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, 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 April 30, 1996, 2,969,215 shares of common stock,
-------------------------------------------------------
$.005 par value
---------------
<PAGE> 2
UPPER PENINSULA ENERGY CORPORATION
FORM 10-Q
MARCH 31, 1996
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three
Months Ended March 31, 1996 and
March 31, 1995 3
Consolidated Statements of Cash Flow -
Three Months Ended March 31, 1996 and
March 31, 1995 4
Consolidated Balance Sheets - March 31
1996 and December 31, 1995
Assets 6
Capitalization and Liabilities 7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operation 8
Part II. OTHER INFORMATION 10
Items 1. through 5. N/A
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
(Unaudited)
------------------
1996 1995
-------- -------
(Thousands of Dollars)
<S> <C> <C>
Operating Revenues........................ $15,572 $16,757
------- -------
Operating Expenses:
Operation - Power Supply Costs.......... 4,693 5,359
- Other....................... 3,770 3,280
Maintenance............................. 824 640
Depreciation and Amortization........... 1,505 1,430
Federal Income Tax Expense.............. 861 1,327
Taxes Other Than Federal Income Taxes -
Ad Valorem............................ 857 825
Other................................. 387 355
------- -------
Total........................... 12,897 13,216
------- -------
Operating Income.......................... 2,675 3,541
------- -------
Other Income (Deductions):
Interest Income......................... 17 13
Other................................... 25 (12)
Federal Income Tax Expense.............. (7) 6
------- -------
Total........................... 35 7
------- -------
Income Before Interest Charges............ 2,710 3,548
------- -------
Interest Charges:
Interest on Long-Term Debt.............. 974 978
Amortization of Debt Expense............ 19 19
Other Interest Expense.................. 16 8
------- -------
Total........................... 1,009 1,005
------- -------
Income Before Dividends on Preferred
Stock of Subsidiary..................... 1,701 2,543
Dividends on Preferred Stock of
Subsidiary.............................. 6 7
------- -------
Net Income................................ $ 1,695 $ 2,536
======= =======
Average Number of Shares Outstanding...... 2,969,215 2,969,215
Earnings Per Share of Common Stock........ $0.57 $0.85
Dividends Paid Per Share of Common Stock.. $0.3125 $0.3000
</TABLE>
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Three Months Ended
March 31
(Unaudited)
------------------
1996 1995
------- -------
(Thousands of Dollars)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income.............................. $ 1,695 $ 2,536
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization......... 1,505 1,430
Dividends on Preferred Stock of
Subsidiary.......................... 6 7
Allowance for Equity Funds Used
During Construction................. (13)
Deferred Federal Income Taxes and
Investment Tax Credit............... (227) 454
Prepaid and Accrued Pension........... (337) 1,018
Other................................. 45 572
Changes in Assets and Liabilities:
Accounts Receivable................... 43 (172)
Inventories........................... (64) 67
Prepayments........................... 44 442
Accrued Ad Valorem Taxes.............. (42) (40)
Accounts Payable and Accrued Accounts. (995) (371)
------- -------
Cash Flows From Operating
Activities...................... 1,660 5,943
------- -------
Cash Flows from Investing Activities:
Plant and Property Additions
(excluding Allowance for Funds Used
During Construction)................ (2,367) (3,589)
Allowance for Borrowed Funds Used
During Construction................ (17)
Other - Net........................... 1 (634)
------- -------
Cash Flows from Investing
Activities...................... (2,383) (4,223)
------- -------
Cash Flows From Financing Activities:
Increase in Notes Payable............. 1,300
Retirement of Long-Term Debt and
Preferred Stock..................... (5)
Dividends............................. (934) (898)
------- -------
Cash Flows from Financing
Activities...................... 366 (903)
------- -------
<PAGE> 5
Net Increase (Decrease) in Cash and
Cash Equivalents........................ (357) 817
Cash and Cash Equivalents at the
Beginning of Period..................... $ 3,249 $ 2,887
------- -------
Cash and Cash Equivalents at the End
of Period............................... $ 2,892 $ 3,704
