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 June 30, 1997
-------------------------------------
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
--------------
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 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 July 31, 1997, 2,950,001 shares of common stock, no par value
- -------------------------------------------------------------------------------
UPPER PENINSULA ENERGY CORPORATION
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION 3
Item 1. Financial Statements (Unaudited) 3
Consolidated Statements of Income - Three
Months Ended June 30, 1997 and June 30, 1996 3
Consolidated Statements of Income - Six
Months Ended June 30, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flow -
Six Months Ended June 30, 1997 and
June 30, 1996 5
Consolidated Balance Sheets - June 30,
1997 and December 31, 1996
Assets 7
Capitalization and Liabilities 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 10
Part II. OTHER INFORMATION 14
Items 1. through 4. N/A
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30
(Unaudited)
----------------------
1997 1996
(Thousands of Dollars)
Operating Revenues.......................... $13,796 $13,810
----------------------
Operating Expenses:
Operation - Power Supply Costs.......... 4,619 4,121
- Other....................... 3,727 3,679
Maintenance............................... 699 749
Depreciation and Amortization............. 1,457 1,505
Federal Income Tax ....................... 350 513
Taxes Other Than Federal Income Taxes -
Ad Valorem.............................. 904 851
Other................................... 297 361
----------------------
Total................................. 12,053 11,779
----------------------
Operating Income............................ 1,743 2,031
----------------------
Other Income (Deductions):
Interest Income........................... 59 22
Other..................................... 49 1
Federal Income Tax Expense................ (47) (2)
----------------------
Total................................. 61 21
----------------------
Income Before Interest Charges.............. 1,804 2,052
----------------------
Interest Charges:
Interest on Long-Term Debt................ 968 972
Amortization of Debt Expense.............. 18 18
Other Interest Expense.................... 147 44
----------------------
Total................................. 1,133 1,034
----------------------
Income Before Dividends on Preferred
Stock of Subsidiary........................ 671 1,018
Dividends on Preferred Stock of
Subsidiary................................. 5 6
----------------------
Net Income.................................. $ 666 $ 1,012
======================
Average Number of Shares Outstanding........ 2,969,215 2,969,215
Earnings Per Share of Common Stock.......... $ 0.22 $ 0.34
Dividends Paid Per Share of Common Stock.... $ 0.32 $0.3125
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
June 30
(Unaudited)
----------------------
1997 1996
(Thousands of Dollars)
Operating Revenues............................ $30,099 $29,382
----------------------
Operating Expenses:
Operation - Power Supply Costs............ 10,252 8,814
- Other......................... 7,224 7,449
Maintenance................................. 1,351 1,573
Depreciation and Amortization............... 2,913 3,010
Federal Income Tax.......................... 1,292 1,374
Taxes Other Than Federal Income Taxes -
Ad Valorem................................ 1,809 1,708
Other..................................... 651 748
----------------------
Total................................... 25,492 24,676
----------------------
Operating Income.............................. 4,607 4,706
----------------------
Other Income (Deductions):
Interest Income............................. 99 39
Other....................................... 196 26
Federal Income Tax Expense.................. (112) (9)
----------------------
Total................................... 183 56
----------------------
Income Before Interest Charges................ 4,790 4,762
----------------------
Interest Charges:
Interest on Long-Term Debt.................. 1,937 1,946
Amortization of Debt Expense................ 37 37
Other Interest Expense...................... 215 60
----------------------
Total................................... 2,189 2,043
----------------------
Income Before Dividends on Preferred
Stock of Subsidiary.......................... 2,601 2,719
Dividends on Preferred Stock of
Subsidiary................................... 11 12
----------------------
Net Income.................................... $ 2,590 $ 2,707
======================
Average Number of Shares Outstanding.......... 2,969,215 2,969,215
Earnings Per Share of Common Stock............ $ 0.87 $ 0.91
Dividends Paid Per Share of Common Stock...... $ 0.64 $ 0.625
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended
June 30
(Unaudited)
----------------------
1997 1996
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net Income.................................... $ 2,590 $ 2,707
Adjustments to Reconcile Net Income
to Net Cash Flows from Operating
Activities:
Depreciation and Amortization............... 2,913 3,010
Dividends on Preferred Stock of
Subsidiary................................. 11 12
Allowance for Equity Funds Used
During Construction........................ (37) (38)
Deferred Federal Income Taxes and
Investment Tax Credit...................... 13 (87)
Prepaid and Accrued Pension................. (183) (740)
Other....................................... 769 379
Changes in Assets and Liabilities:
Accounts Receivable......................... 25 1,030
Inventories................................. (151) (127)
Prepayments................................. (122) (4)
Accrued Ad Valorem Taxes.................... (89) (84)
Accounts Payable and Accrued Accounts....... (962) (1,735)
----------------------
Cash Flows From Operating Activities...... 4,777 4,323
----------------------
Cash Flows from Investing Activities:
Plant and Property Additions
(excluding Allowance for Borrowed
Funds Used During Construction)............ (3,545) (4,724)
Allowance for Borrowed Funds Used
During Construction........................ (55) (50)
Other - Net................................. (83) (75)
----------------------
Cash Flows from Investing Activities...... (3,683) (4,849)
----------------------
Cash Flows From Financing Activities:
Retirement of Long-Term Debt and
Preferred Stock............................ (177) (207)
Dividends................................... (1,911) (1,868)
Issuance of Notes Payable................... 2,600 2,500
----------------------
Cash Flows from Financing Activities...... 512 425
----------------------
Net Increase (Decrease) in Cash and
Cash Equivalents............................... 1,606 (101)
Cash and Cash Equivalents at the
Beginning of Period............................ 2,064 3,249
----------------------
Cash and Cash Equivalents at the End
of Period...................................... $ 3,670 $ 3,148
======================
Supplemental Cash Flows Information:
Interest Paid................................. $ 2,272 $ 2,049
======================
Income Taxes Paid............................. $ 950 $ 1,250
======================
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30 December 31
1997 1996
----------------------
(Thousands of Dollars)
Utility Plant:
Electric Plant in Service............ $164,920 $165,386
Less Accumulated Depreciation and
Amortization........................ 78,461 75,970
---------------------
Net Electric Plant in Service.... 86,459 89,416
Construction Work in Progress........ 17,016 14,526
---------------------
Net Utility Plant................ 103,475 103,942
---------------------
Other Property......................... 11,107 9,942
---------------------
Current Assets:
Cash and Cash Equivalents............ 3,670 2,064
Accounts Receivable (less allowance
for doubtful accounts of $67 in
1997 and $65 in 1996)............... 6,243 6,476
Revenue Receivable - Power Supply
Cost Recovery-Net................... 208
Inventories - at average cost:
Materials and Supplies............. 2,186 2,030
Fuel............................... 269 274
Prepayments.......................... 427 305
Accrued Ad Valorem Taxes............. 3,729 3,640
Deferred Federal Income Taxes........ 963 1,227
---------------------
Total............................ 17,695 16,016
---------------------
Deferred Debits and Other Assets:
Unamortized Debt Expense ............ 487 508
Intangible Pension Plan Asset........ 1,595 1,595
Other................................ 1,728 1,675
---------------------
Total............................ 3,810 3,778
---------------------
$136,087 $133,678
=====================
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS (continued)
CAPITALIZATION AND LIABILITIES
June 30 December 31
1997 1996
----------------------
(Thousands of Dollars)
Capitalization:
Common Stock and Paid-In-Capital..... $ 21,507 $ 21,537
Retained Earnings.................... 22,271 21,581
----------------------
Total Common Equity.............. 43,778 43,118
Redeemable Preferred Stock........... 451 456
Long-Term Debt, less current
maturities.......................... 43,083 43,266
----------------------
Total Capitalization............. 87,312 86,840
----------------------
Current Liabilities:
Long-Term Debt Due Within One Year... 253 242
Notes Payable........................ 7,600 5,000
Accounts Payable..................... 4,113 4,182
Accrued Accounts:
Taxes - Ad Valorem................. 5,575 6,212
- Other...................... 422 27
Wages and Benefits................. 2,800 2,934
Interest........................... 901 965
Revenue Payable - Power Supply
Cost Recovery-Net................. 531
Other.............................. 82 4
----------------------
Total............................ 21,746 20,097
----------------------
Deferred Credits:
Deferred Federal Income Taxes........ 6,763 6,923
Unamortized Investment Tax Credit.... 2,651 2,742
Customer Advances for Construction... 1,702 1,591
Accrued Pensions..................... 3,120 3,303
Regulatory Liabilities............... 5,905 5,904
Post Retirement Health and Life...... 4,249 3,780
Other................................ 2,639 2,498
----------------------
Total............................ 27,029 26,741
----------------------
Commitments and Contingencies..........
----------------------
$136,087 $133,678
======================
See notes to consolidated financial statements
Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with the summary of significant accounting policies set forth in the
notes to the consolidated financial statements contained in the Company's Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1997.
The preparation of consolidated 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 of a normal recurring nature which are necessary for a fair
statement of results for the interim periods presented. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. 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
-------------------------------------------------
Results of Operations
Second Quarter of 1997 Compared to Second Quarter of 1996
---------------------------------------------------------
Operating revenues for the second quarter of 1997 were $13,796,000
compared to $13,810,000 for the same quarter of 1996. Although energy sales
remained relatively unchanged in total, higher unit rate residential sales
decreased 3.7% resulting in lower revenues. However, the higher average unit
power supply cost pass through kept the decrease to only $14,000 for the
quarter.
Power supply costs for the second quarter increased 12.08% from the 1996
period. This increase is the result of a rise in the average unit cost of
power supply resulting from higher unit cost power purchases.
Total other operation and maintenance expenses (excluding power supply
cost) were virtually the same during the second quarter of 1997 compared to the
second quarter of 1996.
