<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 June 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 __________
Commission File Number
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1-956
Duquesne Light Company
----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0451600
------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
411 Seventh Avenue
Pittsburgh, Pennsylvania 15219
-------------------------------
(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 June 30, 1996 and July 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 Six Months Ended
June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Operating Revenues
Sales of electricity:
Customers - net $260,186 $252,750 $526,769 $517,290
Utilities 15,077 12,027 31,042 24,516
-------- -------- -------- --------
Total sales of electricity 275,263 264,777 557,811 541,806
Other 9,259 9,892 17,568 19,479
-------- -------- -------- --------
Total Operating Revenues 284,522 274,669 575,379 561,285
-------- -------- -------- --------
Operating Expenses
Fuel and purchased power 58,695 52,825 117,860 107,925
Other operating 63,791 63,910 124,721 126,136
Maintenance 18,864 21,029 39,368 39,859
Depreciation and amortization 54,837 49,122 110,855 97,077
Taxes other than income taxes 20,552 20,384 42,258 41,707
Income taxes 17,622 11,694 35,572 35,334
-------- -------- -------- --------
Total Operating Expenses 234,361 218,964 470,634 448,038
-------- -------- -------- --------
OPERATING INCOME 50,161 55,705 104,745 113,247
-------- -------- -------- --------
Other Income and (Deductions)
Interest and dividend income 2,427 2,014 4,149 4,108
Income taxes 1,075 (726) 1,986 (1,008)
Other - net 2,741 (62) 5,226 (1,183)
-------- -------- -------- --------
Total Other Income and (Deductions) 6,243 1,226 11,361 1,917
-------- -------- -------- --------
INCOME BEFORE INTEREST AND
OTHER CHARGES 56,404 56,931 116,106 115,164
INTEREST CHARGES 22,193 24,490 45,146 49,352
MONTHLY INCOME PREFERRED
SECURITIES DIVIDEND
REQUIREMENTS 1,640 - 1,640 -
-------- -------- -------- --------
NET INCOME 32,571 32,441 69,320 65,812
DIVIDENDS ON PREFERRED AND
PREFERENCE STOCK 1,014 1,483 2,032 2,968
-------- -------- -------- --------
EARNINGS FOR COMMON STOCK $ 31,557 $ 30,958 $ 67,288 $ 62,844
======== ======== ======== ========
</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>
June 30, December 31,
1996 1995
------------ -------------
<S> <C> <C>
ASSETS
Property, plant and equipment $ 4,640,743 $ 4,652,010
Less: Accumulated depreciation and
amortization (1,715,726) (1,673,107)
----------- -----------
Property, plant and equipment - net 2,925,017 2,978,903
----------- -----------
Long-term investments:
Investment in DQE Common Stock 57,799 66,757
Other investments 102,066 102,648
----------- -----------
Total long-term investments 159,865 169,405
----------- -----------
Current assets:
Cash and temporary cash investments 116,275 2,490
Receivables 115,007 113,184
Other current assets, principally
material and supplies 117,281 86,707
----------- -----------
Total current assets 348,563 202,381
----------- -----------
Other non-current assets:
Regulatory assets 650,350 671,928
Other 46,933 45,048
----------- -----------
Total other non-current assets 697,283 716,976
----------- -----------
TOTAL ASSETS $ 4,130,728 $ 4,067,665
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock - $1 par value (shares -
90,000,000 authorized; 10 issued) $ - $ -
Capital surplus 825,747 837,265
Retained earnings 290,894 294,069
----------- -----------
Total common stockholders' equity 1,116,641 1,131,334
----------- -----------
Non-redeemable preferred stock 63,608 63,608
Non-redeemable Monthly Income
Preferred Securities 150,000 -
Non-redeemable preference stock 29,241 29,615
----------- -----------
Total preferred and preference
stock before deferred employee
stock ownership plan (ESOP) benefit
(involuntary liquidation values of
$242,711 and $93,086 exceed par by
$28,417 and $28,781, respectively) 242,849 93,223
Deferred ESOP benefit (20,841) (22,257)
----------- -----------
Total preferred and preference stock 222,008 70,966
----------- -----------
