UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
_______________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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, Houghton, Michigan 49931-0130
_______________________________________ ___________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 487-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
___________________ _________________________________________
None
___________________ _________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
_________________________________________________________________
(Title of Class)
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
periods 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
_______ _______
The aggregate market value of the voting stock (Common Stock, No Par
Value) held by non-affiliates is computed at $79,650,027 based on 2,950,001
shares held by non-affiliates and the last quoted price for such stock of
$27.00 as reported in "The Wall Street Journal" for February 27, 1998. (A
date within 60 days prior to the date of filing)
Number of shares outstanding of each of the Registrant's classes of
Common Stock, as of February 27, 1998: 2,950,001 shares of Common Stock, No
Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement (filed or to be
filed pursuant to Regulation 14A) with respect to Registrant's April 28,
1998 Annual Meeting of Shareholders are incorporated by reference herein in
response to Part III.
TABLE OF CONTENTS
PART I
PAGE
____
ITEM 1. BUSINESS 1
General 1
Service Area and Customers 1
General 1
Sales and Customers 2
Rates and Regulations 3
Retail Rates 4
Wholesale Rates 4
Wholesale Wheeling 4
Licensing of Hydroelectric Projects 5
Generation and Purchased Power Resources 6
Arrangements with Others 8
Arrangements with Wisconsin Electric Power Company 8
Arrangements with the City of Escanaba 9
Other Arrangements 9
Construction and Financing 9
Environmental Matters 10
Employee Relations 12
Patents and Franchises 12
ITEM 2. PROPERTIES 13
Transmission and Distribution 13
Company-Owned Generation 13
Other Properties 14
Property Additions and Retirements 14
Maintenance 14
Titles 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 15
Executive Officers of the Registrant 15
Executive Officers of Upper Peninsula
Power Company 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 45
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT * 45
ITEM 11. EXECUTIVE COMPENSATION * 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT * 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS * 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE,
AND REPORTS ON FORM 8-K 46
SIGNATURES 53
* Incorporated by Reference
PART I
Item 1. BUSINESS
__________________
GENERAL
_______
Upper Peninsula Energy Corporation (UPEN) is a holding company,
incorporated in 1988 under the laws of the State of Michigan.
UPEN's principal subsidiary, Upper Peninsula Power Company (UPPCO) is
the primary source of earnings. UPPCO, incorporated in 1947 under the laws
of the State of Michigan, is an electric utility engaged in the generation,
purchase, transmission, distribution and sale of electric energy in the
Upper Peninsula of Michigan.
UPEN also has two other subsidiaries. Upper Peninsula Building
Development Company (UPBDC), owns the corporate headquarters building and
leases it to UPPCO under a twenty-year renewable lease. The second
subsidiary PENVEST, Incorporated formed in 1995, has investments in
communications and real estate.
On July 10, 1997, 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 Commision (FERC);
(2) the expiration or termination of the waiting period applicable to the
merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (3)
receipt by the parties of an opinion of counsel that the exchange of stock
qualifies as a tax-free transaction; (4) receipt by the parties of
appropriate assurances that the transaction will be accounted for as a
pooling of interests; and (5) 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.
Under the terms of the merger agreement, each share of the company's
outstanding common stock (no par value) will be converted into 0.90 shares
of WPSR common stock ($1.00 par value).
SERVICE AREA AND CUSTOMERS
__________________________
General
_______
UPPCO supplies electric energy to approximately 48,000 customers in
two-thirds of Michigan's Upper Peninsula. UPPCO's service area covers 4,460
square miles and has a population of about 130,000. Its service area is
divided into the Integrated System and the Iron River System. "Integrated
System" refers to UPPCO's "contiguous" service territory and does not
include the isolated Iron River service territory. UPPCO's Integrated
System serves 94 communities and adjacent rural areas at retail and
furnishes electric energy at wholesale to five municipal- ities, two rural
electrification associations and two investor owned utilities, namely
Wisconsin Electric Power Company (WEPCO) and Edison Sault Electric Company.
An interchange power agreement with WEPCO enables UPPCO to purchase and sell
power during emergency conditions at various locations on its Integrated
System. A separate purchase power contract with Wisconsin Power & Light
Company (WP&L) allows UPPCO to purchase wholesale power from WP&L to cover
all of UPPCO's retail service requirements for its Iron River System which
includes five communities and adjacent rural areas in the Iron River
District.
Approximately 95% of UPPCO's sales are in its Integrated System with
the balance being in the Iron River District.
Iron ore processing, wood products, tourism, equipment manufacturing,
and institutions for higher education constitute the basic industries in
UPPCO's service area.
Unemployment rates in the Upper Peninsula dropped to 7.2% in 1997
compared to 7.6% in 1996. These figures are high compared with the overall
Michigan rate of 4.1% in December 1997 and 4.7% in December 1996 as reported
by the Michigan Employment Security Commission.
Sales and Customers
___________________
See "Consolidated Selected Financial Data" on pages 17 and 18 filed
herewith for data on operating revenues and sales (by customer
classification) and customer data.
During 1997 UPPCO derived 39% of its operating revenues from sales of
electric energy to residential customers; 28% from small commercial and
industrial customers; 16% from large commercial and industrial customers;
10% from sales to other electric utilities, municipalities and public
authorities; and 7% from other sources.
In 1997, UPPCO's three largest commercial and industrial customers,
which accounted in the aggregate for 14% of energy sales and 8% of operating
revenues, were:
<TABLE>
<CAPTION>
Operating
Sales (mWh) Revenues
__________ _________
<S> <C> <C>
Stone Container Corporation*.......... 74,447 $2,841,857
Michigan Technological University..... 27,168 1,379,058
Celotex Corporation................... 18,434 878,768
<F*> Excludes sales under emergency rate schedule
</TABLE>
Stone Container Corporation operates a mill at Ontonagon, Michigan,
producing corrugating medium. Sales to this customer in 1998 are
anticipated to be approximately 81,000 mWh.
Michigan Technological University in Houghton, is a nationally
recognized university offering technical degrees and academic programs
through the doctorate level. Michigan Tech has an enrollment of
approximately 6,300. Sales to this customer in 1998 are anticipated to be
approximately 26,200 mWh.
Celotex Corporation's plant in L'Anse manufactures mineralboard
ceiling panels for U.S., Canadian, and overseas markets. Celotex is a
subsidiary of Jim Walter Corporation of Tampa. Its business is tied to
commercial building activity. Sales to this customer in 1998 are
anticipated to be approximately 17,100 mWh.
In 1997, UPPCO's five largest wholesale customers, which accounted in
the aggregate for 13% of energy sales and 6% of operating revenues, were:
<TABLE>
<CAPTION>
Operating
Sales (MWh) Revenues
__________ _________
<S> <C> <C>
City of Gladstone..................... 30,500 $1,045,044
City of Negaunee...................... 22,504 780,662
Ontonagon County Rural Electrifi-
cation Assn......................... 20,778 703,895
Alger-Delta Cooperative Electric
Assn................................ 19,580 656,906
Village of Baraga..................... 17,942 649,764
</TABLE>
Sales to the above wholesale customers are projected to total 112,100
MWh in 1998.
Electric sales are influenced by, among other factors, weather
conditions. Peak loads are usually experienced in December or January.
RATES AND REGULATIONS
_____________________
UPPCO is subject to the jurisdiction of the Michigan Public Service
Commission (MPSC) which has general power of supervision and regulation with
reference to territory served, accounting, services, facilities, valuations,
issuance of securities and all electric rates with the exception of
wholesale for resale rates.
UPPCO is a licensee under Part I and a public utility under Part II of
the Federal Power Act and, accordingly, various phases of its business,
including wholesale for resale rates, are subject to the jurisdiction of the
Federal Energy Regulatory Commission (FERC).
Retail Rates
____________
UPPCO derived approximately 85% of its operating revenues from retail
electric sales in 1997.
Billings to customers under MPSC jurisdiction include base rate
charges and a power supply cost recovery (PSCR) factor. Approximately 40%
of UPPCO's operating expense is power supply costs. UPPCO is required under
PA 304 to receive MPSC approval each year to recover projected power supply
costs by establishment of PSCR factors. These factors are subject to annual
reconciliation to actual costs and permit 100% recovery of allowed power
supply costs. Any over or under recovery is deferred on UPPCO's balance
sheet, and such deferrals are relieved as refunds or additional billings are
made.
The restructuring process in Michigan continued to be debated
throughout 1997. The Michigan Public Service Commission's order detailing
its direct access program was issued in June. Utilities had to file
proposals for the structuring and implementation of the program within their
own systems. The state's two largest utilities, which have been working
with the open access concept for over five years, will be the first to offer
customers their choice of power supplier. The phased-in programs of these
utilities will begin in 1998, with recovery of stranded costs and
implementation costs from customers choosing to purchase energy from a
provider other than their host utility.
UPPCO, along with most smaller utilities, requested a delayed schedule
to begin its program. Discussions will begin soon to finalize the plans for
customer choice in the Upper Peninsula. Some details of the direct access
plans for the larger utilities will have to be modified to fit the
operations of smaller utilities.
At this time, it appears that the open access program for utilities
our size will begin the phase-in of direct access starting in the year 2000
and be fully implemented by 2004.
Wholesale Rates
_______________
UPPCO derived 8% of its operating revenues from wholesale for resale
rates in 1997.
UPPCO's wholesale tariff rates include a base rate charge and are
subject to a fuel clause (such clause includes certain purchased power
costs), with a 30-day billing lag without reconciliation provisions. Most
of UPPCO's wholesale customers are now taking service under special
contracts.
Wholesale Wheeling
__________________
In its order 888, FERC required each utility with transmission lines
that could potentially be used for buying or selling wholesale energy to
file an Open-Access Tariff for transmission services. This tariff
"unbundles" or isolates transmission services from the complete delivery
packages that make up most utility rates. Order 888 also defines the terms,
conditions, and rates for transmission services to be provided by
transmission-system owners. We filed our tariff in January 1997, then
slightly modified it in July.
Another FERC order would have required us to separate our power
marketing function from our transmission operations and planning function
and to post our transmission capacity availability and tariff rates on an
electronic bulletin board via the Internet. We requested and were granted a
waiver from these requirements because of our small size and the additional
expense involved with compliance.
Licensing of Hydroelectric Projects
___________________________________
Licenses have been issued to UPPCO pursuant to Part I of the Federal
Power Act for the Bond Falls Project and the Prickett Hydro Project. Under
the Federal Power Act and said licenses, the United States has the right to
take over these projects at or after the expirations of the licenses in 1989
or subsequent annual extension thereof and 2037, respectively, on paying
UPPCO's "net investment" as defined in the Act and by FERC. Current
licenses are usually automatically extended on an annual basis until FERC
issues a new license.
The power generated by UPPCO's hydro projects is delivered to the
Integrated System for use by its customers.
FERC 2402, Prickett - The installed nameplate rating at the Prickett
Project is 2,200 kilowatts. The license offered by the FERC for this
project requires run-of-river operation with a dependable capacity of 704
kilowatts.
An order issuing a license for Prickett (FERC 2402) was issued on
August 29, 1995. UPPCO entered a "Request for Rehearing of Order Issuing a
New License" dated September 28, 1995. The Michigan Department of Natural
Resources (MDNR) issued a "Request for Rehearing of License Order" dated
September 26, 1995. The Michigan Hydro Relicensing Coalition filed a
"Request for Rehearing" dated September 27, 1995. Motions for a rehearing
have been granted. A FERC Order amending the license was issued on May 6,
1997 and an extension of time for Article Compliance was granted on
September 22, 1997.
FERC 1864, Bond Falls - The installed nameplate rating of the Victoria
Project is 12,000 kilowatts. The license application before the FERC
proposes a peaking operation, thus the nameplate capacity if the new license
allows peaking, is 12,000 kilowatts.
A final application for license for the Bond Falls Project (FERC 1864)
was submitted December 24, 1987. An Additional Information Request (AIR)
was issued by the FERC on January 2, 1990 requesting additional studies and
information within 18 months of the date of the request. Because of a FERC
mandated dam replacement at Victoria, the deadline for gathering and
submittal of certain information was extended to December 1995. The
requested information was submitted to FERC in December 1995. FERC has
indicated that it is proceeding with an Environmental Impact Statement (EIS)
for the Project in conjunction with the license application. Completion
date for the EIS is unknown. Final action by the FERC on the Application
for a License will follow completion of the EIS. Meanwhile, the Project
continues to operate under an annual license issued by the FERC in
accordance with terms and conditions of the existing license issued for the
Project in 1953 which expired on January 1, 1989.
In February 1988 UPPCO purchased from Cliffs Electric Service Company
(CESCO), the McClure, Hoist, Cataract and AuTrain hydroelectric facilities
with a total capacity of 15.5 MW.
A license application for the Cataract Project was submitted to FERC
in August 1993 and a license issued in February 1997. UPPCO entered a
"Request for Rehearing of Order Issuing a New License" in March 1997. A
FERC order amending the license was issued in June 1997. A license
application for the AuTrain Project was submitted in April 1993. FERC
issued a license for the Project in June 1997 and UPPCO requested a
rehearing in July 1997. FERC's response is pending. A license application
for the Dead River Project (Silver Lake, Hoist and McClure Developments) was
submitted to FERC in April 1994. FERC issued UPPCO an AIR in May 1997 and
UPPCO responded to the AIR in November 1997. FERC's response is pending.
Licensing expenditures through December 1997 were $6,760,000 with
additional expenditures of approximately $340,000 estimated to be spent over
the next two years to complete the licenses.
The estimated cost of licensing by projects are as follows: Bond
Falls, $1,391,000; Prickett, $1,267,000; Dead River, $2,833,000; AuTrain,
$960,000; and Cataract, $649,000. Typical allocation splits by function are
29% for engineering, 29% for environmental studies, 25% for preparation of
the license application, and 17% for post-application requirements.
Although not in the existing rate structure, licensing cost(s) will be
booked (upon acceptance of a license) as a capital asset, thus becoming
eligible for inclusion in the rate base.
GENERATION AND PURCHASED POWER RESOURCES
________________________________________
Available generation and purchased power resources for UPPCO's
Integrated System are described below, together with 1997 and projected 1998
net station generation:
<TABLE>
<CAPTION>
Net Net
Station Fuel Capability (KW) Generation (mWh)
_______ ____ _______________ ________________
Company-Owned 1997 1998
_____________ ____ ____
<S> <C> <C> <C> <C>
Warden Coal/Gas 17,700 (298) (347)
Victoria Hydro 12,340 69,807 69,300
McClure Hydro 8,680 41,953 41,800
Hoist Hydro 4,280 10,759 13,200
Prickett Hydro 2,220 7,643 8,000
Cataract Hydro 1,460 3,370 3,400
AuTrain Hydro 1,060 5,391 5,300
Portage Oil 27,500 1,474 1,500
Gladstone Oil 27,500 4,863 -0-
Purchased Power (Firm)
______________________
WEPCO Coal 65,000 475,793 -0-
COMED 55,000 -0- 470,820
Purchased Power (Non-Firm)
__________________________
WPS, WEPCO, NSP, & WP&L 239,241 240,209
Others 29,198 -0-
_______ _______
Total 889,194 853,182
_______ _______
</TABLE>
During 1993 the Warden Station was upgraded to have natural gas
burning capability and is now capable of burning gas and/or coal in any
combination. Effective January 1, 1994, the station was taken out of
service and placed in service lay-up status.
