<PAGE>
[CONFORMED]
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, 1996
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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)
411 Seventh Avenue
Pittsburgh, Pennsylvania 15219
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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, 1996 and October 31, 1996.
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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,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating Revenues
Sales of Electricity:
Customers - net $295,788 $313,956 $822,557 $831,246
Utilities 14,599 15,356 45,641 39,872
--------- --------- -------- ---------
Total Sales of Electricity 310,387 329,312 868,198 871,118
Other 9,888 7,844 27,456 27,323
--------- --------- -------- ---------
Total Operating Revenues 320,275 337,156 895,654 898,441
--------- --------- -------- ---------
Operating Expenses
Fuel and purchased power 61,126 66,466 178,986 174,391
Other operating 61,400 64,935 186,121 191,071
Maintenance 19,554 21,185 58,922 61,044
Depreciation and amortization 52,386 50,677 163,241 147,754
Taxes other than income taxes 22,145 23,275 64,403 64,982
Income taxes 33,926 34,617 69,498 69,951
--------- --------- -------- ---------
Total Operating Expenses 250,537 261,155 721,171 709,193
--------- --------- -------- ---------
OPERATING INCOME 69,738 76,001 174,483 189,248
--------- --------- -------- ---------
Other Income and (Deductions)
Interest and dividend income 3,379 2,261 7,528 6,369
Income taxes (155) (1,860) 1,831 (2,868)
Other - net 2,981 642 8,207 (541)
--------- --------- -------- ---------
Total Other Income and (Deductions) 6,205 1,043 17,566 2,960
--------- --------- -------- ---------
INCOME BEFORE INTEREST AND
OTHER CHARGES 75,943 77,044 192,049 192,208
INTEREST CHARGES 21,950 24,257 67,096 73,609
MONTHLY INCOME PREFERRED
SECURITIES DIVIDEND
REQUIREMENTS 3,141 - 4,781 -
--------- --------- -------- ---------
NET INCOME 50,852 52,787 120,172 118,599
DIVIDENDS ON PREFERRED AND
PREFERENCE STOCK 1,004 1,380 3,036 4,348
--------- --------- -------- ---------
EARNINGS FOR COMMON STOCK $ 49,848 $ 51,407 $117,136 $114,251
========= ========= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
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DUQUESNE LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Property, plant and equipment $ 4,653,043 $ 4,652,010
Less: Accumulated depreciation and
amortization (1,756,481) (1,673,107)
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Property, plant and equipment - net 2,896,562 2,978,903
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Long-term investments:
Investment in DQE Common Stock 58,507 66,757
Other investments 102,044 102,648
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Total long-term investments 160,551 169,405
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Current assets:
Cash and temporary cash investments 195,428 2,490
Receivables 134,115 113,184
Other current assets, principally
material and supplies 94,801 86,707
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Total current assets 424,344 202,381
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Other non-current assets:
Regulatory assets 643,800 671,928
Other 48,229 45,048
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Total other non-current assets 692,029 716,976
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TOTAL ASSETS $ 4,173,486 $ 4,067,665
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock - $1 par value (shares -
90,000,000 authorized; 10 issued) $ - $ -
Capital surplus 825,577 837,265
Retained earnings 285,890 294,069
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Total common stockholders' equity 1,111,467 1,131,334
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Non-redeemable preferred stock 63,608 63,608
Non-redeemable Monthly Income
Preferred Securities 150,000 -
Non-redeemable preference stock 29,127 29,615
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Total preferred and preference
stock before deferred employee
stock ownership plan (ESOP) benefit
(involuntary liquidation values of
$242,598 and $93,086 exceed par by
$28,306 and $28,781, respectively) 242,735 93,223
Deferred ESOP benefit (20,246) (22,257)
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Total preferred and preference stock 222,489 70,966
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Long-term debt 1,322,581 1,322,531
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Total capitalization 2,656,537 2,524,831
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Obligations under capital leases 28,787 34,546
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Current liabilities:
Current maturities and sinking fund
requirements 23,509 71,051
Accounts payable 72,132 76,435
Accrued liabilities 84,100 53,930
Dividends declared 57,485 37,015
Other 7,792 9,191
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Total current liabilities 245,018 247,622
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Deferred income taxes - net 803,450 805,996
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Deferred investment tax credits 104,645 115,760
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Deferred income 145,035 162,916
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Other 190,014 175,994
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Commitments and contingencies (Note 4)
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TOTAL CAPITALIZATION AND
LIABILITIES $ 4,173,486 $ 4,067,665
============= =============
</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,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Operations $ 259,518 $ 251,702
Changes in working capital other than
cash 15,913 33,642
Other - net 24,928 34,034
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Net Cash Provided by Operating
Activities 300,359 319,378
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Cash Flows Used in Investing Activities
Construction expenditures (53,339) (50,395)
Long-term investments - net 382 (64,980)
Other - net (3,587) 5,529
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Net Cash Used in Investing
Activities (56,544) (109,846)
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Cash Flows Used in Financing Activities
Issuance (redemption) of preferred
and preference stock - net 150,000 (26,732)
Dividends on capital stock (129,036) (115,088)
Reductions of long-term obligations -
net (63,878) (75,236)
Other - net (7,963) (8,380)
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Net Cash Used in Financing
Activities (50,877) (225,436)
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Net increase (decrease) in cash and
temporary cash investments 192,938 (15,904)
Cash and temporary cash investments at
beginning of period 2,490 15,904
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Cash and temporary cash investments at
end of period $ 195,428 $ -
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Except for historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements that involve
risks and uncertainties including, but not limited to, economic, competitive,
governmental and technological factors affecting Duquesne Light Company's
(Duquesne's) operations, markets, products, services and prices, and other
factors discussed in Duquesne's filings with the Securities and Exchange
Commission (SEC).
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. Duquesne has one wholly owned subsidiary,
Monongahela Light and Power, also a Pennsylvania corporation, which currently
holds energy-related lease investments.
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 1996 presentation.
These statements should be read with the financial statements and notes
included in the Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 1995. The results of operations for the three and nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the full year. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. The reported amounts of revenues and expenses during
the reporting period may also be affected by the estimates and assumptions
management is required to make. Actual results could differ from those
estimates.
Duquesne is subject to the accounting and reporting requirements of the
SEC. In addition, Duquesne's operations are subject to the regulation of the
Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory
Commission (FERC). 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.
Such effects concern mainly the time at which various items enter into the
determination of net income in accordance with the principle of matching costs
and revenues. (See "Rate Matters," Note 3, on page 6.)
Duquesne's long-term investments include certain investments in marketable
securities. In accordance with Statement of Financial Accounting Standards No.
115, Accounting for Certain
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Investments in Debt and Equity Securities, these investments are classified as
available-for-sale and are stated at market value. The amounts of unrealized
holding gains on investments at September 30, 1996 and December 31, 1995 are
$16.8 million and $22.8 million. Reduced for deferred income taxes, net
unrealized holding gains on investments are $9.8 million and $13.4 million at
September 30, 1996 and December 31, 1995.
2. RECEIVABLES
Components of receivables for the periods indicated are as follows:
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1996 1995 1995
(Amounts in Thousands of Dollars)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct customer accounts receivable $107,419 $110,963 $103,821
Other utility receivables 36,626 17,216 22,441
Other receivables 9,143 24,236 11,842
Less: Allowance for uncollectible
accounts (19,073) (19,211) (17,920)
- -------------------------------------------------------------------------------------------
Receivables less allowance for
uncollectible accounts 134,115 133,204 120,184
Less: Receivables sold - - (7,000)
- -------------------------------------------------------------------------------------------
Total Receivables $134,115 $133,204 $113,184
===========================================================================================
</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
$50.0 million of accounts receivable. At September 30, 1996 and 1995, Duquesne
had not sold any receivables to the unaffiliated corporation. At December 31,
1995, Duquesne had sold $7.0 million of receivables to the unaffiliated
corporation. The accounts receivable sales agreement, which expires in June
1997, is one of many sources of funds available to Duquesne. Duquesne may
attempt to extend the agreement or to replace the facility with a similar
arrangement or to eliminate it upon expiration.
