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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] For the Quarterly Period Ended June 30, 1999
-----------------
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
----------------------
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, Inc. is the holder of all shares of common stock, $1 par value, of Duquesne
Light Company consisting of 10 shares as of June 30, 1999 and July 31, 1999.
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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,
------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenues
Sales of Electricity:
Customers - net $ 239,948 $ 269,477 $ 494,367 $ 537,840
Utilities 15,478 6,970 29,131 14,042
------------ ------------ ------------- -------------
Total Sales of Electricity 255,426 276,447 523,498 551,882
Other 17,813 10,886 31,717 20,608
------------ ------------ ------------- -------------
Total Operating Revenues 273,239 287,333 555,215 572,490
------------ ------------ ------------- -------------
Operating Expenses
Fuel and purchased power 49,669 71,575 96,580 131,108
Other operating 59,894 56,916 121,990 125,742
Maintenance 23,434 15,669 43,771 35,952
Depreciation and amortization 47,058 56,104 99,898 111,784
Taxes other than income taxes 22,148 19,363 44,238 38,928
Income taxes 16,558 21,888 35,251 37,827
------------ ------------ ------------- -------------
Total Operating Expenses 218,761 241,515 441,728 481,341
------------ ------------ ------------- -------------
OPERATING INCOME 54,478 45,818 113,487 91,149
------------ ------------ ------------- -------------
Other Income and Deductions 6,157 7,969 14,392 19,672
Income Before Interest and Other Charges
and Extraordinary Item 60,635 53,787 127,879 110,821
Interest Charges 28,918 20,086 57,154 40,535
Monthly Income Preferred Securities
Dividend Requirements 3,141 3,141 6,281 6,281
------------ ------------ ------------- -------------
INCOME Before Extraordinary Item 28,576 30,560 64,444 64,005
Extraordinary Item (Net of Tax) -- (82,548) -- (82,548)
------------ ------------ ------------- -------------
NET INCOME (LOSS) After Extraordinary Item $ 28,576 $ (51,988) $ 64,444 $ (18,543)
============ ============ ============= =============
DIVIDENDS ON PREFERRED AND
PREFERENCE STOCK 987 991 1,980 1,989
------------ ------------ ------------- -------------
EARNINGS (LOSS) FOR COMMON STOCK
Before Extraordinary Item $ 27,589 $ 29,569 $ 62,464 $ 62,016
============ ============ ============= =============
EARNINGS (LOSS) FOR COMMON STOCK
After Extraordinary Item $ 27,589 $ (52,979) $ 62,464 $ (20,532)
============ ============ ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
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DUQUESNE LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Property, plant and equipment $ 4,606,716 $ 4,589,140
Less: Accumulated depreciation and amortization (3,151,225) (3,141,841)
---------------- ----------------
Property, plant and equipment net 1,455,491 1,447,299
---------------- ----------------
Long-term investments 189,265 202,256
---------------- ----------------
Current assets:
Cash and temporary cash investments 8,198 53,151
Receivables 80,933 125,956
Other current assets, principally material and supplies 111,949 92,119
---------------- ----------------
Total current assets 201,080 271,226
---------------- ----------------
Other non-current assets:
Transition costs 2,040,473 2,132,980
Regulatory assets 62,153 64,568
Other 68,763 56,799
---------------- ----------------
Total other non-current assets 2,171,389 2,254,347
---------------- ----------------
TOTAL ASSETS $ 4,017,225 $ 4,175,128
================ ================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock - $1 par value (shares - 90,000,000
authorized; 10 issued) $ -- $ --
Capital surplus 746,330 813,528
Retained earnings 15,440 27,646
Accumulated other comprehensive Income 22,823 27,326
---------------- ----------------
Total common stockholder's equity 784,593 868,500
---------------- ----------------
Preferred and preference stock 228,940 227,782
---------------- ----------------
Long-term debt 1,060,469 1,160,348
---------------- ----------------
Total capitalization 2,074,002 2,256,630
---------------- ----------------
Obligations under capital leases 14,992 36,596
---------------- ----------------
Current liabilities:
Notes payable and current maturities 234,516 96,137
Other current liabilities 196,293 268,141
---------------- ----------------
Total current liabilities 430,809 364,278
---------------- ----------------
Deferred income taxes - net 567,992 610,272
---------------- ----------------
Deferred income 112,625 117,508
---------------- ----------------
Beaver Valley lease liability 475,570 475,570
---------------- ----------------
Other non-current liabilities 341,235 314,274
---------------- ----------------
Commitments and contingencies (Note 4)
---------------- ----------------
TOTAL CAPITALIZATION AND LIABILITIES $ 4,017,225 $ 4,175,128
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
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DUQUESNE LIGHT COMPANY
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities
Operations $ 156,717 $ 219,070
Changes in working capital other than cash (4,471) (54,585)
Increase in ECR -- (19,219)
Other (15,389) 2,507
-------------- --------------
Net Cash Provided By Operating Activities 136,857 147,773
-------------- --------------
Cash Flows From Investing Activities
Construction expenditures (40,760) (34,621)
Long-term investments (1,431) (11,537)
Other (4,931) (1,025)
-------------- --------------
Net Cash Used in Investing Activities (47,122) (47,183)
-------------- --------------
Cash Flows From Financing Activities
Dividends on capital stock (145,431) (59,451)
Increase in notes payable 19,500 --
Reductions of long-term obligations - net (9,097) (36,938)
Other 340 (5,503)
-------------- --------------
Net Cash Used in Financing Activities (134,688) (101,892)
-------------- --------------
Net decrease in cash and temporary cash investments (44,953) (1,302)
Cash and temporary cash investments at beginning of period 53,151 165,169
-------------- --------------
Cash and temporary cash investments at end of period $ 8,198 $ 163,867
============== ==============
Non-Cash Investing and Financing Activities
Capital lease obligations recorded $ 5,988 $ 4,941
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
4
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Duquesne Light Company
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
NET INCOME $ 28,576 $ 30,560 $ 64,444 $ 64,005
Other Comprehensive Income:
Unrealized holding gains (losses)
net of tax of $1,470, $(1,083),
$(2,198) and $1,013, respectively 2,072 (1,527) (3,100) 1,429
Less: reclassification adjustment for
gains included in net income, net of
tax of $0, $0, $756 and $0, respectively -- -- (1,404) --
------------ ------------- ------------ -------------
Total Other Comprehensive Income 2,072 (1,527) (4,504) 1,429
------------ ------------- ------------ -------------
Comprehensive Income $ 30,648 $ 29,033 $ 59,940 $ 65,434
============ ============= ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. CONSOLIDATION, RECLASSIFICATIONS AND ACCOUNTING POLICIES
Duquesne Light Company (Duquesne) is a wholly owned subsidiary of DQE, Inc.
(DQE), a multi-utility delivery and services company. Duquesne is engaged in the
generation, transmission, distribution and sale of electric energy. Duquesne has
one wholly owned subsidiary, Monongahela Light and Power Company, which makes
long-term investments.
The Pennsylvania Public Utility Commission (PUC) has approved Duquesne's
plan to divest itself of its generation assets through an auction (including an
auction of its provider of last resort service), and the pending exchange of
certain power station assets with FirstEnergy Corporation (FirstEnergy). Final
agreements governing these transactions must be approved by various regulatory
agencies. Duquesne currently expects these transactions to close in late 1999 or
early 2000. (See "Rate Matters," Note 2, on page 7.)
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 periods have been reclassified to conform
with accounting presentations adopted during 1999.
These statements should be read with the financial statements and notes
included in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC) for the year ended December 31, 1998. The results of
operations for the three and six months ended June 30, 1999, are not necessarily
indicative of the results that may be expected for the full year. The
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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 electric utility operations are subject to
regulation by the PUC, including regulation under the Pennsylvania Electricity
Generation Customer Choice and Competition Act (Customer Choice Act), and 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.
As a result of the PUC's May 29, 1998, final order regarding Duquesne's
restructuring plan under the Customer Choice Act (see "Rate Matters," Note 2, on
page 7), the electricity generation portion of Duquesne's business does not meet
the criteria of Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS No. 71).
Accordingly, fixed assets related to the generation portion of Duquesne's
business are evaluated in accordance with SFAS No. 121, Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS No. 121). Pursuant to the PUC's final restructuring order, certain of
Duquesne's generation-related regulatory assets are being recovered through a
competitive transition charge (CTC) collected in connection with providing
transmission and distribution services (the electricity delivery business
segment), and have been reclassified accordingly. Additionally, pursuant to the
PUC's final restructuring order, Duquesne is recovering its above-market
investment in generation assets through the CTC, subject to receipt of the
proceeds from the generation asset auction. The electricity delivery business
segment continues to meet SFAS No. 71 criteria and accordingly reflects
regulatory assets and liabilities consistent with 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. (See "Rate Matters," Note 2, below.)
Through the Energy Cost Rate Adjustment Clause (ECR), Duquesne previously
recovered (to the extent that such amounts were not included in base rates)
nuclear fuel, fossil fuel and purchased power expenses. Also through the ECR,
Duquesne passed to its customers the profits from short- term power sales to
other utilities (collectively, ECR energy costs). As a consequence of the PUC's
final order regarding Duquesne's restructuring plan (see "Rate Matters," Note 2,
below), such costs are no longer recoverable through the ECR. Instead, effective
May 29, 1998 (the date of the PUC's final restructuring order), such costs are
expensed as incurred and thus impact net income. Under-recoveries from customers
prior to May 29, 1998, were recorded on the consolidated balance sheet as a
regulatory asset. At June 30, 1999 and December 31, 1998, $42.7 million was
receivable from customers. Duquesne expects to recover this amount through the
CTC. (See "Restructuring Plan" discussion, Note 2, on page 7.)
