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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1995
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
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Commission File Number
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1-956
Duquesne Light Company
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-0451600
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant Street
Pittsburgh, Pennsylvania 15279
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
DQE is the holder of all shares of common stock, $1 par value, of Duquesne Light
Company consisting of 10 shares as of September 30, 1995 and October 31, 1995.
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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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating Revenues:
Sales of Electricity:
Customers $319,527 $303,146 $842,104 $873,657
Phase-in deferrals - - - (28,810)
Utilities 15,356 12,234 39,872 35,619
-------- -------- -------- --------
Total Sales of Electricity 334,883 315,380 881,976 880,466
Other 7,844 7,124 27,323 21,683
-------- -------- -------- --------
Total Operating Revenues 342,727 322,504 909,299 902,149
-------- -------- -------- --------
Operating Expenses:
Fuel and purchased power 66,466 64,780 174,391 186,363
Other operating 70,833 68,863 205,368 208,083
Maintenance 21,185 20,797 61,044 58,408
Depreciation and amortization 45,625 38,781 136,140 117,107
Taxes other than income taxes 23,275 22,235 64,982 64,996
Income taxes 36,342 35,378 75,126 80,804
-------- -------- -------- --------
Total Operating Expenses 263,726 250,834 717,051 715,761
-------- -------- -------- --------
OPERATING INCOME 79,001 71,670 192,248 186,388
-------- -------- -------- --------
Other Income and (Deductions):
Interest and dividend income 2,261 1,835 6,369 4,680
Income taxes (1,860) 135 (2,868) 1,847
Other - net (2,358) (3,304) (3,541) (6,585)
-------- -------- -------- --------
Total Other Income and (Deductions) (1,957) (1,334) (40) (58)
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 77,044 70,336 192,208 186,330
INTEREST CHARGES 24,257 25,460 73,609 75,405
-------- -------- -------- --------
NET INCOME 52,787 44,876 118,599 110,925
DIVIDENDS ON PREFERRED AND
PREFERENCE STOCK 1,380 1,481 4,348 4,565
-------- -------- -------- --------
EARNINGS FOR COMMON STOCK $ 51,407 $ 43,395 $114,251 $106,360
-------- -------- -------- --------
</TABLE>
See notes to condensed consolidated financial statements.
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DUQUESNE LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
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<S> <C> <C>
Property, Plant and Equipment $ 4,618,958 $ 4,618,966
Less Accumulated Depreciation and Amortization (1,630,538) (1,550,447)
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Property, Plant and Equipment - Net 2,988,420 3,068,519
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Other Property and Investments 161,239 74,269
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Current Assets:
Cash and temporary cash investments - 15,904
Receivables 133,204 132,315
Other current assets, principally material and supplies 90,221 104,541
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Total Current Assets 223,425 252,760
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Other Non-Current Assets:
Extraordinary property loss 11,997 22,394
Unamortized debt costs 102,333 103,454
Beaver Valley Unit 2 sale/leaseback premium 31,940 33,414
Deferred rate synchronization costs 51,149 51,149
Regulatory tax receivable 417,909 428,043
Other regulatory assets 71,040 72,309
Other non-current 41,405 43,556
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Total Other Non-Current Assets 727,773 754,319
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TOTAL ASSETS $ 4,100,857 $ 4,149,867
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CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock - $1 par value (shares - 90,000,000
authorized; 10 issued) $ - $ -
Capital surplus 824,320 824,764
Net unrealized holding gain (loss) on investments 7,957 (1,571)
Retained earnings 296,570 292,319
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Total Common Stockholders' Equity 1,128,847 1,115,512
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Non-redeemable preferred stock 63,608 90,340
Non-redeemable preference stock, Plan Series A 29,683 29,857
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Total preferred and preference stock before deferred ESOP
benefit (involuntary liquidation values of $93,154 and
$120,060, exceed par by $28,847 and $43,882, respectively) 93,291 120,197
Deferred employee stock ownership plan (ESOP) benefit (22,855) (24,852)
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Total Preferred and Preference Stock 70,436 95,345
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Long-term debt 1,322,470 1,368,930
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Total Capitalization 2,521,753 2,579,787
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Obligations Under Capital Leases 32,292 41,106
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Current Liabilities:
Current maturities and 1994 sinking fund requirements 72,472 85,691
Accounts payable 96,828 88,585
Accrued liabilities 56,268 58,826
Other current liabilities 49,995 35,469
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Total Current Liabilities 275,563 268,571
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Deferred investment tax credits 117,718 123,591
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Deferred income taxes - net 807,711 991,149
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Deferred Credits 345,820 145,663
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Commitments and contingencies (Note 4)
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TOTAL CAPITALIZATION AND LIABILITIES $ 4,100,857 $ 4,149,867
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</TABLE>
See notes to condensed consolidated financial statements.