Generating equipment is in standby or inactive reserve ("service lay-
up status") which is further defined as not normally used equipment that has
been deactivated but would be available for service with short term
reactivation procedures.
In the particular case of the Warden Station, the boiler has been
filled with water containing corrosion-inhibiting chemicals which are
periodically circulated throughout the entire system. The turbine generator
is protected by circulating warm, dry air through the equipment to prevent
corrosion resulting from moisture and oxidation. The ambient temperature of
the plant is maintained above freezing during winter months.
In the Iron River District, all requirements are currently purchased
from Wisconsin Power & Light Company. Total purchases were 45,030 MWh in
1997 and are projected to be 45,386 MWh in 1998.
In 1997 virtually all energy generated by UPPCO owned facilities was
produced by hydroelectric facilities. UPPCO purchased 53% of its total
energy requirements from WEPCO. UPPCO supplies energy to an isolated WEPCO
load (isolated from the remainder of WEPCO's service territory) in western
Marquette County. WEPCO purchases the energy at wholesale for resale under
their Michigan retail rate structure. This energy comes from any of UPPCO's
resources, including generation and purchased power, and is included in
UPPCO's load planning.
UPPCO has contracted with Commonwealth Edison (ComEd) for 55 MW of
capacity through December 31, 1998.
UPPCO, for reasons of necessity or economy, may exchange energy with
WEPCO, Wisconsin Public Service Corporation (WPS), Northern States Power
(NSP), Wisconsin Power & Light, the City of Marquette, the City of Escanaba
and Edison Sault Electric Company when and if availability and need exists.
UPPCO's 1998 system net dependable capability, including its capacity
entitlement from COMED is 157,740 kW. UPPCO is a winter-peaking utility.
The maximum demand created on the Integrated System by UPPCO's customers was
138,600 kW experienced on December 22, 1997.
ARRANGEMENTS WITH OTHERS
________________________
Arrangements with Wisconsin Electric Power Company
__________________________________________________
Under contract with Wisconsin Electric Power Company (WEPCO), UPPCO
had operated WEPCO's Presque Isle Power Plant in Marquette, Michigan, since
1988. Under the terms of the agreement, UPPCO received a management fee
plus reimbursement for costs associated with labor and other services
provided. This contract terminated on December 31, 1997. All employees at
the plant were offered employment by WEPCO. UPPCO and WEPCO have entered
into an agreement in which post-contract retirement benefit responsibilities
are delineated. This event is considered a partial "curtailment" per SFAS
88, "Employers' Accounting for Settlements and Curtailments of Defined
Pension Plans and for Terminated Benefits." Therefore, the company had to
reflect a curtailment loss of $1,541,000 in its 1997 financial results.
UPPCO currently has a Joint Use Transmission Agreement whereby UPPCO
and WEPCO agree to the joint use of portions of transmission facilities
owned by the other party. The contract will be terminated at December 31,
1998.
In 1990, an agreement was executed between UPPCO and WEPCO for the
joint use and sharing of transmission facilities in connection with WEPCO's
construction of an 80-mile, 345-kV transmission line from its Presque Isle
Station in Marquette to Quinnesec, Michigan. The line was put into service
in June 1992, after which UPPCO began maintaining a portion of the
transmission line and terminal equipment under contract with WEPCO. The
transmission line maintenance agreement was terminated on December 31, 1997.
The agreement allows the companies to share existing rights-of-way and
utilize common structures in areas where transmission line routes coincide.
Arrangements with the City of Escanaba
______________________________________
UPPCO operates and manages the City of Escanaba's steam electric
generating station. The City and UPPCO have the following agreements: (a)
Plant Operating Agreement whereby UPPCO operates and manages the station and
pays all costs of operation, and the City reimburses UPPCO for all expenses
incurred in operating and maintaining the plant plus a management fee; (b)
Interconnection Agreement whereby UPPCO and the City may transact energy
exchanges according to published Service Schedules; and (c) Dispatch
Services Agreement whereby UPPCO performs electric power and/or energy
dispatching functions for the City's system. The Plant Operating and
Interconnection Agreements can be terminated upon not less than 36 month's
written notice to the other party. The Dispatch Agreement can be terminated
upon 12 month's written notice to the other party.
Other Arrangements
__________________
The Iron River area, which accounts for approximately 5% of UPPCO's
kWh sales and is not integrated, is served by energy purchased from
Wisconsin Power and Light Company.
UPPCO's 138-kV interconnections with WEPCO provide UPPCO with
electrical interconnections to Wisconsin's electric utilities. These
interconnections permit UPPCO to participate in coordinated planning, design
and operating activities with Wisconsin's electric utilities as a member of
the Wisconsin - Upper Michigan Systems organization. UPPCO also has a 69-kV
interconnection with the City of Marquette, the City of Escanaba, and with
Edison Sault Electric Company.
In October 1996 we transferred our after-hours trouble-call
dispatching and selected system operation functions to Wisconsin Public
Service (WPS) Corporation of Green Bay, Wisconsin. We expect WPS's high-
tech energy management system to help us to reduce costs while maintaining
high service and operating standards.
In July 1997 UPPCO agreed to purchase three hydroelectric generating
facilites on the Escanaba River from the Publishing Paper Division of Mead
Corporation. These hydros (the Escanaba Project) received a 40-year license
in 1995 and generate approximately 30,000 megawatthours of energy annually.
The paper company placed them on the market as part of its ongoing program
to divest itself of non-core business assets. Under the terms of the sale,
Mead will purchase all generation from the facilities for 15 years. The
agreement was finalized in April 1997.
CONSTRUCTION AND FINANCING
__________________________
UPEN's construction expenditures for 1997 totaled $6,094,000 including
an Allowance for Funds Used During Construction (AFUDC). Of this amount,
$287,000 was expended on the licensing and relicensing of certain hydro-
electric stations, $901,000 was spent on construction of a 138-kV
transmission line and substation in Delta County, $197,000 was spent on
facilities to serve the new Sawyer Lumber Company sawmill, and $95,000 was
spent to complete the purchase of the Escanaba river hydro-electric
stations. Construction costs including AFUDC for 1998 and 1999 through 2002
are estimated as follows:
<TABLE>
<CAPTION>
1998 1999-2002
____ _________
<S> <C> <C>
Utility Construction:
Production Plant Improvements........ $ 796,000 $ 7,200,000
Transmission Plant Improvements and
Extensions......................... 225,000 1,200,000
Distribution Plant Improvements and
Extensions......................... 2,565,000 10,800,000
Miscellaneous Improvements........... 726,000 3,000,000
Non Utility Construction............... 60,000 300,000
AFUDC.................................. -0- 200,000
__________ ___________
$4,372,000 $22,700,000
</TABLE>
Net plant and property at December 31, 1997 amounted to $102,460,000
including AFUDC. The construction program for 1998 through 2002
contemplates aggregate gross additions to plant and property of $27,072,000.
These estimates include capital expenditures of $340,000 to complete
licensing/relicensing of certain hydroelectric generating stations and
comply with regulating agency requirements at the Company's hydroelectric
stations. (See "Licensing of Hydroelectric Projects").
See "Liquidity and Capital Resources" under Management's Discussion
and Analysis of Financial Condition and Results of Operations incorporated
herein.
ENVIRONMENTAL MATTERS
_____________________
The Company's operations are subject to Federal, State and local
regulations in regard to air and water quality, land use and other
environmental matters.
The Company is currently evaluating information which indicates that
groundwater pollution is emanating from the ash disposal site at the Presque
Isle Station in Marquette, Michigan, sold to WEPCO in December of 1987.
Pursuant to certain agreements between WEPCO, UPPCO and The Cleveland Cliffs
Iron Company, UPPCO may be required to reimburse WEPCO for a portion of the
remediation costs. The first $2 million expended by WEPCO is not
reimbursable and it is estimated that UPPCO's share of the remaining
remediation costs will not be more than $200,000.
The closure of the ash disposal site at UPPCO's John H. Warden Station
near L'Anse, Michigan was completed in 1994. A Closure Certification Report
was submitted to the Michigan Department of Natural Resources (MDNR) and was
approved in January, 1995.
The Closure Certification includes an agreement with the MDNR for the
Company to monitor groundwater surrounding the ash disposal site for a 30-
year period. In December, 1994, an estimated liability and regulatory asset
of $841,000 was recorded for such future costs. The estimated liability and
regulatory asset are being reduced as actual expenses are incurred. At
December 31, 1997 the balance of the estimated liability and regulatory
asset was $633,000.
The Michigan Department of Environmental Quality (MDEQ - Formally
included in the MDNR) also advised UPPCO in early 1995 that recent water
samples from the site indicated elevated levels of boron and lithium. The
MDEQ determined that UPPCO's Feasibility Study submitted in 1993 did not
address the recent issues and was rejected. Supplemental Remedial
Investigations were performed in 1995 and the results were submitted to the
MDEQ in February 1996. UPPCO also requested and was granted an amendment to
the Consent Order to allow for modification of the Feasibility Study and
redefining a new timetable for submission of the Remedial Action Plan. An
amended Remedial Action Plan was submitted to the MDEQ in July, 1997. As of
December 31, 1997 the MDEQ had not completed their review of the plan.
Additional information for two of three remaining contaminated
underground storage tank sites has been requested by the MDEQ, but it is not
expected to be extensive. It is anticipated that one site will be granted
full closure and the remaining two sites will receive restricted use
closures. The MDEQ may require long term monitoring, estimated at five
years, as part of the closure plans. Site closures could be modified after
future investigations verify that contamination no longer exists.
Title V of the 1990 Clean Air Act requires each State to develop a
Renewable Operating Permit program based on State and Federal requirements.
A sources "Potential to Emit" air contaminants determines the applicable
regulatory requirements. Sources that are not operated continuously can
self impose enforceable limitations to restrict their emissions below major
source threshold limits and not be subject to the Renewable Operating Permit
program.
Because of the evolving changes in the electric utility industry,
UPPCO has elected not to impose limitations on its generating capabilities.
Renewable Operating Permit applications were submitted for authorization of
unrestricted operation for the Portage and John H. Warden Generating
Stations. The applications were deemed "administratively complete" by the
MDEQ in October, 1996.
Because of specific site configuration at the Gladstone Generating
Station, UPPCO has opted to operate within the parameters of the existing
permit which contains some restrictions. These restrictions do not present
any problems under present operating requirements.
No major expenditures are currently budgeted for the limitation or
monitoring of hazardous substances or pollution control. The recurring
operational and maintenance costs associated with these items are not
expected to change significantly on an annual basis.
UPPCO cannot presently forecast the full costs and other effects that
current and future regulations may have on the Company.
EMPLOYEE RELATIONS
__________________
On December 31, 1997 UPPCO had 416 full-time employees, of whom 300
were represented by Local 510, International Brotherhood of Electrical
Workers, AFL-CIO, under two separate agreements. UPPCO is in the third year
of a three-year agreement with both the Physical and Clerical Unit
employees, which is effective through April 30, 1998. Wage rate increases
averaging 3.5% were granted to both Physical and Clerical Unit employees on
January 1, 1997. Out of the 416 employees, 209 assigned to Presque Isle,
became WEPCO employees on January 1, 1998 as the Presque Isle Management
Agreement terminated on December 31, 1997. There are currently 25 employees
assigned to the Escanaba Generating Station, operated for the City of
Escanaba.
Both contracts will expire in 1998 covering certain employees in most
of the company's locations. The company expects to negotiate with the union
and to enter into two new collective bargaining agreements. There can be no
assurance, however, that such agreements will be reached without a work
stoppage. A prolonged work stoppage affecting a substantial number of
locations could have a material adverse effect on results of the company's
operations.
PATENTS AND FRANCHISES
______________________
In 1988 UPEN was incorporated as a holding company of which UPPCO is
its principal subsidiary. Therefore, UPPCO retains all franchise
agreements.
UPPCO has no patents.
UPPCO is the transferee of municipal franchises, or has obtained
franchises itself, to conduct business in substantially all of the
municipalities presently served by UPPCO in which operations were commenced
subsequent to January 1, 1909. UPPCO has franchises in 54 townships and
municipalities throughout its system, by virtue of 30-year grants. These
franchises will expire at various times through 2022. All expired
franchises have been renewed.
UPPCO operates in 20 other townships and municipalities by authority
of Public Act 264 of 1905. Court decisions have held that electric
companies who were operating under the 1905 statute before the Michigan
Constitution of 1908 are not required to obtain franchises as stated in the
constitutional provision. This right also applies to successor companies.
UPPCO operates in the Village of Ontonagon by virtue of a 30-year revocable
franchise granted in 1975 by the Village Council and in the Village of
L'Anse by virtue of a 30-year nonrevocable franchise acquired in 1988.
Item 2. PROPERTIES
___________________
Transmission and Distribution
_____________________________
UPPCO's transmission and distribution system is comprised of
approximately 3,537 circuit miles. Transmission and sub-transmission
networks are operated at 138, 69, 33 and 12 kV, consisting of approximately
374, 371, 48 and 13 circuit miles, respectively. The remaining 2,731 miles
are operated at distribution voltages ranging between 120 and 15,000 volts.
As of December 31, 1997, there were 417 mVa of distribution
transformers, 495 mVa of transmission bulk power step-down transformers, and
147 mVa of generation step-up transformers in service on the system.
Company-Owned Generation
________________________
Certain information as to UPPCO owned generation is set forth below:
<TABLE>
<CAPTION>
Year Net
Station Installed Fuel Capability (KW)
_______ _________ ____ _______________
<S> <C> <C> <C>
Warden 1959 Coal/Gas 17,700
Victoria 1930 Hydro 12,340
McClure 1919 Hydro 8,680
Hoist 1916, 1925, 1941 Hydro 4,280
Prickett 1931 Hydro 2,220
Cataract 1929 Hydro 1,460
AuTrain 1910 Hydro 1,060
Portage 1975 Oil 27,500
Gladstone 1987* Oil 27,500
<F*> Installed at Portage in 1973
</TABLE>
See "Generation and Purchased Power Resources", part of Item I.
Business, for information as to utilization of UPPCO-owned generation and
other available generation.
The Warden Station is a one-unit plant with an extraction steam turbine,
which extraction unit is no longer in service.
Prickett, Cataract, and AuTrain hydroelectric generating stations are
generally run-of-the river plants with limited capacity to store water while
the Victoria, Hoist and McClure hydroelectric generating stations are
operated as peaking facilities.
The Portage and Gladstone Stations are both one-unit oil- fired gas
turbines.
Other Properties
________________
UPPCO owns numerous miscellaneous properties in various parts of its
territory which are used for office, service and other purposes. The most
important of these are Service Centers at Ishpeming, Houghton, Ontonagon,
Iron River, Escanaba, and Munising, Michigan. UPPCO also leases small
parcels of land for substations and miscellaneous temporary uses.
Property Additions and Retirements
__________________________________
The gross additions to UPPCO's Utility Plant during the period January
1, 1993 to December 31, 1997 amounted to $36,932,111, approximately 20% of
its Gross Utility Plant at December 31, 1997. During the same period, a
total of $5,482,424 was retired.
Maintenance
___________
It is management's opinion that UPPCO's generating facilities are
adequately maintained and equipped (subject to changing environmental
requirements). UPPCO's maintenance practices at all generating facilities
are designed to ensure safe and reliable operation.
