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 Quarterly Period Ended September 30, 1996
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17427
---------
UPPER PENINSULA ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2817909
- ----------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Lakeshore Drive, P.O. Box 130, Houghton, Michigan 49931-0130
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone no., including area code) (906) 487-5000
----------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date.
As of October 31, 1996, 2,969,215 shares of common stock, no par value
UPPER PENINSULA ENERGY CORPORATION
FORM 10-Q
SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three Months Ended
September 30, 1996 and September 30, 1995 3
Consolidated Statements of Income - Nine Months Ended
September 30, 1996 and September 30, 1995 4
Consolidated Statements of Cash Flow - Nine Months Ended
September 30, 1996 and September 30, 1995 5
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995
Assets 7
Capitalization and Liabilities 8
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 10
Part II. OTHER INFORMATION 14
Items 1. through 5. N/A
Item 6. Exhibits and Reports on Form 8-K 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30
(Unaudited)
------------------------
1996 1995
(Thousands of Dollars)
Operating Revenues........................ $ 14,079 $ 14,906
------------------------
Operating Expenses:
Operation - Power Supply Costs.......... 4,438 5,076
- Other....................... 3,563 3,633
Maintenance............................. 659 952
Depreciation and Amortization........... 1,505 1,430
Federal Income Tax Expense.............. 745 502
Taxes Other Than Federal Income Taxes -
Ad Valorem............................ 854 825
Other................................. 303 363
------------------------
Total........................... 12,067 12,781
------------------------
Operating Income.......................... 2,012 2,125
------------------------
Other Income (Deductions):
Interest Income......................... 18 13
Other................................... 37 (35)
Federal Income Tax Expense.............. (13) 18
------------------------
Total........................... 42 (4)
------------------------
Income Before Interest Charges............ 2,054 2,121
------------------------
Interest Charges:
Interest on Long-Term Debt.............. 971 975
Amortization of Debt Expense............ 19 19
Other Interest Expense.................. 57 20
------------------------
Total........................... 1,047 1,014
------------------------
Income Before Dividends on Preferred
Stock of Subsidiary..................... 1,007 1,107
Dividends on Preferred Stock of
Subsidiary.............................. 5 5
------------------------
Net Income................................ $ 1,002 $ 1,102
========================
Average Number of Shares Outstanding...... 2,969,215 2,969,215
Earnings Per Share of Common Stock........ $ 0.34 $ 0.37
Dividends Paid Per Share of Common Stock.. $ 0.3125 $ 0.31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
September 30
(Unaudited)
------------------------
1996 1995
(Thousands of Dollars)
Operating Revenues........................ $ 43,461 $ 46,186
------------------------
Operating Expenses:
Operation - Power Supply Costs.......... 13,252 15,139
- Other....................... 11,012 10,335
Maintenance............................. 2,232 2,373
Depreciation and Amortization........... 4,515 4,291
Federal Income Tax Expense.............. 2,119 2,556
Taxes Other Than Federal Income Taxes -
Ad Valorem............................ 2,562 2,473
Other................................. 1,051 1,054
------------------------
Total........................... 36,743 38,221
------------------------
Operating Income.......................... 6,718 7,965
------------------------
Other Income (Deductions):
Interest Income......................... 57 38
Other................................... 63 (60)
Federal Income Tax Expense.............. (22) 35
------------------------
Total........................... 98 13
------------------------
Income Before Interest Charges............ 6,816 7,978
------------------------
Interest Charges:
Interest on Long-Term Debt.............. 2,917 2,930
Amortization of Debt Expense............ 56 56
Other Interest Expense.................. 117 49
------------------------
Total........................... 3,090 3,035
------------------------
Income Before Dividends on Preferred
Stock of Subsidiary..................... 3,726 4,943
Dividends on Preferred Stock of
Subsidiary.............................. 17 19
------------------------
Net Income................................ $ 3,709 $ 4,924
========================
Average Number of Shares Outstanding...... 2,969,215 2,969,215
Earnings Per Share of Common Stock........ $ 1.25 $ 1.66
Dividends Paid Per Share of Common Stock.. $ 0.94 $ 0.91
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended
September 30
(Unaudited)
----------------------
1996 1995
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net Income.............................. $ 3,709 $ 4,924
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization......... 4,515 4,291
Dividends on Preferred Stock of
Subsidiary.......................... 17 19