3. RATE MATTERS
On October 31, 1996 the sale of Duquesne's ownership interest in the Ft.
Martin Power Station (Ft. Martin) was completed. In accordance with the PUC
order approving Duquesne's plan for the sale of its ownership interest in Ft.
Martin, Duquesne will not increase its base rates for a five-year period through
the year 2000. In addition, Duquesne will record a five-year annual $5.0 million
credit to the Energy Cost Rate Adjustment Clause (ECR) and cap energy costs
beginning April 1, 1997 through the remainder of the plan period. (See "Ft.
Martin Plan" discussion on page 8.)
Regulatory Assets
As a result of the application of 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 customers
through the ratemaking process.
6
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Duquesne's operations currently satisfy the SFAS No. 71 criteria. However,
a company's electric utility operations or a portion of such operations could
cease to meet these criteria for various reasons, including a change in the PUC
or the FERC regulations. Should Duquesne's operations cease to meet the SFAS No.
71 criteria, Duquesne would be required to write off any regulatory assets or
liabilities for those operations that no longer meet these requirements.
Management will continue to evaluate significant changes in the regulatory and
competitive environment in order to assess Duquesne's overall compliance with
the criteria of SFAS No. 71.
The components of regulatory assets for the periods presented are as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Amounts in Thousands of Dollars)
- ----------------------------------------------------------------------------
<S> <C> <C>
Regulatory tax receivable $404,409 $414,543
Unamortized debt costs (a) 94,656 98,776
Deferred rate synchronization costs
(see below) 42,149 51,149
Beaver Valley Unit 2 sale/leaseback
premium (b) 30,435 31,564
Deferred employee costs (c) 29,194 31,218
Extraordinary property loss 0 8,300
Deferred nuclear maintenance outage
costs 16,002 6,776
DOE decontamination and decommissioning
receivable 10,010 10,687
Deferred coal costs 11,303 12,753
Other 5,642 6,162
- ----------------------------------------------------------------------------
Total Regulatory Assets $643,800 $671,928
============================================================================
</TABLE>
(a) The premiums paid to reacquire debt prior to scheduled maturity dates are
deferred for amortization over the life of the debt issued to finance the
reacquisitions.
(b) The premium paid to refinance the Beaver Valley Unit 2 lease was deferred
for amortization over the life of the lease.
(c) Includes amounts for recovery of accrued compensated absences and accrued
claims for workers' compensation.
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 accumulated deferred income taxes - net are included in income taxes.
Deferred Rate Synchronization Costs
In 1987, the PUC approved Duquesne's petition to defer initial operating
and other costs of Perry Unit 1 and Beaver Valley Unit 2 (BV Unit 2). Duquesne
deferred the costs incurred from the date the units went into commercial
operation until the date a rate order was issued. In its rate order, the PUC
postponed ruling on whether these costs would be recoverable from Duquesne's
customers. Duquesne is not earning a return on the deferred costs.
In accordance with the PUC order approving Duquesne's plan for the sale of
its ownership interest in Ft. Martin, Duquesne has expensed $9.0 million
related to the depreciation portion of deferred rate synchronization costs.
Duquesne's approved plan also provides for the amortization of the remaining
$42.1 million of deferred rate synchronization costs over a ten-year period.
(See "Ft. Martin Plan" discussion below.)
7
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Property Held for Future Use
In 1986, the PUC approved Duquesne's request to remove Phillips Power
Station (Phillips) and a portion of Brunot Island Power Station (BI) from
service and from rate base. Duquesne expects to recover its investment in BI
through future electricity sales. Duquesne believes its investment in BI will be
necessary in order to meet future business needs as outlined in Duquesne's plans
for optimizing generation resources. A portion of the proceeds of the sale of
Ft. Martin is expected to be used to fund reliability enhancements to BI
combustion turbines. The reliability enhancements are contingent upon the
projects meeting a least-cost test versus other potential sources of peaking
capacity. (See "Ft. Martin Plan" discussion below.) Duquesne is analyzing the
effects of retail choice on its future generating requirements and specifically
whether Phillips will be able to operate in this new competitive marketplace.
Duquesne is also investigating other opportunities to recover its investment and
associated costs of Phillips, including the possible sale of the station. In the
event that market demand, transmission access or rate recovery do not support
the utilization or sale of these plants, Duquesne may have to write off part or
all of these investments and associated costs. At September 30, 1996, Duquesne's
net of tax investment in Phillips and BI held for future use was $53.2 million
and $27.6 million, respectively.
Ft. Martin Plan
On October 31, 1996 the sale of Duquesne's ownership interest in Ft. Martin
was completed. The sale and a plan to be funded in part by the proceeds of the
Ft. Martin transaction were approved by the PUC on May 23, 1996. Under the
approved plan, Duquesne will not increase its base rates for a period of five
years through the year 2000. In addition, Duquesne recorded in October 1996 a
one-time reduction of approximately $130.0 million in the book value of
Duquesne's nuclear plant investment. The proceeds from the sale are expected to
be used to fund reliability enhancements to the BI combustion turbines and to
reduce Duquesne's capitalization. The approved plan also provides for an
increase of $25.0 million in depreciation and amortization expense in 1996,
$50.0 million in 1997 and $75.0 million in 1998 related to Duquesne's nuclear
investment, as well as additional annual contributions to its nuclear plant
decommissioning funds of $5.0 million, without any increase in existing electric
rates. Also, Duquesne will record an annual $5.0 million credit to the ECR
during the plan period to compensate Duquesne's customers for lost profits from
any short-term power sales foregone by the sale of its ownership interest in Ft.
Martin. In addition to the annual credit of $5.0 million to the ECR, Duquesne
will cap energy costs beginning April 1, 1997 through the remainder of the plan
period, at a historical five-year average of 1.47 cents per kilowatt hour. In
accordance with the approved plan, Duquesne has expensed $9.0 million related to
the depreciation portion of the $51.1 million of deferred rate synchronization
costs associated with BV Unit 2 and Perry Unit 1. Upon final transfer of its
ownership interest in Ft. Martin, Duquesne began to amortize the remaining $42.1
million of deferred rate synchronization costs over a ten-year period. (See
"Deferred Rate Synchronization Costs" discussion on page 7.) Finally, Duquesne's
approved plan also provides for annual assistance of $0.5 million to low-income
customers.
4. COMMITMENTS AND CONTINGENCIES
Construction
8
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Duquesne estimates that it will spend, excluding the Allowance for Funds
Used During Construction (AFC) and nuclear fuel, approximately $90.0 million on
construction during 1996. This estimate also excludes any potential expenditures
for reliability enhancements to the BI combustion turbines. (See "Ft. Martin
Plan" discussion, Note 3, on page 8.)
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 (BV Unit 1) could begin in 1977, and that
recovery for BV Unit 2 and Perry Unit 1 could begin in 1988. Duquesne expects to
decommission BV Unit 1, BV Unit 2 and Perry Unit 1 no earlier than the
expiration of each plant's operating license in 2016, 2027 and 2026,
respectively. BV Unit 1 will be placed in safe storage until the expiration of
the BV Unit 2 operating license, at which time the units may be decommissioned
together.