Duquesne's long-term investments include assets of nuclear decommissioning
trusts and marketable securities accounted for in accordance with SFAS 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 related to marketable securities were
$39.0 million ($22.8 million, net of tax) at June 30, 1999, and $46.5 million
($27.3 million, net of tax) at December 31, 1998.
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2. RATE MATTERS
Competition and the Customer Choice Act
Under historical ratemaking practice, regulated electric utilities were
granted exclusive geographic franchises to sell electricity, in exchange for
making investments and incurring obligations to serve customers under the then-
existing regulatory framework. Through the ratemaking process, those prudently
incurred costs were recovered from customers, along with a return on the
investment. Additionally, certain operating costs were approved for deferral for
future recovery from customers (regulatory assets). As a result of this process,
utilities had assets recorded on their balance sheets at above-market costs,
thus creating transition and stranded costs.
In Pennsylvania, the Customer Choice Act went into effect on January 1,
1997. The Customer Choice Act enables Pennsylvania's electric utility customers
to purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). Although the Customer Choice Act will give
customers their choice of electric generation suppliers, the existing,
franchised local distribution utility is still responsible for delivering
electricity from the generation supplier to the customer. The local distribution
utility is also required to serve as the provider of last resort for all
customers in its service territory, unless other arrangements are approved by
the PUC. The provider of last resort must provide electricity for any customer
who cannot or does not choose an alternative electric generation supplier, or
whose supplier fails to deliver. The Customer Choice Act provides that the
existing franchised utility may recover, through a CTC, an amount of transition
costs that are determined by the PUC to be just and reasonable. Pennsylvania's
electric utility restructuring is being accomplished through a two-stage process
consisting of an initial customer choice pilot period (which ended in December
1998) and a phase-in to competition period (which began in January 1999).
Phase-In to Competition
The phase-in to competition began in January 1999, when 66 percent of
customers became eligible to participate in customer choice (including customers
covered by the pilot program); all customers will have customer choice in
January 2000. As of June 30, 1999, approximately 14 percent of Duquesne's
customers had chosen alternative generation suppliers. Customers that have
chosen an electricity generation supplier other than Duquesne pay that supplier
for generation charges, and pay Duquesne the CTC (discussed below) and charges
for transmission and distribution. Customers that continue to buy their
generation from Duquesne pay for their service at current regulated tariff rates
divided into generation, transmission and distribution charges, and the CTC.
Under the Customer Choice Act, an electric distribution company, such as
Duquesne, remains a regulated utility and may only offer PUC-approved rates,
including generation rates. Also under the Customer Choice Act, electricity
delivery (including transmission, distribution and customer service) remains
regulated in substantially the same manner as under historical regulation.
In an effort to "jumpstart" competition, Duquesne had made 600 megawatts
(MW) of power available through the first six months of 1999 to licensed
electric generation suppliers, to be used to supply electricity to Duquesne's
customers who had chosen alternative generation suppliers.
Rate Cap
An overall four-and-one-half-year rate cap from January 1, 1997, has been
imposed on the transmission and distribution charges of Pennsylvania electric
utility companies under the Customer Choice Act. Additionally, electric utility
companies may not increase the generation price component of rates as long as
transition costs are being recovered, with certain exceptions.
Restructuring Plan
In its May 29, 1998, final restructuring order, the PUC determined that
Duquesne should recover most of the above-market costs of the generation assets,
including plant and regulatory assets through the collection of the CTC from
electric utility customers. The total of the transition costs to be recovered
was $1,485 million, net of tax, over a seven-year period beginning January 1,
1999, as may be adjusted to account for the proceeds of the generation asset
auction. In addition, the transition
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costs as reflected on the consolidated balance sheet are being amortized over
the same period that the CTC revenues are being recognized. Duquesne is allowed
to earn an 11 percent pre-tax return on the unrecovered, net of tax balance of
transition costs, as adjusted following the generation asset auction.
As part of its restructuring plan filing, Duquesne requested recovery of
$11.5 million ($6.7 million, net of tax) through the CTC for energy costs
previously deferred under the ECR. Recovery of this amount was approved in the
PUC's final restructuring order. Duquesne also requested recovery of an
additional $31.2 million ($18.2 million, net of tax) in deferred fuel costs. On
December 18, 1998, the PUC denied recovery of this additional amount. Duquesne
has appealed the PUC's denial of recovery to the Pennsylvania Commonwealth
Court. Based upon the Customer Choice Act, which mandates recovery of all
regulatory assets, and the PUC's specific authorization for Duquesne to create a
regulatory asset for these costs, Duquesne believes that it is probable that
these costs will be recovered through retail rates. In the event that Duquesne
does not prevail in its appeal, these costs would be written off as a charge
against income.
Restructuring Plan and Auction Plan. With respect to transition cost
recovery, the PUC's final order on the restructuring plan approved Duquesne's
proposal to auction its generation assets and use the proceeds to offset
transition costs. The remaining balance of such costs (with certain exceptions
described below) is expected to be recovered from ratepayers through the CTC.
Until the divestiture is complete, Duquesne has been ordered to use an interim
CTC and price to compare for each rate class based on the methodology approved
in its pilot program (on average, approximately 2.9 cents per kilowatt hour
(KWH) for the CTC and approximately 3.8 cents per KWH for the price to compare).
On December 18, 1998, the PUC approved Duquesne's auction plan, including
an auction of its provider of last resort service, as well as an agreement in
principle to exchange certain generation assets with FirstEnergy. The assets to
be auctioned will include Duquesne's wholly owned Cheswick , Elrama, Phillips
and Brunot Island power stations, as well as the stations to be received from
FirstEnergy in the power station exchange described below. The auction plan
calls for a two-phase, sealed bid process similar to that used in other power
plant divestitures. The initial confidential bidding process began in April
1999, with potential buyers identified by Duquesne being asked to submit non-
binding bids. Qualified applicants have been asked to submit binding, second-
round bids, due in September 1999. Final agreements governing the transactions
must be approved by various regulatory agencies, including the PUC, the FERC,
the NRC, and the Federal Trade Commission. Duquesne currently expects the sale
to close at the end of 1999 or the beginning of 2000.
Power Station Exchange. Pursuant to the definitive agreements entered into
on March 25, 1999, Duquesne and FirstEnergy will exchange ownership interests in
certain power stations. Duquesne will receive 100 percent ownership rights in
three coal-fired power plants located in Avon Lake and Niles, Ohio and New
Castle, Pennsylvania (totaling approximately 1,300 MW), which Duquesne expects
to sell as part of the auction of generation assets. FirstEnergy will acquire
Duquesne's interests in Beaver Valley Unit 1 (BV Unit 1), Beaver Valley Unit 2
(BV Unit 2), Perry Unit 1, Sammis Unit 7, Eastlake Unit 5 and Bruce Mansfield
Units 1, 2 and 3 (totaling approximately 1,400 MW). In connection with the power
station exchange, Duquesne anticipates terminating the BV Unit 2 lease in
December 1999. (See "Financing" discussion on page 21.) Pursuant to the December
18, 1998, PUC order and subject to final approval, the proceeds from the sale of
the power stations received in the exchange will be used to offset the
transition costs associated with Duquesne's currently-held generation assets and
costs associated with completing the exchange. Duquesne expects this exchange to
enhance the value received from the auction, because participants will bid on
entire plants, rather than plants that are jointly owned and/or operated by
another entity. Additionally, the auction will include only coal- and oil-fired
plants, which are anticipated to have a higher market value than nuclear plants.
These value-enhancing features, along with a minimum level
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of auction proceeds guaranteed by FirstEnergy, are expected to maximize auction
proceeds, minimize transition costs required to be recovered through the CTC (by
shortening the length of the CTC recovery period), and thus reduce customer
bills as rapidly as possible. Other benefits of this exchange include the
resolution of all joint ownership issues, and other risks and costs associated
with the jointly-owned units. The Federal Trade Commission approved the
exchange on June 30, 1999. The PUC approved the definitive exchange agreement
on July 15, 1999, having found the exchange to be in the public interest.
Certain aspects of the exchange have yet to be approved by, among other
agencies, the FERC, the NRC and, solely with respect to reliability issues,
the Public Utilities Commission of Ohio. The power station exchange is expected
to occur at the end of 1999 or in early 2000. (See "Legal Proceedings" on
page 28.)
Termination of the AYE Merger
On October 5, 1998, DQE announced its unilateral termination of the merger
agreement between DQE and Allegheny Energy, Inc. (AYE). DQE believes that AYE
suffered a material adverse effect as a result of the PUC's final restructuring
order regarding AYE's utility subsidiary, West Penn Power Company. AYE filed
suit in the United States District Court for the Western District of
Pennsylvania, seeking to compel DQE to proceed with the merger and seeking a
temporary restraining order and preliminary injunction to prevent DQE from
certain actions pending a trial, or in the alternative seeking an unspecified
amount of money damages. DQE and AYE continue to litigate this matter. (See
"Legal Proceedings" on page 28.) In a letter dated February 24, 1999, the PUC
informed DQE that the merger application was deemed withdrawn and the docket was
closed.
