August 12, 1994
Securities and Exchange Commission
Attention: Filing Desk, Stop 1-4
450 Fifth Street, N.W.
Washington, DC 20549-1004
Dear Sir or Madam:
Electronically filed herewith the Securities and Exchange Commission
is Duquesne Light Company's Form 10-Q for the quarter ended
june 30, 1994.
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification Number
- - ----------- ----------------------------------- ---------------------
1-956 Duquesne Light Company 25-0451600
(A Pennsylvania Corporation)
One Oxford Centre
301 Grant Street
Pittsburgh, Pennsylvania 15279
Telephone (412) 393-6000
Sincerely,
/s/ M. K. O'Brien
Assistant Controller
<PAGE>
[CONFORMED]
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 June 30, 1994
-------------
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification Number
- - ------------- ----------------------------------- ---------------------
1-956 Duquesne Light Company 25-0451600
(A Pennsylvania Corporation)
One Oxford Centre
301 Grant Street
Pittsburgh, Pennsylvania 15279
Telephone (412) 393-6000
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 June 30, 1994 and July 31, 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 Six Months Ended
June 30, June 30,
--------------------------------------------
<S> <C> <C> <C> <C>
1994 1993 1994 1993
---- ---- ---- ----
Operating Revenues:
Sales of Electricity:
Customers $272,376 $284,547 $574,350 $581,315
Phase-in deferrals (3,990) (23,719) (28,810) (47,784)
Utilities 6,041 9,897 17,439 13,646
-------- -------- -------- --------
Total Sales of Electricity 274,427 270,725 562,979 547,177
Other 7,243 9,871 14,559 17,132
-------- -------- -------- --------
Total Operating Revenues 281,670 280,596 577,538 564,309
-------- -------- -------- --------
Operating Expenses:
Fuel and purchased power 59,808 57,647 121,476 111,628
Other operating expense 72,115 68,680 138,362 140,880
Maintenance expense 21,356 18,610 37,611 38,617
Depreciation and amortization 39,038 36,930 81,527 74,183
Taxes other than income taxes 21,684 20,505 43,618 42,497
Income taxes 13,686 17,606 39,867 37,349
-------- -------- -------- --------
Total Operating Expenses 227,687 219,978 462,461 445,154
-------- -------- -------- --------
OPERATING INCOME 53,983 60,618 115,077 119,155
-------- -------- -------- --------
Other Income and (Deductions):
Allowance for equity funds used during
construction 336 222 795 492
Interest and dividend income 1,620 2,102 3,286 3,765
Income taxes (117) (2,298) 850 (3,745)
Other - net (7) 3,668 (3,573) 5,749
-------- -------- -------- --------
Total Other Income and (Deductions) 1,832 3,694 1,358 6,261
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 55,815 64,312 116,435 125,416
-------- -------- -------- --------
Interest Charges:
Interest on long-term debt and other interest 25,536 29,924 51,042 58,476
Allowance for borrowed funds used during
construction (278) (182) (656) (418)
-------- -------- -------- --------
Total Interest Charges 25,258 29,742 50,386 58,058
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT ON
PRIOR YEARS OF CHANGES IN ACCOUNTING
PRINCIPLES 30,557 34,570 66,049 67,358
Adoption of SFAS 109 - Income taxes - - - 8,000
Accounting for maintenance costs - net - - - (5,425)
-------- -------- -------- --------
NET INCOME 30,557 34,570 66,049 69,933
DIVIDENDS ON PREFERRED AND
PREFERENCE STOCK 1,487 2,302 3,084 4,608
-------- -------- -------- --------
EARNINGS FOR COMMON STOCK $ 29,070 $ 32,268 $ 62,965 $ 65,325
-------- -------- -------- --------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
DUQUESNE LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------ -------------
<S> <C> <C>
ASSETS
Property, Plant and Equipment $ 4,597,419 $ 4,554,498
Less Accumulated Depreciation and Amortization (1,508,062) (1,435,732)
----------- -----------
Property, Plant and Equipment - Net 3,089,357 3,118,766
----------- -----------
Other Property and Investments 73,738 61,060
----------- -----------
Current Assets:
Cash and temporary cash investments 2,157 --
Receivables 78,911 139,759
Other current assets, principally materials and supplies 130,206 99,808
----------- -----------
Total Current Assets 211,274 239,567
----------- -----------
Other Assets:
Extraordinary property loss 29,193 35,781
Unamortized loss on reacquired debt 92,647 95,266
Beaver Valley Unit 2 sale/leaseback premium 34,158 34,903
Deferred rate synchronization costs 51,149 51,149
Phase-in plan deferrals -- 28,621
Uncollected deferred income taxes 562,799 569,555
Deferred debits 141,054 153,435
----------- -----------
Total Other Assets 911,000 968,710
----------- -----------
TOTAL ASSETS $ 4,285,369 $ 4,388,103
----------- -----------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock - $1 par value (90,000,000 authorized, 10 shares issued) $ -- $ --
Capital surplus 824,738 805,755
Retained earnings 293,882 294,916
----------- -----------
Total Common Stockholder's Equity 1,118,620 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 29,897 29,956
----------- -----------
Total preferred and preference stock before deferred ESOP
benefit (involuntary liquidation values of $120,353 and