Allowance for Equity Funds Used
During Construction................. (69)
Deferred Federal Income Taxes and
Investment Tax Credit............... 127 562
Prepaid and Accrued Pension........... (449) 494
Other................................. 823 1,283
Changes in Assets and Liabilities:
Accounts Receivable................... 1,336 (244)
Inventories........................... (122) (86)
Prepayments........................... (119) 180
Accrued Ad Valorem Taxes.............. (126) (120)
Accounts Payable and Accrued Accounts. (1,712) (465)
----------------------
Cash Flows From Operating
Activities........................ 7,930 10,838
----------------------
Cash Flows from Investing Activities:
Plant and Property Additions
(excluding Allowance for Funds Used
During Construction)................ (9,382) (7,867)
Allowance for Borrowed Funds Used
During Construction................. (91)
Other - Net........................... (96) (736)
----------------------
Cash Flows from Investing
Activities...................... (9,569) (8,603)
----------------------
Cash Flows From Financing Activities:
Retirement of Long-Term Debt and
Preferred Stock..................... (208) (223)
Dividends............................. (2,801) (2,729)
Increase in Notes Payable............. 3,500 500
----------------------
Cash Flows from Financing
Activities...................... 491 (2,452)
----------------------
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
Nine Months Ended
September 30
(Unaudited)
----------------------
1996 1995
(Thousands of Dollars)
Net Decrease in Cash and Cash
Equivalents............................. (1,148) (217)
Cash and Cash Equivalents at the
Beginning of Period..................... 3,249 2,887
----------------------
Cash and Cash Equivalents at the End
of Period............................... $ 2,101 $ 2,670
======================
Supplemental Cash Flows Information:
Interest Paid......................... $ 2,725 $ 2,672
======================
Income Taxes Paid..................... $ 1,475 $ 1,750
======================
Item 1. Financial Statements (continued)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30 December 31
1996 1995
(Unaudited)
------------ -----------
(Thousands of Dollars)
Utility Plant:
Electric Plant in Service............ $ 161,370 $ 162,506
Less Accumulated Depreciation and
Amortization....................... 75,105 71,736
------------------------
Net Electric Plant in Service.. 86,265 90,770
Construction Work in Progress........ 18,939 10,045
------------------------
Net Utility Plant.............. 105,204 100,815
------------------------
Other Property and Investments......... 6,127 5,726
------------------------
Current Assets:
Cash and Cash Equivalents............ 2,101 3,249
Accounts Receivable (less allowance
for doubtful accounts of $86)...... 5,490 6,195
Revenue Receivable - Power Supply
Cost Recovery-Net.................. 631
Inventories - at average cost:
Materials and Supplies............. 2,280 2,176
Fuel............................... 281 263
Prepayments.......................... 479 360
Accrued Ad Valorem Taxes............. 3,566 3,440
Deferred Federal Income Taxes........ 1,293 1,219
------------------------
Total.......................... 15,490 17,533
------------------------
Deferred Debits and Other Assets:
Unamortized Debt Expense (being
amortized over the lives of
debt issues)...................... 518 550
Intangible Pension Plan Asset........ 1,821 1,821
Other................................ 2,023 1,939
------------------------
Total.......................... 4,362 4,310
------------------------
$ 131,183 $ 128,384
========================
CONSOLIDATED BALANCE SHEETS (continued)
CAPITALIZATION AND LIABILITIES
September 30 December 31
1996 1995
(Unaudited)
------------ -----------
(Thousands of Dollars)
Capitalization:
Common Stock and Paid-In-Capital...... $ 21,540 $ 21,552
Retained Earnings..................... 21,110 20,185
------------------------
Total Common Equity............. 42,650 41,737
Redeemable Preferred Stock.............. 456 503
Long-Term Debt, less current
maturities............................ 43,336 43,508
------------------------
Total Capitalization............ 86,442 85,748
------------------------
Current Liabilities:
Long-Term Debt Due Within One Year.... 236 225
Notes Payable......................... 4,200 700
Accounts Payable...................... 3,084 5,318
Accrued Accounts:
Taxes - Ad Valorem.................. 5,023 5,806
- Other....................... 707 147
Wages and Benefits.................. 3,245 3,324
Interest............................ 1,318 871
Revenue Payable - Power Supply Cost
Recovery - Net.................... 377
Other............................... 4 4
------------------------
Total........................... 18,194 16,395
------------------------
Deferred Credits:
Deferred Federal Income Taxes......... 7,117 6,779
Unamortized Investment Tax Credit..... 2,788 2,925
Customer Advances for Construction.... 1,643 1,283
Accrued Pensions...................... 3,620 4,069
Regulatory Liabilities................ 5,355 5,355
Post Retirement Health and Life....... 3,315 2,883
Other................................. 2,709 2,947
------------------------
Total........................... 26,547 26,241
------------------------
Commitments and Contingencies...........