Based on site-specific studies finalized in 1992 for BV Unit 2 and in 1994
for BV 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 is $121.7 million for BV Unit
1, $35.2 million for BV Unit 2 and $67.1 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
$2.0 million, to bring the total annual funding to approximately $4.0 million
per year. On July 18, 1996, the PUC issued a Proposed Policy Statement
Regarding Nuclear Decommissioning Cost Estimation and Cost Recovery for the
purpose of obtaining comments from the public. The proposed policy includes
guidelines for a site-specific study to estimate the cost of decommissioning.
These studies need to be performed at least every five years addressing
radiological and non-radiological costs and include a contingency factor of not
more than 10 percent. Under the proposed policy, annual decommissioning funding
levels are based on an annuity calculation recognizing inflation in the cost
estimates and earnings on fund assets. Utilities may be permitted to update
their annual decommissioning trust fund payments through accounting petitions, a
change in base rates, or a non-earnings related change in base rates under the
proposed policy. With respect to the transition to a competitive generation
market, the proposed policy recommends that utilities include a plan to mitigate
any shortfall in decommissioning trust fund payments for the life of the
facility with any future decommissioning filings. In response to this
recommendation, Duquesne has taken steps to currently fund its nuclear
decommissioning obligation. The PUC approved Duquesne's plan for the sale of
its ownership interest in Ft. Martin, which provides for additional annual
contributions to its nuclear decommissioning funds of $5.0 million without any
increase in existing electric utility rates. (See "Ft. Martin Plan" discussion,
Note 3, on page 8.) Also, on October 17, 1996 the PUC adopted an Accounting
Order filed by Duquesne to recognize the increased funding as part of Duquesne's
cost of service. Duquesne is currently seeking approval from the Internal
Revenue Service to allow for this additional funding of its decommissioning
trusts.
Duquesne records decommissioning expense under the category of depreciation
and amortization 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 of
municipal bonds, certificates of deposit and United States government securities
having a weighted average duration of four to seven years. Trust fund earnings
increase the fund balance and the recorded liability. The market value of the
aggregate
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trust fund balances at September 30, 1996 totaled approximately $32.0 million.
On Duquesne's consolidated balance sheet, the decommissioning trusts have been
reflected in long-term investments, and the related liability has been recorded
as other non-current liabilities.
Nuclear Insurance. The Price-Anderson Amendments to the Atomic Energy Act
of 1954 limit public liability from a single incident at a nuclear plant to $8.9
billion. The maximum available private primary insurance of $200.0 million has
been purchased by Duquesne. Additional protection of $8.7 billion would be
provided by an assessment of up to $79.3 million per incident on each nuclear
unit in the United States. Duquesne's maximum total assessment, $59.4 million,
which is based on its ownership or leasehold interests in three nuclear
generating units, would be limited to a maximum of $7.5 million per incident per
year. This assessment is subject to indexing for inflation and may be subject to
state premium taxes. If funds prove insufficient to pay claims, the United
States Congress could impose other revenue-raising measures on the nuclear
industry.
Duquesne's share of insurance coverage for property damage, decommissioning
and decontamination liability is $1.2 billion. 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 that provides a portion of this coverage, are
inadequate to cover claims arising from an incident at any United States nuclear
site covered by that insurer, effective November 15, 1996, Duquesne could be
assessed retrospective premiums totaling a maximum of $7.3 million.
In addition, Duquesne participates in a NEIL program that provides
insurance for the increased cost of generation and/or purchased power resulting
from an accidental outage of a nuclear unit. Subject to the policy limit, the
coverage provides for 100 percent of the estimated incremental costs 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 with no coverage thereafter.
If NEIL's losses for this program ever exceed its reserves, Duquesne could be
assessed retrospective premiums totaling a maximum of $3.5 million.
Beaver Valley Power Station (BVPS) Steam Generators. BVPS's two units are
equipped with steam generators designed and built by Westinghouse Electric
Corporation (Westinghouse). Similar to other Westinghouse nuclear plants,
outside diameter stress corrosion cracking (ODSCC) has occurred in the steam
generator tubes of both units. BV Unit 1, which was placed in service in 1976,
has required removal of approximately 15 percent of its steam generator tubes
from service through a process called plugging. However, BV Unit 1 continues to
operate at 100 percent reactor power and has the ability to return tubes to
service by repairing them through a process called sleeving. To date, no tubes
at either BV Unit 1 or BV Unit 2 have been sleeved. BV Unit 2, which was placed
in service eleven years after BV Unit 1, has not yet exhibited the degree of
ODSCC experienced at BV Unit 1. Approximately 2 percent of BV Unit 2's tubes are
plugged; however, it is too early in the life of the unit to determine the
extent to which ODSCC may become a problem.
Duquesne has undertaken certain measures, such as increased inspections,
water chemistry control and tube plugging, to minimize the operational impact of
and to reduce susceptibility to ODSCC. Although Duquesne has taken these steps
to allay the effects of ODSCC, the inherent potential for future ODSCC in steam
generator tubes of the Westinghouse design still exists. Material acceleration
in the rate of ODSCC could lead to a loss of plant efficiency, significant
repairs or the possible replacement of BV Unit 1's steam generators. The total
replacement cost of BV Unit 1's steam generators is currently estimated at
approximately $125.0 million. Duquesne would be responsible for $59.0 million of
this total, which includes the cost of equipment removal and replacement steam
generators but excludes replacement power costs. The earliest that BV Unit 1's
steam generators could be replaced is 1999.
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<PAGE>
BV Unit 1 completed its 11th refueling outage on May 11, 1996. The outage
lasted 49 days and was the shortest refueling outage in the history of the unit.
During the outage, various inspections of the unit's steam generators were made,
including examinations using a new "Plus Point" probe. As a result of these
inspections, Duquesne returned to service tubes that had previously been
plugged. Following the refueling outage, 85 percent of the steam generator tubes
were in service, approximately 1 percent more than at the beginning of the
outage.
BV Unit 2 began its 6th refueling outage on August 30, 1996. Various
inspections of the unit's steam generators, including inspections using the
"Plus Point" probe, have been completed. Upon completion of the outage,
approximately 98 percent of the unit's steam generator tubes will be in service.
Unanticipated repairs to two residual heat removal pumps will extend the outage
by approximately six weeks. The unit is expected to return to service in late
November.
Duquesne continues to explore all viable means of managing ODSCC, including
new repair technologies, and plans to continue to perform 100 percent tube
inspections during future refueling outages, which occur at approximately 18
month intervals for each unit. Duquesne will continue to monitor and evaluate
the condition of the BVPS steam generators.
Spent Nuclear Fuel Disposal. The Nuclear Waste Policy Act of 1982
established a policy for handling and disposing of spent nuclear fuel and a
policy requiring the established final repository to accept spent fuel.
Electric utility companies have entered into contracts with the Department of
Energy (DOE) for the permanent disposal of spent nuclear fuel and high-level
radioactive waste in compliance with this legislation. The DOE has indicated
that its repository under these contracts will not be available for acceptance
of spent fuel before 2010 at the earliest. On July 23, 1996, the U. S. Court of
Appeals for the District of Columbia Circuit, in response to a suit brought by
25 electric utilities and 18 states and state agencies, unanimously ruled that
the DOE has a legal obligation to begin taking spent fuel by January 31, 1998.
The DOE has not yet established an interim or permanent storage facility, and it
is uncertain whether the DOE will be able to accept spent nuclear fuel by
January 31, 1998. Further, Congress is considering amendments to the Nuclear
Waste Policy Act of 1982 that could give the DOE authority to proceed with the
development of a federal interim storage facility. In the event the DOE does
not begin accepting fuel, existing on-site fuel storage capacities at BV Unit 1,
BV Unit 2 and Perry Unit 1 are expected to be sufficient until 2016, 2010 and
2011, respectively.