3. RECEIVABLES
Components of receivables for the periods indicated are as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1999 1998 1998
(Amounts in Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric customer accounts receivable $ 86,136 $ 87,830 $ 87,262
Other utility receivables 22,154 20,907 25,412
Other receivables 32,951 31,067 22,419
Less: Allowance for uncollectible accounts (10,308) (16,784) (9,137)
- --------------------------------------------------------------------------------------------------------
Receivables less allowance for uncollectible 130,933 123,020 125,956
accounts
Less: Receivables sold (50,000) -- --
========================================================================================================
Total Receivables $ 80,933 $123,020 $125,956
========================================================================================================
</TABLE>
Duquesne and an unaffiliated corporation have an agreement that entitles
Duquesne to sell and the corporation to purchase, on an ongoing basis, up to $50
million of accounts receivable. The accounts receivable sales agreement, the
expiration of which has been extended until late August 1999, is one of many
sources of funds available to Duquesne. Duquesne currently anticipates further
extending the agreement or replacing it with a similar arrangement upon
expiration. At June 30, 1999, Duquesne had sold $50 million of receivables. At
June 30 and December 31, 1998, Duquesne had not sold any receivables.
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4. COMMITMENTS AND CONTINGENCIES
Duquesne anticipates divesting itself of its generation assets through the
auction and the power station exchange by early 2000 and, depending on the
regulatory approvals of the final agreements regarding the divestiture, expects
certain obligations related to the divested assets will be transferred to the
future owners. (See "Restructuring Plan" discussion, Note 2, on page 7.)
Construction
Duquesne currently estimates that during 1999 it will spend, excluding the
Allowance for Funds Used During Construction and nuclear fuel, approximately
$110 million (including $30 million for generation) for electric utility
construction.
Nuclear-Related Matters
Duquesne has an interest in three nuclear units, two of which it operates.
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. 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. At the end of its operating life,
BV Unit 1 may be placed in safe storage until BV Unit 2 is ready to be
decommissioned, at which time the units may be decommissioned together.
Based on site-specific studies conducted in 1997 for BV Unit 1 and BV
Unit 2, and a 1997 update of the 1994 study for Perry Unit 1, Duquesne's
approximate share of the total estimated decommissioning costs, including
removal and decontamination costs, is $170 million, $55 million and $90 million,
respectively. The amount currently used to determine Duquesne's cost of service
related to decommissioning all three nuclear units is $224 million. Funding for
nuclear decommissioning costs is deposited in external, segregated trust
accounts and invested in a portfolio of corporate common stock and debt
securities, municipal bonds, certificates of deposit and United States
government securities. The market value of the aggregate trust fund balances
at June 30, 1999, totaled approximately $69.4 million.
As part of the power station exchange, FirstEnergy has agreed to assume the
decommissioning liability for each of the nuclear plants in exchange for the
balance in the decommissioning trust funds, plus the decommissioning costs to be
collected through the CTC, as approved by the PUC.
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 $9.7
billion. The maximum available private primary insurance of $200 million has
been purchased by Duquesne. Additional protection of $9.5 billion would be
provided by an assessment of up to $88.1 million per incident on each licensed
nuclear unit in the United States. Duquesne's maximum total possible assessment,
$66.1 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 assessments from the nuclear industry
prove insufficient to pay claims, the United States Congress could impose other
revenue-raising measures on the 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, Duquesne could be assessed retrospective premiums
totaling a maximum of $7.9 million. Duquesne also 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.
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Subject to the policy deductible, terms and limit, the coverage provides for
a weekly indemnity of the estimated incremental costs during a period of
approximately three years, starting 12 weeks after an accident, 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 $2.9 million.
Beaver Valley Power Station (BVPS). 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 17 percent of its steam generator tubes from service through a
process called "plugging." However, BV Unit 1 still has the capability to
operate at 100 percent reactor power and has the ability to return tubes to
service by repairing them through a process called "sleeving." No tubes at
either BV Unit 1 or BV Unit 2 have been sleeved to date. BV Unit 2, which was
placed in service 11 years after BV Unit 1, has not yet exhibited the degree of
ODSCC experienced at BV Unit 1. Approximately 3 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 at that unit.
Duquesne has undertaken certain measures, such as increased inspections,
water chemistry control and tube plugging, to minimize the operational impact of
and 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 the BV Unit 1 steam generators. The total
replacement cost of the BV Unit 1 steam generators is currently estimated at
$125 million. Duquesne would be responsible for $59 million of this total, which
includes the cost of equipment removal and replacement steam generators, but
excludes replacement power costs. The earliest that the BV Unit 1 steam
generators could be replaced during a currently scheduled refueling outage is
the spring of 2003.
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. BV Unit 1's next refueling outage
is currently scheduled to begin in the spring of 2000. BV Unit 2's next
refueling outage is currently scheduled for the fall of 2000. 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 federal policy for handling and disposing of spent nuclear fuel
and a policy requiring the establishment of a final repository to accept spent
nuclear fuel. Electric utility companies have entered into contracts with the
United States 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 nuclear fuel before 2010. The DOE
has not yet established an interim or permanent storage facility, despite a
ruling by the United States Court of Appeals for the District of Columbia
Circuit that the DOE was legally obligated to begin acceptance of spent nuclear
fuel for disposal by January 31, 1998. Existing on-site spent nuclear fuel
storage capacities at BV Unit 1, BV Unit 2 and Perry Unit 1 are expected to be
sufficient until 2018, 2012 and 2011, respectively.
In early 1997, Duquesne joined 35 other electric utilities and 46 states,
state agencies and regulatory commissions in filing suit in the United States
Court of Appeals for the District of Columbia Circuit against the DOE. The
parties requested the court to suspend the utilities' payments into the Nuclear
Waste Fund and to place future payments into an escrow account until the DOE
fulfills its obligation to accept spent nuclear fuel. The DOE had requested that
the court delay litigation while it pursued alternative dispute resolution under
the terms of its contracts with the utilities. The court ruling, issued November
14, 1997, and affirmed on rehearing May 5, 1998, denied the relief requested by
the utilities and states and permitted the DOE to pursue alternative dispute
resolution, but prohibited the DOE from using its lack of a spent fuel
repository as a defense. The United States Supreme Court declined to review the
decision. The utilities' remaining remedies are to
11
<PAGE>
sue the DOE in federal court for money damages caused by the DOE's delay in
fulfilling its obligations, or to pursue an equitable contract adjustment before
the DOE contracting officer.
Uranium Enrichment Obligations. 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, and are to be paid by such utilities over a 15-year period.
At June 30, 1999, Duquesne's liability for contributions is being recovered
through the CTC as part of transition costs.
Guarantees
Duquesne and the other owners of Bruce Mansfield Power Station (Bruce
Mansfield) have guaranteed certain debt and lease obligations related to a coal
supply contract for Bruce Mansfield. At June 30, 1999, Duquesne's share of these
guarantees was $5.4 million.
Environmental Matters
Various federal and state authorities regulate Duquesne with respect to air
and water quality and other environmental matters. Duquesne believes it is in
current compliance with all material applicable environmental regulations.
Employees
As previously reported, in connection with the anticipated divestiture,
Duquesne has developed early retirement programs and enhanced separation
packages. To date, approximately 250 eligible employees have elected to
participate in early retirement.
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.
5. BUSINESS SEGMENTS AND RELATED INFORMATION
Historically, Duquesne has been treated as a single integrated business
segment due to its regulated operating environment. The PUC authorized a
combined rate for supplying and delivering electricity to customers which was
cost-based and was designed to recover Duquesne's operating expenses and
investment in electric utility assets and to provide a return on the investment.
As a result of the Customer Choice Act, generation of electricity is deregulated
and charged at a separate rate from the delivery of electricity beginning in
1999. For the purposes of complying with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131), Duquesne is
required to disclose information about its business segments separately.
Accordingly, Duquesne has used the PUC-approved separate rates for 1999 to
develop the financial information of the business segments for the three and six
months ended June 30, 1998 (or as of December 31, 1998, with respect to assets).
Beginning in 1999, Duquesne has three principal business segments
(determined by products, services and regulatory environment) which consist of
the transmission and distribution by Duquesne of electricity (electricity
delivery business segment); the generation by Duquesne of electricity
(electricity generation business segment); and the collection of transition
costs (CTC business segment). To comply with SFAS No. 131, Duquesne has reported
the results for 1999 by these business segments and an "all other" category. The
all other category in the following table includes Duquesne investments below
the quantitative threshold for separate disclosure. However, as Duquesne was not
yet collecting transition costs prior to 1999, the 1998 results are reported by
the electricity delivery and electricity generation business segments.
Financial data for business segments is provided as follows:
12
<PAGE>
Business Segments for the Three Months Ended
<TABLE>
<CAPTION>
June 30, 1999 (Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------
Electricity Electricity All
Delivery Generation CTC Other Consolidated
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 81,077 $ 102,782 $ 89,380 $ -- $ 273,239
Operating expenses 48,689 98,178 23,858 978 171,703
Depreciation and
amortization expense 12,821 8,807 25,430 -- 47,058
- --------------------------------------------------------------------------------------------------------
Operating income (loss) 19,567 (4,203) 40,092 (978) 54,478
Other income 648 2,045 -- 3,464 6,157
Interest and other charges 9,157 11,814 12,007 68 33,046
- --------------------------------------------------------------------------------------------------------
Earnings (loss) for
common stock $ 11,058 $ (13,972) $ 28,085 $ 2,418 $ 27,589
========================================================================================================
Assets $ 1,303,969 $ 536,680 $2,040,473 $136,103 $ 4,017,225
========================================================================================================
Capital expenditures $ 15,218 $ 9,127 $ -- $ -- $ 24,345
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998 (Thousands of Dollars)
- ---------------------------------------------------------------------------------------------------
Electricity Electricity All
Delivery Generation Other Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 76,355 $ 210,681 $ 297 $ 287,333
Operating expenses 45,461 139,463 487 185,411
Depreciation and
amortization expense 12,335 43,769 -- 56,104
- -------------------------------------------------------------------------------------------------
Operating income (loss) 18,559 27,449 (190) 45,818
Other income 610 1,480 5,879 7,969
Interest and other charges 9,432 14,661 125 24,218
- -------------------------------------------------------------------------------------------------
Earnings (loss) for common stock,
before extraordinary item $ 9,737 $ 14,268 $ 5,564 $ 29,569
Extraordinary item, net of tax -- (82,548) -- (82,548)
- -------------------------------------------------------------------------------------------------
Earnings (loss) for common stock,
after extraordinary item $ 9,737 $ (68,280) $ 5,564 $ (52,979)
=================================================================================================
Assets(1) $ 1,314,266 $ 2,711,533 $ 149,329 $4,175,128
=================================================================================================
Capital expenditures $ 10,173 $ 11,064 $ -- $ 21,237
=================================================================================================
</TABLE>
(1) Relates to assets as of December 31, 1998.