------------------------
$ 131,183 $ 128,384
========================
Item 1. Financial Statements (continued)
--------------------------------
On January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation. Adoption of these
Statements did not have a significant impact on the Company's financial
statements.
On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued
Order No. 888, which requires the Company to file open access transmission
tariff, and Order No. 889, requiring the Company to set procedures for
implementation of standards of conduct utilizing an open access same time
information system.
On July 5, 1996, Upper Peninsula Power Company submitted an application to
the FERC asking for waiver of, or in the alternative, extension of time to
comply with Order No. 888 and Order No. 889. This waiver request was denied and
UPPCO was prepared to file on October 11; however, FERC has extended the
deadline for filing until it has disposed of all petitions for rehearing related
to the initial deadline.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, the information furnished reflects all
adjustments which are necessary for a fair statement of results for the interim
period. Certain items previously reported have been reclassified to conform to
the current presentation in the financial statements.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
-----------------------------------------------------------------------
Third Quarter of 1996 Compared to Third Quarter of 1995
---------------------------------------------------------
Operating revenues for the third quarter of 1996 were $14,079,000 compared
to $14,906,000 for the same quarter of 1995, a decrease of $827,000 (5.5%). The
decrease in revenues was mainly due to the decommissioning of K.I. Sawyer Air
Force Base, and the pass through of lower power supply costs.
Power supply costs for the third quarter decreased 12.6% from the 1995
period. This decrease is the result of a 17.2% reduction in the average unit
cost of power supply resulting from a 98.9% increase in hydro generation and
some low unit cost short-term power purchases.
Total other operation and maintenance expenses decreased 7.9% during the
third quarter of 1996. The decrease was the result of a decrease in customer
accounting expense and a lower level of expense on the transmission and
distribution system.
Depreciation and ad valorem taxes increased in the third quarter due to an
increase in plant-in-service. Other taxes decreased 16.5% in the third quarter
due to lower payroll associated taxes reflecting the reduction in employees
during the second quarter of 1996.
Based on the above changes net income decreased by $100,000 (9.1%),
compared to the third quarter of 1995. Earnings per average common share for the
three months ended September 30, 1996 were $0.34 compared to $0.37 for the same
period in 1995.
First Nine Months of 1996 Compared
to First Nine Months of 1995
------------------------------------
Net income decreased $1,215,000 in the first nine months of 1996 compared
to the same period last year. Earnings per average common share for the nine
months ended September 30, 1996 and 1995 were $1.25 and $1.66 respectively.
Operating revenues for the nine months ended September 30, 1996 were
$43,461,000 compared to $46,186,000 for the corresponding period of the prior
year, a decrease of $2,725,000 (5.9%). The decrease was due primarily to the
5.7% rate reduction granted Michigan Public Service Commission jurisdictional
customers effective during the second quarter of 1995, the decommissioning of
K.I. Sawyer Air Force Base, and the pass through of lower power supply costs.
Power supply costs for the nine months ended September 30, 1996 were
$1,887,000 (12.5%) lower than the previous period. A 4.4% reduction in mWh sales
and a 10.5% decrease in the average unit cost of power supply brought about by
an 35.0% increase in hydro generation and low unit cost short-term purchases
contributed to the lower power supply cost in the current period.