UPPCO continues its systematic approach to maintaining and upgrading
existing transmission and distribution plant to ensure safe and reliable
service to customers throughout the service territory. The Company does
this through a program of inspections, rebuilds, replacements, and additions
designed to improve the performance of facilities and enhance the quality of
service to customers. The Company also conducts an aggressive program for
maintenance of transmission and distribution line rights-of-way to improve
continuity and quality of service to customers.
Titles
______
In the opinion of counsel, UPPCO has satisfactory title to its
properties for use in its utility business. Electric transmission and
distribution lines are constructed principally on rights-of-way which are
maintained under franchise or held by easement only. All properties of
UPPCO are subject to the lien of UPPCO's Indenture of Mortgage, dated May 1,
1947 as supplemented, other than "excepted property" as defined therein.
In the opinion of counsel, UPBDC has satisfactory title to its properties
which consist of an office building used by UPPCO for its general office and
corporate headquarters.
Item 3. LEGAL PROCEEDINGS
__________________________
UPEN is subject to various unresolved legal matters that arose in the
normal course of business. Although it is not possible to predict the
outcome of these legal actions, company management believes that these
actions will not have a material adverse effect on its financial position or
results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
____________________________________________________________
There were no security holder votes occurring in the fourth quarter of 1997.
Executive Officers of the Registrant
____________________________________
<TABLE>
<CAPTION>
Age as of Present Position First Elected
Name of Officer 12/31/97 With Company an Officer
_______________ _________ ________________ _____________
<S> <C> <S> <C>
Clarence R. Fisher 57 Chairman of the Board, 7/09/91
Chief Executive Officer,
President and Director
Burton C. Arola 44 Vice President, Treasurer 8/11/88
and Secretary
</TABLE>
Clarence R. Fisher was first elected a UPEN director on April 8, 1992.
All executive officers were reelected at the July 2, 1997 Board of
Directors meeting. All officers serve until the first Board meeting
following the April 28, 1998 Annual Shareholders' Meeting or until their
respective successors are elected and qualified.
Executive Officers of Upper Peninsula Power Company
___________________________________________________
<TABLE>
<CAPTION>
Age as of Present Position First Elected
Name of Officer 12/31/97 With Company an Officer
_______________ _________ ________________ _____________
<S> <C> <S> <C>
Clarence R. Fisher 57 Chairman of the Board, 7/10/84
Chief Executive Officer,
President and Director
Burton C. Arola 44 Vice President-Finance, 4/12/83
Treasurer and Secretary
Neil D. Nelson 59 Vice President-Operations 1/05/94
</TABLE>
Clarence R. Fisher was first elected an UPPCO director on April 8,
1992.
Burton C. Arola and Neil D. Nelson were elected at the July 2, 1997
Board of Directors' meeting. All officers serve until the first Board
meeting following the April 28, 1998 Annual Shareholders' Meeting or until
their respective successors are elected and qualified.
There are no family relationships between officers and directors.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
___________________________________________________________________________
The corporation's stock is traded on The Nasdaq Stock Market under the
symbol "UPEN." At December 31, 1997, UPEN had 3,665 registered common
shareholders. To our knowledge, no individual shareholder holds more than
5% of the 2,950,001 total outstanding shares.
Dividends have been paid quarterly without interruption or reduction since
May of 1949. Payments are made the first day of February, May, August, and
November, and the current annual dividend is $1.28 per share. We intend to
continue paying dividends, although future payments will be dependent upon
earnings, liquidity, and indenture restrictions (See Notes to Financial
Statements-Note 5). All dividends paid in 1997 were fully taxable for
federal income tax purposes.
Shareholders of at least one (1) share of UPEN common stock may join the
dividend reinvestment plan to purchase additional shares at market price
without brokerage commissions. Part A of this plan allows for quarterly
reinvestment of cash dividends, while part B allows for optional cash
payments of $50 minimum or $5,000 maximum each quarter.
The Company does not sell its stock directly to the public, nor does it buy
shares directly from its shareholders.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Sale Prices ($)
1997 - High............... 20 20-1/2 24-1/16 29-1/4
1997 - Low................ 16-1/2 17 18-1/4 22-1/2
1996 - High............... 20-3/4 19-3/4 20 19-1/4
1996 - Low................ 17-1/2 17 17-1/2 16
Dividends (cent)-per Share
1997...................... 32 32 32 32
1996...................... 31-1/4 31-1/4 31-1/4 32
</TABLE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
_____________________________________________
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31
Operating Revenues: 1997 1996 1995
<S> <C> <C> <C>
Electric
- Residential........... $ 22,626 $ 23,554 $ 23,267
- Comm. & Ind.-Small.... 16,611 16,833 16,581
- Comm. & Ind.-Large.... 9,271 8,405 9,794
- Other................. 6,065 6,590 6,832
- Provision for Rate
Refunds............. 1,379 (1,124) 792
Miscellaneous............. 4,152 4,044 3,839
__________ __________ __________
Total............... 60,104 58,302 61,105
__________ __________ __________
Operating Expenses:
Operation................. 38,541 33,108 34,595
Maintenance............... 2,664 2,976 3,897
Depreciation and
Amortization............ 5,900 5,584 5,718
Taxes Other Than Income
Taxes................... 4,927 4,803 4,634
Income Taxes.............. 1,620 2,778 2,745
__________ __________ __________
Total............... 53,652 49,249 51,589
__________ __________ __________
Operating Income............ 6,452 9,053 9,516
Other Income................ 250 217 (159)
__________ __________ __________
Income Before Interest
Charges................... 6,702 9,270 9,357
Interest Charges............ 4,613 4,117 4,041
Pref. Dividends of Sub...... 22 23 25
__________ __________ __________
Net Income.................. $ 2,067 $ 5,130 $ 5,291
========== ========== ==========
Average Common Shares....... 2,960,477 2,969,215 2,969,215
Earnings per Common Share... $ 0.70 $ 1.73 $ 1.78
========== ========== ==========
Dividends Paid
per Common Share.......... $ 1.28 $ 1.26 $ 1.23
Book Value of Common Stock.. $ 13.88 $ 14.52 $ 14.06
Total Assets................ $ 136,844 $ 133,678 $ 128,384
Long-Term Debt.............. $ 43,267 $ 43,508 $ 43,733
Redeemable Preferred Stock.. $ 445 $ 456 $ 503
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
Operating Revenues: 1994 1993
<S> <C> <C>
Electric
- Residential........... $ 23,991 $ 22,833
- Comm. & Ind.-Small.... 17,151 16,044
- Comm. & Ind.-Large.... 11,256 11,098
- Other................. 6,839 7,359
- Provision for Rate
Refunds............. 71 144
Miscellaneous............. 3,222 3,993
__________ __________
Total............... 62,530 61,471
__________ __________
Operating Expenses:
Operation................. 36,232 36,900
Maintenance............... 4,005 3,241
Depreciation and
Amortization............ 5,514 5,627
Taxes Other Than Income
Taxes................... 4,514 4,887
Income Taxes.............. 2,688 2,527
__________ __________
Total............... 52,953 53,182
__________ __________
Operating Income............ 9,577 8,289
Other Income................ (70) 2,532
__________ __________
Income Before Interest
Charges................... 9,507 10,821
Interest Charges............ 4,047 3,977
Pref. Dividends of Sub...... 29 33
__________ __________
Net Income.................. $ 5,431 $ 6,811
========== ==========
Average Common Shares....... 2,981,996 3,038,613
Earnings per Common Share... $ 1.82 $ 2.24
========== ==========
Dividends Paid
per Common Share.......... $ 1.19 $ 1.17
Book Value of Common Stock.. $ 13.52 $ 12.92
Total Assets................ $ 123,181 $ 124,440
Long-Term Debt.............. $ 43,942 $ 44,156
Redeemable Preferred Stock.. $ 576 $ 649
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
__________________________________________________________
RESULTS OF OPERATIONS
Upper Peninsula Energy Corporation (the company) is the parent of
Upper Peninsula Power Company (UPPCO), an electric utility, and two
nonutility subsidiaries. The utility operations of UPPCO are the primary
source of earnings.
Earnings
Earnings per share in 1997 were $.70, compared with $1.73 in 1996 and
$1.78 in 1995. The decrease in earnings is mainly attributable to the
expensing of merger-related costs, which decreased earnings by $.60 per
share, and an employee benefit "curtailment" loss associated with the
termination of the Presque Isle Power Plant operating agreement, which
reduced earnings by $.38 per share. Earnings declined 2.8% in 1996 because
of a full-year impact of a 5.7% reduction in retail rates in April 1995 and
a decline in large-industrial sales, offset by a reduction in maintenance
expenditures.
Sales and Revenues
The majority of operating revenues come from the sale of electricity
based on rates authorized by the Michigan Public Service Commission (MPSC)
and the Federal Energy Regulatory Commission (FERC). Over the past three
years, approximately 90% of energy sales revenues were under the
jurisdiction of the MSPC.
Fluctuations in revenues occur because of changes in rates, power
supply costs, number of customers, weather, and energy-consumption trends.
Power supply cost recovery matches fuel and purchased-power cost changes and
does not affect earnings.
In 1997, operating revenues were 3.1% higher than in 1996 mainly
because of higher per-unit power supply costs. A 2.9% increase in sales
during 1997 had little impact on overall revenues, as gains were realized in
low unit price categories with decreases in higher price categories.
Operating revenues in 1996 were 4.6% lower than in 1995 because of lower
power supply costs, reduced sales, and the April 1995 retail rate reduction.
Sales of electric energy accounted for 93.1% of operating revenues in
1997. Electric sales in 1997, 1996, and 1995 were 845,377 MWh, 821,311 MWh,
and 846,951 MWh, which included 27,808 MWh, 12,370 MWh, and 39,816 MWh,
respectively, sold at a non-firm emergency rate for certain large-industrial
customers.
Excluding emergency sales, 1997 and 1996 energy sales were up 1.1% and
0.2%, respectively. During 1997, sales grew in both the Commercial &
Industrial-Small and Large categories, offsetting a decline in energy
consumption by residential and wholesale customers because of mild winter
weather. In 1996, there was a general rise in sales, with the exception of
large industrials due in large part to the closure of the K. I. Sawyer Air
Force Base in September 1995.
Sales to the Air Force at the former K. I. Sawyer base site accounted
for $536,000, $672,000, and $1,406,000 of revenues in 1997, 1996, and 1995,
respectively. New load continues to develop on the base site.
Customers with firm energy requirements exceeding 20,000 MWh in either
of the past two years were:
<TABLE>
<CAPTION>
1997 1996 %
MWh MWh Change
<S> <C> <C> <C>
Stone Container Corporation 74,447 62,053 20.0
City of Gladstone 30,500 30,471 0.1
Michigan Technological
University 27,168 25,992 4.5
City of Negaunee 22,504 22,741 -1.0
Ontonagon R.E.A. 20,778 20,825 - .2
</TABLE>
Operating Expenses
Operating expenses increased 8.9% in 1997 following a 4.5% decline in
1996.
Power supply costs (fuel and purchased power) accounted for 39.4%,
37.0%, and 38.7% of operating expenses in 1997, 1996, and 1995,
respectively. Power supply costs change depending on overall system energy
requirements, unit production costs for generation, and purchased-power
rates. Purchased power represented 84.5%, 80.8%, and 84.1% of output to
lines in 1997, 1996, and 1995, respectively. The percentage of UPPCO's
energy requirements purchased in 1997 returned to a more normal level. In
1996, hydro generation increased 23.1% because of record snowfalls and a
late spring.
Power supply costs increased 15.8% in 1997 following an 8.7% decrease
in 1996. These expenses were above last year's because of increased energy
requirements and a 10.9% rise in cost per KWH. The higher per-unit cost was
due to regional shortages of non-firm energy caused by extended outages at
three Midwest nuclear facilities and the aforementioned return to normal
hydro generation. In 1996, the per-unit power supply cost decreased 8.2%
because of higher hydro generation and reduced purchased-power costs.
Operation expenses, exclusive of power supply costs, were 17.2% higher
in 1997 because of merger-related costs and the employee benefit
"curtailment" costs associated with the termination of the Presque Isle
Power Plant operating agreement. Otherwise, 1997 operation expenses were
generally lower because of reduced costs associated with fewer employees.
In 1996, other operation expenses were 1.6% above the prior year as
increased outside service needs associated with the changing regulatory
climate and other strategic changes more than offset the financial impact of
a reduced work force.
In 1997, maintenance expenses decreased 10.5% because of reduced
production plant expenditures. Maintenance costs were 23.6% lower in 1996
because of reduced tree-trimming and lower production plant expenses.
Depreciation and amortization expense increased by 5.7% in 1997 due to
additions to plant in service. In 1996, this expense declined by 2.3%
because of an increase in the estimated service life of the Victoria hydro
facility.
Ad Valorem taxes increased 5.2% and 6.8% in 1997 and 1996,
respectively, due to additional plant in service.
Total interest charges increased 12.0% in 1997 and 1.9% in 1996 due to
additional short-term borrowing requirements.
FUTURE OUTLOOK
On July 10, 1997, the company 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.
The company's shareholders approved the merger on January 29, 1998. The
merger is subject to (1) approval by FERC; (2) the expiration or termination
of the waiting period applicable to the merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976; (3) receipt by the parties of an opinion
of counsel that the exchange of stock qualifies as a tax-free transaction;
(4) receipt by the parties of appropriate assurances that the transaction
will be accounted for as a pooling of interests; and (5) the satisfaction of
various other conditions. The merger is expected to be completed in the
second half of 1998. The company will merge with and into WPSR, and UPPCO
will become a wholly owned subsidiary of WPSR.
Under the terms of the merger agreement, each share of the company's
outstanding common stock (no par value) will be converted into 0.90 shares
of WPSR common stock ($1.00 par value).
The restructuring process in Michigan continued to be debated
throughout 1997. The Michigan Public Service Commission's order detailing
its direct access program was issued in June. Utilities had to file
proposals for the structuring and implementation of the program within their
own systems. The state's two largest utilities, which have been working
with the open access concept for over five years, will be the first to offer
customers a choice of power supplier. The phased-in programs of these
utilities will begin in 1998 with recovery of stranded costs and
implementation costs from customers choosing to purchase energy from a
provider other than their host utility.
UPPCO, along with most smaller utilities, requested a delayed schedule
to begin its program. Discussions will begin soon to finalize the plans for
customer choice in the Upper Peninsula. Some details of the direct access
plans for the larger utilities will have to be modified to fit the
operations of small utilities.
At this time, it appears that the open access program for utilities
our size will phase in starting in the year 2000 and be fully implemented by
2004.
In its Order 888, FERC required each utility with transmission lines
that could potentially be used for buying or selling wholesale energy to
file an open-access tariff for transmission services. This tariff
"unbundles" or isolates transmission services from the complete delivery
packages that make up most utility rates. Order 888 also defines the terms,
conditions, and rates for transmission services to be provided by
transmission-system owners. We filed our tariff in January 1997, then
slightly modified it in July.
Another FERC order would have required us to separate our power
marketing function from our transmission operations and planning function
and to post our transmission capacity availability and tariff rates on an
electronic bulletin board via the Internet. We requested and were granted a
waiver from these requirements because of our small size and the additional
expense involved with compliance.
Management believes that UPPCO meets the criteria of Statement of
Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects
of Certain Types of Regulation," and that all regulatory assets are probable
of recovery. In the event UPPCO no longer meets the criteria of SFAS 71,
such regulatory assets would be removed.
