<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1994
--------------
<TABLE>
<CAPTION>
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification Number
- - ------------- ----------------------------------- ---------------------
<S> <C> <C>
1-956 Duquesne Light Company 25-0451600
(A Pennsylvania Corporation)
One Oxford Centre
301 Grant Street
Pittsburgh, Pennsylvania 15279
Telephone (412) 393-6000
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ----
DQE is the holder of all shares of common stock, $1 par value, of Duquesne Light
Company consisting of 10 shares as of March 31, 1994 and April 30, 1994.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DUQUESNE LIGHT COMPANY
CONDENSED STATEMENT OF CONSOLIDATED INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Operating Revenues:
Sales of Electricity:
Customers $301,974 $296,768
Phase-in deferrals (24,820) (24,065)
Utilities 11,398 3,749
-------- --------
Total Sales of Electricity 288,552 276,452
Other 7,316 7,261
-------- --------
Total Operating Revenues 295,868 283,713
-------- --------
Operating Expenses:
Fuel and purchased power 61,668 53,981
Other operating expense 66,247 72,200
Maintenance expense 16,255 20,007
Depreciation and amortization 42,489 37,253
Taxes other than income taxes 21,934 21,992
Income taxes 26,181 19,743
-------- --------
Total Operating Expenses 234,774 225,176
-------- --------
OPERATING INCOME 61,094 58,537
-------- --------
Other Income and (Deductions):
Allowance for equity funds used during
construction 459 270
Interest and dividend income 1,666 1,663
Income taxes 967 (1,447)
Other - net (3,566) 2,081
-------- --------
Total Other Income and (Deductions) (474) 2,567
-------- --------
INCOME BEFORE INTEREST CHARGES 60,620 61,104
-------- --------
Interest Charges:
Interest on long-term debt and other interest 25,506 28,552
Allowance for borrowed funds used during
construction (378) (236)
-------- --------
Total Interest Charges 25,128 28,316
-------- --------
INCOME BEFORE CUMULATIVE EFFECT ON PRIOR
YEARS OF CHANGES IN ACCOUNTING PRINCIPLES 35,492 32,788
Adoption of SFAS 109 - Income taxes -- 8,000
Accounting for maintenance costs - net -- (5,425)
-------- --------
NET INCOME 35,492 35,363
DIVIDENDS ON PREFERRED AND PREFERENCE
STOCK 1,597 2,306
-------- --------
EARNINGS FOR COMMON STOCK $ 33,895 $ 33,057
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
2
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DUQUESNE LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Property, Plant and Equipment $ 4,570,485 $ 4,554,498
Less Accumulated Depreciation and Amortization (1,474,044) (1,435,732)
----------- -----------
Property, Plant and Equipment - Net 3,096,441 3,118,766
----------- -----------
Other Property and Investments 80,506 61,060
----------- -----------
Current Assets:
Cash and temporary cash investments 39,272 --
Receivables 107,837 139,759
Other current assets, principally materials and
supplies 116,917 99,808
----------- -----------
Total Current Assets 264,026 239,567
----------- -----------
Other Assets:
Extraordinary property loss 32,513 35,781
Unamortized loss on reacquired debt 93,956 95,266
Beaver Valley Unit 2 sale/leaseback premium 34,531 34,903
Deferred rate synchronization costs 51,149 51,149
Phase-in plan deferrals 3,801 28,621
Uncollected deferred income taxes 566,177 569,555
Deferred debits 157,056 162,798
----------- -----------
Total Other Assets 939,183 978,073
----------- -----------
TOTAL ASSETS $ 4,380,156 $ 4,397,466
----------- -----------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock - $1 par value (90,000,000 authorized,
10 shares issued) $ -- $ --
Capital surplus 824,738 805,755
Retained earnings 291,811 294,916
----------- -----------
Total Common Stockholder's Equity 1,116,549 1,100,671
----------- -----------
Non-redeemable preferred and preference stock 90,593 121,906
Redeemable preferred and preference stock -- 8,392
Non-redeemable preference stock, Plan Series A 29,956 29,956
----------- -----------
Total preferred and preference stock before
deferred ESOP benefit (involuntary liquidation
values of $120,414 and $160,117, exceed par
by $44,107 and $81,585, respectively) 120,549 160,254
Deferred employee stock ownership plan (ESOP) benefit (26,556) (27,126)
----------- -----------
Total Preferred and Preference Stock 93,993 133,128
----------- -----------
Long-term debt 1,416,513 1,416,705
----------- -----------
Total Capitalization 2,627,055 2,650,504
----------- -----------
Obligations Under Capital Leases 48,476 55,733
----------- -----------
Current Liabilities:
Notes payable -- 10,991
Current maturities and sinking fund requirements 44,348 45,741
Accounts payable 109,551 112,401
Accrued liabilities 106,449 63,530
Other current liabilities 43,786 46,544
----------- -----------
Total Current Liabilities 304,134 279,207
----------- -----------
Investment Tax Credits Unamortized 128,078 129,574
----------- -----------
Accumulated Deferred Income Taxes 1,134,281 1,145,782
----------- -----------
Deferred Credits 138,132 136,666
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $ 4,380,156 $ 4,397,466
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DUQUESNE LIGHT COMPANY
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1994 1993
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Operations $ 94,429 $ 87,119
Changes in working capital 52,123 (12,295)
Other - net 11,148 (3,754)
-------- --------
Net Cash Provided from Operating Activities 157,700 71,070
-------- --------
Cash Flows Used by Investing Activities:
Construction expenditures (19,428) (24,415)
Allowance for borrowed funds used during construction (378) (236)
Other - net (222) (1,006)
-------- --------
Net Cash Used by Investing Activities (20,028) (25,657)
-------- --------
Cash Flows Used in Financing Activities:
Sale of bonds -- 80,000
Reduction in notes payable (10,991) --
Dividends on capital stock (37,000) (40,554)
Reductions of long-term obligations (49,896) (87,204)
Other - net (513) (2,018)
-------- --------
Net Cash Used in Financing Activities (98,400) (49,776)
-------- --------
Net increase (decrease) in cash and temporary cash investments 39,272 (4,363)
Cash and temporary cash investments at beginning of period -- 6,156
-------- --------
Cash and temporary cash investments at end of period $ 39,272 $ 1,793
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. CONSOLIDATION AND RECLASSIFICATIONS
The condensed consolidated financial statements include the accounts of Duquesne
Light Company (Duquesne) and its wholly owned subsidiary. All material
intercompany balances and transactions have been eliminated in the preparation
of the condensed consolidated financial statements.
