January 30, 2003

UniSource Energy Reports Earnings for 2002

TUCSON, Ariz.--(BUSINESS WIRE)--Jan. 30, 2003--UniSource Energy Corporation (NYSE:UNS) today reported earnings for 2002 of $33.3 million, or $0.99 per share of common stock.

Reduced wholesale power prices, mild weather and lower demand from TEP's mining customers impacted earnings in 2002. The resulting decline in kilowatt-hour sales, as well as the expense of a coal contract buyout and operating costs at some of UniSource Energy's unregulated subsidiaries, were primary reasons why earnings fell below those recorded in 2001. That year, UniSource Energy reported earnings of $61.3 million, or $1.84 per share of common stock.

"Despite lower earnings, I'm pleased with everything we accomplished over the last 12 months," said James S. Pignatelli, Chairman, President and Chief Executive Officer of UniSource Energy. "We've had a challenging year, but we've put ourselves in a good position for the future."

UniSource Energy capitalized on the strong performance of Tucson Electric Power Company (TEP), its primary subsidiary, to strengthen its balance sheet and increase its dividend. In 2002, TEP produced operating cash flows exceeding $200 million from its expanding customer base.

"Our track record in 2002 proves UniSource Energy's commitment to long-term prosperity," Pignatelli said. "TEP's strong cash flow has allowed us to reward our current shareholders while making several key investments in the company's future."

In 2002, TEP purchased more than $130 million of lease debt, bought out of an unfavorably priced coal contract and successfully negotiated a new $400 million credit agreement in a difficult capital market environment. TEP also earned regulatory approval to expand its coal-fired Springerville Generating Station. UniSource Energy, meanwhile, increased its quarterly dividend by 25 percent. It also reached an agreement to acquire gas and electric distribution systems in Arizona from Citizens' Communications.

"Our plans to expand the Springerville plant will help maximize the value of that facility, while our acquisition of Citizens' utility assets will expand our customer base by more than 40 percent without leaving our home state. Both moves fit in well with our strategy of controlled growth as an integrated utility," Pignatelli said.

Tucson Electric Power Company

In 2002, TEP reported earnings of $53.7 million or $1.59 per UniSource Energy share. TEP's earnings include a pre-tax charge of $11.3 million related to the cost of terminating a coal contract at its Irvington Generation Facility. The termination fee relieves TEP of annual $3.5 million pre-tax take-or-pay payments in future years. In 2001, TEP reported earnings of $75.3 million or $2.25 per UniSource Energy share.

TEP's retail kilowatt-hour (kWh) sales were down 3 percent in 2002, due primarily to a 33 percent decline in sales to mining customers and a 3 percent decline in cooling degree-days. Total retail revenues of $666 million were down less than 1 percent compared with 2001. Excluding TEP's mining customers, 2002 retail sales of 7.3 billion kWh and revenues of $638 million were up over 1 percent compared with 2001.

"Retail sales and revenues continue to be affected by our mining customers. The nationwide economic slowdown has caused many of our mining customers to curtail their production and energy usage. However, our core retail customer base continues to grow," Pignatelli said.

The number of retail customers served by TEP grew by 2.4 percent to nearly 360,000 in 2002. The University of Arizona Economic and Business Research Program projects Tucson's population growth will average 2.3 percent per year through 2007, above the national average of less than 1 percent.

In 2002, wholesale revenues of $178 million were down 76 percent from the prior year due to lower wholesale power prices and softening demand. Wholesale kWh sales were down 33 percent compared with 2001. Around-the-clock power prices on the Dow Jones Palo Verde Index returned to more normal levels in 2002, averaging $27 per megawatt hour (MWh), down from $94 per MWh in 2001.

TEP generated operating cash flows of $204 million in 2002, due primarily to continued retail customer growth and strong operating performance. TEP's generating units operated at a 95 percent equivalent availability factor during the summer months, without any unplanned customer outages. In 2002, TEP once again scored among the national leaders in J.D. Power and Associates' Electric Utility Residential Customer Satisfaction Study.

Millennium Energy Holdings

Millennium Energy Holdings (MEH), parent of UniSource Energy's unregulated energy businesses, reported an annual net loss of $15.5 million in 2002 or $0.46 per UniSource Energy share. In 2001, MEH reported a loss of $9.2 million or $0.27 per UniSource Energy share. MEH's 2002 results reflect operating costs as well as research and development expenses at its unregulated subsidiaries. Losses in 2001 were partially offset by an $11 million pre-tax gain from the sale of an independent power project.

In 2002, MEH and Dow Corning made equal $2.5 million equity investments in Infinite Power Solutions (IPS), an MEH subsidiary that has developed tiny, self-charging batteries for use in ID tags, medical implants and other portable electronic devices.