3
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DUQUESNE LIGHT COMPANY
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Operations $ 251,702 $ 255,023
Changes in working capital 33,642 (21,877)
Other - net 34,034 62,771
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Net Cash Provided from Operating Activities 319,378 295,917
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Cash Flows Used by Investing Activities:
Capital expenditures (50,395) (65,918)
Long-term investments (64,980) -
Other - net 5,529 4,343
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Net Cash Used by Investing Activities (109,846) (61,575)
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Cash Flows Used in Financing Activities:
Dividends on capital stock (115,088) (117,326)
Reductions of long-term obligations (net) (101,968) (65,211)
Reductions in notes payable - (10,391)
Other - net (8,380) (1,976)
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Net Cash Used in Financing Activities (225,436) (194,904)
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Net increase in cash and temporary cash investments (15,904) 39,438
Cash and temporary cash investments at beginning of period 15,904 -
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Cash and temporary cash investments at end of period $ - $ 39,438
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</TABLE>
See notes to condensed consolidated financial statements.
4
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. CONSOLIDATION, RECLASSIFICATIONS AND ACCOUNTING POLICIES
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, whose origins date to 1880.
The condensed consolidated financial statements include the accounts of 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 1995 presentation.
These statements should be read with the financial statements and notes included
in the Form 10-k, Annual Report, filed with the Securities and Exchange
Commission for the year ended December 31, 1994. The results of operations for
the three and nine months ended September 30, 1995 are not necessarily
indicative of the results which may be expected for the full year.
Depreciation and amortization expense increased due to an increase in Duquesne's
composite depreciation rate from 3.0 percent to 3.5 percent effective January 1,
1995. The effect of the change in the depreciation rate on operating income was
$8.6 million, net of taxes, for the nine months ended September 30, 1995.
Duquesne's other property and investments include certain investments in
marketable securities. In accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, these investments are classified as available-for-sale and are
stated at market value. The amount of unrealized holding gain (loss) on
investments at September 30, 1995, and December 31, 1994, are $13.6 million and
$(2.8) million, respectively. Reduced for deferred income taxes, net unrealized
holding gain (loss) on investments are $8.0 million and $(1.6) million at
September 30, 1995, and December 31, 1994, respectively.
In 1995, the Financial Accounting Standards Board issued Financial Accounting
Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS No. 121), and Financial Accounting
Standard No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS
No. 121 requires a financial accounting of long-lived assets impaired in
economic fair value or, in the case of regulated utilities, regulatory assets
excluded from allowable costs. SFAS No. 123 defines a fair value based method
of accounting for stock based compensation plans. Pursuant to the new standard,
companies are encouraged, but not required, to adopt the fair value method of
accounting for employee stock-based transactions. Both Standards are effective
January 1, 1996. Duquesne is currently reviewing the effects, if any, of a
January 1, 1996, adoption.