In the opinion of management, the unaudited condensed consolidated financial
statements included in this report reflect all adjustments that are necessary
for a fair presentation of the results of interim periods, and are normal,
recurring adjustments. Prior period financial statements were reclassified to
conform with the 1994 presentation.
These statements should be read with the financial statements and notes included
in the Form 10-K filed with the Securities and Exchange Commission for the year
ended December 31, 1993. The results of operations for the three months ended
March 31, 1994 are not necessarily indicative of the results which may be
expected for the full year.
2. RECEIVABLES
Components of Receivables for the periods indicated are as follows:
<TABLE>
<CAPTION>
Amounts in Thousands of Dollars
--------------------------------------
March 31, 1994 March 31, 1993 December 31, 1993
--------------- -------------- -----------------
<S> <C> <C> <C>
Electric customer accounts receivable $109,961 $118,451 $107,342
Other accounts receivable 42,150 33,900 54,699
Less: Allowance for uncollectible accounts (14,274) (9,351) (13,282)
-------- -------- --------
Receivables less allowance for uncollectible
accounts 137,837 143,000 148,759
Less: Receivables sold (30,000) (59,500) (9,000)
-------- -------- --------
Total Receivables $107,837 $ 83,500 $139,759
-------- -------- --------
</TABLE>
An arrangement between Duquesne and an unaffiliated corporation entitles
Duquesne to sell, and the corporation to purchase, up to $100 million of
Duquesne's accounts receivable. At March 31, 1994, Duquesne had sold $30.0
million of receivables to the unaffiliated corporation. The sales agreement
includes a limited recourse obligation under which Duquesne could be required to
repurchase certain of the receivables. The maximum amount of Duquesne's
contingent liability was $9.9 million at March 31, 1994. The current sales
agreement will expire in June of 1994.
3. EXTRAORDINARY PROPERTY LOSS
Duquesne abandoned its interest in Perry Unit 2 in 1986 and subsequently
disposed of its interest in 1992. In 1987, the Pennsylvania Public Utility
Commission (PUC) approved recovery, over a 10-year period, of Duquesne's
original $155 million investment in Perry Unit 2. Duquesne is not earning a
return on the as yet unrecovered portion (approximately $35.5 million at March
31, 1994) of its investment in the unit.
5
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4. INCOME TAXES
Since DQE's formation in 1989, Duquesne has filed consolidated federal income
tax returns with its parent and other companies in the affiliated group.
Federal income tax returns have been audited by the Internal Revenue Service and
closed for the tax years through 1989. Returns filed for the tax years 1990 to
date remain subject to IRS review. Duquesne does not believe that final
settlement of the federal tax returns for these years will have a material
adverse effect on its financial position or results of operations.
Effective January 1, 1993, Duquesne adopted the Statement of Financial
Accounting Standards Number 109 (SFAS No. 109). The cumulative effect on
prior years of $8 million was reported in 1993 as an increase in net income.
The SFAS No. 109 impact to 1993 income before cumulative effect of changes
in accounting principle was immaterial.
With respect to financial presentation of SFAS No. 109, Duquesne records the
amortization of uncollected deferred income taxes in depreciation and
amortization expense and reversals of accumulated deferred income taxes in
income tax expense.
5. RATE MATTERS
1987 Rate Case
In March 1988, the PUC adopted a rate order that increased Duquesne's annual
revenues by $232 million phased-in from April 1988 through April 1994.
Deficiencies which resulted from the phase-in plan in current revenues have been
included in the condensed consolidated income statement as deferred revenues.
Deferred revenues have been recorded on the balance sheet as a deferred asset
for future recovery. As customers were billed for deficiencies related to prior
periods, this deferred asset was reduced. As designed, the phase-in plan
provided for carrying charges (at the after-tax AFC rate) on revenues deferred
for future recovery. Duquesne has not recorded additional carrying charges on
the deferred revenue balance since April 1993. Duquesne has recovered
previously deferred revenues and carrying charges of $310.7 million as of March
31, 1994. The remaining phase-in plan deferral balance of $3.8 million at March
31, 1994 was recovered in April of 1994.
At this time, Duquesne has no pending base rate case and has no immediate plans
to file a base rate case.
Deferred Coal Costs
The PUC has established market price coal cost standards for all Pennsylvania
utilities that have interests in mines that supply coal to their generating
stations. Duquesne is subject to two such standards. One applies only to coal
delivered at the Mansfield plant. The other, the system-wide coal cost
standard, applies to coal delivered to the remainder of Duquesne's system. Both
standards are updated monthly to reflect prevailing market prices for similar
coal. The PUC has directed Duquesne to defer recovery of the delivered cost of
coal to the extent that such cost exceeds generally prevailing market prices, as
determined by the PUC, for similar coal. The PUC allows deferred amounts to be
recovered from customers when the delivered costs of coal fall below such PUC-
determined prevailing market prices.