Annual Reported Earnings Per Share Summary

Per UniSource Energy Share                       2002         2001
--------------------------------------------- ------------ -----------
Tucson Electric Power                            $1.59        $2.25
Millennium Energy Holdings                      ($0.46)      ($0.27)
Other (1)                                       ($0.14)      ($0.14)
--------------------------------------------- ------------ -----------
Consolidated Earnings Per Share                  $0.99        $1.84
Shares Outstanding (in millions)                33,665       33,398

(1) Includes inter-company and other transactions


Quarterly Results

UniSource Energy's consolidated fourth quarter 2002 earnings were $4.9 million or $0.14 per share of common stock, compared with $13.3 million or $0.40 per share of common stock in the same period of last year. Fourth quarter 2002 earnings were down due primarily to lower retail sales volumes resulting from milder weather, an unscheduled plant outage, and higher debt costs at TEP. TEP reported earnings of $11.6 million, or $0.34 per UniSource Energy share in the fourth quarter of 2002, compared with $18.4 million or $0.55 per UniSource Energy share, in the same period last year. MEH reported a loss of $4.9 million, or $0.15 per UniSource Energy share, in the fourth quarter of 2002, compared with a loss of $3.9 million, or $0.12 per UniSource Energy share, in the same period last year.

Quarterly and annual condensed consolidated statements of income for UniSource Energy are attached.

Earnings Outlook

UniSource Energy management currently estimates that its 2003 full-year earnings will be $1.30 to $1.50 per share.

Numerous factors can affect UniSource Energy's ability to reach the 2003 estimate. The factors include, but are not limited to: uncertainties prevailing in the wholesale power market; regulatory decisions; performance of TEP's generating plants; the weather; the pace and strength of the economic recovery in the region; fuel and purchased power expense; changes to long-term contracts; ability of the company to develop the Springerville generation expansion project; changes in accounting standards; impacts from the Citizens' utility transaction; and the amount of research and development expenses incurred by UniSource Energy's unregulated energy technology investments.

UniSource Energy's earnings are subject to TEP's seasonal energy sales. Generally, TEP records a significant portion of its earnings during the third quarter as a result of peak energy usage during the summer. Conversely, TEP generally records a loss during the first quarter due to moderate temperatures and lower customer demand.

Fourth Quarter 2002 and Annual Earnings Discussion

UniSource Energy will hold its 2002 year-end conference call and Webcast at 11 a.m. (ET) on Monday, February 3, 2003. UNS Chairman, President and Chief Executive Officer James S. Pignatelli and UNS Chief Financial Officer Kevin Larson will discuss UniSource Energy's 2002 performance and its plans for 2003.

To participate in the conference call, dial 877/582-0446 at least 5 minutes prior to the event and reference confirmation code 7651121. A replay of the call will be available for seven days following the event by dialing 800/642-1687 and using confirmation code 7651121.

A live Internet Webcast of the conference call can be accessed from a link at www.unisourceenergy.com. Listeners are encouraged to access the Web site at least 30 minutes before the event to register, download and install any necessary audio software.

UniSource Energy's primary subsidiaries include Tucson Electric Power Company, Arizona's second-largest investor-owned electric utility, and Millennium Energy Holdings, parent company of UniSource Energy's unregulated energy businesses. For more information about UniSource Energy and its subsidiaries, visit www.unisourceenergy.com.

This news release contains forward-looking information that involves risks and uncertainties, that include, but are not limited to, the outcome of regulatory proceedings; the ongoing restructuring of the electric industry; regional economic and market conditions which could affect customer growth and the cost of power supplies; the Citizens' utility acquisition; the cost of debt and equity capital; changes in accounting standards; weather variations affecting customer usage; and other factors. The preceding factors may cause future results to differ materially from outcomes currently expected by UniSource Energy.


                    UNISOURCE ENERGY 2002 RESULTS

                     UniSource Energy Corporation
             Condensed Consolidated Statements of Income
         (in thousands of dollars, except per share amounts)
                             (UNAUDITED)


                                    Three Months
                                        Ended
                                     December 31,  Increase/(Decrease)
                                   2002      2001      Amount  Percent

Operating Revenues
  Electric Retail Revenues       $144,985  $151,665    $(6,680)  (4.4)
  Electric Wholesale Revenues      51,997   165,902   (113,905) (68.7)
  Net Gain (Loss) on TEP
   Forward Contracts and MEG
   Trading Activities                (292)   (5,600)     5,308   94.8
  Other Revenues                    2,588     3,525       (937) (26.6)

    Total Operating Revenues      199,278   315,492   (116,214) (36.8)


Operating Expenses
  Fuel                             44,775    54,861    (10,086) (18.4)
  Purchased Power                  17,595   123,336   (105,741) (85.7)
  Other Operations and
   Maintenance                     48,020    31,586     16,434   52.0
  Depreciation and Amortization    31,848    31,895        (47)  (0.1)
  Amortization of Transition
   Recovery Asset                   4,243     4,145         98    2.4
  Taxes Other Than Income Taxes    10,804    10,343        461    4.5

    Total Operating Expenses      157,285   256,166    (98,881) (38.6)

      Operating Income             41,993    59,326    (17,333) (29.2)


Other Income (Deductions)
  Interest Income                   5,741     3,307      2,434   73.6
  Other Income (Deductions)           106    (1,540)     1,646    N/M

    Total Other Income
     (Deductions)                   5,847     1,767      4,080    N/M