Uranium Enrichment Decontamination and Decommissioning Fund. Nuclear
reactor licensees in the United States are assessed annually for the
decontamination and decommissioning of DOE uranium 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 (NEPA)
and are to be paid by such utilities over a 15-year period. At September 30,
1996, Duquesne's liability for contributions was approximately $9.9 million
(subject to an inflation adjustment). Contributions, when made, are recovered
from customers through the ECR.
Guarantees
Duquesne and the owners of Bruce Mansfield Power Station have guaranteed
certain debt and lease obligations related to a coal supply contract for the
Bruce Mansfield plant. At September 30, 1996, Duquesne's share of these
guarantees was $20.3 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 in the year 2000. The minimum future payments to be
made by Duquesne solely in relation to these obligations total $21.0 million at
September 30, 1996.
Residual Waste Management Regulations
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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
assessing the sites it utilizes and has developed compliance strategies that are
now under review by the DEP. Capital compliance costs of $3.0 million were
incurred by Duquesne in 1995 to comply with these DEP regulations; on the basis
of information currently available, an additional $2.5 million will be incurred
in 1996. The expected additional capital cost of compliance through the year
2000 is estimated, based on current information, to be approximately $25.0
million. This estimate is subject to the results of ground water assessments and
DEP final approval of compliance plans.
Employees
In November 1996, Duquesne reached an agreement on a three year contract
extension with the International Brotherhood of Electrical Workers, which
represents approximately 2,000 of Duquesne's employees. The contract expires
September 30, 2001.
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, results of
operations or cash flows.
___________________________
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part I, Item 2 of this Quarterly Report on Form 10-Q should be read in
conjunction with Duquesne's Annual Report on Form 10-K filed with the Securities
and Exchange Commission (SEC) for the year ended December 31, 1995 and
Duquesne's condensed consolidated financial statements, which are set forth on
pages 2 through 12 in Part I, Item 1 of this Report.
General
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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. Duquesne has one wholly owned subsidiary,
Monongahela Light and Power, also a Pennsylvania corporation, which currently
holds energy-related lease investments.
Duquesne provides electric service to customers in Allegheny County,
including the City of Pittsburgh, and Beaver County. This represents
approximately 800 square miles in southwestern Pennsylvania, located within a
500-mile radius of one-half of the population of the United States and Canada.
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 direct customers, Duquesne also sells
electricity to other utilities.
Regulation
Duquesne's operations are subject to regulation of the Pennsylvania Public
Utility Commission (PUC), as well as 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 operations are also subject to regulation of 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 (BV Unit 1), Beaver Valley Unit 2 (BV Unit 2) and Perry
Unit 1. Duquesne is also subject to the accounting and reporting requirements
of the SEC.
Duquesne's consolidated financial statements report 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 consolidated financial statements reflect regulatory assets and
liabilities 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 electric utility customers through the ratemaking process.
Duquesne's operations currently satisfy the SFAS No. 71 criteria. However,
a company's utility operations or a portion of such operations could cease to
meet these criteria for various reasons, including a change in the PUC or the
FERC regulations. (See "Competition" discussion on page 17.) Should Duquesne's
operations cease to meet the SFAS No. 71 criteria, Duquesne would be required to
write off any regulatory assets or liabilities for those operations that no
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longer meet these requirements. Management will continue to evaluate significant
changes in the regulatory and competitive environment in order to assess
Duquesne's overall compliance with the criteria of SFAS No. 71.
Results of Operations
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Seasonality
The quarterly results are not necessarily indicative of full-year
operations because of seasonal fluctuations. Sales of electricity to customers
by Duquesne tend to increase during the warmer summer and colder winter seasons
because of greater customer use of electricity for cooling and heating.
In the near term, weather conditions and the overall level of business
activity in Duquesne's geographic area are expected to continue to be the
primary factors affecting sales of electricity to customers. In the long-term,
Duquesne's electric sales may also be affected by increased competition in the
electric utility industry. (See "Competition" discussion on page 17.)
Operating Revenues
Total operating revenues decreased $16.9 million during the third quarter
of 1996 and $2.8 million during the first nine months of 1996 as compared to the
third quarter of 1995 and the first nine months of 1995.
Total sales of electricity decreased $18.9 million and $2.9 million during
the third quarter of 1996 and the first nine months of 1996 as compared to the
same periods in 1995. Cooler summer temperatures during 1996 resulted in lower
customer revenues in the third quarter from residential and commercial customers
of 11.8 percent and 2.8 percent. Revenue from sales of electricity to other
utilities decreased $0.8 million in the third quarter of 1996 when compared to
the corresponding quarter of 1995 due to increased price competition resulting
from additional power being marketed by other utilities. Direct customer
revenues from residential and commercial customers during the first nine months
of 1996 were 2.2 percent and 0.5 percent lower than for the same period of 1995
primarily due to cooler summer temperatures during 1996. Revenues from sales of
electricity to other utilities increased $5.8 million for the first nine months
of 1996 as compared to the same period in 1995. Scheduled outages at Elrama,
Cheswick, and Mansfield, as well as a forced outage at Ft. Martin, reduced
generation available for sales to other utilities during the first nine months
of 1995.
Other operating revenues increased $2.0 million when comparing the third
quarters of 1996 and 1995 and were consistent when comparing the first nine
months of 1996 and 1995. The increase in other operating revenues reflects
greater billings to the other joint owners of BV Unit 2 in connection with the
6th refueling outage.
Operating Expenses
Total operating expenses decreased $10.6 million and increased $12.0
million during the third quarter of 1996 and the first nine months of 1996 as
compared to the same periods in 1995.
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Fuel and purchased power expense was $5.3 million lower in the third
quarter of 1996 when compared to the third quarter of 1995 primarily due to a 29
percent decrease in the kilowatt hours purchased. In the first nine months of
1996, as compared to the first nine months of 1995, fuel and purchased power
expense increased $4.6 million. This increase can be primarily attributed to a
4.4 percent increase in kilowatt hour sales which was partially offset by
the third quarter of 1996 decrease in kilowatt hours purchased.
Other operating expenses were $3.5 million and $5.0 million lower for the
third quarter of 1996 and for the first nine months of 1996 when compared to the
same periods in 1995. The decreases are primarily due to cost reductions.
Maintenance expenses decreased $1.6 million when comparing the third
quarters of 1996 and 1995 and $2.1 million when comparing the first nine months
of 1996 and 1995. The decreases are primarily due to lower refueling outage
costs. The lower expenses for the first nine months also result from fewer
fossil station outages in 1996.
Depreciation and amortization expense increased $1.7 million and $15.5
million for the third quarter of 1996 and the first nine months of 1996, as
compared to the same periods in 1995. During the third quarter of 1996,
Duquesne completed recovery of its investment in Perry Unit 2, the construction
of which was abandoned by Duquesne in 1986. The resultant decrease in
amortization expense, combined with other lower amortization costs, offset
Duquesne's increase in depreciation related to the Ft. Martin Plan. The
increase for the first nine months of 1996 resulted from the increased
depreciation costs as well as $9.0 million which was expensed related to the
depreciation portion of deferred rate synchronization costs in conjunction with
the sale of its ownership interest in Ft. Martin. (See "Ft. Martin Plan"
discussion on page 16.)
Other Income and (Deductions)
The $5.2 million and $14.6 million increases in the third quarter of 1996
and the first nine months of 1996 in total other income and deductions primarily
related to income from long-term investments that were made in the third quarter
of 1995.