In 1990, the PUC approved a joint petition for settlement that clarified certain
aspects of the system-wide coal cost standard and gave Duquesne options to
extend the standard throughMarch 2000. In December 1991, Duquesne exercised the
first of two options that extended the standard through March 1996. The
unrecovered cost of coal used at Mansfield amounted to $6.8 million and the
unrecovered cost of coal used throughout the system amounted to $6.8 million at
March 31, 1994. Duquesne believes that all deferred coal costs will be
recovered.
6
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Electric Operating Revenues
Duquesne is authorized by the PUC to recover fuel costs and purchased energy
costs through an Energy Cost Rate Adjustment Clause which is adjusted
annually. Revenues are adjusted for differences between recoverable fuel
costs and amounts actually recovered in current rates. Through the ECR,
Duquesne passes to its customers the profits from short-term sales to other
utilities.
Warwick Mine Costs
The 1990 joint petition for settlement (See preceding section on deferred coal
costs.) also recognized costs at Duquesne's Warwick Mine, which had been on
standby since 1988, and allowed for recovery of such costs, including the costs
of ultimately closing the mine. In 1990, Duquesne entered into an agreement
under which an unaffiliated company will operate the mine until March 2000 and
sell the coal produced. Production began in late 1990. The mine reached a full
production rate in early 1991. The Warwick Mine coal reserves include both high
and low sulfur coal; the sulfur content averages in the mid-range at 1.7 percent
- - - 1.9 percent sulfur content. More than 60 percent of the coal mined at Warwick
currently is used by Duquesne. Duquesne receives a royalty on sales of coal in
the open market. The Warwick Mine currently supplies less than one-fifth of the
coal used in the production of electricity at the plants owned or co-owned by
Duquesne.
Costs at the Warwick Mine and Duquesne's investment in the mine are expected to
be recovered through the cost of coal in the ECR. Recovery is subject to the
system-wide coal cost standard. Duquesne also has an opportunity to earn a
return on its investment in the mine through the cost of coal during the period
of the system-wide coal cost standard, including extensions. At March 31, 1994,
Duquesne's net investment in the mine was $23.1 million. The estimated
liability, including final site reclamation, mine water treatment and certain
labor liabilities, for mine closing is $33 million and Duquesne has collected
approximately $9.6 million toward these costs.
Property Held for Future Use
In 1986, the PUC approved Duquesne's request to remove the Phillips and most of
the Brunot Island (BI) power stations from service and place them in cold
reserve. Duquesne expects to recover its net investment in these plants
through future electric sales. Phillips and BI represent licensed,
certified, clean sources of electricity that will be necessary to meet
expanding opportunities in the power markets. Duquesne believes that
anticipated growth in peak load demand for electricity within its service
territory will require additional peaking generation. Duquesne looks to BI
to meet this need. The Phillips Power Plant is an important component in
Duquesne's strategy to identify and serve these opportunities for providing
bulk power service. With recent legislation permitting wider transmission
access to bulk power markets and with the opportunity to package a sale of
power from Phillips with the support of Duquesne's system, the Phillips plant
can be made a highly reliable, cost-competitive alternative for most
purchasers. In summary, Duquesne believes its investment in these
cold-reserved plants will be necessary in order to meet future business
needs. If business opportunities do not develop as expected, Duquesne will
consider the sale of these assets. In the event that mark demand,
transmission access or rate recovery do not support the utilization or
sale of the plants, Duquesne may have to write off part or all of their costs.
7
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Nuclear Decommissioning
The PUC ruled that recovery of the decommissioning costs for Beaver Valley
Unit 1 could begin December 24, 1977, and that recovery for Beaver Valley
Unit 2 and Perry Unit 1 could begin March 25, 1988. Duquesne expects to
decommission each nuclear plant at the end of its life, a date that currently
coincides with the expiration of each plant's operating license. The total
estimated decommissioning costs, including removal and decontamination costs,
being recovered in rates are $70 million for Beaver Valley Unit 1, $20 million
for Beaver Valley Unit 2, and $38 million for Perry Unit 1. These amounts
were based upon the most recent studies available at the time of Duquesne's
last rate case.
Since the time of Duquesne's last rate case, site specific studies have been
performed to update the estimated decommissioning costs, in current dollars, for
each of its nuclear generating units. In 1992, Duquesne's share of the
estimated decommissioning costs for Beaver Valley Unit 2 was revised to $35
million. Duquesne's share of decommissioning costs, which is based on
preliminary site specific studies to be finalized in 1994, is estimated to
increase to $122 million for Beaver Valley Unit 1 and to $71 million for Perry.
Duquesne plans to increase the annual contribution to its decommissioning
trusts by $2 million to bring the total annual funding to approximately $4
million per year. Duquesne plans to continue making periodic reevaluations
of estimated decommissioning costs, to provide additional funding from time
to time, and to seek regulatory approval for recognition of these increased
funding levels.
Duquesne records decommissioning costs under the category of depreciation
expense and accrues a liability equal to that amount for nuclear
decommissioning expense. Such nuclear decommissioning funds are deposited in
external, segregated trust accounts. Trust fund earnings increase the fund
balance and the recorded liability. The aggregate trust fund balances at March
31, 1994 totaled $17.8 million. On Duquesne's condensed consolidated balance
sheet, the decommissioning trusts have been reflected in investments, and
the related liability has been recorded as deferred credits.
