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 March 31, 1998
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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
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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
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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 April 30, 1998, 2,950,001 shares of common stock, no par value
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UPPER PENINSULA ENERGY CORPORATION
FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
Page No.
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Part I. FINANCIAL INFORMATION 3
Item 1. Financial Statements (Unaudited) 3
Consolidated Statements of Income - Three
Months Ended March 31, 1998 and
March 31, 1997 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and
March 31, 1997 4
Consolidated Balance Sheets - March 31
1998 and December 31, 1997
Assets 6
Capitalization and Liabilities 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 9
Part II. OTHER INFORMATION 11
Items 1. through 3. N/A
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 14
Signature 17
-3-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
(Unaudited)
------------------
1998 1997
(Thousands of Dollars)
Operating Revenues........................ $15,573 $16,303
________ ________
Operating Expenses:
Operation - Power Supply Costs.......... 5,368 5,633
- Other....................... 3,988 3,497
Maintenance............................. 660 652
Depreciation and Amortization........... 1,544 1,456
Federal Income Tax Expense.............. 576 942
Taxes Other Than Federal Income Taxes -
Ad Valorem............................ 992 905
Other................................. 453 354
________ ________
Total........................... 13,581 13,439
________ ________
Operating Income.......................... 1,992 2,864
________ ________
Other Income (Deductions):
Interest Income......................... 83 40
Other................................... 44 147
Federal Income Tax Expense.............. (58) (65)
________ ________
Total........................... 69 122
________ ________
Income Before Interest Charges............ 2,061 2,986
________ ________
Interest Charges:
Interest on Long-Term Debt.............. 964 969
Amortization of Debt Expense............ 19 19
Other Interest Expense.................. 222 68
________ ________
Total........................... 1,205 1,056
________ ________
Income Before Dividends on Preferred
Stock of Subsidiary..................... 856 1,930
Dividends on Preferred Stock of
Subsidiary.............................. 5 6
________ ________
Net Income................................ $ 851 $ 1,924
======== ========
Average No. of Common Shares Outstanding.. 2,950,001 2,969,215
Earnings Per Share of Common Stock........ $0.29 $0.65
Dividends Paid Per Share of Common Stock.. $0.32 $0.32
See notes to consolidated financial statements
-4-
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
(Unaudited)
___________________
1998 1997
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net Income.............................. $ 851 $ 1,924
Adjustments to Reconcile Net Income
to Net Cash Flows from Operating
Activities:
Depreciation and Amortization......... 1,544 1,456
Dividends on Preferred Stock of
Subsidiary.......................... 5 6
Allowance for Equity Funds Used
During Construction................. (37)
Deferred Federal Income Taxes and
Investment Tax Credit............... 151 96
Prepaid and Accrued Pension........... (255) (60)
Other................................. (1) 188
Changes in Assets and Liabilities:
Accounts Receivable................... 2,064 (789)
Inventories........................... (14) (77)
Prepayments........................... 93 111
Accrued Ad Valorem Taxes.............. (240) (44)
Accounts Payable and Accrued Accounts. (1,647) 45
________ ________
Cash Flows From Operating
Activities...................... 2,551 2,819
________ ________
Cash Flows from Investing Activities:
Plant and Property Additions
(excluding Allowance for Funds Used
During Construction)................ (633) (1,958)
Allowance for Borrowed Funds Used
During Construction................ (55)
Other - Net........................... (777) (1)
________ ________
Cash Flows from Investing
Activities...................... (1,410) (2,014)
________ ________
Cash Flows From Financing Activities:
Increase in Notes Payable............. 500 350
Dividends............................. (949) (956)
________ ________
Cash Flows from Financing
Activities...................... (449) (606)
________ ________
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Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Months Ended
March 31
(Unaudited)
___________________
1998 1997
(Thousands of Dollars)
Net Increase in Cash and
Cash Equivalents........................ 692 199
Cash and Cash Equivalents at the
Beginning of Period..................... 2,071 2,064
________ ________
Cash and Cash Equivalents at the End
of Period............................... $ 2,763 $ 2,263
======== ========
Supplemental Cash Flows Information:
Interest Paid......................... $ 803 $ 793
======== ========
Income Taxes Paid..................... $ 0 $ 0
======== ========
See notes to consolidated financial statements
-6-
Item 1. Financial Statements (continued)