13
<PAGE>
Business Segments for the Six Months Ended
<TABLE>
<CAPTION>
June 30, 1999 (Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------
Electricity Electricity All
Delivery Generation CTC Other Consolidated
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 163,398 $ 209,413 $ 182,404 $ -- $ 555,215
Operating expenses 95,479 197,280 47,701 1,370 341,830
Depreciation and
amortization expense 27,172 17,663 55,063 -- 99,898
- --------------------------------------------------------------------------------------------------------
Operating income (loss) 40,747 (5,530) 79,640 (1,370) 113,487
Other income 1,783 3,851 8,758 14,392
Interest and other charges 18,043 23,522 23,715 135 65,415
- --------------------------------------------------------------------------------------------------------
Earnings (loss) for
common stock $ 24,487 $ (25,201) $ 55,925 $ 7,253 $ 62,464
========================================================================================================
Assets $ 1,303,969 $ 536,680 $ 2,040,473 $ 136,103 $ 4,017,225
========================================================================================================
Capital expenditures $ 28,644 $ 12,116 $ -- $ -- $ 40,760
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998 (Thousands of Dollars)
- ---------------------------------------------------------------------------------------------------
Electricity Electricity All
Delivery Generation Other Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 155,298 $ 416,895 $ 297 $ 572,490
Operating expenses 91,633 277,401 523 369,557
Depreciation and
amortization expense 24,504 87,280 -- 111,784
- ---------------------------------------------------------------------------------------------------
Operating income (loss) 39,161 52,214 (226) 91,149
Other income 1,563 3,386 14,723 19,672
Interest and other charges 19,032 29,581 192 48,805
- ---------------------------------------------------------------------------------------------------
Earnings (loss) for common stock,
before extraordinary item $ 21,692 $ 26,019 $ 14,305 $ 62,016
Extraordinary item, net of tax -- (82,548) -- (82,548)
- ---------------------------------------------------------------------------------------------------
Earnings (loss) for common stock,
after extraordinary item $ 21,692 $ (56,529) $ 14,305 $ (20,532)
===================================================================================================
Assets(1) $ 1,314,266 $ 2,711,533 $ 149,329 $ 4,175,128
===================================================================================================
Capital expenditures $ 19,111 $ 15,510 $ -- $ 34,621
===================================================================================================
</TABLE>
(1) Relates to assets as of December 31, 1998.
14
<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 should be read in
conjunction with Duquesne Light Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission (SEC) for the year ended December 31,
1998 and its condensed consolidated financial statements, which are set forth on
pages 2 through 14 in Part I, Item 1 of this Report.
General
- --------------------------------------------------------------------------------
Duquesne Light Company (Duquesne) is a wholly owned subsidiary of DQE, Inc.
(DQE), a multi-utility delivery and services company. Duquesne is engaged in the
generation, transmission, distribution and sale of electric energy. Duquesne has
one wholly owned subsidiary, Monongahela Light and Power Company, which
currently holds energy-related investments.
The Pennsylvania Public Utility Commission (PUC) has approved Duquesne's
plan to divest itself of its generation assets through an auction (including an
auction of its provider of last resort service), and the pending exchange of
certain power station assets with FirstEnergy Corporation (FirstEnergy). Final
agreements governing these transactions must be approved by various regulatory
agencies. Duquesne currently expects these transactions to close in late 1999 or
early 2000. (See "Rate Matters" on page 22.)
Service Territory
Duquesne provides electric service to customers in Allegheny County
(including the City of Pittsburgh), Beaver County and, to a limited extent,
Westmoreland County. (See "Rate Matters" on page 22.) This territory represents
approximately 800 square miles in southwestern Pennsylvania. In addition to
serving approximately 580,000 direct customers, Duquesne also sells electricity
to other utilities.
Regulation
Duquesne is subject to the accounting and reporting requirements of the
SEC. In addition, Duquesne's electric utility operations are subject to
regulation by the PUC, including regulation under the Pennsylvania Electricity
Generation Customer Choice and Competition Act (Customer Choice Act), and 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. (See "Rate Matters" on page 22.)
Duquesne's electric utility 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.
As a result of the PUC's May 29, 1998, final order regarding Duquesne's
restructuring plan under the Customer Choice Act (see "Rate Matters" on page
22), the electricity generation portion of Duquesne's business does not meet the
criteria of Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS No. 71).
Accordingly, fixed assets related to the generation portion of Duquesne's
business are evaluated in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS No. 121). Pursuant to the PUC's final restructuring order, certain of
Duquesne's generation-related regulatory assets are being recovered through a
competitive transition charge (CTC) collected in connection with providing
transmission and distribution services (the electricity delivery business
segment), and have been reclassified accordingly. Additionally, pursuant to the
PUC's final restructuring order, Duquesne is recovering its above-market
investment in generation assets through the CTC, subject to receipt of the
proceeds from the generation asset auction. The electricity delivery business
segment continues to meet SFAS No. 71 criteria, and accordingly reflects
regulatory assets and liabilities consistent with cost-based ratemaking
15
<PAGE>
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. (See "Rate Matters" on page 22.)
Results of Operations
- --------------------------------------------------------------------------------
Overall Performance
In the second quarter of 1998, the PUC issued an order related to
Duquesne's plan to recover its stranded costs from electric utility customers.
As a result of the order, Duquesne recorded an extraordinary charge
(Restructuring Charge) against earnings of $82.5 million, or $1.06 per share.
The following discussion of results of operations excludes the impact of that
Restructuring Charge.
Comparison of Three Months Ended June 30, 1999, and June 30, 1998.
Duquesne's earnings available for common stock were $27.6 million in the second
quarter of 1999, a decrease of 6.7%. This decrease was the result of costs
related to scheduled generating station maintenance and refueling outages. In
previous periods, when the electricity generation business segment was rate
regulated, these costs were deferred for future rate recovery.
Comparison of Six Months Ended June 30, 1999, and June 30, 1998.
Duquesne's earnings available for common stock were $62.5 million for the six
months ended June 30, 1999, which is relatively consistent with 1998 earnings.
Subsequent Events. During the latter part of July 1999, a prolonged,
wide-spread heat wave in the eastern half of the United States led to
unprecedented market prices for purchased power, record peak demands and
regional capacity constraints. This combination of factors resulted in
unexpected net purchased power costs of approximately $24 million. Because of
these unexpected costs, July's earnings will be reduced by approximately $0.18
per share of DQE common stock. Duquesne did not default on any wholesale
supply commitments and did not curtail any firm retail load during July.
During the first 13 days of August, Duquesne has been a net seller of
wholesale power. Duquesne believes its purchased power price risk will be
eliminated in the future by the auction of its generating stations and
provider of last resort obligation. (See "Rate Matters" on page 22.) The
foregoing statements are forward-looking regarding the impact on earnings of
Duquesne's power purchases and divestiture of generation assets, and purchased
power risks. Actual results could materially differ from those implied by such
statements due to known and unknown risks and uncertainties, including, but
not limited to, weather conditions, market prices and availability of power,
availability of Duquesne's generating stations, constraints on regional
transmission facilities, and timing of divestiture closings.
Results by Business Segment
Historically, Duquesne has been treated as a single integrated business
segment due to its regulated operating environment. The PUC authorized a
combined rate for supplying and delivering electricity to customers which was
cost-based and was designed to recover Duquesne's operating expenses and
investment in electric utility assets and to provide a return on the investment.
As a result of the Customer Choice Act, generation of electricity is deregulated
and charged at a separate rate from the delivery of electricity beginning in
1999. For the purposes of complying with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131), Duquesne is
required to disclose information about its business segments separately.
Accordingly, Duquesne has used the PUC-approved separate rates for 1999 to
develop the financial information of the business segments for 1998.
Beginning in 1999, Duquesne has three principal business segments
(determined by products, services and regulatory environment): (1) the
transmission and distribution by Duquesne of electricity (electricity delivery
business segment), (2) the generation by Duquesne of electricity (electricity
generation business segment), and (3) the collection of transition costs (CTC
business segment). Duquesne has reported the results for 1999 by these business
segments and an "all other" category. The all other category includes Duquesne
investments in leasing and gas reserve transactions. However, as Duquesne was
not yet collecting transition costs prior to 1999, the 1998 results are reported
by the electricity delivery and electricity generation business segments.
(Additional information regarding Duquesne's business segments is set forth in
"Business Segments and Related Information," Note 5 to the consolidated
financial statements on page 12.)
Electricity Delivery Business Segment
Comparison of Three Months Ended June 30, 1999, and June 30, 1998. The
electricity delivery business segment contributed $11.1 million to net income in
the second quarter of 1999 compared to $9.7 million in the second quarter of
1998, an increase of 13.6 percent. Operating revenues for this business segment
are primarily derived from Duquesne's delivery of electricity and services
provided to electric generation suppliers.