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2. RECEIVABLES
Components of Receivables for the periods indicated are as follows:
<TABLE>
<CAPTION>
Amounts in Thousands of Dollars
----------------------------------------------------
September 30, September 30, December 31,
1995 1994 1994
---- ---- ----
<S> <C> <C> <C>
Electric customer accounts receivable $110,963 $105,469 $ 96,157
Other accounts receivable 41,452 39,814 51,179
Less: Allowance for uncollectible accounts (19,211) (13,879) (15,021)
-------- -------- --------
Receivables less allowance for uncollectible
Accounts 133,204 131,404 132,315
Less: Receivables sold - - -
-------- -------- --------
Total Receivables $133,204 $131,404 $132,315
-------- -------- --------
</TABLE>
Duquesne and an unaffiliated corporation have an agreement that entitles
Duquesne to sell and the corporation to purchase, on an ongoing basis, up to $50
million of accounts receivable. At September 30, 1995, Duquesne had not sold
any receivables to the unaffiliated corporation. The accounts receivable sales
agreement, which expires in June 1996, is one of many sources of funds available
to Duquesne.
3. RATE MATTERS
Electric rates charged by Duquesne to its customers are regulated by the
Pennsylvania Public Utility Commission (PUC). Electric rates charged to the
Borough of Pitcairn and to other electric utilities are regulated by the Federal
Energy Regulatory Commission (FERC). These rates are designed to recover
Duquesne's operating expenses, investment in utility assets, and a return on
those investments. Sales to other utilities are made at market rates. At this
time, Duquesne has no pending base rate case and has no immediate plans to file
a base rate case.
Regulatory Assets
As a result of the 1987 Rate Case, and the continued application of Statement of
Financial Accounting Standards No. 71, Accounting for the Effects of Certain
Types of Regulation (SFAS No. 71), Duquesne records regulatory assets on its
consolidated balance sheet. The regulatory assets represent probable future
revenue to Duquesne because provisions for these costs are currently included,
or are expected to be included, in charges to utility customers through the
ratemaking process. Management will continue to evaluate significant changes in
the regulatory and competitive environment to assess Duquesne's overall
consistency with the criteria of SFAS No. 71.
Regulatory Tax Receivable
With respect to the financial statement presentation of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, Duquesne reflects the
amortization of the regulatory tax receivable resulting from reversals of
deferred taxes as depreciation and amortization expense. Reversals of deferred
income taxes-net are included in income taxes.
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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 electricity sales. 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 or other generating 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. At
September 30, 1995, Duquesne's net investment in Phillips and BI was $93.0
million and $42.5 million, respectively.
4. COMMITMENTS AND CONTINGENCIES
Construction
Duquesne estimates that it will spend $81 million on utility construction during
1995. This amount excludes allowance for funds used during construction (AFC),
nuclear fuel, expenditures for possible early replacement of steam generators at
the Beaver Valley Power Station (See "Nuclear Litigation" discussion on page 8.)
and expenditures for the refurbishment of the cold-reserved units.
Nuclear-Related Matters
Duquesne operates two nuclear units and has an ownership interest in a third.
The operation of a nuclear facility involves special risks, potential
liabilities and specific regulatory and safety requirements. Specific
information about risk management and potential liabilities is discussed below.
Nuclear Decommissioning. The PUC ruled that recovery of the decommissioning
costs for Beaver Valley Unit 1 could begin in 1977, and that recovery for Beaver
Valley Unit 2 and Perry Unit 1 could begin in 1988. Duquesne expects to
decommission Beaver Valley Unit 1, Beaver Valley Unit 2 and Perry Unit 1 no
earlier than the expiration of each plant's operating license, 2016, 2026 and
2025, respectively. Beaver Valley Unit 1 will be placed in safe storage until
the expiration of the Beaver Valley Unit 2 operating license, at which time the
units may be decommissioned together.