Long-term debt 1,322,545 1,322,531
----------- -----------
Total capitalization 2,661,194 2,524,831
----------- -----------
Obligations under capital leases 31,866 34,546
----------- -----------
Current liabilities:
Current maturities and sinking fund
requirements 23,616 71,051
Accounts payable 67,826 76,435
Accrued liabilities 56,287 53,930
Dividends declared 37,454 37,015
Other 9,429 9,191
----------- -----------
Total current liabilities 194,612 247,622
----------- -----------
Deferred income taxes - net 808,788 805,996
----------- -----------
Deferred investment tax credits 104,645 115,760
----------- -----------
Deferred income 150,995 162,916
----------- -----------
Other 178,628 175,994
----------- -----------
Commitments and contingencies (Note 4)
----------- -----------
TOTAL CAPITALIZATION AND
LIABILITIES $ 4,130,728 $ 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>
Six Months Ended
June 30,
--------
1996 1995
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Operations $160,830 $ 157,633
Changes in working capital other than
cash (37,972) 10,797
Other - net 12,877 5,920
-------- ---------
Net Cash Provided by Operating
Activities 135,735 174,350
-------- ---------
Cash Flows Used in Investing Activities
Construction expenditures (32,256) (32,454)
Long-term investments - net 1,124 (1,430)
Other - net (1,728) (2,302)
-------- ---------
Net Cash Used in Investing Activities (32,860) (36,186)
-------- ---------
Cash Flows Provided by (Used in)
Financing Activities
Issuance (redemption) of preferred and
preference stock 150,000 (111)
Dividends on capital stock (73,032) (66,216)
Reductions of long-term obligations -
net (58,668) (60,627)
Other - net (7,390) (4,100)
-------- ---------
Net Cash Provided by (Used in)
Financing Activities 10,910 (131,054)
-------- ---------
Net increase in cash and temporary cash
investments 113,785 7,110
Cash and temporary cash investments at
beginning of period 2,490 15,904
-------- ---------
Cash and temporary cash investments at
end of period $116,275 $ 23,014
======== =========
</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 six months
ended June 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.)
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Duquesne's other 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 amounts of unrealized holding gains on investments at June 30, 1996 and
December 31, 1995, are $16.0 million and $22.8 million, respectively. Reduced
for deferred income taxes, net unrealized holding gains on investments are $9.4
million and $13.4 million at June 30, 1996 and December 31, 1995, respectively.
2. RECEIVABLES
Components of receivables for the periods indicated are as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1996 1995 1995
(Amounts in Thousands of Dollars)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Direct customer accounts receivable $105,199 $ 93,453 $103,821
Other utility receivables 14,611 18,934 22,441
Other receivables 15,884 26,207 11,842
Less: Allowance for uncollectible
accounts (20,687) (16,461) (17,920)
- ----------------------------------------------------------------------------
Receivables less allowance for
uncollectible accounts 115,007 122,133 120,184
Less: receivables sold - (26,000) (7,000)
- ----------------------------------------------------------------------------
Total Receivables $115,007 $ 96,133 $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 June 30, 1996, Duquesne had no
receivables sold to the unaffiliated corporation. At December 31, 1995 and June
30, 1995, Duquesne had sold $7.0 million and $26.0 million of receivables to the
unaffiliated corporation, respectively. The accounts receivable sales agreement,
which was recently extended to 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 May 23, 1996, the PUC approved Duquesne's plan for the sale of its
ownership interest in the Ft. Martin Power Station. In accordance with this PUC
order, 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.
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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 consistency with
the criteria of SFAS No. 71.