Sales to residential and commercial customers are influenced by weather
conditions. Warmer summer and colder winter seasons lead to increased customer
use of electricity for cooling and heating. Commercial sales are also affected
by regional development. Sales to industrial customers are influenced by
national and global economic conditions.
16
<PAGE>
Operating revenues increased by $4.7 million or 6.2 percent in the second
quarter of 1999 due to an increase in electricity usage by customers of 2.1
percent and to services provided to electric generation suppliers. The following
table sets forth KWH delivered to electric utility customers during the second
quarter:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
KWH Delivered
--------------------------------------------
(In Millions)
--------------------------------------------
Three Months Ended June 30, 1999 1998 Change
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 751.8 730.9 2.9%
Commercial 1,457.4 1,434.3 1.6%
Industrial 872.9 853.4 2.3%
- ---------------------------------------------------------------------------------
Sales to Electric Utility Customers 3,082.1 3,018.6 2.1%
==============================================================================================
</TABLE>
Operating expenses for the electricity delivery business segment are
primarily made up of costs to operate and maintain the transmission and
distribution system; meter reading and billing costs; customer service;
collection; administrative expenses; income taxes; and non-income taxes, such as
property and payroll taxes. Operating expenses increased $3.2 million or 7.1
percent in the second quarter of 1999, primarily due to the timing of non-
recurring charges related to meter reading in both 1999 and 1998.
Interest and other charges include interest on long-term debt, other
interest and preferred stock dividends of Duquesne. In the second quarter of
1999, there was $0.3 million or 2.9 percent less in interest and other charges
compared to the second quarter of 1998. The decrease was the result of the
refinancing of long-term debt at lower interest rates and the maturity of
approximately $75 million of long-term debt during 1998.
Comparison of Six Months Ended June 30, 1999, and June 30, 1998. The
electricity delivery business segment contributed $24.5 million to net income in
the first six months of 1999 compared to $21.7 million in the first six months
of 1998, an increase of 12.9 percent.
Operating revenues increased by $8.1 million or 5.2 percent in the first
six months of 1999, due to a 2.0 percent increase in electricity usage by
customers and to services provided to electric generation suppliers. Sales to
residential and commercial customers increased due to weather conditions, while
industrial sales decreased primarily due to a reduction in electricity
consumption by steel manufacturers, which experienced a decline in demand. The
following table sets forth KWH delivered to electric utility customers during
the first six months of 1999 and 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
KWH Delivered
--------------------------------------------
(In Millions)
--------------------------------------------
Six Months Ended June 30, 1999 1998 Change
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 1,668.4 1,599.3 4.3%
Commercial 2,897.6 2,814.0 3.0%
Industrial 1,723.7 1,754.3 (1.7)%
- ---------------------------------------------------------------------------------
Sales to Electric Utility Customers 6,289.7 6,167.6 2.0%
==============================================================================================
</TABLE>
Operating expenses for the electricity delivery business segment increased
$3.8 million or 4.2 percent in the first six months of 1999, primarily due to
the timing of non-recurring charges related to meter reading in both 1999 and
1998.
17
<PAGE>
Depreciation and amortization expense increased $2.7 million or 10.9
percent in the first six months of 1999 due to additions to the plant and
equipment.
In the first six months of 1999, there was $1.0 million or 5.2 percent less
in interest and other charges compared to the first six months of 1998. The
decrease was the result of the refinancing of long-term debt at lower interest
rates and the maturity of approximately $75 million of long-term debt during
1998.
Electricity Generation and CTC Business Segments
Comparison of Three Months Ended June 30, 1999, and June 30, 1998. In the
second quarter of 1999, the electricity generation and CTC business segments
reported net income of $14.1 million compared to $14.3 million for the second
quarter of 1998, a decrease of 1.1 percent.
During 1998, five percent of Duquesne's electric utility customers
participated in the customer choice pilot program under the Customer Choice Act,
and purchased electricity from alternative generation suppliers. Beginning in
1999, up to 66 percent of Duquesne's electric utility customers are eligible to
participate in customer choice. As of June 30, 1999, approximately 14 percent
of Duquesne's customers are purchasing electricity from alternative generation
suppliers.
For the electricity generation and CTC business segments, operating
revenues are primarily derived from Duquesne's supply of electricity for
delivery to retail customers, the supply of electricity to wholesale customers
and, beginning in 1999, the collection of generationrelated transition costs
from electricity delivery customers. Under fuel cost recovery provisions
effective through May 29, 1998, fuel revenues generally equaled fuel expense, as
costs were recoverable from customers through the Energy Cost Rate Adjustment
Clause (ECR), including the fuel component of purchased power, and did not
affect net income. In 1999, due to the PUC's final restructuring order, fuel
costs are expensed as incurred, and impact net income to the extent fuel costs
exceed amounts included in Duquesne's authorized generation rates. (See "Rate
Matters" on page 22.)
Energy requirements for electric utility customers are reduced as more
customers participate in customer choice. Energy requirements for residential
and commercial customers are also influenced by weather conditions. Warmer
summer and colder winter seasons lead to increased customer use of electricity
for cooling and heating. Commercial energy requirements are also affected by
regional development. Energy requirements for industrial customers are also
influenced by national and global economic conditions.
Short-term sales to other utilities are made at market rates. Fluctuations
in electricity sales to other utilities are related to Duquesne's customer
energy requirements, the energy market and transmission conditions, and the
availability of Duquesne's generating stations. Future levels of short-term
sales to other utilities will be affected by market rates, the level of
participation in customer choice, and Duquesne's divestiture of its generation
assets. (See "Rate Matters" on page 22.)
Operating revenues decreased by $18.5 million or 8.8 percent in the second
quarter of 1999. The decrease in revenues can be attributed to a decrease in
energy supplied to electric utility customers due to increased participation in
customer choice. As of June 30, 1999, 13.6 percent of residential non-coincident
peak load, 29.4 percent of commercial load, and 5.8 percent of industrial load
have selected alternative generation suppliers. Partially offsetting this
decrease was a 127.3 percent increase in energy supplied to other utilities in
the second quarter of 1999, due to Duquesne's decision to sell 600 MW to
licensed generation suppliers to stimulate competition, and increased capacity
available to sell as a result of participation in customer choice. The following
table sets forth KWH supplied for customers who have not chosen an alternative
generation supplier.
18
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
KWH Delivered
---------------------------------------------
(In Millions)
---------------------------------------------
Three Months Ended June 30, 1999 1998 Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 633.9 687.3 (7.8)%
Commercial 987.0 1,355.1 (27.2)%
Industrial 837.5 840.0 (0.3)%
- ----------------------------------------------------------------------------------
Sales to Electric Utility Customers 2,458.4 2,882.4 (14.7)%
Sales to Other Utilities 787.9 346.6 127.3%
- ----------------------------------------------------------------------------------
Total Sales 3,246.3 3,229.0 0.5%
===============================================================================================
</TABLE>
Operating expenses for the electricity generation and CTC business segments
are primarily made up of energy costs; costs to operate and maintain the power
stations; administrative expenses; and non-income taxes, such as property and
payroll taxes.
Fluctuations in energy costs generally result from changes in the cost of
fuel, the mix between coal and nuclear generation, total KWH supplied, and
generating station availability. Because of the ECR, changes in fuel and
purchased power costs did not impact earnings for the first five months of 1998.
Operating expenses decreased $17.4 million or 12.5 percent in the second
quarter of 1999 as a result of decreased energy costs and the reclassification
of the interest component of Beaver Valley lease costs to interest expense.
Partially offsetting these reductions were an increase in costs recognized
currently as expense related to generating station outages, as opposed to prior
accounting which deferred the expense for recovery over the subsequent 18
months.
In the second quarter of 1999, fuel and purchased power expense decreased
by $21.9 million or 30.6 percent compared to the second quarter of 1998. This
decrease was the result of decreased energy costs due to a favorable power
supply mix. During the second quarter of 1998, reduced availability of nuclear
generating stations due to an increase in outage hours required Duquesne to
purchase power and generate power from the higher fuel cost fossil stations.
Depreciation and amortization expense includes the depreciation of the
power stations' plant and equipment, accrued nuclear decommissioning costs and
the amortization of transition costs. A decrease of $9.5 million or 21.8 percent
in the second quarter of 1999 was the result of accelerated transition cost
reduction efforts during that period in 1998. In 1999, Duquesne began to recover
transition costs through an interim CTC. The total of transition costs to be
recovered was $1,485 million, net of tax, over a seven-year period, as may be
adjusted to account for the proceeds of the generation asset auction. Duquesne
records amortization expense for transition costs reflected on the consolidated
balance sheet over the same period as the CTC revenues are being recognized.
Interest and other charges include interest on long-term debt, other
interest and preferred stock dividends of Duquesne. In the second quarter of
1999 there was a $9.2 million or 62.5 percent increase in interest and other
charges compared second quarter of 1998. The increase reflected the
reclassification of the interest component of Beaver Valley lease costs to
interest expense, partially offset by refinancing of long-term debt at lower
interest rates and the maturity of approximately $75 million of long-term debt
during 1998. (See "Financing" discussion on page 21.)
Comparison of Six Months Ended June 30, 1999, and June 30, 1998. In the
first six months of 1999, the electricity generation and CTC business segments
reported net income of $30.7 million compared to $26.0 million for the first six
months of 1998, an increase of 18.1 percent.