Interest Charges
As the result of retirement and refinancing of long-term debt, interest
charges were $2.3 million and $6.5 million lower for the third quarter of 1996
and the first nine months of 1996 when compared to the same periods in 1995.
Monthly Income Preferred Securities Dividend Requirements
The Monthly Income Preferred Securities Dividend Requirements reflect the
payment of $3.1 million in dividends in the third quarter of 1996 and $4.8
million in dividends during the first nine months of 1996 related to the Monthly
Income Preferred Securities that were issued in May 1996. (See "Liquidity and
Capital Resources" on page 16.)
Liquidity and Capital Resources
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Financing
Duquesne expects to meet its current obligations and debt maturities
through the year 2000 with funds generated from operations and through new
financings. At September 30, 1996, Duquesne was in compliance with all of its
debt covenants.
All of Duquesne's First Collateral Trust Bonds have been issued under a
mortgage indenture established in April 1992. All First Collateral Trust Bonds
became first mortgage bonds when Duquesne's 1947 first mortgage bond indenture
was retired in the third quarter of 1995 following the maturity of the last bond
series issued under that indenture.
On May 14, 1996, Duquesne Capital L.P., a Delaware special-purpose limited
partnership whose sole general partner is Duquesne, issued in aggregate $150.0
million principal amount of 8-3/8% Cumulative Monthly Income Preferred
Securities, Series A, with a stated liquidation value of $25. A portion of the
proceeds was used to retire $50.0 million of long-term debt maturing May 15,
1996. Duquesne intends to apply the remaining proceeds to the purchase or
redemption of outstanding securities and for general corporate purposes.
In June 1996, a $50.0 million accounts receivable sale arrangement was
extended to June 25, 1997. Duquesne and an unaffiliated corporation have an
agreement that entitles Duquesne to sell, and the corporation to purchase, on an
ongoing basis, up to $50.0 million of accounts receivable. Duquesne may attempt
to extend the agreement or to replace the facility with a similar one or to
eliminate it upon expiration.
On October 4, 1996, Duquesne extended a $150.0 million revolving credit
arrangement to October 3, 1997. Interest rates can, in accordance with the
option selected at the time of the borrowing, be based on prime, Eurodollar or
certificate of deposit rates. Commitment fees are based on the unborrowed amount
of the commitment. The credit facility contains a two-year repayment period for
any amounts outstanding at the expiration of the revolving credit period.
Investing
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Duquesne's long-term investments consist of its holdings of DQE common
stock, investments in affordable housing, leasing and other investments, and
Duquesne's nuclear decommissioning trusts. Duquesne invested $2.0 million and
$3.9 million in affordable housing funds during the nine months ended September
30, 1996 and 1995. Investments in leasing for the nine months ended September
30, 1995 were $60.0 million.
Outlook
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Ft. Martin Plan
On October 31, 1996 the sale of Duquesne's ownership interest in Ft. Martin
was completed. The sale and a plan to be funded in part by the proceeds of the
Ft. Martin transaction were approved by the PUC on May 23, 1996. Under the
approved plan, Duquesne will not increase its base rates for a period of five
years through the year 2000. In addition, Duquesne recorded in October 1996 a
one-time reduction of approximately $130.0 million in the book value of
Duquesne's nuclear plant investment. The proceeds from the sale are expected to
be used to fund reliability enhancements to the Brunot Island Power Station (BI)
combustion turbines and to reduce Duquesne's capitalization. The approved plan
also provides for an increase of
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$25.0 million in depreciation and amortization expense in 1996, $50.0 million in
1997 and $75.0 million in 1998 related to Duquesne's nuclear investment, as well
as additional annual contributions to its nuclear plant decommissioning funds of
$5.0 million, without any increase in existing electric rates. Also, Duquesne
will record an annual $5.0 million credit to the Energy Cost Rate Adjustment
Clause (ECR) during the plan period to compensate Duquesne's customers for lost
profits from any short-term power sales foregone by the sale of its ownership
interest in Ft. Martin. In addition to the annual credit of $5.0 million to the
ECR, Duquesne will cap energy costs beginning April 1, 1997 through the
remainder of the plan period, at a historical five-year average of 1.47 cents
per kilowatt hour. In accordance with the approved plan, Duquesne has expensed
$9.0 million related to the depreciation portion of the $51.1 million of
deferred rate synchronization costs associated with BV Unit 2 and Perry Unit 1.
Upon final transfer of its ownership interest in Ft. Martin, Duquesne began to
amortize the remaining $42.1 million of deferred rate synchronization costs over
a ten-year period. Finally, Duquesne's approved plan also provides for annual
assistance of $0.5 million to low-income customers.
Deferred Coal Costs
Duquesne's regulatory assets include deferred coal costs of $11.3 million
and $12.8 million at September 30, 1996 and December 31, 1995. Duquesne believes
these deferred costs continue to represent probable future revenues recoverable
under all existing energy caps. Duquesne will continue to monitor significant
changes in the regulatory and competitive climate that would affect its ability
to recover these costs from electric utility customers. (See "Regulation"
discussion on page 13.)
Competition
The electric utility industry is undergoing fundamental change in response
to the open transmission access and increased availability of energy
alternatives fostered by the National Energy Policy Act of 1992 (NEPA), which
has served to increase competition in the industry. These competitive pressures
require utilities to offer competitive pricing and terms to retain customers and
to develop new markets for the optimal utilization of their generation capacity.
At the national level, on April 24, 1996, the FERC issued two related final
rules that address the terms on which electric utilities will be required to
provide wholesale suppliers of electric energy with non-discriminatory access to
the utility's wholesale transmission system. The first rule, Order No. 888,
addresses both open access and stranded cost issues. Each public utility that
owns, controls or operates interstate transmission facilities was required to
file, no later than July 9, 1996, a tariff that offers unbundled transmission
services containing non-rate terms that conform to the FERC's Order No. 888 pro
forma tariff and to propose rates for these services. Duquesne's tariff was
timely filed. Order No. 888 also provides for full recovery of those costs that
were prudently incurred to serve wholesale (and retail-turned wholesale)
customers that subsequently leave a utility's system. These costs will be
recovered from the departing customers. However, the FERC will not be the forum
for recovery of stranded costs arising when retail customers leave a utility's
system, even if their new suppliers rely on FERC-jurisdiction transmission
services, unless state regulators lack authority under state law to provide for
recovery. The rule indicates FERC's willingness to defer to state regulators
with respect to retail access, recovery of retail stranded costs and the scope
of state regulatory jurisdiction.
The second rule, Order No. 889, is the Open Access Same Time Information
rule (OASIS).
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This rule prohibits transmission owners and their affiliates from gaining
preferential access to information concerning transmission and establishes a
code of conduct to ensure the complete separation of a utility's wholesale power
marketing and transmission operation functions.
Finally, the FERC simultaneously issued a new Notice of Proposed Rulemaking
(NOPR) on Capacity Reservation Open Access Transmission Tariffs (CRT), which
would require all market participants to reserve firm capacity rights between
designated receipt and delivery points. If adopted, the CRT would replace the
open access pro forma tariff implemented in Order No. 888. On July 12, 1996,
Duquesne filed with the FERC a request for acceptance of a CRT to replace the
FERC pro forma tariff filed on July 9, 1996. (See "Transmission Access"
discussion on page 19.)