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31 December 31
1998 1997
(Unaudited)
____________ ___________
(Thousands of Dollars)
Utility Plant:
Electric Plant in Service............ $178,736 $178,943
Less Accumulated Depreciation and
Amortization....................... 82,332 80,993
________ ________
Net Electric Plant in Service.. 96,404 97,950
Construction Work in Progress........ 5,044 4,510
________ ________
Net Utility Plant.............. 101,448 102,460
________ ________
Other Property......................... 11,430 11,387
________ ________
Current Assets:
Cash and Cash Equivalents............. 2,763 2,071
Accounts Receivable (less allowance
for doubtful accounts of $70 in
1997 and 1998).................... 4,945 7,515
Revenue Receivable - Power Supply
Cost Recovery-Net................... 1,382 876
Inventories - at average cost:
Materials and Supplies.............. 1,986 1,968
Fuel................................ 282 286
Prepayments........................... 186 279
Accrued Ad Valorem Taxes.............. 4,107 3,867
Deferred Federal Income Taxes......... 473 642
________ ________
Total........................... 16,124 17,504
________ ________
Deferred Debits and Other Assets:
Unamortized Debt Expense.............. 456 466
Regulatory Assets..................... 1,303 1,305
Intangible Pension Plan Asset......... 2,998 2,998
Other................................. 1,501 724
________ ________
Total........................... 6,258 5,493
________ ________
$135,260 $136,844
======== ========
See notes to consolidated financial statements
-7-
CONSOLIDATED BALANCE SHEETS (continued)
CAPITALIZATION AND LIABILITIES
March 31 December 31
1998 1997
(Unaudited)
____________ ___________
(Thousands of Dollars)
Capitalization:
Common Stock and Paid-In-Capital...... $ 21,087 $ 21,087
Retained Earnings..................... 19,760 19,854
________ ________
Total Common Equity............. 40,848 40,941
Redeemable Preferred Stock.............. 445 445
Long-Term Debt, less current
maturities............................ 43,007 43,007
________ ________
Total Capitalization............ 84,299 84,393
________ ________
Current Liabilities:
Long-Term Debt Due Within One Year.... 260 260
Notes Payable......................... 10,000 9,500
Accounts Payable...................... 3,627 4,096
Accrued Accounts:
Taxes - Ad Valorem.................. 5,135 6,488
- Other....................... 434 112
Wages and Benefits.................. 2,200 2,875
Interest............................ 1,293 910
Other............................... 149 4
________ ________
Total........................... 23,098 24,245
________ ________
Deferred Credits:
Deferred Federal Income Taxes......... 6,062 6,035
Unamortized Investment Tax Credit..... 2,515 2,560
Customer Advances for Construction.... 1,897 1,895
Accrued Pensions...................... 3,335 3,590
Regulatory Liabilities................ 6,208 6,208
Postretirement Health and Life........ 5,464 5,229
Sick Leave Termination................ 1,735 2,033
Other................................. 647 656
________ ________
Total........................... 27,863 28,206
________ ________
Commitments and Contingencies...........
________ ________
$135,260 $136,844
======== ========
See notes to consolidated financial statements
-8-
Item 1. Notes to Consolidated Financial Statements (Unaudited)
______________________________________________________
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 three months ended March 31, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998.
Certain items previously reported have been reclassified to conform to the
current presentation in the financial statements.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
_________________________________________________
Results of Operations
First Quarter of 1998 Compared to First Quarter of 1997
_______________________________________________________
Operating revenues for the first quarter of 1998 were $15,573,000
compared to $16,303,000 for the same quarter of 1997. The decrease resulted
from a reduction of 4.3% in mWh sales from the prior period due mainly to
lower residential sales due to our mild winter.
Power supply costs for the first quarter were $265,000 (4.7%) lower
than the previous period. This decrease is the result of a 1.6% decrease in
the average unit cost of power supply and the aforementioned decrease in mWh
sales.
Total other operation and maintenance expenses (excluding power supply
cost) increased 499,000 (12.0%) due mainly to the expensing of merger-
related costs and an 8.3% increase in expenses on the transmission and
distribution systems.
Depreciation expense and ad valorem taxes increased in the first
quarter due to an increase in electric plant in service. Other taxes
increased $99,000 (28.0%) in the first quarter due to higher Michigan Single
Business Tax and payroll tax accruals.
Other interest expense increased $154,000 because of a higher level of
short-term borrowings in the current period.
Other Financial Information
___________________________
Liquidity and Capital Resources
During the first quarter of 1998 the Corporation's cash requirements
were met through funds that were internally generated and short-term
borrowings. There were $10,000,000 of
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short-term borrowings at March 31, 1998 compared to $9,500,000 at December
31, 1997.