$160,117, exceed par by $44,047 and $81,585,
respectively) 120,490 160,254
Deferred employee stock ownership plan (ESOP) benefit (25,975) (27,126)
----------- -----------
Total Preferred and Preference Stock 94,515 133,128
----------- -----------
Long-term debt 1,367,247 1,416,705
----------- -----------
Total Capitalization 2,580,382 2,650,504
----------- -----------
Obligations Under Capital Leases 48,305 55,733
----------- -----------
Current Liabilities:
Notes payable 2,300 10,991
Current maturities and sinking fund requirements 91,218 45,741
Accounts payable 102,943 112,401
Accrued liabilities 40,249 63,530
Other current liabilities 32,480 46,544
----------- -----------
Total Current Liabilities 269,190 279,207
----------- -----------
Investment Tax Credits Unamortized 126,583 129,574
----------- -----------
Accumulated Deferred Income Taxes 1,127,999 1,145,782
----------- -----------
Deferred Credits 132,910 127,303
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $ 4,285,369 $ 4,388,103
----------- -----------
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
DUQUESNE LIGHT COMPANY
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
<S> <C> <C>
1994 1993
--------- ---------
Cash Flows from Operating Activities:
Operations $ 164,132 $ 194,847
Changes in working capital (16,353) (126,248)
Other - net 28,436 (13,313)
--------- ---------
Net Cash Provided from Operating Activities 176,215 55,286
--------- ---------
Cash Flows Used by Investing Activities:
Construction expenditures (46,039) (45,507)
Allowance for borrowed funds used during construction (656) (418)
Other - net 5,343 (4,687)
--------- ---------
Net Cash Used by Investing Activities (41,352) (50,612)
--------- ---------
Cash Flows Used in Financing Activities:
Sale of bonds - 645,000
Dividends on capital stock (67,591) (71,105)
Reductions of long-term obligations (55,944) (556,966)
Reduction in notes payable (8,691) -
Premium on reacquired debt - (25,613)
Other - net (480) (1,956)
--------- ---------
Net Cash Used in Financing Activities (132,706) (10,640)
--------- ---------
Net increase (decrease) in cash and temporary cash investments 2,157 (5,966)
Cash and temporary cash investments at beginning of period - 6,156
--------- ---------
Cash and temporary cash investments at end of period $ 2,157 $ 190
--------- ---------
</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 and six months
ended June 30, 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
--------------------------------------------------
June 30, 1994 June 30, 1993 December 31, 1993
-------------- -------------- ------------------
<S> <C> <C> <C>
Electric customer accounts receivable $103,868 $106,086 $107,342
Other accounts receivable 39,998 42,459 54,699
Less: Allowance for uncollectible accounts (14,955) (9,202) (13,282)
-------- -------- --------
Receivables less allowance for uncollectible
accounts 128,911 139,343 148,759
Less: Receivables sold (50,000) (35,000) (9,000)
-------- -------- --------
Total Receivables $ 78,911 $104,343 $139,759
-------- -------- --------
</TABLE>
An arrangement between Duquesne and an unaffiliated corporation entitles
Duquesne to periodically sell its accounts receivable. At June 30, 1994,
Duquesne had sold $50 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 $18.2 million at June 30, 1994. This
sales agreement was replaced effective July 1, 1994. The replacement sales
agreement provides for the periodic sale of up to $50 million of Duquesne's
accounts receivable. The new arrangement expires on June 30, 1995.
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 $31.7 million at June
30, 1994) of its investment in the unit.
5
<PAGE>
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.
With respect to financial presentation of Statement of Financial Accounting
Standards Number 109 (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 were
included in the condensed consolidated income statement as deferred revenues.
Deferred revenues were recorded on the balance sheet as a deferred asset. 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
recovered previously deferred revenues and carrying charges of approximately
$315 million during the phase-in period which concluded 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 two market price coal cost standards for Duquesne's
interests in mines that supply coal to its generating stations. 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 through March 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 $7.5 million and the
unrecovered cost of coal used throughout the system amounted to $2.3 million at
June 30, 1994. Duquesne believes that all deferred coal costs will be
recovered.
6
<PAGE>
Electric Operating Revenues
Duquesne is authorized by the PUC to recover fuel costs and purchased energy
costs through an Energy Cost Rate Adjustment Clause (ECR), 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 power 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. In the past year, the Warwick Mine supplied less than one-
fifth of the coal used in the production of electricity at Duquesne's wholly
owned and jointly owned plants.