Total other operation expenses rose 6.6% for the nine months ended
September 30, 1996 due in large part to increased legal and consulting services
associated with regulatory requirements and operational procedure changes.
Depreciation and ad valorem taxes increased in the current period due to an
increase in plant-in-service.
No other component of the Corporation's first nine months of 1996
operations changed significantly.
Other Financial Information
-----------------------------
During the third quarter of 1996, the Corporation's cash requirements were
met through funds that were internally generated and short-term borrowings.
There were $4,200,000 of short-term borrowings at September 30, 1996 compared to
$700,000 at December 31, 1995.
The Corporation's primary subsidiary, Upper Peninsula Power Company
(UPPCO), has indentures relating to first mortgage bonds containing certain
limitations on the payment of cash dividends on common stock. Under the most
restrictive of these provisions, approximately, $15,186,000 of consolidated
retained earnings is available at September 30, 1996, for payment of common
stock cash dividends by the Corporation. At December 31, 1995 unrestricted
retained earnings were approximately $14,182,000.
On July 5, 1996 Upper Peninsula Power Company submitted an application to
the Federal Energy Regulatory Commission asking for waiver of, or in the
alternative, extension of time to comply with Order No. 888 which requires the
Company to file open access transmission tariff and Order No. 889 requiring that
the Company set procedures for implementation of standards of conduct utilizing
an open access same time information system. This waiver was denied and UPPCO
was prepared to file on October 11; however, FERC has extended the deadline for
filing until it has disposed of all petitions for rehearing related to the
initial deadline.
The statements under Management's Discussion and Analysis of Financial
Condition and Results of Operations and the other statements in this Form 10-Q
which are not historical facts are forward looking statements. These forward
looking statements involve risks and uncertainties that could render them
materially different, including, but not limited to, the effect of economic
conditions, the rate of technology change, the availability of capital, supply
constraints or difficulties, the effect of the Company's accounting policies,
the effect of regulatory and legal developments, and other risks detailed in the
Company's Securities and Exchange Commission filings.
Part II - OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of
Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) List of Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
- ----------- ----------------------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession N/A
(4) Instruments defining the rights of security holders,
including indentures
[INSTRUMENTS TO WHICH UPPCO IS A PARTY]
4.1(a)-1 --- Indenture of Mortgage dated May 1, 1947
relating to UPPCO's First Mortgage Bonds.
(Exhibit 4(d)-1 to Form 8-K, dated
December 13, 1988)
4.1(a)-2 --- Supplemental Indenture dated as of May 1,
1947.
(Exhibit 4(d)-2 to Form 8-K, dated
December 13, 1988)
4.1(a)-3 --- Second Supplemental Indenture dated as of
December 1, 1948.
(Exhibit 4(d)-3 to Form 8-K, dated
December 13, 1988)
4.1(a)-4 --- Third Supplemental Indenture dated as of
November 1, 1950.
(Exhibit b(1)(d)4 to Registration No.
2-66759)*
4.1(a)-5 --- Fourth Supplemental Indenture dated as of
October 1, 1953.
(Exhibit b(1)(d)5 to Registration No.
2-66759)*
4.1(a)-6 --- Fifth Supplemental Indenture dated as of
April 1, 1957.
(Exhibit b(1)(d)6 to Registration No.
2-66759)*
4.1(a)-7 --- Sixth Supplemental Indenture dated as of
September 1, 1958.
(Exhibit b(1)(d)7 to Registration No.
2-66759)*
4.1(a)-8 --- Seventh Supplemental Indenture dated as of
May 1,1961.
(Exhibit b(1)(d)8 to Registration No.
2-66759)*
4.1(a)-9 --- Eighth Supplemental Indenture dated as of
May 1, 1963.
(Exhibit b(1)(d)9 to Registration No.
2-66759)*
4.1(a)-10 --- Ninth Supplemental Indenture dated as of
January 1, 1971.
(Exhibit 4(d-10 to Form 8-K, dated
December 13, 1988)
4.1(a)-11 --- Tenth Supplemental Indenture dated as of
November 1, 1973.