In Pennsylvania, the PUC has completed its investigation concerning
regulatory reform and has issued a report recommending to the governor and the
Pennsylvania General Assembly that retail customers be given a choice of their
electric supplier (retail choice). The report also recommends that existing
transmission and distribution franchises continue to be regulated by the PUC. In
addition, hearings have been held and legislation has been introduced in the
Pennsylvania state legislature. A broad group of interested parties led by the
Chairman of the PUC has reached a consensus on proposed amendments to previously
introduced legislation. This group included legislators, customer groups,
consumer advocates, small business advocates, environmental groups, labor
representatives, and utility representatives. First, the proposed amendments
provide for a transition period of two years, subject to two six-month
extensions at the discretion of the PUC, and a two-year phase-in period.
Utilities would be required to file transition plans between April 1, 1997 and
September 30, 1997. The transition plans would be subject to approval by the PUC
and would include the utilities' plans for the recovery and mitigation of
stranded costs. Second, excluding the effects of possible extensions, retail
choice would be open to 33 percent of all customer classes beginning January 1,
1999, 66 percent of all customer classes beginning January 1, 2000 and 100
percent of all customer classes beginning January 1, 2001. Finally, utilities
would have an opportunity to recover stranded costs, as determined by the PUC to
be just and reasonable, for recovery from customers through a competitive
transition charge for a period not to exceed nine years, unless a longer period
is approved by the PUC. The PUC may allow for all or a portion of the stranded
costs to be securitized by the issuance of bonds. Cost savings, if any,
associated with securitization of stranded costs would reduce prices to
customers. An overall 4.5 year price cap would be imposed on electric utility
companies. Additionally, an electric utility company may not increase the
generation price component as long as stranded costs are being recovered, with
certain limited exceptions. The proposed consensus amendments to the legislation
are expected to be presented to the legislature in November 1996. Duquesne
cannot predict what legislation, if any, may ultimately be enacted.
Duquesne is aware of the foregoing federal and state regulatory,
legislative and business uncertainties and is attempting to position itself to
operate in a more competitive environment. Because of Duquesne's current
electric generating configuration, some of its baseload capacity is used less
than optimally. Duquesne is currently considering ways to align its generating
capabilities more closely with customer demand. Its current rate structure
allows some flexibility in setting rates to retain its customer base and attract
new business. In addition, despite the fact that sales to wholesale customers do
not account for a significant portion of Duquesne's revenues, open access
transmission offers Duquesne the opportunity to sell power on a market basis to
customers outside of its geographic area.
Open access transmission requirements implicitly create the potential for
stranded costs. Duquesne implemented a $25.0 million annual increase to
depreciation and amortization expense in 1995 related to Duquesne's nuclear
investment and continues to further evaluate the accelerated depreciation of its
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generating assets as one method to guard against the competitive risks of
stranded investments. On October 31, 1996 the sale of Duquesne's ownership
interest in Ft. Martin was completed. The PUC approved plan, including the sale
of Ft. Martin, provides for an increase of $25.0 million in depreciation and
amortization expense in 1996, $50.0 million in 1997 and $75.0 million in 1998
related to Duquesne's nuclear investment, as well as a one-time write-down in
the book value of Duquesne's nuclear plant investment of approximately $130.0
million. In addition, Duquesne's plan recognized an immediate expense of $9.0
million of deferred rate synchronization costs and, upon final transfer of
Duquesne's ownership interest in Ft. Martin, Duquesne began to amortize the
remaining $42.1 million balance over a ten-year period. (See "Ft. Martin Plan"
discussion on page 16.) These current and proposed accelerated investment cost
recovery measures will be absorbed by Duquesne without an increase in base
rates. Although Duquesne believes the initiatives will enable it to mitigate
these issues, Duquesne could face the risk of reduced rates of return if
unforeseen costs arise and if revenues from sales or if sources of other income
prove inadequate to fund those costs.
Duquesne believes that these and similar mitigation strategies will
strengthen its position to succeed in a more competitive environment by
eliminating the need to charge its customers in the future for these currently
recognized expenses. At this time, however, there is no assurance as to the
extent to which Duquesne's initiatives can or will ultimately eliminate
regulatory and other uncertainties associated with increased competition.
In November 1996, Duquesne reached an agreement on a three year contract
extension with the International Brotherhood of Electrical Workers, which
represents approximately 2,000 of Duquesne's employees. It is Duquesne's intent
to provide a stable work force through the transition to a competitive
generation market with this contract, expiring September 30, 2001.
Transmission Access
In March 1994, Duquesne submitted, pursuant to the Federal Power Act, two
separate "good faith" requests for transmission service with Allegheny Power
System (APS) and the 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 Companies 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. In May 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.
On July 12, 1996, Duquesne filed with the FERC a request for acceptance of
a capacity reservation tariff to replace the FERC pro forma tariff filed on July
9, 1996 (previously discussed in "Competition" on page 17). The tariff is
intended to provide for the transition to retail customer choice in
Pennsylvania. Duquesne's tariff proposes to adopt marginal cost pricing for
transmission service on the Duquesne transmission system. Marginal cost pricing
of transmission service will ensure that generators delivering energy to the
Duquesne system will compete on the basis of their relative marginal costs. On
September 10, 1996, the FERC issued an order accepting Duquesne's tariff filing
and postponing its effectiveness for five months, or until February 11, 1997,
subject to refund.
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Duquesne is currently evaluating the impact of FERC regulatory actions on
these proceedings. Duquesne cannot predict the final outcome of these
proceedings.
Generation Resource Optimization
Duquesne's plans for optimizing generation resources are designed to reduce
underutilized generating capacity, promote competition in the wholesale
marketplace, maintain stable prices and meet customer-specified levels of
service reliability. Duquesne is committed to exploring firm energy sales to
wholesale customers, system power sales, system power sales with specific unit
back-up, unit power sales, generating asset sales and any other approach to
efficiently managing capacity and energy.
The sale of Duquesne's ownership interest in Ft. Martin demonstrates
Duquesne's ongoing efforts to optimize the utilization of generation resources.
(See "Ft. Martin Plan" discussion on page 16.) The sale is expected to reduce
power production costs by employing a cost-effective source of peaking capacity
through enhanced reliability of the BI combustion turbines. The reliability
enhancements are contingent upon the projects meeting a least-cost test versus
other potential sources of peaking capacity. Implementation of the plan will
better align Duquesne's generating capabilities with its native load
requirements.
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______________________________
Except for historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements that involve
risks and uncertainties including, but not limited to, economic, competitive,
governmental and technological factors affecting Duquesne's operations, markets,
products, services and prices, and other factors discussed in Duquesne's filings
with the SEC.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In September 1995, Duquesne commenced arbitration against Cleveland
Electric Illuminating Company (CEI), seeking damages, a declaratory judgment,
termination of the Operating Agreement for Eastlake Power Station Unit 5
(Eastlake), the appointment of a special operations advisor to oversee CEI's
operation of Eastlake, partition of the parties' interests in Eastlake through a
sale and division of the proceeds, and other equitable relief. The arbitration
demand alleged, among other things, the improper allocation by CEI of fuel and
related costs; the mismanagement of the administration of the Saginaw coal
contract in connection with the closing of the Saginaw mine, which historically
supplied coal to Eastlake; and the concealment by CEI of material information,
particularly with regard to costs relating to the closing of the Powhattan No. 6
mine contract. The Powhattan No. 6 mine currently supplies coal to Eastlake.
In October 1995, CEI commenced an action against Duquesne in the Court of
Common Pleas, Lake County, Ohio seeking to enjoin Duquesne from taking any
action to effect a partition, through arbitration or otherwise, on the basis of
a waiver of partition contained in the deed to the land underlying Eastlake.