Depreciation expense decreased (3.2%) in the second quarter due to lower
depreciation rates on the hydro plant accounts. Ad valorem taxes increased
6.2% in the second quarter due to an increase in electric plant in service.
Other taxes decreased 17.7% in the second quarter due to lower payroll related
taxes reflecting fewer employees in the current period.
Other income increased $40,000 from the second quarter of 1996 to the
second quarter of 1997 due to revenues received under a management agreement
requiring the sale of generation to Mead Corporation from the three
hydroelectric generating facilities purchased from them during the second half
of fiscal 1996.
Interest charges increased $99,000 because of a higher level of short-
term borrowings in the current period.
Based on the above changes, net income decreased $346,000 (34.2%),
compared to the second quarter of 1996. Earnings per average common share for
the three months ended June 30, 1997 were $0.22 compared to $0.34 for the same
period in 1996.
First Six Months of 1997 Compared
to First Six Months of 1996
---------------------------------
Net income decreased $117,000 in the first six months of 1997 compared to
the same period last year. Earnings per average common share for the six
months ended June 30, 1997 and 1996 were 0.87 and 0.91 respectively.
Operating revenues for the six months ended June 30, 1997 were
$30,099,000 compared to $29,382,000 for the corresponding period of the prior
year, an increase of $717,000 (2.4%). The increase in revenues was mainly due
to an increase in the unit cost of power supply and higher emergency sales to
large industrial customers.
Power supply costs for the six months ended June 30, 1997 were $1,438,000
(16.3%) higher than the previous period. This increase is the result of a rise
in the average unit cost of power supply resulting from higher unit cost power
purchases.
Total other operation and maintenance expenses decreased $447,000 (5.0%)
for the six months ended June 30, 1997 due mainly to efficiencies recognized
from the implementation of our customer call center and a lower level of
expense on our transmission and distribution system.
Depreciation expense decreased in the current period due to lower
depreciation rates on the hydro plant accounts.
Ad valorem taxes increased 5.9% for the first six months of 1997 due to
an increase in electric plant in service. Other taxes decreased 13.0% in the
current period due to lower payroll related taxes reflecting fewer employees in
the current period.
Other income increased $127,000 in the first six months of 1997 compared
to the first six months of 1996 due to revenues received under a management
agreement requiring the sale of generation to Mead Corporation from the three
hydroelectric generating facilities purchased from them during the second half
of fiscal 1996.
Interest charges increased $146,000 because of a higher level of short-
term borrowings in the current period.
Other Financial Information
---------------------------
Liquidity and Capital Resources
During the second quarter of 1997, the Corporation's cash requirements
were met through funds that were internally generated and short-term
borrowings. There were $7,600,000 of short-term borrowings at June 30, 1997
compared to $5,000,000 at December 31, 1996.
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, $16,417,000 of consolidated
retained earnings is available at June 30, 1997, for payment of common stock
cash dividends by the Corporation. At December 31, 1996 unrestricted retained
earnings were approximately $15,659,000.
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
On July 10, 1997 Upper Peninsula Energy Corporation (UPEN) and WPS
Resources Corporation (NYSE:WPS) announced that their Boards of Directors had
approved an agreement to merge the two energy companies. WPS's principal
subsidiary is Wisconsin Public Service Corporation (WPSC), an electric and
natural gas utility headquartered in Green Bay, Wisconsin. It serves 400,000
customers in northeastern and north central Wisconsin as well as a small
portion of Michigan's Upper Peninsula. WPS's other subsidiaries include WPS
Energy Services, Inc., which provides marketing services and energy project
management services in the non-regulated energy marketplace, and WPS Power
Development, Inc., which develops electric generation projects and provides
services to the non-regulated electric generation industry. WPS's revenues for
the year ending December 31, 1996, were $858,254,000. The transaction will be
structured as a tax-free, stock-for-stock exchange in which holders of UPEN
common stock will receive .90 shares of WPS common stock for each share of UPEN
common stock they own. The merger is subject to approval by shareholders of
UPEN (expected in the last quarter of 1997), the Securities and Exchange
Commission, and the Federal Energy Regulatory Commission. Following the
necessary approvals, UPEN will be merged into WPS and Upper Peninsula Power
Company (UPPCO) will become a wholly owned subsidiary of WPS. There are no
plans to change UPPCO's name and the Houghton office will continue to serve as
its headquarters. UPEN shareholders will be receiving detailed merger
information in proxy materials that will be mailed later this year.
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)-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
(Filed herewith)
(99) Additional Exhibits N/A
Item 6(b). Reports on Form 8-K
-------------------
A current report on Form 8-K was filed on July 17, 1997 reporting
on a definitive Agreement and Plan of Merger between Upper
Peninsula Energy Corporation and WPS Resources Corporation.
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: August 14, 1997
/s/ B. C. Arola
B. C. Arola
Vice President, Treasurer and Secretary
(Principal Financial Officer)