The components of regulatory assets for the periods presented are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Amounts in Thousands of Dollars)
- -----------------------------------------------------------------------------
<S> <C> <C>
Regulatory tax receivable $407,787 $414,543
Unamortized debt costs (a) 96,013 98,776
Deferred rate synchronization costs
(see below) 42,149 51,149
Beaver Valley Unit 2 sale/leaseback
premium (b) 30,811 31,564
Deferred employee costs (c) 28,123 31,218
Extraordinary property loss 732 8,300
Deferred nuclear maintenance outage
costs 16,569 6,776
DOE decontamination and decommissioning
receivable 10,235 10,687
Deferred coal costs 12,233 12,753
Other 5,698 6,162
- -----------------------------------------------------------------------------
Total Regulatory Assets $650,350 $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 recent PUC order approving Duquesne's plan for the
sale of its ownership interest in the Ft. Martin Power Station, Duquesne has
charged off $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 on page 8.)
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 net investment in these plants
through future electricity sales. Duquesne believes its investment in these
plants will be necessary in order to meet future business needs outlined in
Duquesne's plans for optimizing generation resources. If business opportunities
do not develop as expected, Duquesne will consider the sale of these assets. In
the event that market demand, transmission access or rate recovery do not
support the utilization or sale of the plants, Duquesne may have to write off
part or all of these costs. A portion of the proceeds of the sale of the Ft.
Martin Power Station is expected to be used to finance reliability enhancements
to BI combustion turbines, allowing the reutilization of the facilities. The
reliability enhancements are contingent on the projects meeting a least-cost
test versus other potential sources of peaking capacity. (See "Ft. Martin Plan"
discussion below.) At June 30, 1996, Duquesne's net investment in Phillips and
BI held for future use was $78.3 million and $44.9 million, respectively.
Ft. Martin Plan
On May 23, 1996, the PUC approved the sale of Duquesne's ownership interest in
the Ft. Martin Power Station and a plan to be financed in part by the proceeds
of the Ft. Martin transaction. Under the plan, Duquesne will not increase its
base rates for a period of five years through the year 2000. In addition,
Duquesne will record a one-time reduction of approximately $130.0 million in the
value of Duquesne's nuclear plant investment. The proceeds from the sale are
expected to be used to finance reliability enhancements to the BI combustion
turbines, to retire debt and to reduce equity. The approved plan also provides
for an annual increase of $25.0 million for three years in depreciation and
amortization expense 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 the lost profits from any reduced short-term
power sales foregone by the sale of its ownership interest in the Ft. Martin
Power Station. 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 charged off $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 the Ft. Martin Power Station,
Duquesne will 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.
4. COMMITMENTS AND CONTINGENCIES
Construction
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 the reliability enhancements to the BI combustion turbines.
(See "Ft. Martin Plan" discussion, Note 3, above.)
8
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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, 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 $122.0 million for BV
Unit 1, $35.0 million for BV Unit 2, and $67.0 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, 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 will 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 transition to a competitive generation market, the
proposed policy recommends utilities include a plan to mitigate any shortfall in
decommissioning trust fund payments for the life of the facility with any future
decommissioning filings. The PUC recently approved Duquesne's plan for the sale
of its ownership interest in the Ft. Martin Power Station, which provides for
additional annual contributions to its nuclear decommissioning funds of $5.0
million without any increase in existing electric utility rates, which is
intended to achieve this mitigation objective. (See "Ft. Martin Plan"
discussion, Note 3, on page 8.)
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 trust fund balances at June 30, 1996, totaled approximately $30.2
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, $59.5 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 property damage, decommissioning and decontamination
liability provides $1.2 billion of insurance coverage. 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
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States nuclear site covered by that insurer, Duquesne could be assessed
retrospective premiums totaling a maximum of $10.9 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. 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 removed 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. Less than 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, but excludes replacement power costs. The earliest that BV Unit
1's steam generators could be replaced is 1999.
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. Use of the probe found
fewer defects than expected at the top of the steam generators' tube sheets. In
addition, 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's 6th refueling outage is scheduled to begin on August 30, 1996.
Duquesne continues to explore all viable means of managing ODSCC, including
new repair technologies, and plans to perform 100 percent tube inspections at
each unit during future refueling outages. 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
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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 June 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 June 30, 1996, Duquesne's share of these guarantees
was $21.1 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 $23.1 million at June 30, 1996.
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 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.
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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<PAGE>
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 (Report) 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 11 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 by 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 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 (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 Securities and Exchange Commission (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 16.) 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 consistency with the criteria of SFAS No. 71.