6. COMMITMENTS AND CONTINGENCIES
Westinghouse Lawsuit
In 1991, the co-owners of Beaver Valley Units 1 and 2 filed suit against
Westinghouse Electric Corporation (Westinghouse) in the United States District
Court for the Western District of Pennsylvania. The suit alleges that six steam
generators supplied by Westinghouse for the two units contain serious defects -
in particular defects causing tube corrosion and cracking. Duquesne is seeking
monetary and corrective relief. Discovery in the proceeding has been
completed and the trial may commence as early as mid-year. Steam generator
maintenance costs have increased as a result of these defects and are likely
to continue increasing. The condition of the steam generators is being
monitored closely. If the corrosion and cracking continue, replacement of
the steam generators could be required prior to the ends of their 40-year
design lives. Duquesne is continuing to conduct a corrective maintenance
program and to explore longer term options, including replacement of the
steam generators. While Duquesne has no current plans to replace the steam
generators and has not yet completed a detailed, site-specific study,
replacement cost per unit is estimated to be between $100 million and $150
million. (Other utilities with similar units have replaced steam generators
at costs in this range.) Duquesne cannot predict the outcome of this matter;
however, Duquesne does not believe that resolution will have a material
adverse effect on its financial position or results of operations.
Duquesne's percentage interests (ownership and leasehold) in Beaver Valley
Unit 1 and in Beaver Valley Unit 2 are 47.5 percent and 13.74 percent,
respectively. The remainder of Beaver Valley Unit 1 is owned by Ohio Edison
Company and Pennsylvania Power Company. The remaining in Beaver Valley Unit
2 is owned by Ohio Edison Company, Cleveland Electric Illuminating Company
and Toledo Edison Company. Duquesne operates both units on behalf of these
co-owners.
8
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Nuclear Insurance
Co-owners of the Beaver Valley Power Station maintain the maximum available
nuclear insurance for the $5.9 billion total investment in Beaver Valley Units 1
and 2. The insurance program provides $2.8 billion for property damage,
decommissioning, and decontamination liabilities. Similar property insurance is
held by the joint owners of the Perry Plant for their $5.4 billion total
investment in Perry Unit 1. Duquesne would be responsible for its share of any
damages in excess of insurance coverage. In addition, if the property damage
reserves of Nuclear Electric Insurance Limited (NEIL), an industry mutual, are
inadequate to cover claims arising from an incident at any United States nuclear
site covered by that insurer, Duquesne could be assessed retrospective premiums
totaling a maximum of $6.5 million over a seven year period.
The Price-Anderson Amendments to the Atomic Energy Act limit public liability
from a single incident at a nuclear plant to $9.3 billion. Duquesne has
purchased $200 million of insurance, the maximum amount available, which
provides the first level of financial protection. Additional protection of $8.7
billion would be provided by an assessment of up to $75.5 million per incident
on each nuclear unit in the United States. Duquesne's maximum total assessment,
$56.6 million, which is based upon its ownership interests in nuclear generating
stations, would be limited to a maximum of $7.5 million per incident per year.
A further surcharge of 5 percent could be levied if the total amount of public
claims exceeded the funds provided under the assessment program. Additionally,
a state premium tax (typically 3 percent) would be charged on the assessment and
surcharge. Finally, the United States Congress could impose other revenue-
raising measures on the nuclear industry if funds prove insufficient to pay
claims.
Duquesne carries extra expense insurance; coverage includes the incremental
cost of any replacement power purchased (in addition to costs that would have
been incurred had the units been operating) and other incidental expense after
the occurrence of certain types of accidents at its nuclear units. The amounts
of the coverage are 100 percent of the estimated extra expense per week during
the 52-week period starting 21 weeks after an accident and 67 percent of such
estimate per week for the following 104 weeks. The amount and duration of
actual extra expense could substantially exceed insurance coverage.
Guarantees
Duquesne and the other co-owners have guaranteed certain debt and lease
obligations related to a coal supply contract for the Bruce Mansfield plant. At
March 31, 1994, Duquesne's share of these guarantees was $31 million. The
prices paid for the coal by the companies under this contract are expected to be
sufficient to meet debt and lease obligations to be satisfied through the year
2000. (See discussion regarding deferred coal costs at Note 5.) The minimum
future payments to be made by Duquesne solely in relation to these obligations
are $36.4 million at March 31, 1994.
Residual Waste Management Regulations
In July 1992, the Pennsylvania Department of Environmental Resources (DER)
issued residual waste management regulations governing the generation and
management of non-hazardous waste. Duquesne is currently conducting tests and
developing compliance strategies for these regulations. Capital compliance
costs are estimated, on the basis of currently available information, at $10
million through 1995. Through the year 2000, the expected additional capital
cost of compliance, which is subject to the results of ground water assessments
and DER final approval of compliance plans, is approximately $25 million.
9
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Other
Duquesne is involved in various other legal proceedings and environmental
matters. Duquesne believes that such proceedings and matters, in total, will
not have a material adverse effect on its financial position or results of
operations.
______________________________
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Duquesne Light Company (Duquesne) is a wholly owned subsidiary of DQE, an energy
services holding company formed in 1989. Duquesne is engaged in the production,
transmission, distribution and sale of electric energy. Duquesne was formed
under the laws of Pennsylvania by the consolidation and merger in 1912 of three
constituent companies.
Results of Operations
- - ------------------------------------------------------------------------------
Seasonality
The quarterly results are not necessarily indicative of full-year operations
because of seasonal fluctuations. Electric sales to residential and commercial
customers tend to increase during the warmer summer months because of increased
use of electricity for air conditioning. Sales also increase during the winter
months because of the use of electricity for heating.
Operating Revenues
Operating revenues for the first quarter of 1994 exceeded those of the first
quarter of 1993 by 4.3 percent. The $12.2 million increase is largely
attributable to electric sales to other utilities. Consistent with severe 1994
winter weather conditions, revenues from customers for the same periods reflect
a $4.5 million increase due to more power sales to all classes of customers in
1994.
In the absence of major scheduled plant maintenance outages in 1994,
available generation resulted in an increase of 568,597 megawatt hours
of short-term off-system power sales to other utilities in the first quarter of
1994 when compared to the first quarter of 1993. Profits from short-term power
sales to other utilities are returned to Duquesne's customers through the ECR.
See Note 5 to Duquesne's condensed consolidated financial statements for
additional discussion of Electric Operating Revenues.