Based upon site specific studies finalized in 1992 for Beaver Valley Unit 2, and
in 1994 for Beaver Valley Unit 1 and Perry Unit 1, Duquesne's share of the total
estimated decommissioning costs, including removal and decontamination costs,
currently being used to determine Duquesne's cost of service, are $122 million
for Beaver Valley Unit 1, $35 million for Beaver Valley Unit 2, and $67 million
for Perry Unit 1.
In conjunction with an August 18, 1994, PUC Accounting Order, Duquesne has
increased the annual contribution to its decommissioning trusts by approximately
$2 million to bring the total annual funding to approximately $4 million per
year. In collaboration with Duquesne and several other Pennsylvania utilities,
the PUC Office of Special Assistants is evaluating various decommissioning
issues, including funding methods. The PUC may issue a report as early as the
end of 1995. Duquesne expects any action relating to the report of the PUC will
result in further increases in annual contributions to its decommissioning
trusts.
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 September 30, 1995 totaled approximately
$27 million. On Duquesne's condensed consolidated balance sheet, the
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decommissioning trusts have been reflected in long-term investments, and the
related liability has been recorded as other liabilities.
Nuclear Insurance. All of the companies with an interest in Beaver Valley Unit
1, Beaver Valley Unit 2 and Perry Unit 1 maintain nuclear property insurance
which provides coverage for property damage, decommissioning, and
decontamination liabilities. Duquesne's share of this program provides for $1.2
billion of insurance coverage for Duquesne's net investment of $423.7 million in
the Beaver Valley Power Station and $571.4 million in Perry Unit 1, plus its
interest in Beaver Valley Unit 2 with lease commitments of $401.7 million, at
September 30, 1995. The lease commitments of $401.7 million represent the net
present value of the lease payments discounted at 10.94 percent. 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 insurance company, 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
$11.4 million.
The Price-Anderson Amendments to the Atomic Energy Act limit public liability
from a single incident at a nuclear plant to $8.9 billion. Duquesne has
purchased $200 million of insurance, the maximum amount available, which
provides the first level of financial protection.
Additional protection of $8.3 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 or leasehold interests in three nuclear generating units, 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 80 percent of such
estimate per week for the following 104 weeks. The amount and duration of actual
extra expense could substantially exceed insurance coverage. NEIL also provides
this insurance. If NEIL's reserves are inadequate to cover claims at any United
States nuclear site covered by that insurer, Duquesne could be assessed
retrospective premiums not to exceed $3.5 million.
Nuclear Litigation. Beaver Valley Unit 1 and Unit 2 interests are jointly
owned/leased generating units. Duquesne's percentage interests held 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 by Pennsylvania Power Company. The remaining interest in Beaver
Valley Unit 2 is held by Ohio Edison Company, The Cleveland Electric
Illuminating Company (CEI) and The Toledo Edison Company. Duquesne operates both
units on behalf of the joint owners of interests.
In 1991, the aforementioned owners of joint interests in Beaver Valley Unit 1
and Unit 2 filed suit against Westinghouse Electric Corporation (Westinghouse)
in the United States District Court for the Western District of Pennsylvania.
The suit alleged that the steam generators supplied by Westinghouse for the two
units contain serious defects - in particular defects causing tube corrosion and
cracking. To date, twelve additional lawsuits have been brought by other utility
companies around the country against Westinghouse for similar problems with
Westinghouse steam generators.
The condition of the Beaver Valley Unit 1 and Unit 2 steam generators is being
monitored closely. Duquesne's steam generator maintenance costs have increased
as a result of these defects and are likely to continue increasing. Replacement
of the Beaver Valley Unit 1 steam generator defective components may occur as
early as 1999. Based on the experience of other utilities with similar units
that have replaced steam generators, replacement cost is estimated to be
approximately $125 million per unit.
A jury trial began September 12, 1994, in Federal District Court in Western
Pennsylvania. Pennsylvania Power Company, Ohio Edison Company, CEI, Toledo
Edison Company and Duquesne were joined in the litigation against Westinghouse.