The company has entered into an agreement with the Michigan Department
of Natural Resources to monitor groundwater surrounding the John H. Warden
Station ash landfill, which was closed in 1994. Such monitoring is to be
performed over a 30-year period. At December 31, 1997, the company has
recorded an estimated liability of $633,000, offset by a regulatory asset of
$633,000 being amortized over the monitoring period.
Under contract with Wisconsin Electric Power Company (WEPCO), UPPCO
had operated WEPCO's Presque Isle Power Plant in Marquette, Michigan, since
1988. Under the terms of the agreement, UPPCO received a management fee
plus reimbursement for costs associated with labor and other services
provided. This contract terminated on December 31, 1997. All employees at
the plant were offered employment by WEPCO. UPPCO and WEPCO have entered
into an agreement in which post-contract retirement benefit responsibilities
are delineated. This event is considered a partial "curtailment" per SFAS
88, "Employers Accounting for Settlements and Curtailments of Defined
Pension Plans and for Terminated Benefits." Therefore, the company had to
reflect a curtailment expense of $1,541,000 in its 1997 financial results.
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.
LIQUIDITY AND CAPITAL RESOURCES
The company's cash needs are principally for construction expenditures
and debt retirement. Cash is generated through internal operations and
external financing.
To meet short-term cash needs, credit agreements are maintained with
certain banks. These agreements are reviewed annually in the second quarter
of the year. When short-term borrowings grow beyond normal seasonal
requirements, they are replaced with long-term financing. The company had
$9,500,000 of short-term notes outstanding at December 31, 1997, and had
$4,000,000 of unused lines of credit available at or below the prime rate.
Substantial cash flows are generated annually from operating
activities. Net cash from this source was $6,592,000 in 1997, $11,475,000
in 1996, and $13,101,000 in 1995.
During the three-year period 1995 through 1997, there were no long-
term financing activites.
Investment activities from 1995 through 1997 totalled $29,063,000 of
capital expenditures, of which $6,769,000 was spent on a transmission line
project (Chandler) to improve service to Delta County. This project was
completed in 1997. Other utility expenditures were primarily for
distribution and transmission improvements, new service requests, and
equipment replacement.
Utility capital expenditures are expected to be $4,300,000 in 1998.
Cash requirements will be met primarily with short-term borrowings and
internally generated funds.
In 1999 through 2002, the company is forecasting $22,000,000 of
capital expenditures for system improvements and replacements. The company
estimates that almost all cash requirements will be internally generated.
Due to its capital-intensive nature, the utility industry is
influenced by inflation. UPPCO's current utility regulation recognizes only
original-cost rate base. However, assuming the continued ability to bill
customers for increases in power supply costs and the receipt of adequate
and timely rate relief, UPPCO will recover cost escalations caused by
inflation.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
_______________________________________________________
Not Applicable
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
____________________________________________________
The following independent auditors' report and consolidated financial
statements of the registrant for the year ended December 31, 1997, are
included herein:
Independent Auditors' Report dated February 6, 1998.
Consolidated Statements of Income--Years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows--Years ended December
31, 1997, 1996 and 1995.
Consolidated Balance Sheets--December 31, 1997 and 1996.
Consolidated Statements of Changes in Common Equity--Years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Capitalization--December 31, 1997
and 1996.
Notes to Consolidated Financial Statements--December 31, 1997.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the
financial statements and representations in this annual report. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles as applied to regulated utilities
and necessarily include some amounts that are based on informed judgements
and best estimates of management.
To meet its responsibilities with respect to financial information,
management maintains and enforces a system of internal accounting controls
designed to provide assurance, on a cost-effective basis, that transactions
are carried out in accordance with management's authorizations and assets
are safeguarded against loss from unauthorized use or disposition.
Management believes the Company's accounting policies and controls prevent
material errors and irregularities and allow employees in the normal course
of their duties to detect inaccuracies within a timely period.
Directors who are not officers or employees make up the Audit
Committee of the Board of Directors. The committee meets with management,
the internal auditor, and the Company's independent auditors to discuss
auditing, internal accounting controls, and financial reporting matters.
The independent auditors and internal auditor have free access to the
committee, without management's presence, to discuss the results of their
audits.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Upper Peninsula Energy Corporation
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Upper Peninsula Energy Corporation and its subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in common equity, and cash flows for each of the three years
in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in Item 14. These financial statements
and financial statement schedule are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Upper Peninsula Energy
Corporation and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
Davenport, Iowa
February 6, 1998
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Operating Revenues-Electric. $ 55,952 $ 54,257 $ 57,265
-Other.... 4,152 4,045 3,840
__________ __________ __________
Total................. 60,104 58,302 61,105
__________ __________ __________
Operating Expenses:
Operation - Power Supply
Costs.................... 21,128 18,245 19,973
-Other.......... 17,413 14,863 14,622
Maintenance............... 2,664 2,976 3,897
Depreciation and Amorti-
zation................... 5,900 5,584 5,718
Federal Inc. Tax Expense.. 1,620 2,778 2,745
Taxes Other Than Federal
Income Taxes-Ad Valorem. 3,677 3,495 3,274
-Other....... 1,250 1,308 1,360
__________ __________ __________
Total................. 53,652 49,249 51,589
__________ __________ __________
Operating Income............ 6,452 9,053 9,516
__________ __________ __________
Other Income (Deductions):
Interest Income........... 162 84 57
Allowance for Equity Funds
Used During Construction. 25 116 10
Other..................... 279 97 (285)
Federal Income Taxes...... (216) (80) 59
__________ __________ __________
Total................. 250 217 (159)
__________ __________ __________
Income Before Int. Charges.. 6,702 9,270 9,357
__________ __________ __________
Interest Charges:
Int. on Long-Term Debt.... 3,868 3,887 3,905
Amort. of Debt Expense.... 74 75 75
Other Interest Expense.... 738 326 73
Allowance for Borrowed
Construction Funds....... (67) (171) (12)
__________ __________ __________
Total................. 4,613 4,117 4,041
__________ __________ __________
Income Before Dividends on
Preferred Subsidiary....... 2,089 5,153 5,316
Dividends on Preferred Stock
of Subsidiary.............. 22 23 25
__________ __________ __________
Net Income.................. $ 2,067 $ 5,130 $ 5,291
========== ========== ==========
Average Number of Common
Shares Outstanding......... 2,960,477 2,969,215 2,969,215
Earnings Per Share of
Common Stock............... $ 0.70 $ 1.73 $ 1.78
Dividends Paid Per Share of
Common Stock............... $ 1.28 $ 1.26 $ 1.23
</TABLE>
_________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income...................................... $ 2,067 $ 5,130 $ 5,291
Adjustments to reconcile Net Income to Net Cash
Flows from Operating Activities:
Depreciation and Amortization................. 5,900 5,584 5,718
Dividends on Preferred Stock of Subsidiary.... 22 23 25
Allowance for Equity Funds Used During
Construction................................. (25) (116) (10)
Deferred Federal Income Taxes................. (303) 136 658
Investment Tax Credit......................... (182) (183) (184)
Prepaid and Accrued Pension................... (1,116) (540) 308
Accrued Postretirement........................ 1,472 897 504
Other......................................... 1,193 819 294
Changes in Current Assets and Liabilities:
Accounts Receivable........................... (1,915) 350 (600)
Inventories................................... 50 135 87
Prepayments................................... 26 55 268
Accrued Ad Valorem Taxes...................... (227) (200) (140)
Accounts Payable and Accrued Accounts......... (370) (615) 882
_______ ________ ________
Cash Flows from Operating Activities.............. 6,592 11,475 13,101
_______ ________ ________
Cash Flows from Investing
Activities:
Plant, Property and Investment Additions
(excluding Allowance for Funds Used
During Construction)........................... (6,027) (13,010) (9,560)
Allowance for Borrowed Funds Used During
Construction................................... (67) (171) (12)
Other-Net....................................... (544) 250 78
_______ ________ ________
Cash Flows from Investing Activities.............. (6,638) (12,931) (9,494)
_______ ________ ________
Cash Flows from Financing
Activities:
Repurchase of Common Stock...................... (379)
Retirement of Long-Term Debt and Preferred
Stock.......................................... (252) (272) (282)
Dividends....................................... (3,816) (3,757) (3,663)
Increase in Notes Payable....................... 4,500 4,300 700
_______ ________ ________
Cash Flows from Financing Activities.............. 53 271 (3,245)
_______ ________ ________
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... 7 (1,185) 362
Cash and Cash Equivalents at the Beginning of
the Year......................................... 2,064 3,249 2,887
_______ ________ ________
Cash and Cash Equivalents at the End of the Year.. $ 2,071 $ 2,064 $ 3,249
======= ======== ========
Supplemental Cash Flow Information:
Interest Paid................................... $ 4,580 $ 4,163 $ 4,077
Income Taxes Paid............................... $ 1,992 $ 2,475 $ 2,150
</TABLE>
_________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Thousands of Dollars)
December 31 1997 1996
<S> <C> <C>
ASSETS
Utility Plant:
Electric Plant in Service:
Production......................... $ 35,609 $ 35,556
Transmission....................... 52,068 43,960
Distribution....................... 73,671 71,175
General............................ 17,595 14,695
________ ________
Total Electric Plant in Service.. 178,943 165,386
Less Accumulated Depreciation and
Amortization........................ 80,993 75,970
________ ________
Net Electric Plant in Service.... 97,950 89,416
Construction Work in Progress........ 4,510 14,526
________ ________
Net Utility Plant................ 102,460 103,942
________ ________
Other Property and Investments......... 11,387 9,942
________ ________
Current Assets:
Cash and Cash Equivalents............ 2,071 2,064
Accounts Receivable:
Electric (less allowance for
doubtful accounts of $70 in
1997 and $65 in 1996)............. 4,300 4,492
Other.............................. 3,215 1,984
Revenue Receivable - Power Supply
Cost Recovery - Net................. 876
Inventories - at average cost:
Materials and Supplies............. 1,968 2,030
Fuel............................... 286 274
Prepayments.......................... 279 305
Accrued Ad Valorem Taxes............. 3,867 3,640
Deferred Federal Income Taxes........ 642 1,227
________ ________
Total............................ 17,504 16,016
________ ________
Deferred Debits and Other Assets:
Unamortized Debt Expense............. 466 508
Regulatory Assets.................... 1,305 1,424
Intangible Pension Plan Asset........ 2,998 1,595
Other................................ 724 251
________ ________
Total............................ 5,493 3,778
________ ________
$136,844 $133,678
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization: (See Consolidated
Statements of Capitalization)
Common Stock Equity................... $ 40,941 $ 43,118
Redeemable Preferred Stock (of
Upper Peninsula Power Company)...... 445 456
Long-Term Debt, less current
maturities.......................... 43,007 43,266
________ ________
Total............................ 84,393 86,840
________ ________
Current Liabilities:
Long-Term Debt Due Within One Year... 260 242
Notes Payable........................ 9,500 5,000
Accounts Payable..................... 4,096 4,182
Accrued Accounts:
Taxes - Ad Valorem................. 6,488 6,212
- Other...................... 112 27
Wages and Benefits................. 2,875 2,934
Interest........................... 910 965
Dividends.......................... 4 4
Revenue Payable - Power Supply Cost
Recovery - Net...................... 531
________ ________
Total............................ 24,245 20,097
________ ________
Deferred Credits:
Deferred Federal Income Taxes........ 6,035 6,923
Unamortized Investment Tax Credit.... 2,560 2,742
Customer Advances for Construction... 1,895 1,591
Accrued Pension...................... 3,590 3,303
Regulatory Liabilities............... 6,208 5,904
Postretirement Health and Life....... 5,229 3,780
Sick Leave Termination............... 2,033 1,965
Other................................ 656 533
________ ________
Total............................ 28,206 26,741
________ ________
Commitments and Contingencies $136,844 $133,678
======== ========
</TABLE>
_________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON EQUITY
<TABLE>
<CAPTION>
(Thousands of Dollars)
Common Common Total
Stock Stock Paid-In Retained Common
Shares ParValue Capital Earnings Equity
______ ________ _______ ________ ______
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.... 2,969,215 $ 15 $21,596 $18,531 $40,142
Stock Purchase Plan for
Employees-Cost of
Market Repurchase............ (60) (60)
Discount on the Purchase
of Redeemable Preferred
Stock........................ 1 1
Net Income.................... 5,291 5,291
Common Dividends - $1.23
per share.................... (3,637) (3,637)
_________ ____ _______ _______ _______
Balance at December 31, 1995.... 2,969,215 15 21,537 20,185 41,737
Stock Purchase Plan for
Employees-Cost of
Market Repurchase............ (15) (15)
Change to No Par Value
Common Stock................. (15) 15
Net Income.................... 5,130 5,130
Common Dividends - $1.26
per share.................... (3,734) (3,734)
_________ ____ _______ _______ _______
Balance at December 31, 1996.... 2,969,215 21,537 21,581 43,118
Stock Purchase Plan for
Employees-Cost of
Market Repurchase............ (71) (71)
Repurchase of Common
Stock........................ (19,214) (379) (379)
Net Income.................... 2,067 2,067
Common Dividends - $1.28
per share.................... (3,794) (3,794)
_________ ____ _______ _______ _______
Balance at December 31, 1997.... 2,950,001 $ $21,087 $19,854 $40,941
========= ==== ======= ======= =======
</TABLE>
_________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
(Thousands of Dollars)
December 31 1997 1996
<S> <C> <C>
COMMON STOCK EQUITY
Common Stock - No Par Value, authorized
5,000,000 shares, issued and outstanding:
2,950,001 shares in 1997 and 2,969,215
in 1996
Paid-In Capital............................. $21,087 $21,537
Retained Earnings........................... 19,854 21,581
_______ _______
Total Common Stock Equity............... 40,941 43,118
_______ _______
PREFERRED STOCK-UPPER PENINSULA POWER COMPANY
Cumulative Redeemable Preferred Stock - $100
Par Value, authorized 300,000 shares (issu-
able in series), issued and outstanding:
5.25% Series - 853 shares in 1997
and 964 shares in 1996................... 85 96
4.70% Series - 3,600 shares in 1997
and 1996................................. 360 360
_______ _______
Total Preferred Stock................... 445 456
_______ _______
LONG-TERM DEBT UPPER PENINSULA POWER COMPANY
First Mortgage Bonds:
7.94% Series due 2003...................... 15,000 15,000
10% Series due 2008........................ 6,000 6,000
9.32% Series due 2021...................... 18,000 18,000
Installment Sales Contract for Air
Pollution Control Equipment:
6.90% Term Bonds due 1999.................. 230 335
UPPER PENINSULA BUILDING DEVELOPMENT COMPANY
Senior Secured Note:
9.25% Note due 2011......................... 4,037 4,173
_______ _______
Total.................................... 43,267 43,508
Less - Amounts due within one year...... 260 242
_______ _______
Total Long-Term Debt..................... 43,007 43,266
_______ _______
TOTAL CAPITALIZATION.......................... $84,393 $86,840
======= =======
</TABLE>
__________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
The consolidated financial statements include the accounts of Upper
Peninsula Energy Corporation (UPEN), a holding Company incorporated in 1988
under the laws of the State of Michigan, and its wholly owned subsidiaries
(company). All significant intercompany balances and transactions have been
eliminated in consolidation.
