 2002.  As of September 30, 2002, TEP was in compliance with these
financial covenants.

     As of September 30, 2002 and as of November 7, 2002, TEP had no
borrowings outstanding under its $100 million Revolving Credit Facility.

     TEP intends to enter into a new credit agreement prior to the maturity
of its existing Credit Agreement, in a structure substantially similar to
its existing facilities.  In September 2002, the ACC issued an order
granting TEP the authority to refinance its Credit Agreement.  We cannot,
however, predict the final terms and the pricing that will be available.
However, due to current market conditions for bank financing, we believe
that TEP's annual interest expense related to its Credit Agreement will
increase by approximately $12 million.  The $329 million in aggregate
principal amount of tax-exempt variable rate debt that is supported by the
Letter of Credit Facility has been classified as Current Maturities of Long-
Term Debt on TEP's Balance Sheet for the period ended September 30, 2002
because the Letter of Credit Facility matures on December 30, 2002.  Once a
longer term Letter of Credit Facility has been completed, the bonds will be
classified as Long-Term Debt.

     Investment in Springerville Lease Debt and Equity
     -------------------------------------------------

     In the first nine months of 2002, TEP made the following investments
in Springerville lease debt:

<TABLE>
<CAPTION>

                   Principal                                                Average
    Date             Amount                 Debt Purchased                Coupon Rate
-------------------------------------------------------------------------------------
<C>               <C>             <C>                                         <C>
January 2002      $ 96 million    Springerville Coal Handling Lease Debt      14.3%
May 2002             3 million    Springerville Unit 1 Lease Debt             10.7%
September 2002      33 million    Springerville Unit 1 Lease Debt             10.6%

</TABLE>

     In December 2001, TEP purchased a 13% equity ownership interest in the
Springerville Coal Handling Facilities Leases for $13 million.  In March
2002, TEP terminated the leases related to its equity interest and
cancelled the associated debt that we held.  As a result of the lease
termination, TEP recorded a $21 million reduction to the capital lease
obligation, a $27 million reduction of its investment in lease debt, and a
$6 million increase in the capital lease asset, which represents the
residual value of TEP's interest in the leased asset and is carried at
cost.

   MILLENNIUM

     Millennium's significant investments, commitments and investment
proceeds are discussed below.

     Energy Technology Investments
     -----------------------------

     We refer to Global Solar, IPS, MicroSat and ITN collectively as
Millennium's Energy Technology Investments.  During the first quarter of
2002, Millennium reallocated a $10 million line of credit commitment from
MicroSat to Global Solar and IPS.  During the second quarter of 2002,
Millennium committed an additional $10 million in funding to Global Solar.
Millennium's advances to its Energy Technology Investments totaled $17.1
million during the first nine months of 2002.

     On April 3, 2002, Millennium signed a letter agreement that
facilitates the change in the ownership structure of its Energy Technology
Investments to better align Millennium's ownership interest in these
investments with its business plans.  Millennium retains its preferred
shareholder and distribution status.  Under the letter agreement and
related documents, Millennium:

   - increases its ownership of Global Solar from 67% to at least 81%;
   - increases its ownership of IPS from 67% to at least 70%;
   - decreased its ownership of MicroSat from 49% to 35%;
   - decreased its ownership of ITN from 49% to 9%; and
   - provided an additional $1 million in equity contributions to ITN and
     will provide additional contingent capital contributions of up to $0.5
     million.  Such contingent contributions are subject to Millennium's
     approval of subsidiary business plans.

     We anticipate that the Energy Technology Investments letter agreement
provisions will be finalized during the fourth quarter of 2002.  Regardless
of ownership percentage, as the current sole funder of the Energy
Technology Investments, Millennium continues to recognize 100% of the
losses from operations of these companies.  Millennium expects to fund
between $3 million and $7 million of its commitments to its Energy
Technology Investments in the fourth quarter of 2002.  Including
Millennium's unfunded commitments at September 30, 2002 of approximately $7
million, Millennium expects to fund between $11 million and $14 million to
these investments in the next twelve months.  A significant portion of the
funding under these agreements will be used for research and development
purposes and administrative costs.  As funds are expended for these
purposes, Millennium will recognize expense.  Additional investment
commitments may be made to these technology investments depending on their
funding requirements and business outlook.  In addition, Millennium is
seeking external investors for the Energy Technology Investment companies.
If an Energy Technology Investment company receives funding from an
external investor and Millennium is no longer the sole funder of that
company, Millennium will stop recognizing 100% of the losses from
operations of that company and recognize only its percentage share based
on its ownership interest.