Interest Expense
  Long-Term Debt                   17,505    16,467      1,038    6.3
  Interest on Capital Leases       21,905    22,133       (228)  (1.0)
  Other Interest Expense              331         5        326    N/M

    Total Interest Expense         39,741    38,605      1,136    2.9


Income Before Income Taxes          8,099    22,488    (14,389) (64.0)
    Income Tax Expense              3,217     9,210     (5,993) (65.1)


Net Income                         $4,882   $13,278    $(8,396) (63.2)


Average Shares of Common Stock
 Outstanding (000)                 33,699    33,511        188    0.6


Basic Earnings per Share            $0.14     $0.40     $(0.26) (65.0)


Diluted Earnings per Share          $0.14     $0.39     $(0.25) (64.1)


Dividends Paid Per Share           $0.125     $0.10     $0.025   25.0



                                   Three  Months
                                       Ended
                                    December 31,   Increase/(Decrease)
Electric kWh Sales (000):          2002     2001       Amount  Percent

Retail Sales                    1,758,540 1,887,808   (129,268)  (6.8)
Wholesales Sales                1,320,289 1,894,633   (574,344) (30.3)

Total                           3,078,829 3,782,441   (703,612) (18.6)


    Reclassifications have been made to prior year financial
statements presented to conform to the current year's presentation.



                    UNISOURCE ENERGY 2002 RESULTS

                     UniSource Energy Corporation
             Condensed Consolidated Statements of Income
         (in thousands of dollars, except per share amounts)
                             (UNAUDITED)

                                  Twelve Months
                                      Ended
                                   December 31,    Increase/(Decrease)
                                 2002       2001      Amount   Percent

Operating Revenues
  Electric Retail Revenues     $666,049   $670,117     $(4,068)  (0.6)
  Electric Wholesale
   Revenues                     177,908    733,559    (555,651) (75.7)
  Net Gain (Loss) on TEP
   Forward Contracts and MEG
   Trading Activities               644     (1,347)      1,991    N/M
  Other Revenues                 11,621     14,683      (3,062) (20.9)

    Total Operating Revenues    856,222  1,417,012    (560,790) (39.6)


Operating Expenses
  Fuel                          209,712    258,761     (49,049) (19.0)
  Purchased Power                64,504    542,587    (478,083) (88.1)
  Coal Contract Termination
   Fee                           11,250          -      11,250    N/M
  Other Operations and
   Maintenance                  188,910    179,036       9,874    5.5
  Depreciation and
   Amortization                 127,923    120,346       7,577    6.3
  Amortization of Transition
   Recovery Asset                24,554     21,609       2,945   13.6
  Taxes Other Than Income
   Taxes                         45,508     46,213        (705)  (1.5)

    Total Operating Expenses    672,361  1,168,552    (496,191) (42.5)

      Operating Income          183,861    248,460     (64,599) (26.0)


Other Income (Deductions)
  Interest Income                20,654     14,600       6,054   41.5
  Other Income (Deductions)         189      3,868      (3,679) (95.1)

    Total Other Income
     (Deductions)                20,843     18,468       2,375   12.9


Interest Expense
  Long-Term Debt                 65,620     68,678      (3,058)  (4.5)
  Interest on Capital Leases     87,801     90,559      (2,758)  (3.0)
  Other Interest Expense          1,130       (658)      1,788    N/M

    Total Interest Expense      154,551    158,579      (4,028)  (2.5)


Income Before Income Taxes
 and Cumulative Effect of
  Accounting Change              50,153    108,349     (58,196) (53.7)
    Income Tax Expense           16,878     47,474     (30,596) (64.4)


Income Before Cumulative
 Effect of Accounting Change     33,275     60,875     (27,600) (45.3)
Cumulative Effect of
 Accounting Change - Net of
 Tax                                  -        470        (470)   N/M


Net Income                      $33,275    $61,345    $(28,070) (45.8)


Average Shares of Common
 Stock Outstanding (000)         33,665     33,398         267    0.8


Basic Earnings per Share
  Income Before Cumulative
   Effect of Accounting
    Change                        $0.99      $1.83      $(0.84) (45.9)
  Cumulative Effect of
   Accounting Change - Net
    of Tax                            -      $0.01      $(0.01)   N/M
  Net Income                      $0.99      $1.84      $(0.85) (46.2)


Diluted Earnings per Share
  Income Before Cumulative
   Effect of Accounting
    Change                        $0.97      $1.79      $(0.82) (45.8)
  Cumulative Effect of
   Accounting Change - Net
    of Tax                            -      $0.01      $(0.01)   N/M
  Net Income                      $0.97      $1.80      $(0.83) (46.1)


  Dividends Paid Per Share        $0.50      $0.40       $0.10   25.0


                                  Twelve Months
                                      Ended
                                   December 31,    Increase/(Decrease)
Electric kWh Sales (000):        2002       2001      Amount   Percent

Retail Sales                  8,012,418  8,260,882    (248,464)  (3.0)
Wholesales Sales              4,530,793  6,732,802  (2,202,009) (32.7)

Total                        12,543,211 14,993,684  (2,450,473) (16.3)


    Reclassifications have been made to prior year financial
statements presented to conform to the current year's presentation.


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