(Exhibit 4(d-11 to Form 8-K, dated
December 13, 1988)
4.1(a)-12 --- Eleventh Supplemental Indenture dated as
of May 1, 1976.
(Exhibit 4(d-12 to Form 8-K, dated
December 13, 1988)
4.1(a)-13 --- Twelfth Supplemental Indenture dated as of
August 1, 1981
(Exhibit 4(a)-13 to Form 10-K, dated
March 26, 1982)*
4.1(a)-14 --- Thirteenth Supplemental Indenture dated as of
November 1, 1988
(Exhibit 4(d-14 to Form 8-K, dated
December 13, 1988)
4.1(a)-15 --- Fourteenth Supplemental Indenture dated as of
November 1, 1991
(Exhibit 4.1(a)-15 to Form 10-Q, dated
November 11, 1991)
4.1(a)-16 --- Fifteenth Supplemental Indenture dated as of
March 1, 1993
(Exhibit 4.1(a)-16 to Form 10-K, dated
March 25, 1993)
4.1(b) --- Installment Sales Contract between the
Village of L'Anse and UPPCO dated May 1,
1974.
(Exhibit A-II to Form 8-K, dated
July 10, 1974)*
4.1(c)-1 --- Lease and Security Agreement dated May 9, 1977
between UPPCO, as lessee and debtor, and
PruLease, Inc., as lessor and secured party.
(Exhibit 5 to Form 10-K dated March 28, 1978)*
4.1(c)-2 --- Amendment No. 1 to Lease and Security
Agreement dated June 29, 1979 between
UPPCO, as lessee and debtor, and
PruLease, Inc. as lessor and secured
party.
(Exhibit b(1)(d)15 to Registration No.
2-66759)*
4.1(c)-3 --- Amendment No. 2 to Lease and Security
Agreement dated May 1, 1982 between
UPPCO, as lessee and debtor, and
PruLease, Inc. as lessor and secured
party.
(Exhibit 4(c)-3 to Form 10-K dated
March 28, 1983)*
4.1(c)-4 --- Loan Agreement dated as of June 30, 1988 between
UPPCO and First of America Bank-Copper Country
(Exhibit 4.1(c)-4 to Form 10-K dated
March 29, 1989)
4.1(d) --- Lease Agreement dated as of November 13, 1991
between UPPCO and UPBDC
(Exhibit 4.1(d) to Form 10-K dated
March 25, 1992)
[INSTRUMENTS TO WHICH UPBDC IS A PARTY]
4.2(a) --- Trust Indenture, Mortgage and Security
Agreement dated November 1, 1991,
relating to UPBDCO's Senior Secured
Note
(Exhibit 4.2(a) to Form 10-K dated
March 25, 1992)
4.2(c) --- Loan Agreement dated as of June 20, 1989
between UPBDC and National Bank of
Detroit.
(Exhibit 4.2(c) to Form 10-K, dated
March 28, 1990)
4.2(d) --- Lease Agreement dated as of November 13, 1991
between UPBDC and UPPCO
(Exhibit 4.2(d) to Form 10-K dated
March 25, 1992
* Parenthetical references following descriptions
of Upper Peninsula Power Company instruments are
to filings made by that company. 1934 ACT File
No. is 0-1276
(11) Statement re computation of per share earnings N/A
(15) Letter re unaudited interim financial information N/A
(18) Letter re change in accounting principles N/A
(19) Report furnished to security holders N/A
(22) Published report regarding matters submitted
to vote of security holders N/A
(23) Consents of experts and counsel
23(a) - Consent of Independent Certified Public
Accountants N/A
(24) Power of attorney N/A
(27) Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only N/A
(99) Additional Exhibits N/A
Item 6(b). Reports on Form 8-K
No Form 8-K was filed during the quarter for which this report
filed.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UPPER PENINSULA ENERGY CORPORATION
----------------------------------------
(Registrant)
Date: November 8, 1996
/s/ B. C. AROLA
----------------------------------------
B. C. Arola
Vice President, Treasurer and Secretary
(Principal Financial Officer)