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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, respectively.
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 16.)
Operating Revenues
Total operating revenues increased $9.9 million during the second quarter of
1996 as compared to the second quarter of 1995, due to higher sales of
electricity. Warmer May 1996 temperatures, compared to 1995, resulted in higher
direct customer revenues from residential and commercial customers of 6.1
percent and 2.9 percent, respectively. May 1996 temperatures also resulted in
greater demand for electricity from other utilities. Revenue from sales of
electricity to other utilities increased $3.1 million in the second quarter of
1996 when compared to the corresponding quarter of 1995. Total operating
revenues increased $14.1 million during the first six months of 1996 as compared
to the first six months of 1995, also due to greater sales of electricity.
Direct customer revenues from residential and commercial customers during the
first six months of 1996 were 4.4% and 1.3% higher than for the same period of
1995 due to colder winter and warmer May temperatures. Revenues from sales of
electricity to other utilities increased $6.5 million for the first six months
of 1996 as compared to the same period in 1995. Scheduled outages at BV Unit 2
and Elrama Power Station, as well as a forced outage at Ft. Martin Power
Station, reduced generation available for sales to other utilities during the
first six months of 1995.
Other operating revenues declined $0.6 million when comparing the second
quarter of 1996 and 1995 and declined $1.9 million when comparing the first six
months of 1996 and 1995. The reduction in 1996 other operating revenues reflects
the shorter Beaver Valley Power Station refueling outage activity when compared
to the first two quarters of 1995. The record 49-day outage at BV Unit 1 and the
absence of a BV Unit 2 outage during 1996 resulted in lower billings to the
other joint owners for administrative and general costs during the first six
months of the current year.
Operating Expenses
Total operating expenses increased $15.4 million and $22.6 million during the
second quarter of 1996 and the first six months of 1996 as compared to the same
periods in 1995, respectively.
Fuel and purchased power expense was $5.9 million greater in the second
quarter of 1996 when compared to the second quarter of 1995 and $9.9 million
greater in the first six months of 1996 when compared to the first six months of
1995. These increases in fuel and purchased power expense are consistent with
the 1996 increase in electric sales volume.
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<PAGE>
Other operating expenses for the second quarter of 1996 were consistent with
the second quarter of 1995. In the first six months of 1996 other operating
expenses decreased by $1.4 million as compared to the first six months of 1995
because the scheduled refueling outage at Perry Unit 1 resulted in a shift from
other operating expense to maintenance expense as labor resources normally
applied to operations were shifted to plant maintenance during the first quarter
of 1996.
Maintenance expenses decreased $2.2 million when comparing the second quarter
of 1996 and 1995 due to fewer fossil station outages in 1996. Maintenance
expenses incurred during the first six months of 1996 were comparable to the
first six months of 1995.
Depreciation and amortization expense increased $5.7 million and $13.8 million
for the second quarter of 1996 and the first six months of 1996, as compared to
the same periods in 1995, respectively. Duquesne charged off $9.0 million for
the first six months of 1996 depreciation related to deferred rate
synchronization costs in conjunction with the sale of its ownership interest in
the Ft. Martin Power Station. Accelerated depreciation of fixed assets also
contributed to the 1996 period increases in depreciation and amortization. (See
"Ft. Martin Plan" discussion on page 15.)
Taxes other than income taxes for both periods, the second quarter of 1996 and
the first six months of 1996, were comparable to the second quarter of 1995 and
the first six months of 1995, respectively.
Income taxes were $5.9 million greater in the second quarter of 1996 compared
to the second quarter of 1995. The increase in income taxes in the second
quarter of 1996 is partially attributable to additional taxable income. Income
taxes in the second quarter of 1995 were reduced by the amortization of deferred
taxes associated with Duquesne's accelerated depreciation of fixed assets and
the retroactive effect of a one-time reduction in the Pennsylvania income tax
rate. There was little variance in the first six months of 1996 as compared to
the first six months of 1995 because income taxes decreased $5.7 million in its
first guarter of 1996 when compared to the first quarter of 1995 largely due to
reduced operating income and amortization of deferred investment tax credits.