19
<PAGE>
Operating revenues decreased by $25.1 million or 6.0 percent in the first
six months of 1999. The decrease in revenues can be attributed to a decrease in
energy supplied to electric utility customers due to increased participation in
customer choice. Partially offsetting this decrease was a 99.8 percent increase
in energy supplied to other utilities in the first six months of 1999, due to
Duquesne's decision to sell 600 MW to licensed generation suppliers to stimulate
competition, and increased capacity available to sell as a result of
participation in customer choice. The following table sets forth KWH supplied
for customers who have not chosen an alternative generation supplier.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
KWH Delivered
--------------------------------------------
(In Millions)
--------------------------------------------
Six Months Ended June 30, 1999 1998 Change
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 1,456.6 1,513.6 (3.8)%
Commercial 2,139.4 2,665.6 (19.7)%
Industrial 1,660.2 1,728.9 (4.0)%
- ----------------------------------------------------------------------------------
Sales to Electric Utility Customers 5,256.2 5,908.1 (11.0)%
- ----------------------------------------------------------------------------------
Sales to Other Utilities 1,450.4 726.0 99.8%
- ----------------------------------------------------------------------------------
Total Sales 6,706.6 6,634.1 1.1%
==============================================================================================
</TABLE>
Operating expenses decreased $32.4 million or 11.7 percent in the first six
months of 1999 as a result of decreased energy costs and the reclassification of
the interest component of Beaver Valley lease costs to interest expense.
Partially offsetting these reductions was an increase in costs now recognized as
expense related to generating station outages.
In the first six months of 1999, fuel and purchased power expense decreased
by $34.5 million or 26.3 percent compared to the first six months of 1998. This
decrease was the result of decreased energy costs due to a favorable power
supply mix. During the first six months of 1998, reduced availability of nuclear
generating stations due to an increase in outage hours required Duquesne to
purchase power and generate power from the higher fuel cost fossil stations.
A decrease in depreciation and amortization expense of $14.6 million or
16.7 percent in the first six months of 1999 was the result of accelerated
transition cost reduction efforts during that period. In 1999, Duquesne began to
recover transition costs through an interim CTC. The total of transition costs
to be recovered was $1,485 million, net of tax, over a seven-year period, as may
be adjusted to account for the proceeds of the generation asset auction.
Duquesne records amortization expense for transition costs reflected on the
consolidated balance sheet over the same period as the CTC revenues are being
recognized.
In the first six months of 1999 there was a $17.7 million or 59.7 percent
increase in interest and other charges compared to the first six months of 1998.
The increase reflected the reclassification of the interest component of Beaver
Valley lease costs to interest expense, partially offset by the refinancing of
long-term debt at lower interest rates and the maturity of approximately $75
million of long-term debt during 1998.
All Other
Comparison of Three Months Ended June 30, 1999, and June 30, 1998. The all
other category contributed $2.4 million to net income in the second quarter of
1999 compared to $5.6 million in the second quarter of 1998, a decrease of 56.5
percent.
Comparison of Six Months Ended June 30, 1999, and June 30, 1998. The all
other category contributed $7.3 million to net income in the first six months of
1999 compared to $14.3 million in the first six months of 1998, a decrease of
49.3 percent.
20
<PAGE>
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Financing
Duquesne expects to meet its current obligations and debt maturities
through the year 2003 with funds generated from operations, through new
financings and short-term borrowings, and through the proceeds from the auction
of generation assets. At June 30, 1999, Duquesne was in compliance with all of
its debt covenants.
Mortgage bonds in the amount of $75 million matured in July 1999, and were
retired using available cash and short term borrowings.
In connection with the power station exchange with FirstEnergy, Duquesne
anticipates terminating the BV Unit 2 lease in December 1999, in which case the
lease liability recorded on the consolidated balance sheet would no longer be an
obligation of Duquesne. The underlying collateralized lease bonds ($370.7
million at June 30, 1999) would become obligations of Duquesne and be recorded
on the consolidated balance sheet. Duquesne anticipates redeeming the bonds on
December 1, 2002 (the first redemption date), using funds generated from
operations, the generation asset auction proceeds, the CTC, and/or through new
financings. Duquesne would also pay approximately $230 million in termination
costs, which Duquesne expects to recover through the proceeds of the generation
asset auction and the CTC. (See "Power Station Exchange" discussion on page 23.)
In connection with customer choice, Duquesne's customer revenues from
operations will be reduced by an amount equal to the generation rate applicable
to those customers choosing alternative generation suppliers (currently
approximately 14 percent of customers). This reduction is expected to be offset
by reduced cash requirements associated with supplying energy. A further impact
on customer revenues is anticipated to occur when, as part of the divestiture,
Duquesne auctions its provider of last resort service and all customers will be
buying generation, either directly from alternative suppliers or indirectly from
the provider of last resort. An additional impact on customer revenues is
expected to occur when the CTC has been fully collected. The length of the CTC
collection period will depend on the level of auction proceeds and future retail
sales The foregoing statements are forward-looking regarding the impact on cash
flows of customer choice and Duquesne's divestiture. Actual results could
materially differ from those implied by such statements due to known and unknown
risks and uncertainties, including, but not limited to, the amount and timing of
the receipt of auction proceeds. (See "Restructuring Plan" on page 23.)
Duquesne and an unaffiliated corporation have an agreement that entitles
Duquesne to sell, and the corporation to purchase, on an ongoing basis, up to
$50 million of accounts receivable. Duquesne currently anticipates extending or
replacing the accounts receivable sale arrangement upon its expiration in late
August 1999. At June 30, 1999, Duquesne had sold $50 million of receivables.
Duquesne maintains a $150 million revolving credit facility which expires
in October 1999. 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
commitments. The revolving credit facility contains a two-year repayment period
for any amounts outstanding at the expiration of the revolving credit period.
No amounts were outstanding at June 30, 1999.
At June 30, 1999, Duquesne had $19.5 million of commercial paper borrowings
outstanding. During the second quarter the maximum amount of such borrowings
was $40 million, the average daily borrowings was $25.6 million and the weighted
average daily interest rate was 5.13 percent.
21
<PAGE>
Investing
- --------------------------------------------------------------------------------
Duquesne's long-term investments consist of Duquesne's holdings of DQE
common stock, investments in affordable housing, lease investments, alternative
energy investments and nuclear decommissioning trust funds. $5 million was
invested in nuclear decommissioning trust funds during the six months ended June
30, 1999, and June 30, 1998.
Rate Matters
- --------------------------------------------------------------------------------
Competition and the Customer Choice Act
Under historical ratemaking practice, regulated electric utilities were
granted exclusive geographic franchises to sell electricity, in exchange for
making investments and incurring obligations to serve customers under the then-
existing regulatory framework. Through the ratemaking process, those prudently
incurred costs were recovered from customers, along with a return on the
investment. Additionally, certain operating costs were approved for deferral for
future recovery from customers (regulatory assets). As a result of this process,
utilities had assets recorded on their balance sheets at above-market costs,
thus creating transition and stranded costs.
In Pennsylvania, the Customer Choice Act went into effect on January 1,
1997. The Customer Choice Act enables Pennsylvania's electric utility customers
to purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). Although the Customer Choice Act will give
customers their choice of electric generation suppliers, the existing,
franchised local distribution utility is still responsible for delivering
electricity from the generation supplier to the customer. The local distribution
utility is also required to serve as the provider of last resort for all
customers in its service territory, unless other arrangements are approved by
the PUC. The provider of last resort must provide electricity for any customer
who cannot or does not choose an alternative electric generation supplier, or
whose supplier fails to deliver. The Customer Choice Act provides that the
existing franchised utility may recover, through a CTC, an amount of transition
costs that are determined by the PUC to be just and reasonable. Pennsylvania's
electric utility restructuring is being accomplished through a two-stage process
consisting of an initial customer choice pilot period (which ended in December
1998) and a phase-in to competition period (which began in January 1999).
Phase-In to Competition
The phase-in to competition began in January 1999, when 66 percent of
customers became eligible to participate in customer choice (including customers
covered by the pilot program); all customers will have customer choice in
January 2000. As of June 30, 1999, approximately 14 percent of Duquesne's
customers had chosen alternative generation suppliers. Customers that have
chosen an electricity generation supplier other than Duquesne pay that supplier
for generation charges, and pay Duquesne the CTC (discussed below) and charges
for transmission and distribution. Customers that continue to buy their
generation from Duquesne pay for their service at current regulated tariff rates
divided into generation, transmission and distribution charges, and the CTC.
Under the Customer Choice Act, an electric distribution company, such as
Duquesne, remains a regulated utility and may only offer PUC-approved rates,
including generation rates. Also under the Customer Choice Act, electricity
delivery (including transmission, distribution and customer service) remains
regulated in substantially the same manner as under historical regulation.
In an effort to "jumpstart" competition, Duquesne had made 600 MW of power
available through the first six months of 1999 to licensed electric generation
suppliers, to be used to supply electricity to Duquesne's customers who had
chosen alternative generation suppliers.
22
<PAGE>
Rate Cap
An overall four-and-one-half-year rate cap from January 1, 1997, has been
imposed on the transmission and distribution charges of Pennsylvania electric
utility companies under the Customer Choice Act. Additionally, electric utility
companies may not increase the generation price component of rates as long as
transition costs are being recovered, with certain exceptions.
Restructuring Plan
In its May 29, 1998, final restructuring order, the PUC determined that
Duquesne should recover most of the above-market costs of the generation assets,
including plant and regulatory assets through the collection of the CTC from
electric utility customers. The total of the transition costs to be recovered
was $1,485 million, net of tax, over a seven-year period beginning January 1,
1999, as may be adjusted to account for the proceeds of the generation asset
auction. In addition, the transition costs as reflected on the consolidated
balance sheet are being amortized over the same period that the CTC revenues are
being recognized. Duquesne is allowed to earn an 11 percent pre-tax return on
the unrecovered, net of tax balance of transition costs, as adjusted following
the generation asset auction.