On October 24, 1994, the Court dismissed four of the five claims against
Westinghouse, leaving only the fraud claim. On December 6, 1994, the jury
rendered a verdict in favor of Westinghouse on the fraud count. On January 5,
1995, the owners of joint interests in the Beaver Valley plants appealed the
decision to the United States Court of Appeals for the Third Circuit. The United
States Court of Appeals for the Third Circuit on September 12, 1995, affirmed
the ruling of the Trial Court in the suit brought by the owners of joint
interest in Beaver Valley Unit 1 and Unit 2 against Westinghouse for the supply
of defective steam generators. The owners of joint interests will not seek
rehearing or petition for review of the Third Circuit Court's ruling upholding
the Trial Court decision in favor of Westinghouse. Duquesne does not believe
this disposition will have a materially adverse effect on its financial position
or results of operations.
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Spent Nuclear Fuel Disposal. 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 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 Unit 1, Beaver Valley Unit 2 and Perry are expected to be
sufficient until 2016, 2010, and 2009, respectively.
Uranium Enrichment Decontamination and Decommissioning Fund. Nuclear reactor
licensees in the United States are assessed annually for the decontamination and
decommissioning of DOE enrichment facilities. Assessments are based on the
amount of uranium a utility had processed for enrichment prior to enactment of
the National Energy Policy Act of 1992 (energy act) and are to be paid by such
utilities over a 15-year period. At September 30, 1995, Duquesne's liability
for contributions is approximately $9.9 million. Contributions, when made, are
recovered through the Energy Cost Rate Adjustment Clause (ECR).
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
September 30, 1995, Duquesne's share of these guarantees was $25.4 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 by January 1,
2000. The minimum future payments to be made by Duquesne solely in relation to
these obligations are $27.3 million at September 30, 1995.
Residual Waste Management Regulations
In 1992, the Pennsylvania Department of Environmental Protection (DEP) issued
Residual Waste Management Regulations governing the generation and management of
non-hazardous, residual waste, such as coal ash. Duquesne is currently
conducting tests and developing compliance strategies. Capital compliance costs
are estimated, on the basis of information currently available, at approximately
$5 million in 1995. The expected additional capital cost of compliance through
2000 is estimated, based on current information, to be approximately $25
million; this estimate is subject to the results of continuing ground water
assessments and DEP final approval of compliance plans.
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.
______________________________
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- --------------------------------------------------------------------------------
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.
Service Territory
Duquesne provides electric service to customers in Allegheny County, including
the City of Pittsburgh, and Beaver County. This represents a service territory
of approximately 800 square miles. The population of the area served by
Duquesne, based on 1990 census data, is approximately 1,510,000, of whom 370,000
reside in the City of Pittsburgh. In addition to serving approximately 580,000
customers within this service area, Duquesne also sells electricity to other
utilities beyond its service territory.
Regulation
Duquesne's operations are subject to regulation by the Pennsylvania Public
Utility Commission (PUC). Duquesne is also subject to regulation by the Federal
Energy Regulatory Commission (FERC) under the Federal Power Act with respect to
rates for interstate sales, transmission of electric power, accounting and other
matters.
Duquesne's nuclear facility operations are subject to regulation by the Nuclear
Regulatory Commission (NRC) under the Atomic Energy Act of 1954, as amended,
with respect to the operation of its jointly owned/leased nuclear power plants,
Beaver Valley Unit 1, Beaver Valley Unit 2 and Perry Unit 1.
Duquesne is subject to the accounting and reporting requirements of the
Securities and Exchange Commission. As a result, the consolidated financial
statements contain regulatory assets and liabilities in accordance with
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation (SFAS No. 71) and reflect the effects of the
ratemaking process. In accordance with SFAS No. 71, Duquesne's financial
statements reflect regulatory assets and costs based on current cost-based
ratemaking regulations. The regulatory assets represent probable future revenue
to Duquesne because provisions for these costs are currently included, or are
expected to be included, in charges to utility customers through the ratemaking
process.