Other Income and (Deductions)
The respective $5.0 million and $9.4 million increases in the second quarter
of 1996 and the first six months of 1996 in total other income and deductions
are consistent with income related to long-term investments made since the
second quarter of 1995.
Interest Charges
As the result of retirement and refinancing of long-term debt, interest
charges were $2.3 million and $4.2 million lower for the second quarter of 1996
and the first six months of 1996 when compared to the same periods in 1995,
respectively.
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Monthly Income Preferred Securities Dividend Requirements
The Monthly Income Preferred Securities Dividend Requirements reflect the
payment of $1.6 million in dividends related to the Monthly Income Preferred
Securities totaling $150.0 million that were issued on May 14, 1996.
Liquidity, Capital Resources and Investing
- --------------------------------------------------------------------------------
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 June 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 (the 1992 Indenture). 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 the 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.
During the second quarter, 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.
Investing
Duquesne's long-term investments consist of its holdings of DQE common stock,
investments in affordable housing, leasehold and other investments, and
Duquesne's nuclear decommissioning trusts. Duquesne invested $1.2 million and
$3.1 million in affordable housing funds during the six months ended June 30,
1996 and 1995, respectively.
Outlook
- --------------------------------------------------------------------------------
Ft. Martin Plan
On May 23, 1996, the PUC approved the sale of Duquesne's ownership interest
in the Ft. Martin Power Station and a plan to be financed in part by the
proceeds of the Ft. Martin transaction. Under the approved plan, Duquesne will
not increase its base rates for a period of five years through the year 2000. In
addition, Duquesne will record a one-time reduction of approximately $130.0
million in the value of Duquesne's nuclear plant investment. The proceeds from
the sale are expected to be used to finance reliability enhancements to the
Brunot Island Power Station (BI) combustion turbines, to retire debt and to
reduce equity. The approved plan also provides for an annual increase of $25.0
million for three years in depreciation and amortization expense related
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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 the lost profits from any reduced short-term
power sales foregone by the sale of its ownership interest in the Ft. Martin
Power Station. 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 charged off $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 the Ft. Martin Power Station,
Duquesne will 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.
Duquesne's regulatory assets include deferred coal costs of $12.2 million
and $12.7 million at June 30, 1996 and 1995, respectively. 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 12.)
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). 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 proforma tariff filed on July 9, 1996. (See "Transmission Access"
discussion on page 18.)
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 choice be adopted by the electric
utility industry. The PUC plan calls for electric utility restructuring to be
accomplished through a two-stage process consisting of a transition period (1996
to 2001) and a phase-in period (2001 to 2005). The transition period, which
could be reduced to three years if successful, would afford the industry an
opportunity to restructure itself for retail choice. It would include retail
access pilot programs, milestone reviews and provisions for stranded cost
recovery. Utilities are expected to submit restructuring plans by April 1, 1997.
Competitive retail access pilot programs, which will include all classes of
customers, could begin as early as April 1997. Periodic milestone reviews would
be used to ensure that the move to retail choice is conducted in a careful and
appropriate manner. After a successful transition, the phase-in period would
provide an incremental move to full retail competition. The PUC report proposes
the following phase-in schedule: during the year 2001, no less than 10 percent
load; during the year 2002, no less than 25 percent load; during the year 2003,
no less than 50 percent load; and by January 1, 2005, all customers will have
the option to receive direct retail access. Milestone reviews would be used to
monitor activities related to the implementation.
Under the PUC plan, utilities are to be afforded an opportunity, but not a
guarantee, to recover stranded costs. Utilities will be expected to mitigate
stranded investments through various means, such as selling assets, accelerating
depreciation and buying out uneconomic contracts. These activities, however,
are not to result in any increase in current rates paid by customers. After the
transition period, the PUC will determine the eligibility for recovery of
remaining
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stranded costs through a Competitive Transition Charge, which would be paid by
consumers who chose alternative generation suppliers. Performance Based Rates,
which reward or penalize a utility through incentives that more closely resemble
those available in a market-driven industry, are expected to replace the
existing method of setting rates, according to the plan. The PUC plan also
encourages utilities to employ flexible pricing and other innovative proposals,
such as real-time pricing, interruptible buy-through options and commodity index
pricing, for all customer classes. In addition, legislation related to retail
customer choice has been introduced in the Pennsylvania state legislature.