CEI also seeks monetary damages from Duquesne for alleged unpaid joint costs in
connection with the operation of Eastlake. It is Duquesne's position that the
deed covenant is unenforceable by CEI due to CEI's bad faith conduct toward
Duquesne, as described in the arbitration demand, and because it is indefinite
in duration, being tied to the useful life of Eastlake. Duquesne removed the
action to the United States District Court for the Northern District of Ohio,
Eastern Division, where it is now pending, and the parties have agreed to
litigate all of their disputes in federal court and to waive arbitration.
Duquesne asserted counterclaims in the action identical to the claims made in
its arbitration demand and joined CEI's parent, Centerior Energy Corporation, in
the claims. Several motions have been made by both parties, among them being
motions to dismiss, motions for summary judgment and a motion by Duquesne for
the appointment of a special operations advisor. The court has not ruled on any
of the motions.
Subject to these proceedings, Duquesne is currently soliciting offers for
its ownership interest in Eastlake, located near Cleveland, Ohio and operated by
Centerior Energy Corporation. Duquesne's 31.2 percent ownership interest
represents 186 megawatts of Eastlake's output capacity.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
EXHIBIT 10.1 - Resignation Agreement Between DQE and Duquesne Light Company
(the Companies) and Wesley W. von Schack
EXHIBIT 12.1 - Calculation of Ratio of Earnings to Fixed Charges
EXHIBIT 27.1 - Financial Data Schedule
b. No Current Report on Form 8-K was filed during the three months ended
September 30, 1996.
______________________________
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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 14, 1996 /s/ Gary L. Schwass
---------------------------- ----------------------------
(Signature)
Gary L. Schwass
Senior Vice President and
Chief Financial Officer
Date November 14, 1996 /s/ Morgan K. O'Brien
---------------------------- ----------------------------
(Signature)
Morgan K. O'Brien
Controller and
Principal Accounting Officer
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Exhibit 10.1
August 2, 1996
Mr. Wesley W. von Schack
404 Beaver Road
Sewickley, PA 15143
Dear Mr. von Schack:
This letter sets forth the terms and conditions of your resignation as
Chairman of the Board, President and Chief Executive Officer of DQE, Inc.
("DQE") and Duquesne Light Company ("Duquesne Light" and together with DQE
sometimes hereinafter called the "Companies") effective August 9, 1996 (the
"Effective Date").
Section A below describes your resignation and certain benefits you
will be entitled to receive from the Companies in connection therewith. Section
B sets forth certain covenants by you to the Companies. Section C contains
general terms and conditions.
If you find the terms and conditions set forth in this letter
agreement to be acceptable, please sign and date both this original letter and
the enclosed duplicate copy hereof in the space provided on the last page and
return the duplicate copy to the Company.
Section A. Resignation
-----------
1. DQE and Duquesne Light accept and acknowledge your resignation
as Chairman of the Board, President and Chief Executive Officer, and as a member
of the Board of Directors, of DQE, and your resignation as Chairman of the
Board, President and Chief Executive Officer, and as a member of the Board of
Directors, of Duquesne Light as of the Effective Date. As soon as practicable
following the Effective Date, you shall receive from the Companies, subject to
tax withholding as set forth in Subsection 5 Section C hereof, a lump sum
payment accrued but previously unpaid salary and a payment of $120,428,
representing pro rata portion of your target bonus for fiscal year 1996. For a
period of one month after the Effective Date, the Companies shall, at their
expense but subject to the customary employee premium contribution, continue
your coverage under their medical benefits program.
2. Your resignation is accepted with the consent of the Companies
for purposes of the DQE, Inc., Long-Term Incentive Plan (the "LTIP"). It is
agreed that all of your stock options granted to and currently held by you are
fully awarded, vested and exercisable as of the Effective Date. Except as
provided in this paragraph, the applicable terms of the LTIP and your stock
option agreements with the Companies shall remain in full force and effect.
3. Your benefits under all qualified and non-qualified retirement
and 401(k) plans of the Companies in which you currently participate, including
without limitation the Retirement Plan for Employees of Duquesne Light Company,
the Supplemental Retirement Plan for Non-Represented Employees of Duquesne Light
Company, the Duquesne Light Company 401(k) Retirement Savings Plan for
Management Employees and the Duquesne Light Company Pension Service Supplement
Plan, are fully vested and nonforfeitable and shall be distributed in accordance
with the terms of those plans.
4. Except as expressly provided herein, the Companies shall have no
obligations to you of any nature whatsoever following the Effective Date.
Section B. Certain Covenants
-----------------
<PAGE>
1. You acknowledge that all Confidential Information shall at all
times remain the property of the Companies and their affiliates (i.e., another
company the majority interest of which is owned by DQE or a direct or
indirect subsidiary of DQE). "Confidential Information" means all information
disclosed to you or known by you as a consequence of or through your employment,
which is not generally known in the industry in which the Companies or any
affiliate is or may become engaged, about the Companies' or an affiliate's
business, products, processes, and services, including but not limited to
information relating to research, development, inventions, computer program
designs, flow charts, source and object codes, products and services under
development, pricing and pricing strategies, marketing and selling strategies,
power generating, servicing, purchasing, accounting, engineering, costs and
costing strategies, sources of supply, customer lists, customer requirements,
business methods or practices, training and training programs, and the
documentation thereof. It includes, but is not limited to, proprietary
information and trade secrets of the Companies and their affiliates. It will be
presumed that information supplied to any of the Companies or their affiliates
from outside sources is Confidential Information unless and until it is
designated otherwise. You will not at any time directly or indirectly use,
divulge, disseminate, disclose, lecture upon, or publish any Confidential
Information without having first obtained written permission from the Companies
to do so.
2. You covenant and agree that for a period of one (1) year
following the Effective Date, you shall not engage, directly or indirectly,
whether as principal or as agent, officer, director, employee, consultant,
shareholder, or otherwise, alone or in association with any other person,
corporation or other entity, in any Competing Business located within a 150 mile
radius of the principal place of business of the Companies located in
Pittsburgh, Pennsylvania or in the states of Ohio or West Virginia. For purposes
of this letter agreement, the term "Competing Business" shall mean any person,
corporation or other entity which develops, produces, markets, sells or services
(1) any energy product or service, including but not limited to gas or electric
products or services, and/or (2) any product or service which is the same as or
similar to products or services which the Companies or their affiliates
developed, produced, marketed, or sold, including but not limited to energy
products and services, within the last year prior to the Effective Date. You
recognize that the Companies conduct or intend to conduct business within the
geographic area set forth herein, and therefore you agree that this restriction
is reasonable and necessary to protect the business of the Companies.
3. You agree that for a period of two (2) years following the
Effective Date, you shall not, directly or indirectly, solicit the business of,
or do business with any customer, supplier, or prospective customer or supplier
of the companies or an affiliate of the Companies with whom you had direct or
indirect contact or about whom you may have acquired any knowledge while
employed by the Companies.
4. You agree that, for a period of two (2) years following the
Effective Date, you shall not, directly or indirectly, solicit or induce, or
attempt to solicit or induce, any employee of the Companies or an affiliate of
the Companies to leave the Companies or an affiliate for any reason whatsoever,
or hire or solicit the services of any employee of the Companies or an
affiliate.
5. You acknowledge that the legal remedy available to the Companies
and their affiliates for any breach of covenants by you will be inadequate, and,
therefore, in the event of any threatened or actual breach of this letter
agreement, the Companies or an affiliate shall be entitled to specific
enforcement of this letter agreement through injunctive or other equitable
relief in a court with appropriate jurisdiction. The existence of any claim or
cause of action by you or another against the Companies or an affiliate, whether
predicated on this letter agreement
<PAGE>
or otherwise, shall not constitute a defense to enforcement by the Companies or
an affiliate of this letter agreement.