Duquesne's operations currently satisfy the SFAS No. 71 criteria. However,
Duquesne's operations or a portion of such operations could cease to meet these
criteria for various reasons including a change in PUC or FERC regulations.
Should Duquesne cease to meet the SFAS No. 71 criteria, it would be required to
write-off any regulatory assets or liabilities for those operations that no
longer meet these requirements.
Results of Operations
- --------------------------------------------------------------------------------
Seasonality
The quarterly results are not necessarily indicative of full-year operations
because of seasonal fluctuations. Sales of electricity to ultimate customers by
Duquesne's utility operations tend to increase
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during the warmer summer and cooler winter seasons because of greater customer
use of electricity for cooling and heating.
Operating Revenues
Total operating revenues increased $20.2 million during the third quarter of
1995 as compared to the third quarter of 1994 primarily due to higher sales of
electricity. Prolonged record summer temperatures resulted in higher sales of
electricity to residential and commercial customers, 13.6 percent and 1.8
percent, respectively. Reduced demand from two of Duquesne's largest customers
resulted in a 2.9 percent decrease in sales to industrial customers in the third
quarter of 1995. The extreme summer weather also resulted in greater demand for
electricity from other utilities. Revenue from sales of electricity to other
utilities increased $3.1 million, 26 percent, in the third quarter of 1995 when
compared to the third quarter of 1994.
Operating Expenses
Total operating expenses increased $12.9 million during the third quarter of
1995 as compared to the third quarter of 1994.
Fuel and purchased power expense was greater in the third quarter of 1995. The
$1.7 million net increase in fuel and purchased power expense is consistent with
the quarter's increased electric sales volume to residential and commercial
customers, offset by a decline in energy costs for the quarter. The summer heat
wave resulted in $5.6 million of increased fuel usage; however, favorable
generation mix and less purchased power reduced energy costs by $3.9 million for
the third quarter of 1995 when compared with the same period in 1994.
Depreciation and amortization expense for the third quarter increased due to an
increase in Duquesne's composite depreciation rate from 3.0 percent to 3.5
percent effective January 1, 1995. The net of tax effect of the change in the
depreciation rate on third quarter operating income was $2.9 million. Duquesne
is currently conducting a Depreciation Life Study which is expected to result in
a further increase in depreciation expense.
Income taxes increased compared to the third quarter of 1994 because of greater
taxable income, more than offsetting a one percent reduction in the Pennsylvania
Corporate Net Income Tax rate.
Liquidity, Capital Resources and Investing
- --------------------------------------------------------------------------------
Financing
Duquesne plans to meet its current obligations and debt maturities through 1998
with funds generated from operations and through new financings. At September
30, 1995, Duquesne was in compliance with all of its debt covenants.
On September 1, 1995, Duquesne redeemed all of its outstanding shares of $7.20
preferred stock for $30.3 million. On August 29, 1995, Duquesne purchased $7
million of its 8-3/8% First Collateral Trust Bonds maturing in 2024.
Duquesne's 1947 mortgage bond indenture was retired in the third quarter
following the maturity of the last bond series issued under the indenture. All
mortgage bonds sold since 1992 have been issued
11
<PAGE>
under a new mortgage indenture that was established in April, 1992. The new
mortgage indenture includes more flexible provisions and eliminates
conventions such as mandatory sinking funds and formula-derived maintenance
and replacement clauses. Bonds issued under the 1992 first mortgage bond
indenture are rated the same as Duquesne's former first mortgage bonds.
Investing
In August of 1995, Duquesne made energy related leasing investments of $60
million.
Outlook
- --------------------------------------------------------------------------------
Competition
Regulatory developments in the electric utility industry are placing increasing
competitive pressures on electric utilities. The electric utility industry is
expected to continue to undergo significant changes for the remainder of the
decade. These changes most likely will include increasing competition in the
generation and sale of electricity, increasing energy flows resulting from open
transmission access and non-regulated generation and transmission projects
outside the traditional service areas. 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 amended
the Public Utility Holding Company Act of 1935 (1935 act) and the Federal Power
Act.