As part of its restructuring plan filing, Duquesne requested recovery of
$11.5 million ($6.7 million, net of tax) through the CTC for energy costs
previously deferred under the ECR. Recovery of this amount was approved in the
PUC's final restructuring order. Duquesne also requested recovery of an
additional $31.2 million ($18.2 million, net of tax) in deferred fuel costs. On
December 18, 1998, the PUC denied recovery of this additional amount. Duquesne
has appealed the PUC's denial of recovery to the Pennsylvania Commonwealth
Court. Based upon the Customer Choice Act, which mandates recovery of all
regulatory assets, and the PUC's specific authorization for Duquesne to create a
regulatory asset for these costs, Duquesne believes that it is probable that
these costs will be recovered through retail rates. In the event that Duquesne
does not prevail in its appeal, these costs would be written off as a charge
against income.
Restructuring Plan and Auction Plan. With respect to transition cost
recovery, the PUC's final order on the restructuring plan approved Duquesne's
proposal to auction its generation assets and use the proceeds to offset
transition costs. The remaining balance of such costs (with certain exceptions
described below) is expected to be recovered from ratepayers through the CTC.
Until the divestiture is complete, Duquesne has been ordered to use an interim
CTC and price to compare for each class rate based on the methodology approved
in its pilot program (on average, approximately 2.9 cents per KWH for the CTC
and approximately 3.8 cents per KWH for the price to compare).
On December 18, 1998, the PUC approved Duquesne's auction plan, including
an auction of its provider of last resort service, as well as an agreement in
principle to exchange certain generation assets with FirstEnergy. The assets to
be auctioned will include Duquesne's wholly owned Cheswick, Elrama, Phillips and
Brunot Island power stations, as well as the stations to be received from
FirstEnergy in the power station exchange described below. The auction plan
calls for a two-phase, sealed bid process similar to that used in other power
plant divestitures. The initial confidential bidding process began in April
1999, with potential buyers identified by Duquesne being asked to submit non-
binding bids. Qualified applicants have been asked to submit binding, second-
round bids, due in September 1999. Final agreements governing the transactions
must be approved by various regulatory agencies, including the PUC, the FERC,
the NRC, and the Federal Trade Commission. Duquesne currently expects the sale
to close at the end of 1999 or the beginning of 2000.
Power Station Exchange. Pursuant to the definitive agreements entered into
on March 25, 1999, Duquesne and FirstEnergy will exchange ownership interests in
certain power stations. Duquesne will receive 100 percent ownership rights in
three coal-fired power plants located in Avon Lake and Niles, Ohio and New
Castle, Pennsylvania (totaling approximately 1,300 MW), which Duquesne expects
to sell as part of the auction of generation assets. FirstEnergy will acquire
Duquesne's interests in Beaver Valley Unit 1 (BV Unit 1), Beaver Valley Unit 2
(BV Unit 2), Perry Unit 1, Sammis Unit 7, Eastlake Unit 5 and Bruce Mansfield
Units 1, 2 and 3 (totaling
23
<PAGE>
approximately 1,400 MW). In connection with the power station exchange, Duquesne
anticipates terminating the BV Unit 2 lease in December 1999. (See "Financing"
discussion on page 21.) Pursuant to the December 18, 1998, PUC order and subject
to final approval, the proceeds from the sale of the power stations received in
the exchange will be used to offset the transition costs associated with
Duquesne's currently-held generation assets and costs associated with completing
the exchange. Duquesne expects this exchange to enhance the value received from
the auction, because participants will bid on entire plants, rather than plants
that are jointly owned and/or operated by another entity. Additionally, the
auction will include only coal- and oil-fired plants, which are anticipated to
have a higher market value than nuclear plants. These value-enhancing features,
along with a minimum level of auction proceeds guaranteed by FirstEnergy, are
expected to maximize auction proceeds, minimize transition costs required to be
recovered through the CTC (by shortening the length of the CTC recovery period),
and thus reduce customer bills as rapidly as possible. Other benefits of this
exchange include the resolution of all joint ownership issues, and other risks
and costs associated with the jointly-owned units. The Federal Trade Commission
approved the exchange on June 30, 1999. The PUC approved the definitive
exchange agreement on July 15, 1999, having found the exchange to be in the
public interest. Certain aspects of the exchange have yet to be approved by,
among other agencies, the FERC, the NRC and, solely with respect to reliability
issues, the Public Utilities Commission of Ohio. The power station exchange is
expected to occur at the end of 1999 or in early 2000. (See "Legal Proceedings"
on page 28.)
Termination of the AYE Merger
On October 5, 1998, DQE announced its unilateral termination of the merger
agreement between DQE and Allegheny Energy, Inc. (AYE). DQE believes that AYE
suffered a material adverse effect as a result of the PUC's final restructuring
order regarding AYE's utility subsidiary, West Penn Power Company. AYE filed
suit in the United States District Court for the Western District of
Pennsylvania, seeking to compel DQE to proceed with the merger and seeking a
temporary restraining order and preliminary injunction to prevent DQE from
certain actions pending a trial, or in the alternative seeking an unspecified
amount of money damages. DQE and AYE continue to litigate this matter. (See
"Legal Proceedings" on page 28.) In a letter dated February 24, 1999, the PUC
informed DQE that the merger application was deemed withdrawn and the docket was
closed.
Year 2000
- --------------------------------------------------------------------------------
Duquesne has taken extensive and systematic steps to ensure a smooth
transition into the Year 2000. The transition to the Year 2000 became an issue
because many existing computer programs and embedded microprocessors use only
two digits to identify a year (for example, "99" is used to represent "1999").
Such programs read "00" as the year 1900, and thus may not recognize dates
beginning with the year 2000, or may otherwise produce erroneous results or
cease processing when dates after 1999 are encountered.
Year 2000 Plan. Since 1994, Duquesne has been planning for the Year 2000
with an aggressive strategy to identify information needs, replace or upgrade
equipment and coordinate resources to anticipate the new millennium. Based on
the success to date of the Year 2000 program, Duquesne fully expects normal
operations into the Year 2000 and beyond. Duquesne assembled a Year 2000 team,
comprised of management representatives from all functional areas of Duquesne.
The goal of Duquesne's Year 2000 program is that all components and services
that in any material manner contribute to the operational reliability, customer
relations, safety, revenue, regulatory compliance and reputation of Duquesne be
Year 2000 ready. On June 30, 1999, Duquesne reported to the PUC, the NRC and
the North American Electric Reliability Council (NERC) that all of its mission
critical systems are Year 2000 ready. Duquesne has defined mission critical as
any system that supports the generation of electricity as well as transmission
and delivery of power to customers.
24
<PAGE>
Duquesne's Year 2000 program also addresses all of the its business critical
systems, such as billings, processing orders, and various accounting and
business management functions. Many of these systems also have been declared
ready as of June 30, 1999. The remainder are expected to be completed by
September 30, 1999. The Year 2000 team has focused on all three aspects of the
issue: computer software and hardware systems used to support day-to-day
operations; embedded microprocessors which are small electronic devices found in
a wide range of equipment and devices (such as plant components, substation
equipment, elevators, and heating and cooling systems); and potential related
issues that may originate with third parties with whom Duquesne does business.
To support the planning, organization and management of its efforts, the team
has retained Year 2000 consultants.
In general, Duquesne's overall strategy to address the Year 2000 issue is
comprised of four phases that, in some cases, are performed simultaneously.
These phases are inventory, assessment, remediation, and testing and
implementation.
Inventory consisted of identifying the various components, equipment,
hardware, and software used in Duquesne's operations that may potentially be
faced with Year 2000 issues. The inventory process, completed in 1998, involved
reviewing existing listings and subsequent verification through physical
inspections and walk-downs.
Assessment, completed in January 1999, consisted of evaluating all
inventoried items for Year 2000 compliance or readiness. This was accomplished
by contacting the vendors and manufacturers, inspecting software and code,
researching the results of other companies' assessment of like components, and
various other means.
Remediation, the third step in the process, addressed the activities
necessary to fix or replace those components that have Year 2000 issues that
will adversely affect the Company's operations. Remediation of all mission
critical systems was complete as of June 30, 1999. Remediation is in addition
to previously planned improvements to the Company's systems with benefits beyond
Year 2000 solutions, such as total system replacements discussed below.
Testing and implementation, the final step, consists of placing renovated
processes, systems, equipment, and other items into use within the Company's
operations. Testing has been performed on all mission critical processes,
whether or not remediation activities were involved in the process.
Regulatory Review. Throughout the execution of its Year 2000 plan, the
Company has been providing and will continue to provide information on its
activities to regulatory agencies including the PUC, the NRC and the NERC.
. Following eight months of formal proceedings by the PUC during which all
Pennsylvania utilities, including Duquesne, were required to demonstrate
that they were ready for the Year 2000, the PUC "investigation concludes
that the lights will stay on..." (Motion of PUC Chairman John M. Quain
on Docket No. I-00980076, March 31, 1999)
. Duquesne has complied with the NRC's compliance guidelines and has
verified with the NRC that all systems related to power production,
safety and security are ready for Year 2000. In addition, the NRC
conducted a Year 2000 audit of the nuclear power station safety and
operations systems in May 1999.
. NERC, which coordinates the interconnection of all utilities across the
country, has been requested by the DOE to conduct a detailed review of
the national electric power production and delivery infrastructure to
ensure a reliable power supply during the Year 2000 transition period.