Duquesne cannot predict what legislation, if any, may ultimately be enacted.
Duquesne is aware of the foregoing state and federal regulatory 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 continues to implement, and to further evaluate, the
accelerated depreciation of its generating assets as one method to guard against
the competitive risks of stranded investments. The PUC recently approved
Duquesne's plan for the sale of its ownership interest in the Ft. Martin Power
Station. Duquesne's approved plan provides for an annual increase of $25.0
million for three years in depreciation and amortization expense related to
Duquesne's nuclear investment and a one-time write-down in the value of
Duquesne's nuclear plant investment of approximately $130.0 million. In
addition, Duquesne's plan recognizes an immediate charge-off of $9.0 million of
deferred rate synchronization costs and, upon final transfer of Duquesne's
ownership interest in
17
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the Ft. Martin Power Station, the remaining $42.1 million balance will be
amortized over a ten-year period. (See "Ft. Martin Plan" discussion on page 15.)
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 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.
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 MW 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 proforma tariff filed on July 9,
1996 (previously discussed in "Competition" on page 16). 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. The
tariff is now pending before the FERC.
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 explore 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.
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The sale of Duquesne's ownership interest in the Ft. Martin Power Station
demonstrates Duquesne's ongoing efforts to optimize the utilization of
generation resources. (See "Ft. Martin Plan" discussion on page 15.) 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 on 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.
Customer Service Guarantees
Duquesne's commitment to provide reliable, quality service to its customers
is characterized by its customer service guarantees. On March 6, 1995, Duquesne
became the first Pennsylvania regulated utility, and the third in the United
States, to offer its residential customers guarantees of its commitment to
courteous, reliable and efficient service. Duquesne offers a $25 credit to a
customer's account if Duquesne fails to provide accurate billings; to meet
punctual service appointments; to extend prompt, courteous and professional
service; or to connect new services within one day of the date requested by the
customer.
Customer Advanced Reliability System
In January 1996, Duquesne announced its Customer Advanced Reliability System,
a new communications service that will provide its customers with superior
levels of service reliability, security and convenience. Duquesne has signed a
long-term, full service contract with Itron, Inc. (Itron), a leading supplier of
energy information and communication solutions to the electric utility industry.
Itron will install, operate and maintain a communications network that will
provide Duquesne with an electronic link to its 580,000 customers.
The Customer Advanced Reliability System is designed to respond to customer
needs on the basis of immediate information about the status of power delivery
and offer customer choices for new services. This electronic communications
service is another major element in Duquesne's multi-step plan to make
Duquesne's operations more competitive and efficient.
______________________________
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 (Unit), the appointment of a special operations advisor to oversee
CEI's operation of the Unit, partition of the parties' interests in the
Unit 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
closing of the Saginaw mine, which historically supplied coal to the Unit;
and the concealment by CEI of material information, particularly with
regard to costs relating to the closing of the Powhattan No. 6 mine, which
currently supplies coal to the Unit.
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
the Unit. CEI also seeks monetary damages from Duquesne for alleged unpaid
joint costs in connection with the operation of the Unit. 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 the
Unit. 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 the Unit, located near Cleveland, Ohio and
operated by Centerior Energy Corporation. Duquesne's 31.2 percent ownership
interest represents 186 megawatts of the Unit's output capacity.
Item 5. Other Information
Effective August 9, 1996, Wesley W. von Schack resigned as Chairman,
President, CEO and Director of DQE, as well as Chairman, CEO and Director
of Duquesne to accept the position of Chairman, President, CEO and Director
of New York State Electric and Gas Corporation. Board of Directors for both
DQE and Duquesne elected David D. Marshall, who had been serving as
President and Chief Operating Officer of Duquesne and Executive Vice
President of DQE, to serve as interim CEO of both DQE and Duquesne. The
Board of Directors has undertaken a search for a replacement for Mr. von
Schack that will include both internal and external candidates.