Amendments to the Federal Power Act created the potential for utilities and
other power producers to gain increased access to transmission systems of other
utilities in order to facilitate sales to other utilities. The amendments
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. Duquesne is currently pursuing expanded transmission
access under these amendments. (See discussion in "Transmission Access" on page
13.)
The PUC is currently conducting an investigation into electric power
competition. Duquesne has been advocating increased transmission access to the
wholesale power market as the necessary first step toward enabling our customers
to benefit from competition. On August 4, 1995, the PUC Staff issued a report
which did not recommend retail wheeling at this time. The PUC has scheduled
hearings regarding competition in December of 1995 and January of 1996. The PUC
has indicated an intention to issue a report to the Governor and the
Pennsylvania General Assembly by April of 1996.
Emerging competition, federal deregulation of wholesale energy sales, and
prospective retail access initiatives require Duquesne to reexamine its approach
to doing business. Growth in energy sales, competitive rate pressures, and
Duquesne's commitment to provide reliable, quality service to its customers
influence short-and long-term corporate goals. Duquesne's current business plan
recognizes the need to encourage economic growth and stability in the service
territory and surrounding region. Duquesne's efforts continue to focus on
achievement of business growth through the application of marketing and economic
development programs to achieve energy-efficient growth in its sales of utility
services. Duquesne's rates for energy intensive industrial and commercial
customers are competitively priced and its rate structure allows some
flexibility in setting rates to attract new business. In addition, Duquesne
sponsors programs to help customers manage their electricity consumption and
control their costs.
Although management believes Duquesne's system is well positioned, as a clean,
low cost producer of electricity, to compete both within and outside of its
service territory, efforts continue to further reduce costs, and increase
effectiveness and productivity. Duquesne is attempting to increase its
transmission access. Increasing transmission access is critical to achieving the
most efficient use of Duquesne's generating units. See "Transmission Access"
on page 13. Duquesne is also considering alternatives to transmission access
that include the outright sale of certain generating assets. Management will
continue to aggressively address these factors
12
<PAGE>
to position Duquesne to overcome the challenges they may create and take
advantage of the opportunities increased competition will bring.
Transmission Access
In March 1994, Duquesne submitted, pursuant to the Federal Power Act, separate
"good faith" requests for transmission service with the Allegheny Power System
(APS) and Pennsylvania-New Jersey-Maryland Interconnection Association (PJM
Companies), respectively. Each request is based on 20-year firm service with
flexible delivery points for 300 megawatts of transfer capability over the APS
and PJM transmission networks which together extend from western Pennsylvania to
the East Coast. Because of a lack of progress on pricing and other issues, on
August 5 and September 16, 1994, Duquesne filed with the FERC applications for
transmission service from the PJM Companies and APS, respectively. The
applications are authorized under Section 211 of the Federal Power Act, which
requires electric utilities to provide firm wholesale transmission service. On
May 16, 1995, the FERC issued proposed orders instructing APS and the PJM
Companies to provide transmission service to Duquesne and directing the parties
to negotiate specific rates, terms and conditions. Duquesne was unable to agree
to terms for transmission service with either APS or the PJM companies. Briefs
were filed with the FERC outlining the areas of disagreement among the
companies. The matter is now pending before the FERC. Duquesne cannot predict
the final outcome of these proceedings.
______________________________
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
EXHIBIT 12 - Calculation of Ratio of Earnings to Fixed Charges.
EXHIBIT 27 - Financial Data Schedule.
b. No Current Report on Form 8-K was filed during the three months
ended September 30, 1995.