======= =======
Supplemental Cash Flows Information:
Interest Paid......................... $ 633 $ 625
======= =======
Income Taxes Paid..................... $ 0 $ 0
======= =======
</TABLE>
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31 December 31
1996 1995
(Unaudited)
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Utility Plant:
Electric Plant in Service............ $161,941 $162,506
Less Accumulated Depreciation and
Amortization....................... 72,598 71,736
-------- --------
Net Electric Plant in Service.. 89,343 90,770
Construction Work in Progress........ 12,290 10,045
-------- --------
Net Utility Plant.............. 101,633 100,815
-------- --------
Other Property......................... 5,689 5,726
-------- --------
Current Assets:
Cash and Cash Equivalents............. 2,892 3,249
Accounts Receivable (less allowance
for doubtful accounts of $86)....... 6,471 6,195
Revenue Receivable - Power Supply
Cost Recovery-Net................... 312 631
Inventories - at average cost:
Materials and Supplies.............. 2,225 2,176
Fuel................................ 278 263
Prepayments........................... 316 360
Accrued Ad Valorem Taxes.............. 3,482 3,440
Deferred Federal Income Taxes......... 1,309 1,219
-------- --------
Total........................... 17,285 17,533
-------- --------
Deferred Debits and Other Assets:
Unamortized Debt Expense (being
amortized over the lives of
debt issues)....................... 540 550
Intangible Pension Plan Asset......... 1,089 1,821
Other................................. 1,938 1,939
-------- --------
Total........................... 3,567 4,310
-------- --------
$128,174 $128,384
======== ========
<PAGE> 7
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock 2,969,215 shares......... $ 15 $ 15
Paid-In-Capital......................... 21,537 21,537
Retained Earnings....................... 20,952 20,185
-------- --------
Total Common Equity............. 42,504 41,737
Redeemable Preferred Stock.............. 503 503
Long-Term Debt, less current
maturities............................. 43,508 43,508
-------- --------
Total Capitalization............ 86,515 85,748
-------- --------
Current Liabilities:
Long-Term Debt Due Within One Year.... 225 225
Notes Payable......................... 2,000 700
Accounts Payable...................... 3,668 5,318
Accrued Accounts:
Taxes - Ad Valorem.................. 4,355 5,806
- Other....................... 1,427 147
Wages and Benefits.................. 3,618 3,324
Interest............................ 1,263 871
Other............................... 144 4
-------- --------
Total........................... 16,700 16,395
-------- --------
Deferred Credits:
Deferred Federal Income Taxes......... 6,687 6,779
Unamortized Investment Tax Credit..... 2,880 2,925
Customer Advances for Construction.... 1,299 1,283
Accrued Pensions...................... 3,000 4,069
Regulatory Liabilities................ 5,355 5,355
Post Retirement Health and Life....... 2,859 2,883
Other................................. 2,879 2,947
-------- --------
Total........................... 24,959 26,241
-------- --------
Commitments and Contingencies...........
-------- --------
$128,174 $128,384
======== ========
</TABLE>
<PAGE> 8
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 issued Orders
888 and 889 adopting, with some minor changes, the proposals for open access
transmission and stranded cost recovery that it had made in a previously
issued Notice Of Proposed Rulemaking. The new Orders require each public
utility that owns or controls interstate transmission facilities to file open
access network and point-to-point transmission tariffs that offer services
comparable to the utility's own uses of its transmission system. Management
is currently evaluating the impact the Orders may have on the Company's future
operations and financial results.
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
-------------------------------------------------
First Quarter of 1996 Compared to First Quarter of 1995
-------------------------------------------------------
<PAGE> 9
Operating revenues for the first quarter of 1996 were $15,572,000
compared to $16,757,000 for the same quarter of 1995, a decrease of $1,185,000
(7.1%). The decrease in revenues was mainly due to the 5.7% rate reduction
granted Michigan Public Service Commission jurisdictional customers effective
in April 1995, the decommissioning of K.I. Sawyer Air Force Base, and the pass
through of lower power supply costs.