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, $14,081,000 of
consolidated retained earnings is available at March 31, 1998, for payment
of common stock cash dividends by the Corporation. At December 31, 1997
unrestricted retained earnings were approximately $14,122,000.
The Company expects to incur development costs to modify existing
computer programs to accommodate the year 2000 and beyond. The Company is
currently evaluating its alternatives for the most cost-effective means for
these modifications. Management is of the opinion that the costs associated
with these modifications will not have a material adverse effect on the
results of operations or financial position of the Company.
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.
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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
A Special Meeting of Shareholders of Upper Peninsula Energy Corporation
was held at the Corporate Office of the Corporation, 600 Lakeshore Drive,
Houghton, Michigan, on Thursday, January 29, 1998.
The meeting had been called for the sole purpose of voting upon the
proposed merger of the Corporation into WPS Resources Corporation ("WPS").
There were represented at the meeting, in person or by proxy, 2,131,426
shares of Common Stock (72.25%) out of 2,950,001 shares issued and
outstanding and entitled to vote, being the class of stock entitled to vote
at the meeting. The Chairman stated that since a quorum was present, the
shareholders would consider the adoption of the Agreement and Plan of
Merger, dated as of July 10, 1997, between WPS and the Corporation,
providing, among other things, for the merger (the "Merger") of the
Corporation with and into WPS, with WPS being the surviving corporation in
the Merger. The Chairman noted that, upon the effectiveness of the Merger,
holders of the Corporation's Common Stock would be entitled to receive, in
exchange for each share of the Corporation's Common Stock, 0.9 of a share of
Common Stock, par value $1.00 per share, of WPS. The Chairman stated that a
description of, and the reasons for, the Merger were set forth in the Proxy
Statement/Prospectus dated December 19, 1997, which had been distributed to
shareholders in connection with the meeting.
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The results of the election were as follows:
Shares Present: 2,131,426 (72.25% of shares outstanding)
Shares in Favor of Resolution Regarding Adoption of Merger:
2,048,274 (69.4% of shares outstanding)
Item 5. Other Information
On July 10, 1997 Upper Peninsula Energy Corporation (UPEN) announced an
agreement to merge with WPS Resources Corporation (WPSR). The S-4
Registration Statement was declared effective by the Securities and Exchange
Commission on December 5, 1997. UPEN shareholders approved the merger on
January 29, 1998. The merger is subject to (1) approval by the Federal
Energy Regulatory Commission (FERC); (2) approval by the SEC under the
Public Utility Holding Company Act of 1935; (3) the expiration or
termination of the waiting period applicable to the merger under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976; (4) receipt by the parties
of an opinion of counsel that the exchange of stock qualifies as a tax-free
transaction: (5) receipt by the parties of appropriate assurances that the
transaction will be accounted for as a pooling of interests; and (6) the
satisfaction of various other conditions. The merger is expected to be
completed in the second half of 1998. UPEN will merge with and into WPSR,
and UPPCO, UPEN's utility subsidiary, will become a wholly owned subsidiary
of WPSR.
The summary on the next page contains selected unaudited pro forma
financial data for the quarter ended March 31, 1998. The financial data
should be read in conjunction with the historical UPEN and WPSR consolidated
financial statements and related notes. The pro forma combined earnings per
share reflect the issuance of shares associated with the merger agreement
and the related dilutive effect. The pro forma combined data accounts for
the merger as a pooling of interests.
-13-
Under the terms of the merger agreement, each share of outstanding UPEN
common stock (no par value) will be converted into 0.90 shares of WPSR
common stock ($1.00 par value), subject to adjustment for fractional shares.
Pro Forma
In thousands (except UPEN WPSR Combined
per-share data) (as reported) (as reported) (as reported)
______________________________________________________________________
Quarter Ending March 31, 1998
Operating revenues............. $ 15,573 $ 276,809 $ 292,382
Net income..................... $ 851 $ 17,101 $ 17,952
Basic and diluted
earnings per share........... $ 0.29 $ 0.72 $ 0.68
Assets at March 31, 1998....... $135,260 $1,306,742 $1,441,529
Long-term obligations
at March 31, 1998............ $ 43,006 $ 304,461 $ 347,467
WPSR'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. WPSR'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.
-14-
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)
-15-
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
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
-16-
* 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
No Form 8-K was filed during the quarter for which
this report was filed.
-17-
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: May 13, 1998
/s/ B. C. Arola
B. C. Arola
Vice President, Treasurer and Secretary
(Principal Financial Officer)