     During the third quarter of 2002, Millennium and Dow Corning
Corporation (Dow Corning) signed a letter of intent regarding additional
investments in IPS.  Under the letter of intent, both Millennium and Dow
Corning will provide additional funding to IPS in exchange for preferred
shares of IPS.  If the transaction is consummated, Dow Corning would own
approximately 15% of IPS and would have future rights to preferred stock
warrants based on established milestones.   Millennium would agree to fund
an additional $2.5 million in the form of cash and equipment and maintain a
70% share ownership.

     Other Millennium Investments and Commitments
     --------------------------------------------

     Millennium has a $15 million capital commitment to a limited
partnership that funds energy related investments.  As of September 30,
2002, Millennium had funded $6 million of this commitment.  The remaining
$9 million is expected to be funded within the next three years.  A member
of the UniSource Energy Board of Directors has an investment in the limited
partnership and is a managing director of the general partner of the
limited partnership.

     Millennium has a $5 million capital commitment to a venture capital
fund that will focus on information technology, optics and biotechnology.
During 2002, this venture capital fund merged with another fund that will
focus on investments in Arizona, Southern California, New Mexico, Colorado
and Utah.  As a result, Millennium owns approximately 15% of the merged
venture.  Millennium will use the cost method to account for this
investment.  Before the merger, Millennium accounted for this investment
under the equity method.  Another member of the UniSource Energy Board of
Directors is a general partner of the company that manages the fund.  At
September 30, 2002, Millennium had funded approximately $1 million of the
$5 million commitment.  Millennium expects to fund no more than $1 million
in the fourth quarter of 2002.

     Millennium owns a controlling 50.5% interest in Powertrusion, a
manufacturer of lightweight utility poles.  During the third quarter of
2002, Millennium provided an additional $2 million of funding to maintain
its controlling interest.  In addition, during the third quarter,
Millennium began recognizing 100% of Powertrusion's losses, as it became
the sole funder of Powertrusion's operations.  Millennium's remaining
investment in Powertrusion at September 30, 2002 was $1.9 million.

     On April 1, 2002, Millennium invested an additional $2 million in
TruePricing, Inc., a start-up company established to market energy-related
products, bringing Millennium's total investment to $3.1 million.
Millennium's net remaining investment, after the results of operations, was
$1.4 million at September 30, 2002.

     On July 15, 2002, Millennium invested $20 million in a company created
to develop up to 800 MW of coal-fired generation in the Sabinas region of
Coahuila, Mexico.  Millennium received a 50% share of Carboelectrica
Sabinas, S. de R.L. de C.V., a Mexican limited liability company (Sabinas).
The other 50% of Sabinas is owned by Altos Hornos de Mexico, S.A. de C.V.
(AHMSA) and certain of its affiliates.  Sabinas also owns approximately 19%
of Minerales de Monclova, S.A. de C.V., an owner of coal reserves and a
supplier of metallurgical coal to the steel industry and thermal coal to
the Mexican electricity commission.  Under certain circumstances,
Millennium has the right to sell its interest in Sabinas to an AHMSA
affiliate for $20 million plus an accrued service fee.  These circumstances
include failure of Sabinas to reach financial closing on the generation
project within three years.  Millennium's put option is secured by
collateral with a value currently in excess of $20 million.  UniSource
Energy's Chairman and Chief Executive Officer is a member of the board of
directors of AHMSA.