UPEN's principal subsidiary, Upper Peninsula Power Company (UPPCO), is the
primary source of earnings. UPPCO, incorporated in 1947 under the laws of
the State of Michigan, is an electric utility engaged in the generation,
purchase, transmission, distribution, and sale of electric energy in the
Upper Peninsula of Michigan.
UPPCO supplies electric energy to approximately 48,000 customers in two-
thirds of Michigan's Upper Peninsula. UPPCO's service territory covers
4,460 square miles and has a population of about 130,000. Its service area
is contiguous except for a small area around the city of Iron River near the
northeastern Wisconsin border.
UPEN has two other subsidiaries. Upper Peninsula Building Development
Company owns the corporate headquarters building and leases it to UPPCO
under a twenty-year renewable lease. PENVEST, Inc., has investments in
communications and real estate.
The accounting records of UPPCO are maintained in accordance with the
Uniform System of Accounts prescribed by the Federal Energy Regulatory
Commission (FERC) and the Michigan Public Service Commission (MPSC).
Utility Plant
Plant is stated at original cost. The cost of property additions, including
replacements of units of property and betterments, is capitalized. Cost
includes contract labor, company labor, materials, allowance for funds used
during construction, and overheads. Expenditures for maintenance and
repairs of property and costs of replacing items determined to be less than
units of property are charges to operating expenses. The original cost of
property and the cost of removal, less salvage, are charged to accumulated
provision for depreciation when the property is retired. Substantially all
utility property is subject to lien and collateralized under first mortgage
bonds.
Regulatory Assets and Liabilities
UPPCO is subject to the provisions of Statement of Financial Accounting
Standard No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of
Regulation." Regulatory assets represent probable future revenue associated
with certain costs that will be recovered from customers through the
ratemaking process. Regulatory liabilities represent amounts previously
collected from customers that are refundable in future rates.
The following regulatory assets and (liabilities) were reflected in the
Consolidated Balance Sheets as of December 31:
<TABLE>
<CAPTION>
(Thousands of Dollars)
1997 1996
<S> <C> <C>
Regulatory Assets:
Loss on Reacquired Debt.............. $ 219 $ 252
Retiree Health Care.................. 453 483
Warden Ash Site Groundwater
Monitoring.......................... 633 689
_______ _______
Total.................................. $ 1,305 $ 1,424
======= =======
Regulatory Liabilities:
Investment Tax Credit................ $(1,319) $(1,412)
Tax Rate Changes..................... (4,889) (4,492)
_______ _______
Total.............................. $(6,208) $(5,904)
======= =======
</TABLE>
Based on prior and current rate treatment of costs, management believes it
is probable that UPPCO will continue to recover from ratepayers the deferred
charges described above.
Allowance for Funds Used During Construction (AFUDC)
AFUDC is defined in the applicable regulatory system of accounts as the net
cost, during the period of construction, of borrowed funds used for
construction purposes and a reasonable rate on equity funds when so used.
Allowance for borrowed funds used during construction also includes interest
capitalized on qualifying assets of nonutility subsidiaries. The cost-of-
borrowed-funds element of AFUDC is reported as a reduction of interest
expense, and the noncash equity portion is reported as other income. AFUDC
was capitalized on utility construction at a rate of 8.93% in 1997, 1996,
and 1995, as ordered by the MPSC.
Depreciation and Amortization
For financial statement purposes, the original cost of utility property is
depreciated by the straight-line method over its estimated service life.
UPPCO's depreciation for book purposes, approved by the MPSC and calculated
during each of the years ended December 31, 1997, 1996, and 1995, was
equivalent to approximately 3.5% of depreciable plant in 1997 and 1996 and
3.7% in 1995. For income tax purposes, accelerated methods of depreciation
are utilized.
Debt expense is amortized over the lives of the remaining debt issues.
Inventories
All inventories are valued at average cost.
Income Taxes
Deferred federal income taxes are provided for significant temporary
differences between book and taxable income.
Investment tax credits used to offset federal income taxes are being
amortized ratably over the estimated service lives of the related
properties.
Revenue and Expense Recognition
UPPCO utilizes monthly cycle billing and records revenue based on bills
rendered. Revenue is not accrued for energy delivered but unbilled at the
end of the year. Cost of service rendered is recognized as incurred.
UPPCO is required under Public Act 304 to receive MPSC approval each year to
recover projected fuel and purchased-power costs ("power supply costs") by
establishment of power supply cost recovery (PSCR) factors. These factors
are subject to annual reconciliation to actual costs and permit 100%
recovery of power supply costs. Any over-or-under-recovery is deferred on
the consolidated balance sheets, and such deferrals are relieved as refunds
or additional billings are made.
Risks and Uncertainties
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.
The company is party to two collective bargaining agreements with a union
representing approximately 74% of the company's employees. Both contracts
will expire in 1998 covering certain employees in most of the company's
locations. The company expects to negotiate with the union and to enter
into two new collective bargaining agreements. There can be no assurance,
however, that such agreements will be reached without a work stoppage. A
prolonged work stoppage affecting a substantial number of locations could
have a material adverse effect on results of the company's operations.
Statements of Cash Flows
For purposes of the statements of cash flows, all highly liquid investments
with original maturities of three months or less are considered to be cash
equivalents.
Earnings per Share
Earnings per share of common stock during each of the periods presented is
based on the weighted-average number of shares outstanding.
Reclassification
Certain items previously reported have been reclassified to conform to
current presentation in the financial statements.
2. Compensating Balances and Short-Term Borrowings
<TABLE>
<CAPTION>
(Thousands of Dollars)
Short-term borrowings were
as follows:
1997 1996
<S> <C> <C>
Maximum amount of short-term
borrowings outstanding during
the year......................... $10,500 $5,800
Average amount outstanding
during the year.................. $ 9,506 $3,405
Weighted-average interest
rate during the year............. 8.32% 8.05%
Weighted-average interest rate
on short-term borrowings
outstanding at year-end.......... 8.25% 8.00%
Notes payable outstanding at
December 31.... $ 9,500 $5,000
</TABLE>
The company's unused lines of credit available at December 31, 1997,
totalled $4,000,000. During the past three years, portions of demand
deposits maintained in lending banks were deemed to constitute compensating
balances but were not legally restricted. Because such compensating amounts
are based on average daily balances, cash is not restricted as of any one
day.
3. Other Accounts Receivable
Under contract with Wisconsin Electric Power Company (WEPCO), UPPCO staffed
and operated WEPCO's Presque Isle Power Plant located in Marquette, Michigan
through December 31, 1997, at which time the Presque Isle Plant operating
agreement was terminated. Under the terms of the contract, UPPCO received a
management fee plus reimbursement for all costs associated with labor and
other services provided. UPPCO had current receivables from WEPCO at year-
end 1997 and 1996 of approximately $2,177,000 and $1,165,000, respectively,
in connection with the aforementioned. UPPCO also has other contracts with
WEPCO generally relating to wheeling, and transmission maintenance. The
wheeling contract will continue through December 31, 1998, and the
transmission maintenance contract terminated December 31, 1997.
4. Common Stock
An Employee Stock Purchase Plan is available to all fulltime employees.
This plan allows employees, through payroll deductions, to purchase common
stock of the corporation twice each year at a price equal to 90% of the
average price that was in effect six months prior to the purchase date. The
plan allows for purchase of shares on the open market or the issuance of
reserved shares of the plan. As of December 31, 1997, there were 33,197
shares reserved for the plan.
On December 31, 1997, there were approximately 210 employees eligible to
participate in the employee stock purchase plan. On June 1, 1997, 154
employees purchased 7,066 shares at $15.30 per share, and on December 1,
1997, 159 employees purchased 5,751 shares at $17.32 per share.
A Dividend Reinvestment and Common Stock Purchase Plan (DRIP) provides for
automatic reinvestment of common dividends and allows shareholders quarterly
optional cash payments, within specific limits, for the purchase of
additional shares under the plan. Shares of common stock for the above
plans are purchased on the open market.
In July 1997, the Directors authorized and UPEN repurchased 19,214 shares of
its common stock on the open market at a cost of $379,359. That stock was
used to satisfy the terms of the 1995 Long-Term Stock Incentive Plan, in
which restricted stock was awarded in 1996 by the Compensation Committee to
ten positions selected by the committee as being eligible to participate.
Under terms of the merger agreement, all restricted stock of the company was
terminated. All 19,214 UPEN shares of common stock were cancelled and will
not be reissued.
5. Dividend Restriction
UPPCO's indentures relating to first mortgage bonds contain certain
limitations on the payment of cash dividends on common stock. Under the
most restrictive of these provisions, approximately $14,122,000 of
consolidated retained earnings was available at December 31, 1997, for the
payment of common stock cash dividends by UPEN.
6. Preferred and Preference Stock
UPPCO is obligated under the terms of the Preferred Stock Purchase
Agreements of the 5.25% and 4.70% of redeemable preferred stocks to annually
offer to purchase, at prices not to exceed $100 per share plus accrued
dividends, 3% of the maximum number of shares of each series issued, less
any shares theretofore purchased as a purchase-fund credit for such year,
and will offer to purchase, at $100 per share plus accrued dividends at May
1, 2002, all of the shares then outstanding under the above redeemable
preferred stock issues. All shares so purchased and surrendered shall be
cancelled and shall not be reissued. Maximum annual purchase-fund
requirements as to outstanding shares of redeemable preferred stock are
$75,000 for 1998 through 2002. At December 31, 1997, the optional
redemption prices per share of the 5.25% and 4.70% shares were $105.00 and
$101.00, respectively.
UPPCO has 1,000,000 shares of authorized but unissued $1 par value
preference stock, which may be divided into and issued in one or more series
from time to time as UPPCO's Board of Directors may direct. The preference
stock shall be junior to the preferred stock but in preference to the common
stock.
UPEN has 500,000 shares of authorized but unissued $.01 par value preferred
stock, which may be divided into and issued in one or more series from time
to time as UPEN's Board of Directors may direct.
7. Long-Term Debt
Amounts of long-term debt due in each of the five years subsequent to
December 31, 1997, aggregate approximately $260,000 for 1998, $884,000 for
1999, $720,000 for 2000, $683,000 for 2001, $1,553,000 for 2002 and
$39,167,000 thereafter.
As of December 31, 1997, the market value of UPEN's long-term debt was $51.3
million. This debt has a recorded value of $43.3 million.
8. Federal Income Taxes
Federal income taxes comprise the following:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Ended December 31
__________________________
1997 1996 1995
<S> <C> <C> <C>
Federal income tax-current....... $1,801 $2,276 $2,353
Deferred taxes-net............... 1 685 576
Investment tax credit deferred... (182) (183) (184)
______ ______ ______
Total federal income tax
expense-operations.............. 1,620 2,778 2,745
Federal income tax expense-other
income-current.................. 216 80 (59)
______ ______ ______
Total federal income tax expense. $1,836 $2,858 $2,686
====== ====== ======
</TABLE>
Federal income tax expense applicable to current operations differs from the
amount computed by applying the statutory rate on book income subject to tax
for the following reasons:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Ended December 31
_____________________________
1997 1996 1995
<S> <C> <C> <C>
Income tax at "statutory rate"... $ 1,374 $ 2,804 $ 2,801
Increases (reductions) in tax
resulting from:
Investment tax credit
amortization.................. (182) (183) (184)
Overheads capitalized
on books...................... (8) (8) (9)
Depreciation................... 186 241 101
Merger-related expenses........ 353
Miscellaneous items............ 113 4 (23)
_______ _______ _______
Total federal income tax
expense......................... $ 1,836 $ 2,858 $ 2,686
======= ======= =======
Effective income tax rate........ 46.8% 35.7% 33.6%
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items included in the company's net deferred tax
liability as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
(Thousands of Dollars)
1997 1996
<S> <C> <C>
Current:
Employee benefits.............. $ 719 $ 860
Unbilled revenue............... 587 511
Property taxes................. (449) (414)
Other.......................... (215) 270
________ ________
642 1,227
________ ________
Noncurrent:
Depreciation................... (10,211) (10,216)
Investment tax credit.......... 1,319 1,413
Employee benefits.............. 2,268 1,966
Other.......................... 589 (86)
________ ________
(6,035) (6,923)
________ ________
Total deferred taxes............. $ (5,393) $ (5,696)
======== ========
</TABLE>
9. Retirement Benefits
UPPCO has a noncontributory, defined-benefit pension plan, as amended,
covering full-time employees, subject to age and period-of-employment
conditions, that provides benefits based on years of service and employee
compensation. The current funding policy is to contribute to the plan
amounts necessary to comply with the funding provision of the Employee
Retirement Income Security Act of 1974 (ERISA). Contributions of
$2,159,000, $2,099,000 and $1,385,000, were made in 1997, 1996, and 1995,
respectively.
UPPCO has a noncontributory supplemental retirement plan for certain senior
management employees that provides for benefit payments over a fifteen-year
period to the participant upon retirement or to the participant's spouse
upon death prior to retirement. This retirement plan is non-funded, and
benefits are paid by UPPCO from its general assets.
In 1997 the company recognized a $1.1 million curtailment loss from the
termination of the Presque Isle Power Plant operating agreement.
Net periodic pension cost for accounting purposes for 1997, 1996, and 1995
included the following components:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Ended December 31
_____________________________
1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned
during period.................. $ 1,107 $ 1,055 $ 920
Interest cost on projected
benefit obligation............. 3,740 3,511 3,453
Actual return on assets......... (6,956) (3,589) (6,259)
Net amortization and deferral... 3,924 708 3,736
_______ _______ _______
Net periodic pension cost....... $ 1,815 $ 1,685 $ 1,850
Curtailment loss................ 1,095
_______ _______ _______
Total Cost...................... $ 2,910 $ 1,685 $ 1,850
======= ======= =======
</TABLE>
Net periodic pension expense includes amounts charged to WEPCO in connection
with the operation of the Presque Isle Power Plant of $582,000, $516,000,
and $673,000, for 1997, 1996, and 1995, respectively.
A reconciliation of the funded status of the plans to the amounts recognized
in the December 31 financial statements follows:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Funded Plan
December 31
______________________
1997 1996
Pension Plan
<S> <C> <C>
Vested benefit obligation.......... $48,973 $38,457
======= =======
Accumulated benefit obligation..... $51,726 $42,436
======= =======
Projected benefit obligation....... $53,957 $47,319
Plan assets at fair value.......... 49,201 40,228
_______ _______
Projected benefit obligation in
excess of plan assets............. (4,756) (7,091)
Unrecognized net asset existing at
January 1, 1987, being amortized
over 15.7 years................... (517) (629)
Unrecognized prior service cost.... 1,710 2,213
Unrecognized net loss.............. 4,036 4,894
_______ _______
Prepaid (accrued) pension cost..... $ 473 $ (613)
======= =======
Required minimum liability......... $ 2,998 $ 1,595
======= =======
</TABLE>
<TABLE>
<CAPTION>
(Thousands of Dollars)
Unfunded Plan
December 31
______________________
1997 1996
Supplemental Retirement Plan
<S> <C> <C>
Vested benefit obligation.......... $ 1,884 $ 949
======= =======
Accumulated benefit obligation..... $ 2,190 $ 1,340
======= =======
Projected benefit obligation-
not funded........................ $(1,418) $(1,563)
Unrecognized net obligation
existing at January 1, 1987,
being amortized over 15 years..... 95 125
Unfunded prior service cost........ 139 196
Unrecognized net loss.............. 41 145
_______ _______
Accrued pension cost............... $(1,143) $(1,097)
======= =======
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were 7.25% and 4.0% for 1997 and 7.5% and 4.0%
for 1996. The expected long-term rate of return on assets was 8.5%. Plan
assets consist principally of common stock of public companies, corporate
bonds, and U.S. government securities. Figures reported include benefits of
UPPCO employees assigned to the Presque Isle Power Plant.