______________________________
14
<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 November 13, 1995 /s/ Gary L. Schwass
----------------- ---------------------------
(Signature)
Gary L. Schwass
Senior Vice President and
Principal Financial Officer
Date November 13, 1995 /s/ Morgan K. O'Brien
----------------- ---------------------------
(Signature)
Morgan K. O'Brien
Controller and
Principal Accounting Officer
15
<PAGE>
EXHIBIT 12
Duquesne Light Company and Subsidiary
Calculation of Ratio of Earnings to Fixed Charges
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
Nine Months Ended -------------------------------------------------
September 30, 1995 1994 1993 1992 1991 1990
------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on long-term debt $ 67,700 $ 94,646 $102,938 $119,179 $127,606 $135,850
Other interest 2,177 1,095 2,387 1,749 1,773 4,939
Amortization of debt discount,
premium and expense-net 4,726 6,381 5,541 4,223 3,892 4,039
Portion of lease payments
representing an interest factor 33,068 44,839 45,925 60,721 64,189 64,586
-------- -------- -------- -------- -------- --------
Total Fixed Charges $107,671 $146,961 $156,791 $185,872 $197,460 $209,414
-------- -------- -------- -------- -------- --------
EARNINGS:
Income from continuing operations $118,599 $147,449 $144,787 $149,768 $143,133 $135,456
Income taxes 77,994* 87,897* 75,042 107,999 101,073 84,478
Fixed charges as above 107,671 146,961 156,791 185,872 197,460 209,414
-------- -------- -------- -------- -------- -------
Total Earnings $304,264 $382,307 $376,620 $443,639 $441,666 $429,348
-------- -------- -------- -------- -------- --------
RATIO OF EARNINGS TO FIXED CHARGES 2.83 2.60 2.40 2.39 2.24 2.05
-------- -------- -------- -------- -------- --------
</TABLE>
Duquesne's share of the fixed charges of an unaffiliated coal supplier, which
amounted to approximately $2.6 million for the nine months ended September 30,
1995, has been excluded from the ratio.
*Earnings related to income taxes reflect a $5.4 million decrease for the nine
months ended September 30, 1995, and a $6.8 decrease for the year ended
December 31, 1994, due to a financial statement reclassification related to
SFAS 109. The Ratio of Earnings to Fixed Charges absent this reclassification
equals 2.88 and 2.65 for the nine months ended September 30, 1995 and the year
ended December 31, 1994, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $2,988,420
<OTHER-PROPERTY-AND-INVEST> $161,239
<TOTAL-CURRENT-ASSETS> $223,425
<TOTAL-DEFERRED-CHARGES> $686,368
<OTHER-ASSETS> $41,405
<TOTAL-ASSETS> $4,100,857
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> $832,277
<RETAINED-EARNINGS> $296,570
<TOTAL-COMMON-STOCKHOLDERS-EQ> $1,128,847
0
$70,436
<LONG-TERM-DEBT-NET> $1,322,470
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> $50,000
0
<CAPITAL-LEASE-OBLIGATIONS> $32,292
<LEASES-CURRENT> $22,472
<OTHER-ITEMS-CAPITAL-AND-LIAB> $1,474,340
<TOT-CAPITALIZATION-AND-LIAB> $4,100,857
<GROSS-OPERATING-REVENUE> $909,299
<INCOME-TAX-EXPENSE> $75,126
<OTHER-OPERATING-EXPENSES> $641,925
<TOTAL-OPERATING-EXPENSES> $717,051
<OPERATING-INCOME-LOSS> $192,248
<OTHER-INCOME-NET> ($40)
<INCOME-BEFORE-INTEREST-EXPEN> $192,208
<TOTAL-INTEREST-EXPENSE> $73,609
<NET-INCOME> $118,599
$4,348
<EARNINGS-AVAILABLE-FOR-COMM> $114,251
<COMMON-STOCK-DIVIDENDS> $110,000
<TOTAL-INTEREST-ON-BONDS> $72,427
<CASH-FLOW-OPERATIONS> $319,378
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