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 June 30, 1994,
Duquesne's net investment in the mine was $21.7 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 $10.3 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 bulk 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
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 market
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.
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 following the end of its life, a date that currently coincides
with the
7
<PAGE>
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 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 site
specific studies finalized in 1994, was revised to $122 million for Beaver
Valley Unit 1 and to $67 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 and
amortization expense and accrues a liability equal to that amount for nuclear
decommissioning expense. Such nuclear decommissioning funds are deposited in
external, segregated trust accounts. The funds are invested in a portfolio
consisting of municipal bonds, certificates of deposit, and U.S. government
securities having a weighted average duration of 4-7 years. Trust fund earnings
increase the fund balance and the recorded liability. The market value of the
aggregate trust fund balances at June 30, 1994 totaled $18 million. On
Duquesne's condensed consolidated balance sheet, the decommissioning trusts have
been reflected in long-term 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 is expected to begin in September of 1994. 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 interest
in Beaver Valley Unit 2 is held by Ohio Edison Company, Cleveland Electric
Illuminating Company and Toledo Edison Company. Duquesne operates both units on
behalf of these co-owners.
8
<PAGE>
Nuclear Insurance
All of the companies with an interest in 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.
The Price-Anderson Amendments to the Atomic Energy Act limit public liability
from a single incident at a nuclear plant to $9.2 billion. Duquesne has
purchased $200 million of insurance, the maximum amount available, which
provides the first level of financial protection. Additional protection of $8.5
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
June 30, 1994, Duquesne's share of these guarantees was $31.0 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 $35.7 million at June 30, 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
<PAGE>
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 materially 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
Total operating revenues for the second quarter of 1994 were consistent with
those of the second quarter of 1993.
The net increase in total sales of electricity totaled $3.7 million dollars.
This increase represents a $7.6 million increase in sales to all classes of
customers due to warmer weather conditions in the second quarter of 1994 than in
1993, reduced by a $3.9 million decrease in short-term power sales to other
utilities. Major plant maintenance outages scheduled during the second quarter
of 1994 resulted in a decrease of 223,000 megawatt hours of short-term off-
system power sales when compared to the second quarter of 1993.
Other operating revenue decreased by $2.6 million primarily due to reduced
billings to co-owners of jointly owned power stations. Reduced billings to co-
owners of jointly owned power stations in the second quarter of 1994 reflect an
absence of the scheduled refueling outage of Beaver Valley Unit 1, which
occurred in the second quarter of 1993.
Operating Expenses
Fuel and purchased power expense increased 3.7% in the second quarter of 1994
when compared to the same period in 1993. The $2.2 million increase was the net
result of a $7.0 million decrease due to declining fuel costs and a $9.2 million
increase in purchased power expense. Second quarter energy purchases in 1994
exceeded those of the prior year due to 1994 major scheduled plant maintenance
outages at the Elrama and Bruce Mansfield Power Stations and a refueling outage
at Perry Unit 1 which began on February 5, 1994.
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 June 30,
1994, Duquesne was in compliance with all of its debt covenants.
11
<PAGE>
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. Duquesne is currently negotiating an
extension through August 31, 1995 of this revolving credit facility. 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. Short-term borrowings outstanding on June 30, 1994
were $2.3 million. There were no short-term borrowings outstanding at June 30,
1993.
Sale of Accounts Receivable
In 1989, Duquesne and an unaffiliated corporation entered into an agreement that
entitled Duquesne to periodically sell its accounts receivable. At June 30,
1994, Duquesne had sold $50 million of receivables. The accounts receivable
sales agreement is one of many sources of funds available to Duquesne. This
sales agreement was replaced effective July 1, 1994. The replacement sales
agreement provides for the periodic sale of up to $50 million of Duquesne's
accounts receivable. The new arrangement expires on June 30, 1995.
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 June 30,
1994, the amount of nuclear fuel financed by Duquesne under this arrangement
totaled approximately $55.7 million. Duquesne plans to continue leasing nuclear
fuel to fulfill its requirements at least through 1995, the remaining term of
the leasing arrangement.
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
negotiating with APS the terms for the requested transmission service. On
August 5, 1994, Duquesne filed with the Federal Energy Regulatory Commission an
application for transmission service from the PJM Companies. The application is
authorized under Section 211 of the Federal Power Act, which requires electric
utilities to provide firm wholesale 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
June 30, 1994 totaled $46 million. These amounts exclude AFC, nuclear fuel,
expenditures for the refurbishing of Phillips and Brunot Island and expenditures
for the 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.
12
<PAGE>
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
- - --------------------------------------------------------------------------------
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, customer 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.
See Note 5 to Duquesne's condensed consolidated financial statements for
additional discussion of rate-related matters.