Operating Expenses
The 1994 first quarter $7.7 million increase in fuel and purchased power expense
is affected by the decline in nuclear fuel costs, an increase in fuel
consumption for the generation of higher customer and off-system sales, and the
reduction in purchased power due to increased generation when compared to the
first quarter of 1993.
Duquesne's continuing cost reduction efforts resulted in a decrease of
approximately $6 million in other operating expenses.
Maintenance expense decreased approximately $3.8 million in 1994 as compared to
the same period of 1993 because in the first quarter of 1993 there were higher
expenses related to generating station outages as well as costs associated with
overhead line repairs during a major snow storm in 1993.
Other Income and Deductions
Other income decreased approximately $1.9 million in 1994, in comparison with
that for 1993, because Duquesne has not recorded additional carrying charges on
deferred revenues since April of 1993. See Note 5 to Duquesne's condensed
consolidated financial statements for additional discussion of the conclusion
of the 1987 Rate Case.
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Financial Condition
- - ------------------------------------------------------------------------------
Financing
Duquesne plans to meet its current obligations and debt maturities through 1998
with funds generated from operations and through new financings. At March 31,
1994, Duquesne was in compliance with all of its debt covenants.
On January 14, 1994, Duquesne redeemed all of its outstanding shares of $2.10
preference stock and $7.50 preference stock for approximately $38 million.
In May of 1994, Duquesne and Duquesne Capital L.P., a limited partnership, filed
a shelf registration with the Securities and Exchange Commission for up to $150
million of Cumulative Monthly Income Preferred Securities.
Short-Term Borrowings
Duquesne currently has extendible revolving credit agreements totaling $225
million with a group of banks. The current expiration date of this credit
arrangement is September 30, 1994. Interest rates can, in accordance with the
option selected at the time of each borrowing, be based on prime, federal funds,
Eurodollar or CD rates. Commitment fees are based on the unborrowed amount of
the commitments.
During 1993, the maximum short-term bank and commercial paper borrowings
outstanding was $27 million; the average daily short-term borrowings outstanding
was $1.6 million; and the weighted average daily interest rate applied to such
borrowings was 3.42 percent. There were no short-term borrowings outstanding at
March 31, 1994 or March 31, 1993.
Sale of Accounts Receivable
In 1989, Duquesne and an unaffiliated corporation entered into an agreement that
entitled Duquesne to sell and the corporation to purchase, on an ongoing basis,
up to $100 million of accounts receivable. At March 31, 1994, Duquesne had sold
$30 million of receivables. The accounts receivable sales agreement, which
expires in June 1994, is one of many sources of funds available to Duquesne.
Duquesne is currently planning a replacement of the agreement.
Nuclear Fuel Leasing
Duquesne finances its acquisitions of nuclear fuel through a leasing arrangement
under which it may finance up to $75 million of nuclear fuel. As of March 31,
1994, the amount of nuclear fuel financed by Duquesne under this arrangement
totaled approximately $57 million. Duquesne plans to continue leasing nuclear
fuel to fulfill its requirements at least through 1995, the remaining term of
the leasing arrangement.
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Transmission Access
- - ------------------------------------------------------------------------------
On March 17, 1994, Duquesne submitted, pursuant to the Federal Power Act, a
"good faith" request for transmission service with the Allegheny Power System
(APS) and Pennsylvania-New Jersey-Maryland Interconnection Association (PJM
Companies). The request is based on 20-year firm service with flexible
delivery points for 300 megawatts of transfer capability over the
transmission network that extends from Western Pennsylvania to the East
Coast. Duquesne is currently in discussions with APS and the PJM Companies
regarding the requested transmission service.
Construction
- - ------------------------------------------------------------------------------
During 1993, Duquesne spent approximately $100 million for construction to
improve and expand its production, transmission and distribution systems.
Duquesne estimates that it will spend approximately $110 million for
construction in 1994. Year-to-date construction expenditures incurred through
March 31, 1994 totaled $19.4 million. These amounts exclude AFC, nuclear fuel
and expenditures for possible early replacement of steam generators at the
Beaver Valley Power Station. (See Note 6 to Duquesne's condensed consolidated
financial statements.) Duquesne currently has no plans for construction of new
base load generating plants.
Duquesne anticipates that funds for planned capital expenditures in the next
several years will be provided primarily from cash becoming available from
operations and, to a lesser degree, from additional financings. Interim
financing has been and will continue to be provided through bank borrowings and
sales of commercial paper. Substantially all funds needed for 1994 capital
expenditures are expected to be generated internally.
Rate Matters
- - ------------------------------------------------------------------------------
Electric rates charged by Duquesne to its customers are regulated by the PUC.
Electric rates charged to the Borough of Pitcairn and to other electric
utilities are regulated by the Federal Energy Regulatory Commission (FERC).
Short-term sales to other utilities are made at competitive market rates.
Demand-Side Management
In March of 1994, Duquesne filed with the PUC an updated Demand-Side Management
(DSM) Plan designed to encourage customer energy conservation and load
management. Duquesne's proposed DSM programs include compact fluorescent
lighting, load management, cool storage systems, emergency generation networks
and long-term interruptible rates. The Pennsylvania Industrial Energy Coalition
(PIEC) has recently filed appeals in the Commonwealth Court of Pennsylvania
requesting reversal of PUC orders of December 13, 1993 and April 8, 1994 which
originated electric utility DSM programs in Pennsylvania and allow utilities
to recover prudently incurred DSM program costs through rates.
Implementation of Duquesne's DSM plan awaits PUC approval and disposition of
these appeals.
Rate Changes
In April of 1994, Duquesne's base rates were decreased by approximately $85
million annually effective with the last step in the 1987 rate phase-in plan.
Concurrently, the ECR was approved and the state tax adjustment surcharge was
recalculated and included in base rates.