   UED

     UED is responsible as project developer for facilitating the
Springerville Generating Station expansion project construction.  See
Future Generating Resources above.  To date, we have funded approximately
$16 million for development of the project.  We expect to provide an
additional $7 million in funding for development prior to closing of
construction financing.  Our funding to UED for equity will depend upon the
timing of financial closing of the project and UED's ultimate ownership
percentage of the project, but is expected to be $50 million to $100
million for 50% ownership.  We presently anticipate closing construction
financing for Unit 3 in early 2003.  Total construction cost for Unit 3 is
expected to be $560 million from 2003 to 2006, and total project costs,
which include construction costs, various development costs and interest
during construction, are expected to exceed $800 million.  We can make no
assurances, however, about the ultimate timing, or whether UED 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 western U.S., including
        hydroelectric resources, weather, natural gas prices, the extent of
        utility restructuring in various states, transmission constraints,
        environmental restrictions and cost of compliance, and FERC regulation
        of wholesale energy markets.

     5. The creditworthiness of the entities with whom UniSource Energy, TEP,
        Millennium and their affiliates transact business.

     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 financing and rate structures.

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

     9. Changes in accounting principles or the application of such principles
        to UniSource Energy or TEP.

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

    11. Regulatory conditions to the approval of the acquisition of Citizens'
        Arizona electric utility and gas utility assets.

    12. The level of rate relief granted with respect to Citizens' Arizona
        electric utility and gas utility assets.

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

<PAGE>

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

     The information contained in this Item updates, and should be read in
conjunction with, information included in Part II, Item 7A in UniSource
Energy and TEP's Annual Report on Form 10-K for the year ended December 31,
2001, in addition to the interim condensed consolidated financial
statements and accompanying notes presented in Items 1 and 2 of this Form
10-Q.

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


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

     UniSource Energy and TEP have disclosure controls and procedures to
ensure that material information contained in their filings with the SEC is
recorded, processed, summarized and reported on an accurate and timely
basis.  The principal executive officer and principal financial officer of
UniSource Energy and TEP have evaluated these disclosure controls and
procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended, within 90 days prior to the filing of
this report.  Based on such evaluation, the principal executive officer and
principal financial officer of UniSource Energy and TEP have concluded that
such disclosure controls and procedures are effective at ensuring that
material information is recorded, processed, summarized and reported
accurately and within the time periods specified by the SEC's rules and
forms.  Since such evaluation there have not been any significant changes
in UniSource Energy and TEP's internal controls, or in other factors that
could significantly affect these controls.

<PAGE>

                        PART II - OTHER INFORMATION


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

   LITIGATION RELATED TO ACC ORDERS AND RETAIL COMPETITION

     See Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments in the Arizona
Regulatory Environment.

   SPRINGERVILLE GENERATING STATION COMPLAINT

     See Note 7 of Notes to Condensed Consolidated Financial Statements -
TEP Contingencies.

   LITIGATION RELATED TO SAN JUAN GENERATING STATION

     See Note 7 of Notes to Condensed Consolidated Financial Statements -
TEP Contingencies.

<PAGE>

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

   ADDITIONAL FINANCIAL DATA

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

                                        9 Months Ended     12 Months Ended
                                         September 30,       September 30,
                                             2002                2002
                                        --------------     ---------------
    Ratio of Earnings to Fixed Charges       1.61                1.66

   APPROVAL OF NON-AUDIT SERVICES

     On February 6, 2002, the Audit Committee of the Board of Directors of
UniSource Energy pre-approved ongoing non-audit related services, for fees
not to exceed $600,000, to be performed by our independent auditor,
PricewaterhouseCoopers LLP (PwC), consisting of accounting and tax
research in connection with the financings of Springerville Units 3 and 4.

     On October 17, 2002, the Audit Committee of the Board of Directors of
UniSource Energy pre-approved non-audit related services, for fees not to
exceed $100,000, to be performed by PwC, consisting of performance of
certain tests of financial, statistical and rate-making data relating to
the Arizona gas and electric assets of Citizens Communications Company.

   SEC REPORTS AVAILABLE ON UNISOURCE ENERGY'S WEBSITE

     UniSource Energy and TEP's annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to
those reports are available free of charge through UniSource Energy's
website address: http://www.unisourceenergy.com.  A link to these SEC
reports is accessible as follows:  At the UniSource Energy main page,
select Investor Relations from the menu shown at the top of the page; next
select SEC filings from the menu shown on the Investor Relations page.

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


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

(a) Exhibits.

      See Exhibit Index.

(b) Reports on Form 8-K.

    - UniSource Energy and TEP Form 8-K, dated August 9, 2002 regarding
      Officer Sworn Statements pursuant to Order 4-460 and Section 21(a)(1) of
      the Securities Exchange Act of 1934.