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Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
EXHIBIT 12.1 - Calculation of Ratio of Earnings to Fixed Charges
EXHIBIT 27.1 - Financial Data Schedule
b. A Current Report on Form 8-K was filed during the three months ended
June 30, 1996:
(1) May 13, 1996 - The following event was reported:
Item 7. Exhibit 12.2 - Statement re: Calculation of Ratio of
Earnings to Combined Fixed Charges and Preferred and Preference
Stock Dividend Requirements
No financial statements were filed with this report.
______________________________
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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 August 14, 1996 /s/ Gary L. Schwass
--------------------------- -----------------------------------------
(Signature)
Gary L. Schwass
Senior Vice President and
Principal Financial Officer
Date August 14, 1996 /s/ Deborrah E. Beck
--------------------------- -----------------------------------------
(Signature)
Deborrah E. Beck
Controller and
Principal Accounting Officer
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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,
-----------------------
Six Months Ended
June 30, 1996 1995 1994 1993 1992 1991
----------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on long-term debt $ 41,601 $ 89,139 $ 94,646 $102,938 $119,179 $127,606
Other interest 1,006 2,599 1,095 2,387 1,749 1,773
Monthly Income Preferred Securities
dividend requirements 1,640 - - - - -
Amortization of debt discount,
premium and expense - net 3,035 6,252 6,381 5,541 4,223 3,892
Portion of lease payments
representing an interest factor 21,863 44,386 44,839 45,925 60,721 64,189
-------- -------- -------- -------- -------- --------
Total Fixed Charges $ 69,145 $142,376 $146,961 $156,791 $185,872 $197,460
======== ======== ======== ======== ======== ========
EARNINGS:
Income from continuing operations $ 69,320 $151,070 $147,449 $144,787 $149,768 $143,133
Income taxes 33,586* 92,894* 84,191 77,237 110,993 104,067
Fixed charges as above 69,145 142,376 146,961 156,791 185,872 197,460
-------- -------- -------- -------- -------- --------
Total Earnings $172,051 $386,340 $378,601 $378,815 $446,633 $444,660
======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 2.49 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 $1.6 million for the six months ended
June 30, 1996, has been excluded from the ratio.
*Earnings related to income taxes reflect a $6.0 million decrease for the six
months ended June 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 2.58 and 2.81 for the six months ended June 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $2,925,017
<OTHER-PROPERTY-AND-INVEST> $159,865
<TOTAL-CURRENT-ASSETS> $348,563
<TOTAL-DEFERRED-CHARGES> $650,350
<OTHER-ASSETS> $46,933
<TOTAL-ASSETS> $4,130,728
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> $825,747
<RETAINED-EARNINGS> $290,894
<TOTAL-COMMON-STOCKHOLDERS-EQ> $1,116,641
0
$222,008
<LONG-TERM-DEBT-NET> $1,322,545
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> $31,866
<LEASES-CURRENT> $23,616
<OTHER-ITEMS-CAPITAL-AND-LIAB> $1,414,052
<TOT-CAPITALIZATION-AND-LIAB> $4,130,728
<GROSS-OPERATING-REVENUE> $575,379
<INCOME-TAX-EXPENSE> $35,572
<OTHER-OPERATING-EXPENSES> $435,062
<TOTAL-OPERATING-EXPENSES> $470,634
<OPERATING-INCOME-LOSS> $104,745
<OTHER-INCOME-NET> $11,361
<INCOME-BEFORE-INTEREST-EXPEN> $116,106
<TOTAL-INTEREST-EXPENSE> $45,146
<NET-INCOME> $69,320
$2,032
<EARNINGS-AVAILABLE-FOR-COMM> $67,288
<COMMON-STOCK-DIVIDENDS> $71,000
<TOTAL-INTEREST-ON-BONDS> $44,636
<CASH-FLOW-OPERATIONS> $135,735
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes 8,400 of Preference Stock
</FN>
</TABLE>