See Note 5 to Duquesne's condensed consolidated financial statements for
additional discussion of rate-related matters.
13
<PAGE>
Environmental Matters
- - ------------------------------------------------------------------------------
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
(Superfund) and the Superfund Amendments and Reauthorization Act of 1986
established a variety of informational and environmental action programs. The
Environmental Protection Agency (EPA) has informed Duquesne of its involvement
or potential involvement in three hazardous waste sites. If Duquesne is
ultimately determined to be a responsible party with respect to these sites, it
could be liable for all or a portion of the cleanup costs. However, in each
case, other solvent, potentially responsible parties that may bear all or part
of any liability are also involved. In addition, Duquesne believes that
available defenses, along with other factors (including overall limited
involvement and low estimated remediation costs for one site) will limit any
potential liability that Duquesne may have for cleanup costs. Duquesne believes
that it is adequately reserved for all known liabilities and costs and,
accordingly, that these matters will not have a materially adverse effect on its
financial position or results of operations.
In 1990, Congress approved amendments to the Clean Air Act. Among other
innovations, this legislation established the Emission Allowance Trading System.
An "emission allowance" permits fuel emission of one ton of sulphur dioxide
(SO\\2\\) for one year. These allowances are issued by the EPA to fossil-fired
stations with generating capability of more than 25 megawatts that were in
existence as of the passage of the 1990 amendments. Allowances are part of a
market-based approach to SO\\2\\ reduction. Emission allowances can also be
obtained through purchases on the open market or directly from other sources.
Excess allowances may be banked for future use or sold on the open market to
other parties for their use in offsetting emissions.
The legislation requires significant reductions of SO\\2\\ and oxides of
nitrogen (NO\\X\\) by 1995 and additional reductions by the year 2000. Duquesne
continues to work with the operators of its jointly owned stations to implement
cost-effective compliance strategies to meet these requirements. Duquesne's
plans for meeting the 1995 SO\\2\\ compliance requirements include increasing
the use of scrubbed capacity, switching to fuel with a lower sulfur content and
purchasing emission allowances. NO\\X\\ reductions under Title IV are required
by 1995 at only the Cheswick station; work to achieve the reductions was
completed in 1993. The ozone attainment provisions of Title I of the Clean Air
Act Amendments will require NO\\X \\reductions by 1995 at Duquesne's Elrama
plant and at the jointly owned Mansfield plant. Duquesne plans to achieve such
reductions with low NO\\X\\ burner technology. Duquesne has currently 1,187
megawatts of scrubbed capacity, including 300 megawatts at the currently cold-
reserved Phillips plant, as well as 570 megawatts of capacity that meets the
1995 standards of the Clean Air Act amendments through the use of low sulfur
coal. The estimated capital costs to achieve 1995 compliance standards are
approximately $30 million, of which approximately $15 million has already been
spent. Through the year 2000, Duquesne is planning a combination of compliance
methods that include fuel switching; increased use of, and improvements in,
scrubbed capacity; flue gas conditioning; low NO\\X\\ burner technology; and the
purchase of emission allowances. Duquesne currently estimates that additional
capital costs to comply with environmental requirements from 1995 through the
year 2000 will be approximately $20 million. This estimate is subject to the
finalization of federal and state regulations.
Duquesne is closely monitoring other potential air quality programs and air
emission control requirements that could be imposed in the future. These areas
include additional NO\\X\\ control requirements that could be imposed on fossil
fuel plants by the Ozone Transport Commission, more stringent ambient air
quality and emission standards for SO\\2 \\and particulates, or carbon dioxide
(CO\\2\\) control measures. As these potential programs are in various stages of
discussion and consideration, it is impossible to make reasonable estimates of
the potential costs and impacts of these programs at this time.
In July 1992, the Pennsylvania Department of Environmental Resources (DER)
issued Residual Waste Management Regulations governing the generation and
management of non-hazardous waste. Duquesne is currently conducting tests and
developing compliance strategies. Capital compliance costs are estimated, on the
basis of information currently available, at $10 million through 1995. The
expected additional capital cost of compliance from 1995 through 2000 is
approximately $25 million; this estimate is subject to the results of ground
water assessments and DER final approval of compliance plans.
14
<PAGE>
Duquesne operates the scrubbed Elrama plant and converts the scrubber slurry to
a fixated pozolonic material. This material is placed at an off-site disposal
area having approximately six years of remaining capacity. Additionally,
Duquesne owns 17 percent of the scrubbed Mansfield plant, which is operated by
Pennsylvania Power. This plant pumps a similar slurry to an off-site impoundment
where the slurry is treated by using a Calcilox fixation process. The site has
at least 14 years of remaining capacity. Both plants have limited temporary on-
site storage for flue gas desulfurization material and no permanent on-site
disposal capacity. While there is no imminent shortage of disposal capacity,
Duquesne continues to monitor this situation and to plan for future disposal.
The siting of future disposal facilities will be facilitated by the 1993 EPA
determination that coal combustion waste products are not hazardous waste and
are therefore exempt from the Hazardous Waste Regulations. The second phase of
EPA's determination will consider the co-management of coal combustion wastes
with other low volume fossil fuel combustion waste streams.
Under the Nuclear Waste Policy Act of 1982, which establishes a policy for
handling and disposing of spent nuclear fuel and requires the establishment of a
final repository to accept spent fuel, contracts for jointly owned nuclear
plants have been entered into with the Department of Energy (DOE)for permanent
disposal of spent nuclear fuel and high-level radioactive waste. The DOE has
indicated that the repository will not be available for acceptance of spent fuel
before 2010. Existing on-site spent fuel storage capacities at Beaver Valley 1,
Beaver Valley 2 and Perry Unit 1 are expected to be sufficient until 1996, 2010,
and 2009, respectively. Duquesne is currently increasing the storage capacity at
Beaver Valley 1 by equipping the spent fuel pool with high density fuel storage
racks. Duquesne anticipates that such action will increase the spent fuel
storage capacity at Beaver Valley 1 to provide for sufficient storage through
2014.