    - UniSource Energy Form 8-K, dated October 31, 2002 regarding UniSource
      Energy Purchase of Citizens Communications Company Electric Utility
      Business and Gas Utility Business in Arizona.

<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: November 14, 2002                 /s/  Kevin Larson
                                     ----------------------------
                                             Kevin Larson
                                     Vice President and Principal
                                           Financial Officer



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


Date: November 14, 2002                 /s/  Kevin Larson
                                     -----------------------------
                                             Kevin Larson
                                      Vice President and Principal
                                           Financial Officer

<PAGE>

                          CERTIFICATION
        Pursuant to Section 302 of the Sarbanes-Oxley Act


     I, James S. Pignatelli, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of UniSource
     Energy Corporation;

2.   Based on my knowledge, this quarterly report does not contain any
     untrue statement of a material fact or omit to state a material
     fact necessary to make the statements made, in light of the
     circumstances under which such statements were made, not misleading
     with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other
     financial information included in this quarterly report, fairly
     present in all material respects the financial condition, results
     of operations and cash flows of the registrant as of, and for,
     the periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
     and we have:

     a.   designed such disclosure controls and procedures to ensure
          that material information relating to the registrant, including
          its consolidated subsidiaries, is made known to us by others
          within those entities, particularly during the period in which
          this quarterly report is being prepared;

     b.   evaluated the effectiveness of the registrant's disclosure
          controls and procedures as of a date within 90 days prior to the
          filing date of this quarterly report (the "Evaluation Date"); and

     c.   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on
          our evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based
     on our most recent evaluation, to the registrant's auditors and the
     audit committee of registrant's board of directors (or persons
     performing the equivalent function):

     a.   all significant deficiencies in the design or operation of
          internal controls which could adversely affect the registrant's
          ability to record, process, summarize and report financial data
          and have identified for the registrant's auditors any material
          weaknesses in internal controls; and

     b.   any fraud, whether or not material, that involves management
          or other employees who have a significant role in the
          registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in
     this quarterly report whether or not there were significant changes in
     internal controls or in other factors that could significantly affect
     internal controls subsequent to the date of our most recent evaluation,
     including any corrective actions with regard to significant deficiencies
     and material weaknesses.

Date: November 14, 2002        /s/ James S. Pignatelli
      -----------------        --------------------------------------------
                                   James S. Pignatelli
                                   Chairman, President, and
                                   Chief Executive Officer

<PAGE>

                          CERTIFICATION
        Pursuant to Section 302 of the Sarbanes-Oxley Act


     I, Kevin P. Larson, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of UniSource
     Energy Corporation;

2.   Based on my knowledge, this quarterly report does not contain any
     untrue statement of a material fact or omit to state a material
     fact necessary to make the statements made, in light of the
     circumstances under which such statements were made, not misleading
     with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other
     financial information included in this quarterly report, fairly
     present in all material respects the financial condition, results
     of operations and cash flows of the registrant as of, and for,
     the periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
     and we have:

     a.   designed such disclosure controls and procedures to ensure
          that material information relating to the registrant, including
          its consolidated subsidiaries, is made known to us by others
          within those entities, particularly during the period in which
          this quarterly report is being prepared;

     b.   evaluated the effectiveness of the registrant's disclosure
          controls and procedures as of a date within 90 days prior to the
          filing date of this quarterly report (the "Evaluation Date"); and

     c.   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on
          our evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based
     on our most recent evaluation, to the registrant's auditors and the
     audit committee of registrant's board of directors (or persons
     performing the equivalent function):

     a.   all significant deficiencies in the design or operation of
          internal controls which could adversely affect the registrant's
          ability to record, process, summarize and report financial data
          and have identified for the registrant's auditors any material
          weaknesses in internal controls; and

     b.   any fraud, whether or not material, that involves management
          or other employees who have a significant role in the
          registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in
     this quarterly report whether or not there were significant changes in
     internal controls or in other factors that could significantly affect
     internal controls subsequent to the date of our most recent evaluation,
     including any corrective actions with regard to significant deficiencies
     and material weaknesses.