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 material 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 ) for one year. These allowances are issued by the EPA to fossil-fired
2
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 reduction. Emission allowances can also be
2
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 and oxides of
2
nitrogen (NO ) by 1995 and additional reductions by the year 2000. Duquesne
X
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 compliance requirements include increasing
2
the use of scrubbed capacity, switching to fuel with a lower sulfur content and
purchasing emission allowances. NO reductions under Title IV are required
X
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 reductions by 1995 at Duquesne's Elrama
X
13
<PAGE>
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.
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.
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" on page 15. 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
14
<PAGE>
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. The Perry 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.
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
15
<PAGE>
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
June 30
-------------------
Percent
1994 1993 Change
---- ---- --------
<S> <C> <C> <C>
Kilowatt-hour Sales:
Residential 707,442 677,754 4.4
Commercial 1,335,709 1,299,003 2.8
Industrial 797,532 764,920 4.3
Miscellaneous 20,418 20,411 -
Other Utilities 473,594 696,593 (32.0)
-----------------------
Total Kilowatt-hour Sales 3,334,695 3,458,681 (3.6)
=======================
Operating Revenues:
Electric Sales:
Residential $ 91,998 $ 88,400 4.1
Commercial 121,240 118,898 2.0
Industrial 50,712 49,051 3.4
Miscellaneous 4,436 4,479 (1.0)
Other Utilities 6,041 9,897 (39.0)
Other Operating Revenues 7,243 9,871 (26.6)
-----------------------
Total Operating Revenues $ 281,670 $ 280,596 0.4
=======================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------
Percent
1994 1993 Change
---- ---- -------
<S> <C> <C> <C>
Kilowatt-hour Sales:
Residential 1,621,115 1,544,209 5.0
Commercial 2,707,507 2,633,668 2.8
Industrial 1,611,701 1,536,342 4.9
Miscellaneous 41,617 41,475 0.3
Other Utilities 1,294,826 949,228 36.4
-----------------------
Total Kilowatt-hour Sales 7,276,766 6,704,922 8.5
=======================
Operating Revenues:
Electric Sales:
Residential $ 200,757 $ 193,982 3.5
Commercial 235,949 232,734 1.4
Industrial 99,901 97,810 2.1
Miscellaneous 8,933 9,005 (0.8)
Other Utilities 17,439 13,646 27.8
Other Operating Revenues 14,559 17,132 (15.0)
-----------------------
Total Operating Revenues $ 577,538 $ 564,309 2.3
=======================
</TABLE>
17
<PAGE>
PART II. OTHER INFORMATION
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 June 30, 1994.
_____________________________
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
Duquesne Light Company and Subsidiary
Calculation of Ratio of Earnings to Fixed Charges
(Thousands of Dollars)
Six
Months Ended Year Ended December 31.
-------------------------------------------------------------------------
June 30, 1994 1993 1992 1991 1990 1989
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on long-term debt $ 47,001 $102,938 $119,179 $127,606 $135,850 $140,623
Other interest 895 3,517 2,464 2,339 6,148 12,332
Amorization of debt discount,
premium and expense-net 3,146 5,541 4,223 3,892 4,039 4,010
Portion of lease payments repre-
senting an interest factor 22,376 45,925 60,721 64,189 64,586 64,854
-------- -------- -------- -------- -------- --------
Total Fixed Charges $ 73,418 $157,921 $186,587 $198,026 $210,623 $221,819
-------- -------- -------- -------- -------- --------
EARNINGS:
Income from continuing operations $ 66,049 $144,787 $149,768 $143,133 $135,456 $129,437
Income taxes 39,017* 75,042* 107,999 101,073 84,478 75,151
Fixed charges as above 73,418 157,921 186,587 198,026 210,623 221,819
-------- -------- -------- -------- -------- --------
* Total Earnings $178,484 $377,750 $444,354 $442,232 $430,557 $426,407
-------- -------- -------- -------- -------- --------
RATIO OF EARNINGS TO FIXED CHARGES 2.43 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 $1.9 million for the six months ended June 30,
1994, has been excluded from the ratio.
* Earnings related to income taxes reflect a $6.6 million decrease for the six
months ended June 30, 1994, and a $9.6 million decrease for the year ended
December 31, 1993 due to financial statement reclassification related to SFAS
109. The Ratio of Earnings to Fixed Charges absent this reclassification equals
2.52 and 2.45 for the six months ended June 30, 1994 and the year ended December
31, 1993, respectively.
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 ___August 12, 1994___ ___/s/ Gary L. Schwass___
(Signature)
Gary L. Schwass
Vice President - Finance, and
Principal Financial Officer
Date ___August 12, 1994___ ___/s/ Raymond H. Panza___
(Signature)
Raymond H. Panza
Controller and
Principal Accounting Officer
20