In October 1992, the President signed into law the National Energy Policy Act of
1992 (energy act). The energy act addresses a wide range of energy issues,
including several matters affecting bulk power competition in the electric
utility industry. See discussion in "Outlook" below. The energy act
requires utilities (including Duquesne) that have purchased uranium
enrichment services from the DOE to collectively contribute as much as $150
million annually (adjusted for inflation) up to a total of $2.25 billion for
decommissioning and decontamination of DOE enrichment facilities. Assessments
are based on the amount of uranium a utility had processed for enrichment
prior to enactment of the energy act and are to be paid by such utilities
over a 15-year period. The energy act states that the assessments shall be
deemed a necessary and reasonable current cost of fuel and shall be fully
recoverable in rates in all jurisdictions in the same manner as the utility's
other fuel costs. Duquesne believes these assessments will be fully
recoverable through rates. Duquesne's total estimated liability for
contributions is $12.5 million.
The Low-Level Waste Policy Act of 1980 (LLWPA) mandated that the responsibility
for the disposal of low-level radioactive waste rests with the individual
states. Most states, including Pennsylvania and Ohio, have formed regional
compacts to comply with the LLWPA by providing permanent disposal sites for
radioactive waste generated within each compact. However, plans for these
disposal sites have not progressed as anticipated in the LLWPA and it is not
certain when the regional sites will be available for disposal of waste.
Radioactive waste from Duquesne's jointly owned nuclear plants is currently
shipped to a disposal facility in South Carolina. This facility has announced
that it will not accept any additional waste from outside the Southeast Compact
after June 30, 1994. The co-owners have constructed on-site waste storage
facilities at the Beaver Valley Power Station and the Perry Power Plant for
interim storage of the plants' low-level radioactive waste. The Beaver Valley
on-site facility is expected to be sufficient to meet site storage requirements
until regional disposal facilities become available. ThePerry on-site facility
is expected to be sufficient to meet site storage requirements for a period of
five years.
Duquesne believes that it is adequately reserved for all known environmental
liabilities and costs. Accordingly, Duquesne believes that the ultimate outcome
of these environmental matters will not have a material adverse effect on its
financial position or the results of its operations.
15
<PAGE>
Outlook
- - ------------------------------------------------------------------------------
Competition
Regulatory developments in the industry are placing increasing competitive
pressures on electric public utilities. Duquesne, like the industry in general,
is continuing to assess the impact of these competitive forces on its future
operations.
The National Energy Policy Act of 1992 (energy act) was designed, among other
things, to foster competition. Among other provisions, the energy act amends the
Public Utility Holding Company Act of 1935 (1935 act) and the Federal Power
Act. Amendments to the 1935 act create a new class of independent power
producers known as Exempt Wholesale Generators (EWGs), which are exempt from the
corporate structure regulations of the 1935 act. EWGs, which may include
independent power producers as well as affiliates of electric utilities, do not
require Securities and Exchange Commission approval or regulation. At the
current time, Duquesne has not made, and has no plans to make, any investment in
EWGs.
Amendments to the Federal Power Act create the potential for utilities and other
power producers to gain increased access to transmission systems of other
utilities to facilitate sales to other utilities. The amendments would permit
the FERC to order utilities to transmit power over their lines for use by other
suppliers and to enlarge or construct additional transmission capacity to
provide these services. The FERC may not, however, issue any order that would
unreasonably impair the continuing reliability of affected electric systems.
Finally, the legislation allows brokers and marketers, without owning or
operating any generation or transmission facilities, to enter into the business
of buying and selling electric capacity and energy.
The energy efficiency title of the energy act requires states to consider
adopting integrated resource planning, which allows utility investments in
conservation and other demand-side management techniques to be at least as
profitable as supply investments. The energy act also establishes new
efficiency standards in industrial and commercial equipment and lighting and
requires states to establish commercial and residential building codes with
energy efficiency standards. Additionally, the energy act requires utilities to
consider energy efficiency programs in their integrated resource planning. The
effects on Duquesne of these standards and requirements cannot be determined at
this time.
The energy act encourages increased use of alternative transportation fuels by
federal, state, city and power provider fleets. The energy act also provides
funding for development of electric vehicles and associated infrastructures.
The effects on Duquesne cannot be determined at this time.
The nuclear-related provisions of the energy act generally encourage further
development of the nuclear power industry through a variety of measures,
including the consolidation of construction and operating license steps into one
proceeding. The impact of these provisions on Duquesne is not expected to be
material.
These new regulations also permit industrial and large commercial customers to
own and operate facilities to generate their own electric energy requirements
and, if such facilities are qualifying facilities, to require the displaced
electric utility to purchase the output of such facilities. Customers may also
have the option of substituting fuels, such as the use of natural gas, oil or
wood for heating and/or cooling purposes rather than electric energy or of
relocating their facilities to a lower cost environment.
In addition, increased competition may also result from the 1990 Amendments to
the Clean Air Act. Such amendments exempt from SO\\2\\ and NO\\X\\ control
requirements existing units with less than 25 megawatts of generating capacity
and new or existing co-generation units supplying less than one-third of their
electric output and less than 25 megawatts for commercial sale.