UPPCO had a sick leave payback provision in its contract with bargaining
unit employees that provided for a lump-sum payment of accumulated sick days
upon termination at the then-current wage rate up to a maximum of 100 days.
This provision was changed in 1995 wherein the number of days and wage rate
were capped at the May 1, 1995, level, and the payment is due only upon
retirement. New hires will receive no such payments. Therefore, in 1995 a
curtailment gain of $168,000 was realized.
10. Postretirement Benefits Other Than Pension
UPPCO provides certain health care and life insurance benefits for retired
employees. Statement of Financial Accounting Standards No. 106 (SFAS 106),
"Employer's Accounting for Postretirement Benefits Other Than Pensions,"
requires the accrual of the cost of certain postretirement benefits other
than pensions over the active service life of the employee. UPPCO
previously recorded these costs on the pay-as-you-go (cash) basis.
Effective January 1, 1993, UPPCO adopted SFAS 106. In 1993 UPPCO received
MPSC approval in a general rate order to defer $574,000 in 1993 SFAS 106
postretirement health care costs as a regulatory asset to be amortized over
19 years to match rate recovery.
Net periodic postretirement benefits for accounting purposes in 1997, 1996,
and 1995 included the following components:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Ended December 31
__________________________
1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned
during the period.............. $ 308 $ 203 $ 169
Interest cost on accumulated
postretirement benefit
obligation..................... 1,276 1,107 946
Actual return on assets......... (61) (63) (42)
Net amortization and deferral... 756 605 547
______ ______ ______
Net cost........................ $2,279 $1,852 $1,620
Curtailment loss................ 356
______ ______ ______
Total Cost...................... $2,635 $1,852 $1,620
====== ====== ======
</TABLE>
In 1997 the company recognized a $356,000 curtailment loss from the
termination of the Presque Isle Power Plant operating agreement.
Net periodic postretirement expense includes amounts charged to WEPCO in
connection with the operation of the Presque Isle Power Plant of $920,000,
$610,000, and $545,000 for 1997, 1996, and 1995, respectively.
A reconciliation of the funded status of the plan to the amounts recognized
in the December 31 financial statements follows:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Ended December 31
______________________
1997 1996
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees........................ $ (5,962) $ (6,321)
Fully eligible active plan
participants................... (4,872) (5,637)
Other active plan participants.. (3,226) (3,265)
________ ________
Total............................. $(14,060) $(15,223)
Plan assets at fair value......... 970 620
________ ________
Accumulated postretirement benefit
obligation in excess of plan
assets........................... (13,090) (14,603)
Unrecognized obligation at
transition....................... 6,267 9,210
Unrecognized net gain ............ 1,594 1,613
________ ________
Accrued postretirement benefit
cost............................. $ (5,229) $ (3,780)
======== ========
</TABLE>
For measurement purposes, a 9.7% and 5.9% annual rate of increase in the per
capita cost of covered health care benefits for participants under age 65
and over age 65, respectively, were assumed for 1997; both of the rates were
assumed to decrease gradually to 5.0% after 2003 and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the assumed
health care cost trend rate by one (1) percentage point per year would
increase the accumulated postretirement benefit obligation as of December
31, 1997, by $1,764,974 and the aggregate of the service cost and the
interest cost components of the net periodic postretirement benefit cost for
the year then ended by $200,456.
The obligations disclosed as of December 31, 1997 and 1996, used a discount
rate of 7.25% and 7.5% respectively, to measure the accumulated
postretirement benefit obligation.
11. Commitments and Contingencies
UPPCO has a service schedule to a purchase-power agreement with Commonwealth
Edison that entitles UPPCO to purchase 55 MW of capacity through 1998.
UPPCO pays $225,000 per month for this entitlement.
The company is subject to various unresolved legal matters that arose in the
normal course of business. Although it is not possible to predict the
outcome of these legal actions, company management believes that these
actions will not have a material adverse effect on its financial position or
results of operations.
Cost of the construction program for 1998 is estimated to be $4,300,000. In
connection therewith, certain commitments have been made.
12. Quarterly Information (Unaudited)
The quarterly information has not been audited but in the opinion of the
company reflects all adjustments necessary for the fair statement of results
of operations for each period.
<TABLE>
<CAPTION>
(Thousands of Dollars)
Quarter Ended
____________________________________________
1997 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Operating revenues.... $ 16,303 $ 13,796 $ 14,893 $ 15,112
Operating income...... $ 2,864 $ 1,743 $ 989 $ 856
Net income.(loss)..... $ 1,924 $ 666 $ (147) $ (376)
Earnings per share.... $ .65 $ .22 $ (.05) $ (.12)
1996
Operating revenues.... $ 15,572 $ 13,810 $ 14,079 $ 14,841
Operating income...... $ 2,675 $ 2,031 $ 2,012 $ 2,335
Net income............ $ 1,695 $ 1,012 $ 1,002 $ 1,421
Earnings per share.... $ .57 $ .34 $ .34 $ .48
</TABLE>
The negative earnings in the third and fourth quarters of 1997 reflect the
expensing of merger-related costs and an employee benefit curtailment
associated with the termination of the Presque Isle Power Plant Operating
Agreement, respectfully.
13. Agreement to Merge with WPSR Resources Corporation
On July 10, 1997, 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) the
expiration or termination of the waiting period applicable to the merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (3) receipt
by the parties of an opinion of counsel that the exchange of stock qualifies
as a tax-free transaction; (4) receipt by the parties of appropriate
assurances that the transaction will be accounted for as a pooling of
interests; and (5) 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 following summary contains selected unaudited pro forma financial data
for the year ended December 31, 1997. The financial data should be read in
conjunction with the historical UPEN and WPSC consolidated financial
statements and related notes. The pro forma combined earnings per share
reflect the issuance of shares associated with the merger agreement
following.
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).
<TABLE>
<CAPTION>
Pro Forma
In thousands UPEN WPSR Combined
(except per-share data) (as reported) (as reported) (unaudited)
________________________________________________________________________
<S> <C> <C> <C>
Operating revenues...... $ 60,104 $ 878,340 $ 938,444
Net income.............. $ 2,067 $ 53,742 $ 55,809
Earnings per share...... $ 0.70 $ 2.25 $ 2.10
Assets at
December 31, 1997...... $136,844 $1,299,602 $1,435,804
Long-term obligations
at December 31, 1997... $ 43,007 $ 304,008 $ 347,015
</TABLE>
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.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
______________________________________________________
There are no disagreements on accounting and financial disclosures
between the Registrant and its accountants, Deloitte & Touche LLP.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
____________________________________________________________
The relevant information appearing under the captions, "Election of
Directors", "Directors' Compensation", and "Directors' and Committee
Meetings and Functions" in the Registrant's Proxy Statement (filed pursuant
to Regulation 14A) with respect to the Registrant's April 28, 1998 Annual
Meeting of Shareholders is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
________________________________
The relevant information appearing under the captions "Compensation
Committee Report on Executive Compensation", "Summary Compensation Table",
"Pension Plans", "Supplemental Retirement Plan", "Termination of Employment
and Change of Control Statement Arrangements" and "Other Compensation Plans
(filed pursuant to Regulation 14A) with respect to the Registrant's April
28, 1998 Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
_____________________________________________________________
The information appearing in the first paragraph under the caption
"Stock Outstanding, Voting Rights and Votes Required" and the material under
the caption "Election of Directors" in the Registrant's Proxy Statement
(filed pursuant to Regulation 14A) with respect to the Registrant's April
28, 1998 Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________________________________________________________
The information appearing under the caption "Transactions with
Management" in the Registrant's Proxy Statement (filed pursuant to
Regulation 14A) with respect to the Registrant's April 28, 1998 Annual
Meeting of Shareholders is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS
ON FORM 8-K
______________________________________________________________
(a) 1. List of financial statements:
Management's Responsibility for Financial Statements
Independent Auditors' Report dated February 6, 1998.
Consolidated Statements of Income--Years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows--Years ended
December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets--
December 31, 1997 and 1996
Consolidated Statements of Changes in Common Equity--
Years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Capitalization--
December 31, 1997 and 1996.
Notes to Consolidated Financial Statements
2. Schedule II Valuation and Qualifying Accounts and
Provisions--Years ended December 31, 1997, 1996 and 1995.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, or are included
in the information with the Annual Report to Shareholders and therefore have
been omitted.
3. List of Exhibits
Exhibit No. Description of Exhibit
__________ ______________________
( 3) Articles of Incorporation and Bylaws
3(a) --- Articles of Incorporation of Registrant
(Exhibit 3(i) to Registration
Statement No. 33-24066, filed on
August 30, 1988)
3(b) --- Bylaws of the Registrant
(Exhibit 3(ii) to Registration
Statement No. 33-24066, filed on
August 30, 1988)
[INSTRUMENTS TO WHICH UPPCO IS A PARTY]
3.1(a) --- 1980 Restated Articles of Incorporation
of UPPCO, Incorporating Amendments
No. 1, 2 and 3
(Exhibit 3.1(a) to Form 10-K, dated
March 27, 1991)
3.1(b) --- Bylaws of UPPCO as amended and
restated through June 8, 1988
(Exhibit 3.1(b) to Form 10-K, dated
March 29, 1989)
[INSTRUMENTS TO WHICH UPBDC IS A PARTY]
3.2(a) --- Certificate of Articles of Incorporation
of UPPCO dated January 18, 1989
(Exhibit 3.2(a) to Form 10-K, dated
March 28, 1990)
3.2(b) --- Bylaws of UPBDC
(Exhibit 3.2(b) to Form 10-K, dated
March 28, 1990)
[INSTRUMENTS TO WHICH PENVEST, INC. IS A PARTY]
3.3(a) --- Certificate of Articles of Incorporation
of PENVEST dated October 20, 1995,
(Exhibit 3.3(a) to Form 10-K, dated
March 27, 1997)
3.3(b) --- Bylaws of PENVEST, INC., (Exhibit 3.3(b)
to Form 10-K, dated March 27, 1997)
( 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
( 9) Voting Trust Agreement N/A
(10) Material Contracts
[INSTRUMENTS TO WHICH UPPCO IS A PARTY]
10.1(e)-8 --- Plant Operating Agreement, effective
June 1, 1988 between UPPCO and the
City of Escanaba
(Exhibit 10.1(e)-8 to Form 10-K dated
March 29, 1989)
10.1(e)-9 --- Interconnection Agreement, effective
June 1, 1988 between UPPCO and the
City of Escanaba
(Exhibit 10.1(e)-9 to Form 10-K dated
March 29, 1989)
10.1(e)-10 --- Dispatch Services Agreement, effective
September 8, 1988 between UPPCO and
the City of Escanaba
(Exhibit 10.1(e)-10 to Form 10-K dated
March 29, 1989)
10.1(f)-1 --- Contract among UPPCO and Board of Light
and Power of the City of Marquette,
Michigan, dated September 7, 1978 for
20 mW of capacity from City of
Marquette plant. (Exhibit 10.1(f) to
Form 10-K, dated March 28, 1990)
10.1(f)-2 --- Addendum to contract among UPPCO and
Board of Light and Power of the City of
Marquette, Michigan, dated February 16,
1982.
(Exhibit 10(f)-1 to Form 10-K, dated
March 26, 1982)*
10.1(g)-1 --- Power Plant Operating Agreement dated as
of December 31, 1987 by and among UPPCO
and WEPCO pertaining to operating the
Presque Isle Power Plant and certain
related facilities
(Exhibit 10(g)-1 to Form 10-K, dated
March 29, 1988)*
10.1(g)-1.1 --- Power Plant Operating Agreement dated as
of July 26, 1990 by and among UPPCO
and WEPCO pertaining to operating the
Presque Isle Power Plant and certain
related facilities
(Exhibit 1 to Form 10-Q, dated
August 10, 1990)
10.1(g)-2 --- Dispatch Agreement dated as of December
8, 1987 between UPPCO and WEPCO
pertaining to electric power dispatch
functions for the Presque Isle Power
Plant
(Exhibit 10(g)-2 to Form 10-K, dated
March 29, 1988)*
10.1(g)-2. --- Amendment No. 1 to Dispatch Agreement
dated as of October 31, 1990 between
UPPCO and WEPCO pertaining to electric
power dispatch functions for the
Presque Isle Power Plant
(Exhibit 1 to Form 10-Q, dated
November 12, 1990)
10.1(g)-3 --- Transmission Maintenance Agreement dated
as of December 31, 1987 between UPPCO
and WEPCO pertaining to the mainte-
nance of certain WEPCO transmission
and substation facilities
(Exhibit 10(g)-3 to Form 10-K, dated
March 29, 1988)*
10.1(g)-3.1 --- Amendment No. 1 to Transmission
Maintenance Agreement dated as of
October 31, 1990 between UPPCO and
WEPCO pertaining to the maintenance of
certain WEPCO transmission and sub-
station facilities
(Exhibit 2 to Form 10-Q, dated
November 12, 1990)
10.1(g)-4 --- Joint Use of Transmission Agreement
dated as of December 8, 1987 between
UPPCO and WEPCO
(Exhibit 10(g)-4 to Form 10-K, dated
March 29, 1988)*
10.1(g)-4.1 --- Amendment No. 1 to Joint Use of
Transmission Agreement dated as of
October 31, 1990 between UPPCO and
WEPCO (Exhibit 3 to Form 10-Q, dated
November 12, 1990)
10.1(g)-5 --- Amendment dated December 8, 1987 to
Interconnection Agreement dated April
9, 1974, as amended August 8, 1980 and
February 2, 1982, between UPPCO and
WEPCO
(Exhibit 10(g)-5 to Form 10-K, dated
March 29, 1988)*
10.1(g)-6 --- Joint Use and Facility Sharing Agreement
dated as of October 9, 1990 between
UPPCO and WEPCO
(Exhibit 10.1(g)-6 to Form 10-K, dated
March 27, 1991)
10.1(h)-1 --- Performance Incentive Plan for Officers
of UPPCO, effective January 1, 1990
(Exhibit 10.1(h)-1 to Form 10-K, dated
March 27, 1991)
10.1(i)-1 --- Power Supply Agreement dated August 7,
1997 between UPPCO and Commonwealth
Edison Company (Filed herewith)
10.1(j)-1 --- Settlement Agreement dated February 25,
1998 between UPPCO and Wisconsin
Electric Power Company (Filed herewith)
* 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
(12) Statements re computation of ratios N/A
(18) Letter re change in accounting principles N/A
(21) Subsidiaries of the registrant:
21(a) --- UPPCO, incorporated in 1947 under the
laws of the State of Michigan doing
business under the same name.
21(b) --- UPBDC, incorporated in 1989 under the
laws of the state of Michigan doing
business under the same name.
21(c) --- PENVEST, incorporated in 1995 under the
laws of the State of Michigan doing
business under the same name.
(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 (Filed herewith)
(24) Power of attorney N/A
(27) Financial Data Schedule
(Filed herewith)
(28) Information from reports furnished to state insurance
regulatory authorities. N/A
(b) No reports on Form 8-K have been filed during the fourth
quarter of 1997.