Power supply costs for the first quarter decreased 12.4% from the 1995
period. This decrease is the result of a 3.3% reduction in mWh sales together
with a 8.6% reduction in the average unit cost of power supply resulting from
a 31.4% increase in hydro generation and some low unit cost short-term power
purchases.
Total other operation and maintenance expenses increased 17.2% during the
first quarter of 1996. The increase was the result of higher administrative
and general expenses brought about by higher insurance premiums and regulatory
costs together with a higher level of expense charged by the operating
department due to a reduced construction program during the first quarter of
1996 compared to 1995.
Depreciation and ad valorem taxes increased in the first quarter due to
an increase in plant-in-service.
Other income (deductions) increased by $28,000 and total interest charges
increased by $4,000 during the current period.
Based on the above changes net income decreased by $841,000 (33.2%),
compared to the first quarter of 1995. Earnings per average common share for
the three months ended March 31, 1996 were $0.57 compared to $0.85 for the
same period in 1995.
Other Financial Information
---------------------------
<PAGE> 10
During the first quarter of 1996, the Corporation's cash requirements were
met through funds that were internally generated and short-term borrowings.
There were $2,000,000 of short-term borrowings at March 31, 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, $14,975,000 of consolidated
retained earnings is available at March 31, 1996, for payment of common stock
cash dividends by the Corporation. At December 31, 1995 unrestricted retained
earnings were approximately $14,182,000.
On April 24, 1996, the Federal Energy Regulatory Commission issued Final
Rules (Orders 888 and 889) adopting, with some minor changes, the proposals
for open access transmission and stranded cost recovery that it made in the
Mega-NOPR. The new order requires each public utility that owns or controls
interstate transmission facilities to file open access network and point-to-
point transmission tariffs that offer services comparable to the utility's own
uses of its transmission system. Management is currently evaluating the
impact the Orders may have on the Company's future operations and financial
results.
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
<PAGE> 11
In December 1995, 16 employees (excluding employees working in facilities
operated for others) took part in a voluntary severance program in which they
will leave UPPCO's work force in the second quarter of 1996. Therefore, the
savings brought about through these employee reductions have not yet been
realized.
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)*
<PAGE> 12
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)
<PAGE> 13
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
(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.
<PAGE> 14
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, 1996
/s/ B. C. Arola
---------------------------------------
B. C. Arola
Vice President, Treasurer and Secretary
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000838868
<NAME> UPPER PENINSULA ENERGY CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 101,633
<OTHER-PROPERTY-AND-INVEST> 5,689
<TOTAL-CURRENT-ASSETS> 17,285
<TOTAL-DEFERRED-CHARGES> 3,567
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 128,174
<COMMON> 15
<CAPITAL-SURPLUS-PAID-IN> 21,537
<RETAINED-EARNINGS> 20,952
<TOTAL-COMMON-STOCKHOLDERS-EQ> 42,504
503
0
<LONG-TERM-DEBT-NET> 43,508
<SHORT-TERM-NOTES> 2,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 225
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 39,434
<TOT-CAPITALIZATION-AND-LIAB> 128,174
<GROSS-OPERATING-REVENUE> 15,572
<INCOME-TAX-EXPENSE> 861
<OTHER-OPERATING-EXPENSES> 12,036
<TOTAL-OPERATING-EXPENSES> 12,897
<OPERATING-INCOME-LOSS> 2,675
<OTHER-INCOME-NET> 35
<INCOME-BEFORE-INTEREST-EXPEN> 2,710
<TOTAL-INTEREST-EXPENSE> 1,009
<NET-INCOME> 1,701
6
<EARNINGS-AVAILABLE-FOR-COMM> 1,695
<COMMON-STOCK-DIVIDENDS> 928
<TOTAL-INTEREST-ON-BONDS> 3,866
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<EPS-PRIMARY> .57
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</TABLE>