------------------------------
16
<PAGE>
DUQUESNE LIGHT COMPANY
OPERATING STATISTICS
(000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
<S> <C> <C> <C>
Percent
1994 1993 Change
---------- ---------- -------
Kilowatt-hour Sales:
Residential 913,673 866,454 5.4
Commercial 1,371,798 1,334,665 2.8
Industrial 814,169 771,423 5.5
Miscellaneous 21,199 21,064 0.6
Other Utilities 821,232 252,635 225.1
- - ----------------------------------------------------------
Total Kilowatt-hour Sales 3,942,071 3,246,241 21.4
==========================================================
Operating Revenues:
Electric Sales:
Residential $108,759 $105,582 3.0
Commercial 114,709 113,836 0.8
Industrial 49,189 48,759 0.9
Miscellaneous 4,497 4,526 (0.6)
Other Utilities 11,398 3,749 204.0
Other Operating Revenues 7,316 7,261 0.8
- - ----------------------------------------------------------
Total Operating Revenues $295,868 $283,713 4.3
==========================================================
</TABLE>
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
General Electric Settlement
- - -----------------------------------------------------------------------------
Reference is made to the discussion under this heading in Part I, Item 3 of
the Form 10-K Annual Report for the year ended December 31, 1993. In January
1994, Duquesne Light Company, The Cleveland Electric Illuminating Company,
Ohio Edison Company, Pennsylvania Power Company and The Toledo Edison
Company reached a settlement in connection with a 1991 lawsuit filed in the
United States District Court in Cleveland against General Electric Company (GE)
regarding the Perry Plant. These co-owners jointly constructed Perry Unit 1, a
nuclear power plant on the southern shore of Lake Erie in Ohio, for which GE
supplied the nuclear steam supply systems and other goods and services. The
out-of-court settlement disposed of a complaint filed by the co-owners of Perry
Unit 1 which included claims of breach of contract, warranty, and duties of good
faith and fair dealing, as well as constructive fraud, negligence,
misrepresentation and various Racketeer Influenced and Corrupt Organization
(RICO) violations in connection with delays and cost increases relating to the
construction of Perry Unit 1. The settlement provides for cash payments to the
Perry owners and discounts on their future purchases from GE. This settlement
will not materially affect Duquesne's results of operations.
Rate-Related and Environmental Litigation
- - -----------------------------------------------------------------------------
Proceedings involving Duquesne's rates are reported in PART I, Item 1, Note 5 of
Duquesne's condensed consolidated financial statements under "Rate Matters".
Proceedings involving environmental matters are reported in Item 2.
"Environmental Matters".
Item 4. Submission of Matters to a Vote of Security Holders
a. In lieu of an Annual Meeting, Duquesne's sole stockholder, DQE (the
owner of all 10 outstanding shares of Duquesne's common stock),
elected directors of Duquesne through a Unanimous Consent of
Stockholders executed on April 20, 1994.
b. The directors elected pursuant to the Unanimous Consent and whose
terms will expire in 1997 were:
Daniel Berg
Robert P. Bozzone
William H. Knoell
Thomas J. Murrin
The directors whose terms continue until 1995 are:
John M. Arthur
Doreen E. Boyce
G. Christian Lantzsch
Robert Mehrabian
The directors whose terms continue until 1996 are:
Sigo Falk
Robert B. Pease
Eric W. Springer
Wesley W. von Schack
18
<PAGE>
c. The only other matter addressed by the Board of Directors in the
Unanimous Consent was the ratification of the appointment of Deloitte
& Touche as independent public accountants to audit the books of
Duquesne for the year ending December 31, 1994.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
EXHIBIT 12.1 - Calculation of Ratio of Earnings to Fixed Charges.
b. No Current Report on Form 8-K was filed during the three months ended
March 31, 1994.
_____________________________
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant identified below has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DUQUESNE LIGHT COMPANY
------------------------------
(Registrant)
Date /s/ Gary L. Schwass
------------------- ------------------------------
(Signature)
Gary L. Schwass
Vice President - Finance, and
Principal Financial Officer
Date /s/ Raymond H. Panza
------------------- ------------------------------
(Signature)
Raymond H. Panza
Controller and
Principal Accounting Officer
20
<PAGE>
EXHIBIT 12.1
Duquesne Light Company and Subsidiary
Calculation of Ratio of Earnings to Fixed Charges
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Year Ended December 31,
Months Ended ------------------------------------------------
March 31, 1994 1993 1992 1991 1990 1989
- - ----------------------------------- -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on long-term debt $23,398 $102,938 $119,179 $127,606 $135,850 $140,623
Other interest 535 3,517 2,464 2,339 6,148 12,332
Amortization of debt discount,
premium and expense-net 1,573 5,541 4,223 3,892 4,039 4,010
Portion of lease payments representing
an interest factor 11,292 45,925 60,721 64,189 64,586 64,854
------- -------- -------- -------- -------- --------
Total Fixed Charges $36,798 $157,921 $186,587 $198,026 $210,623 $221,819
------- -------- -------- -------- -------- --------
EARNINGS:
Income from continuing operations $35,492 $144,787 $149,768 $143,133 $135,456 $129,437
Income taxes 25,214* 75,042* 107,999 101,073 84,478 75,151
Fixed charges as above 36,798 157,921 186,587 198,026 210,623 221,819
------- -------- -------- -------- -------- --------
Total Earnings $97,504 $377,750 $444,354 $442,232 $430,557 $426,407
------- -------- -------- -------- -------- --------
RATIO OF EARNINGS TO FIXED CHARGES 2.65 2.39 2.38 2.23 2.04 1.92
------- -------- -------- -------- -------- --------
</TABLE>
Duquesne's share of the fixed charges of an unaffiliated coal supplier, which
amounted to approximately $1 million for the three months ended March 31, 1994,
has been excluded from the ratio.
* Earnings related to income taxes reflect a $9.6 million decrease for the three
months ended March 31, 1994, and a $3.0 decrease for the year ended December 31,
1993 due to a financial statement reclassification related to SFAS 109. The
Ratio of Earnings to Fixed Charges absent this reclassification equals 2.77 and
2.45 for the three months ended March 31, 1994 and the year ended December 31,
1993, respectively.