6. On or as soon as practicable after the Effective Date, you will
deliver to the Companies the originals and all copies of notes, sketches,
drawings, specifications, memoranda, correspondence, documents, records,
notebooks, computer disks and computer tapes and other repositories of
Confidential Information and Inventions then in your possession or under your
control, whether prepared by you or by others. Upon request by the Companies,
you will deliver to the Companies the originals and all copies of Works then in
your possession or under your control.
Section C. General Terms
-------------
1. You irrevocably and unconditionally release, remit, acquit and
discharge the Companies, their respective officers, directors, agents,
employees, successors and assigns (separately and collectively "releasees"),
jointly and individually, from any and all claims, known or unknown, which you,
your heirs, successors or assigns have or may have against releasees arising
from and during employment, in connection with the execution and delivery of
this letter agreement or as a result of termination of your employment, whether
those claims are past or present, whether they arise from common law or statute,
whether they arise from labor laws or discrimination laws, or any other law,
rule or regulation. You specifically acknowledge that this release is
applicable to any claim under the AGE DISCRIMINATION IN EMPLOYMENT ACT and the
CIVIL RIGHTS ACT OF 1964. This release is for any relief, no matter what such
relief is called and no matter what form it takes, including but not limited to
wages, back pay, front pay, compensatory damages, punitive damages or damages
for pain or suffering, or attorney fees.
2. You acknowledge that you have carefully read this letter
agreement and have been advised prior to execution hereof to seek the advice of
an attorney, and that this letter agreement so advises you, that you had the
opportunity to have an attorney explain to you the terms of the foregoing, that
you know and understand the contents of the foregoing, that you execute this
document knowingly and voluntarily as your own free act and deed, and that this
document was freely negotiated and entered into without fraud, duress or
coercion.
3. You acknowledge that you were given adequate time in which to
consider whether to execute this letter agreement before being required to make
a decision.
4. You will, in all communications, discussions and actions, not
express unfavorable views with regard to the Companies, their subsidiaries and
other affiliates, and their respective stockholders, directors, officers,
employees and agents, past and present. Likewise, the directors and officers of
the Companies will not express unfavorable views with regard to you. You and
the Companies will keep confidential the terms of this letter agreement except
as may be required by law.
5. The parties acknowledge that certain amounts payable pursuant to
this letter agreement will be subject to income tax, social security tax and
other federal, state and local tax withholdings. The Companies will be entitled
to withhold from any payment hereunder the amount of any federal, state and
local withholding taxes applicable to the compensation and benefits provided to
you under this letter agreement.
6. Any notice or other communication required or permitted under
this letter agreement will be effective only if it is in writing and delivered
personally or sent by registered or certified mail, postage prepaid, addressed,
if to the Company, to 411 Seventh
<PAGE>
Avenue, P. O. Box 1930, Pittsburgh, PA 15230, or if to you, to 404 Beaver Road,
Sewickley, PA 15143, or to such other address as either party may designate by
notice to the other, and will be deemed to be given upon receipt.
7. If any provision of this letter agreement is determined to be
invalid or unenforceable, the balance of this letter agreement will remain in
effect, and if any provision is inapplicable to any person or circumstance, it
will nevertheless remain applicable to all other persons and circumstances.
8. This letter agreement constitutes the entire understanding of
the parties with respect to its subject matter, supersedes all prior agreements
and understandings with respect to such subject matter, and may be terminated or
amended only by a writing signed by the parties hereto. Without limiting the
generality of the foregoing, you and the Companies hereby acknowledge the
cancellation and termination in its entirety, effective immediately, of the
Employment Agreement, dated as of December 15, 1992, between you and Companies,
as amended.
9. The provisions of this letter agreement will be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania other
than the conflict of law provisions of such laws.
10. You agree, upon demand of the Company, to do all acts and
execute, deliver and perform all additional documents, instruments and
agreements which may be required by the Company to implement the provisions and
purposes of this letter agreement.
Very truly yours,
DQE, Inc.
By: /s/ V. A. Roque
Vice President and General Counsel
DUQUESNE LIGHT COMPANY
By: /s/ V. A. Roque
Vice President and General Counsel
Received and accepted by, and intending to be legally bound hereby:
/s/ Wesley W. von Schack 8/5/96
- ------------------------ ------
Wesley W. von Schack Date
<PAGE>
Exhibit 12.1
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, 1996 1995 1994 1993 1992 1991
------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on long-term debt $ 62,034 $ 89,139 $ 94,646 $102,938 $119,179 $127,606
Other interest 1,387 2,599 1,095 2,387 1,749 1,773
Monthly Income Preferred Securities
dividend requirements 4,781 - - - - -
Amortization of debt discount,
premium and expense - net 4,497 6,252 6,381 5,541 4,223 3,892
Portion of lease payments
representing an interest factor 33,148 44,386 44,839 45,925 60,721 64,189
--------- -------- -------- -------- -------- --------
Total Fixed Charges $ 105,847 $142,376 $146,961 $156,791 $185,872 $197,460
========= ======== ======== ======== ======== ========
EARNINGS:
Income from continuing operations $ 120,172 $151,070 $147,449 $144,787 $149,768 $143,133
Income taxes 67,667* 92,894* 84,191 77,237 110,993 104,067
Fixed charges as above 105,847 142,376 146,961 156,791 185,872 197,460
--------- -------- -------- -------- -------- --------
Total Earnings $ 293,686 $386,340 $378,601 $378,815 $446,633 $444,660
========= ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 2.77 2.71 2.58 2.42 2.40 2.25
========= ======== ======== ======== ======== ========
</TABLE>
Duquesne's share of the fixed charges of an unaffiliated coal supplier,
which amounted to approximately $2.4 million for the nine months ended September
30, 1996, has been excluded from the ratio.
*Earnings related to income taxes reflect a $9.0 million decrease for the nine
months ended September 30, 1996, and a $13.5 million decrease for the twelve
months ended December 31, 1995, due to a financial statement reclassification
related to SFAS No. 109. The ratio of earnings to fixed charges, absent this
reclassification, equals 2.86 and 2.81 for the nine months ended September 30,
1996, and the year ended December 31, 1995, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<CIK> 0000030573
<NAME> DUQUESNE LIGHT CO.
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,896,562
<OTHER-PROPERTY-AND-INVEST> 160,551
<TOTAL-CURRENT-ASSETS> 424,344
<TOTAL-DEFERRED-CHARGES> 643,800
<OTHER-ASSETS> 48,229
<TOTAL-ASSETS> 4,173,486
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 825,577
<RETAINED-EARNINGS> 285,890
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,111,467
0
222,489
<LONG-TERM-DEBT-NET> 1,322,581
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 28,787
<LEASES-CURRENT> 23,509
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,464,653
<TOT-CAPITALIZATION-AND-LIAB> 4,173,486
<GROSS-OPERATING-REVENUE> 895,654
<INCOME-TAX-EXPENSE> 69,498
<OTHER-OPERATING-EXPENSES> 651,673
<TOTAL-OPERATING-EXPENSES> 721,171
<OPERATING-INCOME-LOSS> 174,483
<OTHER-INCOME-NET> 17,566
<INCOME-BEFORE-INTEREST-EXPEN> 192,049
<TOTAL-INTEREST-EXPENSE> 67,096
<NET-INCOME> 120,172
3,036
<EARNINGS-AVAILABLE-FOR-COMM> 117,136
<COMMON-STOCK-DIVIDENDS> 126,000
<TOTAL-INTEREST-ON-BONDS> 66,531
<CASH-FLOW-OPERATIONS> 300,359
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes 8,880 of Preference Stock
</TABLE>