(c) The exhibits filed herewith are identified above.
(d) See Item (a)2 above.
(99) Additional Exhibits
99(a) --- Notice of Annual Meeting and Proxy
Statement with respect to
Registrant's April 28, 1998
Annual Meeting of Shareholders
(Filed March 23, 1998)
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) 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: March 17, 1998 /s/ B. C. Arola
__________________________________
B. C. Arola
Vice President, Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ L. Angeli 3/17/98 /s/ C. R. Fisher 3/17/98
_______________________________ ________________________________
L. Angeli, Director (Date) C. R. Fisher, Chairman (Date)
of the Board and President
(Principal Executive Officer)
/s/ S. S. Benedict 3/17/98 /s/ T. M. Strong 3/17/98
_______________________________ ________________________________
S. S. Benedict, Director (Date) T. M. Strong, Director (Date)
/s/ R. T. Ederer 3/17/98 /s/ R. A. Ubbelohde 3/17/98
_______________________________ ________________________________
R. T. Ederer, Director (Date) R. A. Ubbelohde, Director (Date)
SCHEDULE II
UPPER PENINSULA ENERGY CORPORATION AND SUBSIDIARIES
___________________________________________________
VALUATION AND QUALIFYING ACCOUNTS AND PROVISIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 and 1995
<TABLE>
<CAPTION>
_______________________________________________________________________________________________________
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
.......ADDITIONS.......
BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE AT
BEGINNING TO TO OTHER FROM CLOSE
DESCRIPTION OF YEAR INCOME ACCOUNTS(a) RESERVES(b) OF YEAR
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Valuation account deducted from
caption to which it applies -
accumulated provision for
doubtful accounts.............. $ 64,547 $147,600 $ 27,592 $169,411 $70,328
=====================================================================================================
YEAR ENDED DECEMBER 31, 1996
Valuation account deducted from
caption to which it applies -
accumulated provision for
doubtful accounts.............. $ 86,436 ($51,100) $114,904 $ 85,693 $64,547
=====================================================================================================
YEAR ENDED DECEMBER 31, 1995
Valuation account deducted from
caption to which it applies -
accumulated provision for
doubtful accounts.............. $110,545 $ 42,900 ($ 9,656) $ 57,353 $86,436
=====================================================================================================
<Fa> Recovery of accounts previously written off.
<Fb> Accounts written off.
_____________________________________________________________________________________________________
</TABLE>
EXHIBIT 10.1(i)-1
August 7, 1997
Mr. Neil D. Nelson
Vice President- Operations
Upper Peninsula Power Company
600 Lakeshore Drive
P.O. Box 130
Houghton, MI 49931-0130
Dear Mr. Nelson:
This letter is to confirm your verbal acceptance of our offer dated August
4, 1997, for the supply of Negotiated Capacity. Per our mutual agreement,
ComEd will add a provision to its offer making it contingent upon ComEd
obtaining Firm Transmission over ComEd's system and UPPCo obtaining Firm
Transmission over WEPCO's system as provided below. For ease of contract
administration, this offer dated August 7, 1997, restates and supersedes our
offer of August 4, 1997, and adds the transmission contingency provisions.
In response to your request for proposals, ComEd offers to supply Upper
Peninsula Power Company ("UPPCO") Negotiated Capacity at a 100% capacity
factor for the Supply Period starting January 1, 1998, and ending December
31, 1998, as follows:
<TABLE>
<CAPTION>
Transaction Contract
Contract Period Period Amount
--------------- ----------- ---------
<S> <C> <C>
January 1 - March 31, 1998 ATC 55 MW
April 1, - June 30, 1998 On-Peak 55 MW
Off-Peak 45 MW
July 1, - September 30, 1998 ATC 55 MW
October 1, - December 31, 1998 On-Peak 55 MW
Off-Peak 45 MW
</TABLE>
The Around the Clock (ATC) Transaction Period is defined as all hours of
every day. A Day shall be defined as the twenty-four hour period starting
at 12:00 Midnight. The On-Peak Transaction Period is defined as the period
starting 6:00 A.M. and ending 12:00 Midnight, Sunday through Saturday. The
Off-Peak Transaction Period is defined as the period starting at 12:00
Midnight and ending at 6:00 A.M. Sunday through Saturday. All times are
prevailing Eastern Time.
The Demand Charge shall be $4,100/MW-month and the Energy Charge shall be
$16.10/MWh.
If UPPCo timely accepts the offer, ComEd will sell and UPPCO will purchase
electric power and energy (referred to herein as "Negotiated Capacity") on
the terms and conditions set forth below. Such terms and conditions shall
constitute and govern the parties' agreement ("Agreement"). Negotiated
Capacity will be provided under this Agreement pursuant and subject to
ComEd's FERC Power Sales and Reassignment of Transmission Rights Tariff,
PSRT-1 (the "Tariff") including Power Sales Schedule 4, to the Tariff. The
terms and conditions contained herein are intended to be consistent with,
and supplemental to, the terms and conditions stated in the Tariff; however,
if there should nonetheless be any conflict between the terms and conditions
contained herein and the terms and conditions contained in the Tariff, the
applicable term or condition contained in the Tariff shall govern. Except
as provided herein, this Negotiated Capacity shall have the same degree of
firmness as Firm Power, Power Sales Schedule 1. In Power Sales Schedule 1,
the supply of Firm Power is subject to curtailment or interruption only in
extreme emergencies caused by events or circumstances beyond ComEd's control
and the supply shall be curtailed only in proportion to the amount that
ComEd's other non-interruptible load is curtailed. Thus, the supply of this
Negotiated Capacity shall have the same degree of firmness as ComEd's supply
to its native load.
UPPCO shall pay for the Contract Amount at the Demand Charge and the Energy
Charge for each hour of the Transaction Periods for the duration of the
Supply Period.
ComEd will make arrangements to deliver the Negotiated Capacity hereunder at
ComEd's point of interconnection with WEPCO. Further delivery of this
Negotiated Capacity from this delivery point shall be arranged and paid for
by UPPCO. Transmission of electricity under this agreement over ComEd's
transmission system will be provided on a firm basis and may be interrupted
by ComEd for any reason which permits ComEd to interrupt transmission
service provided to third parties under ComEd's FERC Open Access
Transmission Tariff ("OATT") as in effect from time to time. Failure to
deliver Negotiated Capacity under this agreement due to such an interruption
in transmission shall be deemed to be an event of force majeure excusing
performance.
This offer uses the current quote for Firm Point-to-Point transmission of
$1,400/MW-Month on the ComEd transmission system. Any increase in Firm
Transmission service charges incurred by ComEd above the quote of $1,400/MW-
Month will be passed on directly to UPPCO.
If Firm Transmission Service for delivery of this Negotiated Capacity over
WEPCO's system to UPPCO's system is unavailable to UPPCO, and UPPCO so
notifies ComEd no later than November 30, 1997, UPPCO may terminate this
Agreement by providing to ComEd such notice of unavailability.
If Firm Transmission Service for delivery of this Negotiated Capacity from
ComEd's system to WEPCO's system is unavailable to ComEd, and ComEd so
notifies UPPCO no later than November 30, 1997, ComEd may terminate this
Agreement by providing to UPPCO such notice of unavailability.
ComEd requires that the information in this proposal be kept confidential.
Applicable law may, however, require some form of public disclosure by ComEd
or UPPCO.
Please indicate that this is your understanding of our Agreement by signing
and returning this Agreement to the undersigned. If you desire to retain an
original copy of this Agreement, we will provide a duplicate original copy
upon request.
If you have any questions regarding this proposal, you may contact Fred
Hillger, (312)394-5913.
Very truly yours,
Robert E. Tyler
Bulk Power Marketing
Vice President
Agreed:
Upper Peninsula Power Company
By /s/ Neil D. Nelson
-----------------------------
Neil D. Nelson
Title Vice President-Operations
-------------------------
EXHIBIT 10.1(j)-1
SETTLEMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of December 31, 1997 by and between
Wisconsin Electric Power Company ("WE"), a Wisconsin corporation with its
principal office at 231 West Michigan Street, Milwaukee, Wisconsin 53203 and
Upper Peninsula Power Company ("UP"), a Michigan corporation with its
principal office at 600 Lakeshore Drive, Houghton, Michigan 49931.
RECITALS
--------
A. On December 31, 1987, WE purchased the Presque Isle Power Plant
and certain related facilities ("PIPP") all located in Marquette County,
Michigan from Upper Peninsula Generating Company ("UPGENCO").
B. Prior to its purchase by WE, the PIPP was operated by UP for
UPGENCO.
C. On December 31, 1987, WE and UP entered into a Power Plant
Operating Agreement ("PPOA"), whereby UP agreed to operate the PIPP for WE
pursuant to certain terms and conditions.
D. On July 26, 1990, WE and UP entered into a Presque Isle Plant
Operating Agreement ("PIPPOA") superseding the PPOA, whereby UP agreed to
continue operating the PIPP for WE pursuant to modified terms and
conditions.
E. By notice given December 12, 1996, WE terminated the PIPPOA
pursuant to its terms effective as of December 31, 1997.
F. Pursuant to the terms of the PIPPOA, WE has offered employment
to those employees of UP assigned to, physically located at, and then
performing services for UP at the PIPP as of the date of termination.
G. Prior to the notice by WE terminating the PIPPOA, a dispute has
arisen between the parties, as to the liability of WE to UP for certain
employee benefit costs for PIPP employees.
H. The parties have negotiated a resolution of this dispute and all
outstanding issues relating to the termination of the PIPPOA and now desire
to memorialize the full final and complete settlement they have reached.
WITNESSETH:
-----------
In consideration of the foregoing and the mutual promises herein
contained, the parties agree as follows:
1. Upon execution of this agreement, WE shall pay UP the sum of
$1,500,000.
2. UP shall have the sole responsibility, except as expressly
provided in paragraph 8 herein with regard to medical benefits and paragraph
9 herein with regard to benefits under UP's Supplemental Retirement Pay Plan
for Select Employees, for funding, and providing, in accordance with the
terms and conditions of the relevant UP benefit plan as from time to time
amended and in effect, any and all employee benefits, including without
limitation because of enumeration, pension, retiree life, retiree medical,
and vacation and/or sick leave benefits associated with its operation of the
PIPP for WE through December 31, 1997 under the PIPPOA.
3. Attached hereto as Exhibit "A" is a roster of persons employed
by the PIPP by UP who retired or terminated employment prior to December 31,
1997, indicating the UP health and/or life benefits to which they are or may
become entitled. UP warrants and represents that such roster is complete
and accurate and lists all former PIPP employees entitled or that may
become entitled to such benefits.
4. Attached hereto as Exhibit "B" is a roster of persons employed
at the PIPP by UP as of December 31, 1997 indicating the health and/or
benefits to which they are or may become entitled based on employment by UP
through December 31, 1997. UP warrants and represents that such roster is
complete and accurate and lists all employees who are entitled to or may
become entitled to such benefits.
5. UP will fund and continue to be responsible for administering
and paying all benefits due under the Restated Pension Plan for Employees of
Upper Peninsula Power Company as from time to time amended and in effect, or
any successor to such plan (collectively, the "Pension Plan"). UP shall be
solely responsible for funding the Pension Plan and for all benefit payments
to retirees and all other obligations under the Pension Plan, and shall
indemnify and hold WE harmless from any liability for funding such plan or
for such payments, obligations, or for any promises made by UP to its former
employees with respect to the Pension Plan.
6. UP shall be responsible for funding, administering and paying
all accrued but unused vacation and sick pay benefits due under its vacation
and sick pay plans. UP will be responsible for all administration and other
costs of paying accrued but unpaid vacation and sick pay benefits under the
UP vacation and sick leave plans, and shall indemnify and hold WE harmless
from any liability for such benefits or any of the administration or other
costs, or any promises made by UP to its former employees with respect to
UP"s vacation and sick leave plans.
7. With respect to retiree life insurance benefits for UP's former
PIPP employees:
(a) UP shall be responsible for funding, administering and
paying all benefits due under its retiree life insurance plan to its former
employees indicated on Exhibits "A" and "B" to the extent that such
employees are or become eligible to receive such benefits under the terms of
the UP retiree life insurance plan. UP will be responsible for all
administration and other costs of providing retiree life insurance benefits
under the UP retiree life insurance plan and shall indemnify and hold WE
harmless from any liability for such benefits or any of the administration
or other costs, or any promises made by UP to its former employees with
respect to benefits under the UP retiree life insurance plan.
(b) WE shall give those former employees of UP indicated on
Exhibit "B" and who become employed by WE on January 1, 1998, service credit
under the WE retiree life insurance plan for their years of service with UP
for purposes of determining whether the employee has completed the service
requirement for retiree life insurance benefits under the WE plan.
8. With respect to UP's medical benefits plan for its former PIPP
employees:
(a) UP will continue to fund and administer the plan and shall
be responsible for paying benefits due its former employees who are
indicated on Exhibits "A" and "B" to the extent that such employees are or
become eligible for medical benefits thereunder. UP will be responsible for
all administration and other costs of providing medical benefits, and shall
indemnify and hold WE harmless from any liability for funding such plan and
for benefits or any of the administration or other costs, or any promises
made by UP to its former employees with respect to benefits, under such
plan, except as provided in paragraphs 8(b) and (c) of this Agreement.
(b) Claims incurred by UP's former PIPP employees for services
rendered prior to January 1, 1998 and paid by UP in accordance with UP's
medical plan applicable to the PIPP employees shall be reimbursed by WE in
accordance with section 4.03(a) of the PIPPOA.
(c) For claims incurred by UP's fomer PIPP employees identified
on Exhibits "A" and "B" as being eligible for UP retiree medical benefits
for services rendered during a ten (10) year period beginning January 1,
1998 and ending December 31, 2007 and paid by UP in accordance with UP's
retiree medical plan applicable to such employees, WE shall reimburse UP for
claims incurred and actually paid by UP with respect to any year in
accordance with its retiree medical plan applicable thereto, in an amount
equal to 50% of the total amount of such claims, or the total amount by
which such claims exceed a fixed amount for that year, whichever is greater.
In either case the total amount of such claims shall be net of any premiums
received by UP from its former PIPP employees identified on Exhibits "A" and
"B". The fixed amount shall be $200,000 in 1998. Each year thereafter
through 2007 the fixed amount shall be increased to an amount equal to 105%
of the fixed amount for the previous year. Up shall invoice WE on a monthly
basis for WE's share of such claims, and WE shall pay such amount within ten
(10) business days following WE's receipt of UP's invoice. Interest on
unpaid and overdue amounts will accrue at the prime rate of interest as from
time to time established by M & I Marshal & Iisley Bank of Milwaukee,
Wisconsin. WE will not be responsible to UP for any reimbursement of claims
made and paid for services rendered after December 31, 2007 under UP's
retiree medical benefits plan.
(d) UP agrees that during the ten year period WE is obligated
to make payments under paragraph 8(c) above, UP shall maintain in force a
policy of stop loss insurance at its sole cost and expense but subject to
the reimbursement provisions of paragraph 8(c) and the remainder of this
paragraph 8(d), providing coverage for retiree medical claims for the former
PIPP employees as long as it maintains such insurance for its retiree
medical claims generally. The portion of the premium prorated on a per
capita basis attributable to the former PIPP employees identified on
Exhibits "A" and "B" shall be treated as a retiree medical claim paid by UP
that is subject to reimbursement by WE in accordance with paragraph 8(c)
above. Any amounts received by UP in accordance with any such stop-loss
policy shall be treated as a reduction in the amount of benefits paid by UP
for purposes of calculating the amount of WE's reimbursement obligation
under paragraph 8(c) above.