Date: November 14, 2002        /s/  Kevin P. Larson
      -----------------        --------------------------------------------
                                    Kevin P. Larson
                                    Vice President, Chief Financial Officer
                                    and Treasurer

<PAGE>

                          CERTIFICATION
        Pursuant to Section 302 of the Sarbanes-Oxley Act


     I, James S. Pignatelli, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Tucson
     Electric Power Company;

2.   Based on my knowledge, this quarterly report does not contain any
     untrue statement of a material fact or omit to state a material
     fact necessary to make the statements made, in light of the
     circumstances under which such statements were made, not misleading
     with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other
     financial information included in this quarterly report, fairly
     present in all material respects the financial condition, results
     of operations and cash flows of the registrant as of, and for,
     the periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
     and we have:

     a.   designed such disclosure controls and procedures to ensure
          that material information relating to the registrant, including
          its consolidated subsidiaries, is made known to us by others
          within those entities, particularly during the period in which
          this quarterly report is being prepared;

     b.   evaluated the effectiveness of the registrant's disclosure
          controls and procedures as of a date within 90 days prior to the
          filing date of this quarterly report (the "Evaluation Date"); and

     c.   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on
          our evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based
     on our most recent evaluation, to the registrant's auditors and the
     audit committee of registrant's board of directors (or persons
     performing the equivalent function):

     a.   all significant deficiencies in the design or operation of
          internal controls which could adversely affect the registrant's
          ability to record, process, summarize and report financial data
          and have identified for the registrant's auditors any material
          weaknesses in internal controls; and

     b.   any fraud, whether or not material, that involves management
          or other employees who have a significant role in the
          registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in
     this quarterly report whether or not there were significant changes in
     internal controls or in other factors that could significantly affect
     internal controls subsequent to the date of our most recent evaluation,
     including any corrective actions with regard to significant deficiencies
     and material weaknesses.

Date: November 14, 2002        /s/ James S. Pignatelli
      -----------------        --------------------------------------------
                                   James S. Pignatelli
                                   Chairman, President, and
                                   Chief Executive Officer

<PAGE>

                          CERTIFICATION
        Pursuant to Section 302 of the Sarbanes-Oxley Act


     I, Kevin P. Larson, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Tucson
     Electric Power Company;

2.   Based on my knowledge, this quarterly report does not contain any
     untrue statement of a material fact or omit to state a material
     fact necessary to make the statements made, in light of the
     circumstances under which such statements were made, not misleading
     with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other
     financial information included in this quarterly report, fairly
     present in all material respects the financial condition, results
     of operations and cash flows of the registrant as of, and for,
     the periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
     and we have:

     a.   designed such disclosure controls and procedures to ensure
          that material information relating to the registrant, including
          its consolidated subsidiaries, is made known to us by others
          within those entities, particularly during the period in which
          this quarterly report is being prepared;

     b.   evaluated the effectiveness of the registrant's disclosure
          controls and procedures as of a date within 90 days prior to the
          filing date of this quarterly report (the "Evaluation Date"); and

     c.   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on
          our evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based
     on our most recent evaluation, to the registrant's auditors and the
     audit committee of registrant's board of directors (or persons
     performing the equivalent function):

     a.   all significant deficiencies in the design or operation of
          internal controls which could adversely affect the registrant's
          ability to record, process, summarize and report financial data
          and have identified for the registrant's auditors any material
          weaknesses in internal controls; and

     b.   any fraud, whether or not material, that involves management
          or other employees who have a significant role in the
          registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in
     this quarterly report whether or not there were significant changes in
     internal controls or in other factors that could significantly affect
     internal controls subsequent to the date of our most recent evaluation,
     including any corrective actions with regard to significant deficiencies
     and material weaknesses.

Date: November 14, 2002        /s/  Kevin P. Larson
      -----------------        --------------------------------------------
                                    Kevin P. Larson
                                    Vice President, Chief Financial Officer
                                    and Treasurer

<PAGE>
                               EXHIBIT INDEX


     12 - Computation of Ratio of Earnings to Fixed Charges - TEP.
     15 - Letter regarding unaudited interim financial information.
     99 - Statements of Corporate Officers (pursuant to Section 906 of
          the Sarbanes-Oxley Act of 2002).