(e) UP shall offer former PIPP employees who are eligible for
UP retiree medical benefits and who are employed by WE beginning on January
1, 1998 the option to defer commencement of their UP retiree medical
benefits from the date on which such benefits otherwise would commence under
the UP retiree medical benefits plan to the employee's termination of his or
her employment with WE.
(f) At its expense, UP may attempt to reach an agreement with
Local Union 510 of the International Brotherhood of Electrical Workers AFL-
CIO ("Union") or with some or all of the former PIPP employees who were
represented by the Union, providing that those employees who retire from WE
after December 31, 2007, will not be eligible for UP retiree medical
benefits. WE will not interfere with UP's effort to obtain such agreement.
(g) UP agrees for itself and its successors not to enhance its
retiree medical plan as it relates to its former employees at the PIPP.
9. WE shall assume all obligations and pay the benefits due to
Stanley C. Rajala under UP's Supplemental Retirement Pay Plan for Select
Employees.
10. Except as to obligations created or modified by this Agreement,
any workers' compensation insurance adjustments made pursuant to the
agreement executed by WE on November 12, 1997 and by UP on November 17,
1997, and any payroll, sick pay and vacation payments (and related tax
obligations) made to or on behalf of PIPP employees for work performed or
paid time off through December 31, 1997, or other amounts due or to become
due under sections 4.01, 4.03 (except amounts due for Accrual Benefits),
7.01, 7.02, 7.03 or 11.05, or continuing obligations under sections 2.01,
8.02, 8.03, 10.01, 10.02 and 10.03, of the PIPPOA as of the date hereof, the
parties hereto hereby mutually release one another from any and all claims,
obligations or liabilities arising under or relating to PPOA or PIPPOA
specifically as follows:
(a) UP hereby releases WE, its affiliates, parent and
subsidiaries, and successors from and of any and all claims, obligations or
liabilities of whatever kind or nature, whether known or unknown arising
under or relating to the PPOA or PIPPOA, including but not limited to all
claims or obligations arising under UP employee benefit plans and
reimbursement of employee benefit payments under such plans, and arising
from and relating to any promises, express or implied, made by UP to its
former employees at the PIPP with respect to any employee benefits; and,
(b) WE hereby releases UP, its affiliates, parent and
subsidiaries, and successors, jointly and severally, from and of any and all
claims, obligations or liabilities of whatever kind or nature whether known
or unknown, arising under or relating to the PPOA or PIPPOA, including, but
not limited to, all claims or obligations arising from and relating to any
promises, express or implied, made by WE to PIPP employees with respect to
any employee benefits. WE hereby agrees to indemnify and hold UP harmless
from any liability or expense arising from or related to any promises,
express or implied, made by WE to PIPP employees with respect to any
employee benefits.
11. In its sole discretion WE shall have the right at all reasonable
times and at its expense to audit, inspect and examine the books and records
of UP relating to the employee benefits which are the subject of this
agreement, the payment of such benefits, and any reimbursement claim for
such payments. UP shall provide access to such books and records at all
reasonable times to any officer, employee, agent, or auditor designated by
WE to perform such audit, inspection or examination.
12. Nothing in this Agreement is intended, nor shall it be
construed, to confer any rights or benefits upon any person (including, but
not limited to, any employee or former employee at PIPP or any beneficiary
or dependent of any such employee or former employee) other than WE and UP
and their successors and assigns. The UP benefits that will or may be
provided to eligible former PIPP employees are subject to the terms and
conditions of the applicable employee benefit plans. Except as provided in
paragraphs 8(e) and 8(g) hereof, nothing in this Agreement limits UP's
authority and discretion with respect to the employee benefit plans that it
maintains, including, without limitation, UP's authority to amend, modify or
terminate any such plan.
13. Each of the parties acknowledges and represents to the other
that it has been fully advised by its own legal counsel and actuaries with
respect to this Agreement and that its approval is based solely upon its own
review of the terms and conditions hereof, and its own analysis of the
circumstances giving rise to this Agreement.
14. This Agreement and the enforcement thereof shall be governed by
the laws of the State of Michigan. The invalidity or unenforceability of
any provision of the Agreement shall not affect the validity or
enforceability of the remaining provisions thereof.
15. The parties represent and warrant to one another that their
respective approvals of the terms and conditions of this Agreement have been
duly authorized, and that this Agreement has been executed on their
respective behalves by persons acting in their official capacity and with
full authority.
16. This Agreement shall be binding upon each of the parties and any
successor to either of them by merger, consolidation, sale of assets or
otherwise.
17. For purposes of paragraphs 2,5,6,7 and 8 hereof, UP's obligation
to "fund" relevant UP benefits plans is not intended and shall not be
construed to limit UP's right, to the extent consistent with applicable law,
to pay plan benefits from general corporate assets without having
established a trust fund or other separate funding mechanism for the
provision of such benefits.
EXECUTED as of the day and year first written above.
WISCONSIN ELECTRIC POWER COMPANY
By: /s/ Kristine M Krause
--------------------------------
Kristine M. Krause
Vice President-Fossil Operations
UPPER PENINSULA POWER COMPANY
By: /s/ Burton C. Arola
--------------------------------
Burton C. Arola
Vice President-Finance, Treasurer
and Secretary
EXHIBIT A
Presque Isle Retirees as of 12-31-97
These retirees are drawing their pension as well as retiree life and medical
insurance benefits unless noted
1 Baker, Harold J.
2 Baker, Orville
3 Balbierz, John
4 Balzarini, Sally (1)
5 Barr, Donald J.
6 Belmore, Edward C.
7 Bianchi, Eugene
8 Brady, Stanely W. (2)
9 Brown, John T. Jr. (2)
10 Burns, Forrest A.
11 Cain, Clyde
12 Carlson, Judith (3)
13 Christian, Robert J.
14 Deegan, Gerard W.
15 DesJardins, Raymond J.
16 Engel, Norma A.
17 Gauthier, Jerry J.
18 Havel, Henry A. Jr.
19 Hughes, Timothy P. (2)
20 Johnson, Glenn M.
21 Kyllonen, Alex H.
22 Larson, Oscar E.
23 Mahalic, Thomas
24 Maki, Sulo A. (2)
25 McFadden, Cora A.
26 Pederson, Ronald G. (2)
27 Peterson, Signe (3)
28 Polini, Edmund
29 Prudom, Daryl T. (2)
30 Rajala, Stanley C.
31 Ranta, Donald L.
32 Rose, Francis W.
33 Saatio, Fred R.
34 Schneider, Karl M.
35 Scott, Elizabeth (1)
36 Sherbinow, Donald L.
37 Smart, Ronald (1)
38 Smith, Warren J. (1)
39 York, Charles M.
(1) Pensioner with no life or medical insurance;
(2) Pensioner with life benefit but no medical;
(3) Pensioner with medical but no life insurance.
Presque Isle
Terminated Vested Employees as of 12-31-97
These are terminated employees who will be eligible for retiree health care
if they wait until they reach their 85 points to begin drawing their pension
benefit.
1 Balzarini, Michael
2 Benckendorf, Roger A.
3 Heidtman, Gary
4 Morris, James
5 Smith, Richard S.
6 Stevenson, Paul B.
7 Surface, Lee A.
EXHIBIT B
Presque Isle Employees as of 12-31-97
These employees are terminated as of 12-31-97 and eligible for retiree
health and life insurance only if retired on 1-01-98. All others will be
eligible for health care only if they wait until they reach their 85 points
to begin drawing their pension.
1 Aho, Gene E.
2 Beauchaine, Joseph R.
3 Bedore, Raymond J.
4 Bocklund, Dennis
5 Boyer, Michael R.
6 Campeau, J.G. Bruce
7 Drysdale, James J., Jr.
8 DuBord, Michael
9 Gobert, Gary P.
10 Hauswirth, Wesley
11 Kangas, Stephen R.
12 Kovala, James E.
13 LaForais, Louis B.
14 Michaelson, Bruce E.
15 Miller, Michael J.
16 Mueller, David A.
17 Niemi, David N.
18 Olsen, David J. (Retiring 1-01-98)
19 Paveglio, Edward J.
20 Pekkala, Dennis E.
21 Peterson, Dennis A. (Retiring 1-01-98)
22 Racine, David G.
23 Rodgers, Richard
24 Roe, Albert
25 Rogers, Michael J.
26 Sheppard John
27 Thompson, David (Retiring 1-01-98)
These employees are laid-off as of 12-31-97 and eligible for retiree health
and life insurance only if they elect immediate retirement on or before 7-
01-98.
All others will be eligible for retiree health care only if they wait until
they reach their 85 points to begin drawing their pension.
28 Aho, Timothy A.
29 Amo, John D.
30 Anderson, Kenneth W.
31 Bannan, Robert (Retiring 1-01-98)
32 Barnhart, Paul T.
33 Beauchaine, Paul
34 Beerman, Gerald L. Jr. (Retiring 1-01-98)
35 Beltrame, Gary
36 Berry, Joseph W.
37 Bonanni, Michael P.
38 Borg, Terrance V. (Retiring 1-01-98)
39 Bourdage, George (Retiring 1-01-98)
40 Bower, Arthur C.
41 Brisson, William J., Jr.
42 Brunsman, John R.
43 Bucholtz, James H.
44 Carlson, William J.(Terminated as of 1-01-98)
45 Chaput, Michael B. (Retiring 1-01-98)
46 Chetto, Nicholas L.
47 Christian, Robert A.
48 Contois, Michael
49 Crnkovich, Anthony E.
50 Davey, James
51 Dore, Steven W.
52 Doucette, Milton G.
53 Drobny, James B.
54 Duquette, John W.
55 Fletcher, Edwin J. (Retiring 1-01-98)
56 Foster, Keith C.
57 Fradette, James L.
58 Frazee, Robert F.
59 Fredin, Raymond T. (Retiring 1-01-98)
60 Granroth, Russell J. (Retiring 1-01-98)
61 Grawn, Fredrick J. (Retiring 1-01-98)
62 Grutt, DuWayne K.
63 Gutzman, Gary W. (Retiring 5-01-98)
64 Hamalainen, Mary Gail
65 Hanner, James A. (Retiring 1-01-98)
66 Harris, Harold B., Jr. (Retiring 1-01-98)
67 Hart, Roger
68 Haupt, Michael S.
69 Hawes, Richard J. (Retiring 1-01-98)
70 Hokenson, Theodore H.
71 Holman, Peter R.
72 Hudson, Robert S. (Retiring 1-01-98)
73 Jacobson, Kenneth G. (Retiring 1-01-98)
74 Johns, Paul (Retiring 3-01-98)
75 Kapeller, William T.
76 Karna, David W.
77 Kauppila, Raymond P. (Retiring 1-01-98)
78 Kerekes, Joseph E. Jr. (Retiring 1-01-98)
79 Kipling, James A.
80 Kivisto, Elvin J.
81 Koski, Kevin J.
82 LaBine, Jerome
83 LaFave, Robert L., Jr. (Retiring 7-01-98)
84 Langford, Larry L.
85 Larsen, Richard R.
86 Larson, Paul D. (Retiring 1-01-98)
87 LaValley, William J.
88 Lawrence, John K.
89 LeSage, Gerald A. (Retiring 1-01-98)
90 Lillie, Philip W.
91 Lucas, Michael B.
92 Madosh, Peter J., Jr. (Retiring 1-01-98)
93 Marier, John
94 McAlpine, William H.
95 Miller, James I. (Retiring 1-01-98)
96 Morton, Richard (Retiring 2-01-98)
97 Nason, Stephen
98 Nomellini, Ross A.
99 Nosal, Charles J. (Retiring 1-01-98)
100 Nummela, Raymond
101 Parent, Leon J.
102 Parolini, Grace K. (Retiring 1-01-98)
103 Paveglio, Terry L.
104 Pompo, Danny L.
105 Provost, James
106 Renaud, James (Retiring 1-01-98)
107 Rosenlund, Geraldine L. (Retiring 1-01-98)
108 Schinella, Steven
109 Schneider, Theodore A.
110 Scott, Elizabeth
111 Serfas, Robert H.
112 Sheldon, Donald
113 Skutley, Ronald N. (Retiring 1-01-98)
114 Smith, Paul A.
115 Soli, Cynthia
116 Spencer, Russell W.
117 Steele, Roger
118 Sunne, Craig J. (Retiring 1-01-98)
119 Terzaghi, Louis M.
120 Trotochaud, James W.
121 Truscott, Terry C. (Retiring 1-01-98)
122 VanAbel, Roger
123 White, Duncan C.
124 Wiley, Janet M.
125 Williams, Gerald E.
126 Worthington, Robert T.
127 Zorza, Greg
PLEASE NOTE:
(1) All laid-off employees must pay a premium to UPPCO and retire on or
before 7-01-98 in order to have a life insurance benefit at retirement.
(2) All retired employees electing UPPCO's retiree health care will have
premiums to UPPCO waived for a maximum period of three years. At the end of
that period, retirees must pay premiums to UPPCO or coverage will be
terminated.
ARTICLE IX
AMENDMENTS
The shareholders entitled to vote may alter, amend, add to or repeal these
Bylaws.
EXHIBIT 21
LIST OF SUBSIDIARIES
UPPCO incorporated in 1947 under the laws of the State of Michigan doing
business under the same name.
UPBDC incorporated in 1989 under the laws of the State of Michigan doing
business under the same name.
PENVEST incorporated in 1995 under the laws of the State of Michigan doing
business under the same name.
EXHIBIT 23(a)
INDEPENDENT AUDITORS' CONSENT
Upper Peninsula Energy Corporation
We consent to the incorporation by reference in Registration Statement No.
2-83852 on Form S-8 of our report dated February 6, 1998, appearing in this
Annual Report on Form 10-K of Upper Peninsula Energy Corporation for the
year ended December 31, 1997.
Deloitte & Touche LLP
Davenport, Iowa
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 102,460
<OTHER-PROPERTY-AND-INVEST> 11,387
<TOTAL-CURRENT-ASSETS> 17,504
<TOTAL-DEFERRED-CHARGES> 5,493
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 136,844
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 21,087
<RETAINED-EARNINGS> 19,854
<TOTAL-COMMON-STOCKHOLDERS-EQ> 40,941
445
0
<LONG-TERM-DEBT-NET> 43,007
<SHORT-TERM-NOTES> 9,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 260
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 42,691
<TOT-CAPITALIZATION-AND-LIAB> 136,844
<GROSS-OPERATING-REVENUE> 60,104
<INCOME-TAX-EXPENSE> 1,620
<OTHER-OPERATING-EXPENSES> 52,032
<TOTAL-OPERATING-EXPENSES> 53,652
<OPERATING-INCOME-LOSS> 6,452
<OTHER-INCOME-NET> 250
<INCOME-BEFORE-INTEREST-EXPEN> 6,702
<TOTAL-INTEREST-EXPENSE> 4,613
<NET-INCOME> 2,089
22
<EARNINGS-AVAILABLE-FOR-COMM> 2,067
<COMMON-STOCK-DIVIDENDS> 3,794
<TOTAL-INTEREST-ON-BONDS> 3,868
<CASH-FLOW-OPERATIONS> 6,592
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