Duquesne has provided monthly status reports to NERC. Duquesne's June
30, 1999, report confirmed the Year 2000 readiness of all its
generation, transmission, and distribution systems. In addition,
Duquesne participated in the industry-wide NERC communication drill that
was conducted on April 9, 1999. All of Duquesne's communications systems
exercised in this drill performed as expected. Duquesne will also be
participating in the NERC Year 2000 readiness drill to be conducted on
September 9, 1999.
25
<PAGE>
Risks and Contingency Plans. Duquesne currently believes that
implementation of its plan will minimize the Year 2000 issues relating to its
systems and equipment. Duquesne understands that many variables outside the
control of Duquesne may have an adverse affect on the ability of Duquesne to
perform its mission critical processes. Management believes that the most
reasonably likely worst case scenario would be a temporary disruption of service
to customers caused by potential disruptions in the operations of critical
suppliers, such as fuel supply or telecommunications. In the event such a
scenario occurs, it is not anticipated that Duquesne would incur a material
adverse impact on its financial position or the consolidated results of
operations.
In the normal course of business Duquesne has developed contingency plans
to minimize the risk of interrupted operations. As part of the Year 2000
program, Duquesne has reviewed these plans in terms of Year 2000 related risks,
and either refined the existing plans or developed new contingency plans for all
mission critical and business critical processes. These contingency plans
incorporate numerous mitigation strategies, such as the most appropriate
allocation of staffing resources, the need for additional equipment and
facilities, and special operating procedures, including manual operations and
use of non-computer dependent back-up equipment and procedures.
Duquesne continues to review its operations and its critical external
suppliers and service providers, in order to determine any adverse scenarios it
could face as a result of Year 2000 problems. To date, nothing has been found
that would prevent Duquesne from generating or providing electricity to the
public.
Costs. The estimated total cost of implementing Duquesne's Year 2000 plan
is approximately $49 million, which includes costs related to total system
replacements (i.e., the Year 2000 solution comprises only a portion of the
benefit resulting from such replacements). These costs to date, primarily
incurred as a result of software and system changes and upgrades by Duquesne,
have been approximately $39 million. Of this amount, approximately $35 million
are capital costs attributable to the licensing and installation of new software
for total system replacements. The remaining $4 million has been expensed as
incurred. Funds for Duquesne's Year 2000 plan have come from Duquesne's
operating and capital budgets. Approximately $10 million has been budgeted for
1999 to address Year 2000 issues. Duquesne does not anticipate that Year 2000
issues and related costs will be material to Duquesne's operations, financial
condition and results of operations.
The foregoing paragraphs contain forward-looking statements regarding the
timetable, effectiveness and ultimate cost of Duquesne's Year 2000 strategy.
Actual results could materially differ from those implied by such statements due
to known and unknown risks and uncertainties, including, but not limited to, the
possibility that changes and upgrades are not timely completed, that corrections
to the systems of other companies on which Duquesne's systems rely may not be
timely completed, and that such changes and upgrades may be incompatible with
Duquesne's systems; the availability and cost of trained personnel; and the
ability to locate and correct all relevant computer code and microprocessors.
26
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Funding for nuclear decommissioning costs is deposited by Duquesne in
external, segregated trust accounts and invested in a portfolio of corporate
common stock and debt securities, municipal bonds, certificates of deposit and
United States government securities. The market value of the aggregate trust
fund balances at June 30, 1999, totaled approximately $69.4 million. The amount
funded into the trusts is based on estimated returns which, if not achieved as
projected, could require additional unanticipated funding requirements.
______________________________
Except for historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements that involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of Duquesne to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors may affect Duquesne's
operations, markets, products, services and prices, and include, among others,
the following: DQE's decision not to consummate the merger with AYE; the related
lawsuit initiated by AYE; Duquesne's plan to auction its generating assets; the
power station exchange; general and economic and business conditions; industry
capacity; changes in technology; changes in political, social and economic
conditions; pending regulatory decisions regarding industry restructuring in
Pennsylvania; the loss of any significant customers; and changes in business
strategy or development plans.
27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Eastlake Unit 5
In September 1995, Duquesne commenced arbitration against The Cleveland
Electric Illuminating Company (CEI), seeking damages, termination of the
operating agreement for Eastlake Unit 5 (Eastlake) and partition of the parties'
interests in Eastlake through a sale and division of the proceeds. 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. CEI also seeks monetary damages from Duquesne for alleged unpaid
joint costs in connection with the operation 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. Pursuant to the agreement regarding
the power station exchange between Duquesne and FirstEnergy, the parties have
jointly sought and received a court order staying all proceedings pending the
closing of the exchange. (See "Power Station Exchange" discussion on page 23.)
Termination of the AYE Merger
On October 5, 1998, DQE announced its unilateral termination of the merger
agreement with AYE. More information regarding this termination is set forth in
Duquesne's Current Report on Form 8-K dated October 5, 1998. AYE promptly filed
suit in the United States District Court for the Western District of
Pennsylvania, seeking to compel DQE to proceed with the merger and seeking a
temporary restraining order and preliminary injunction to prevent DQE from
certain actions pending a trial, or in the alternative seeking an unspecified
amount of money damages. On October 28, 1998, the judge denied AYE's motion for
the temporary restraining order and preliminary injunction. AYE appealed to the
United States Court of Appeals for the Third Circuit, asking for an injunction
pending the appeal and expedited treatment of the appeal. On November 6, 1998,
the Third Circuit denied the motion for an injunction and granted the motion to
expedite the appeal.
On March 11, 1999, the Third Circuit vacated the October 28 denial of a
preliminary injunction. The Third Circuit remanded the case to the District
Court for further proceedings to address certain issues, including whether AYE
could demonstrate a reasonable likelihood of success on the merits, before
determining whether any injunctive relief is warranted. On March 12, 1999, AYE
filed a motion for a temporary restraining order with the district court, and a
hearing was held that same day. On March 16, 1999, AYE and DQE entered into a
consent agreement, which was approved by the district court on March 18.
Pursuant to the consent agreement, AYE and DQE have agreed, among other things,
that pending the consolidated hearing on AYE's application for a preliminary
injunction and/or an expedited trial on the merits, both parties will give each
other 10 business days' notice before taking or omitting to take any action
which would prevent the merger from qualifying for "pooling of interests"
accounting treatment. This would not prevent either party from entering into any
agreement, but would require the 10 business days' notice prior to closing any
transaction which prevents pooling. The consent agreement shall terminate on
September 16, 1999, unless earlier terminated or extended by mutual agreement or
an order of the district court. On March 25, 1999, DQE petitioned the Third
Circuit for rehearing; this petition was denied on June 14, 1999. On June 1,
1999, AYE informed the PUC that, given the procedural posture of the merger
litigation, it would seek a Federal court order enjoining the closing of the
power station exchange with FirstEnergy because, in its view, such a closing
would prevent the merger from qualifying for "pooling of interests" accounting.
DQE continues to believe that AYE's claim is entirely without merit in
light of the $1 billion disallowance of its stranded costs, which constituted a
material adverse effect under the merger agreement and entitled DQE to terminate
it as of October 5, 1998. DQE will continue to defend itself vigorously against
AYE's claims and intends to pursue a prompt resolution of the litigation. The
ultimate outcome of this suit cannot be determined at this time. DQE's motion
for summary judgment, originally filed December 18, 1998, remains pending.
28
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
EXHIBIT 3.1 - Restated Articles of Duquesne Light Company, as currently in
effect.
EXHIBIT 3.2 - By-Laws of Duquesne Light Company, as amended through
June 29, 1999, and currently in effect.
EXHIBIT 12.1 - Calculation of Ratio of Earnings to Fixed Charges
EXHIBIT 27.1 - Financial Data Schedule
b. No Reports on Form 8-K were filed during the fiscal quarter ended
June 30, 1999.
______________________________
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant identified below has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Duquesne Light Company
------------------------------
(Registrant)
Date August 13, 1999 /s/ Gary L. Schwass
--------------- ------------------------------
(Signature)
Gary L. Schwass
Senior Vice President and
Chief Financial Officer
Date August 13, 1999 /s/ James E. Wilson
--------------- ------------------------------
(Signature)
James E. Wilson
Controller
(Principal Accounting Officer)
30
<PAGE>
Exhibit 3.1
-----------
RESTATED ARTICLES OF DUQUESNE LIGHT COMPANY
RESOLVED, that the Articles of Duquesne Light Company be amended and
restated in their entirety so as to read in full as follows:
1/st/. The name of the Company is DUQUESNE LIGHT COMPANY.
2/nd/. The location and post office address of its current registered
office in the Commonwealth of Pennsylvania is 411 Seventh Avenue, City of
Pittsburgh 15219, County of Allegheny.
3/rd/. The purposes for which the Company is incorporated under the
Business Corporation Law of the Commonwealth of Pennsylvania are to engage in,
and do any lawful act concerning, any or all lawful business for which
corporations may be incorporated under said Business Corporation Law, including
but not limited to:
A. The supply of light, heat and power to the public by any means;
B. The production, generation, manufacture, transmission,
transportation, storage, distribution or furnishing of electricity, natural
or artificial gas, steam or air conditioning, or any combination thereof to
or for the public; and
C. Manufacturing, processing, owning, using and dealing in personal
property of every class and description, engaging in research and
development, the furnishing of services, and acquiring, owning, using and
disposing of real property of every nature whatsoever.
4/th/. The Company shall exist for the term of 999 years from June 18,
1890.
5/th/. The aggregate number of shares which the Company shall have
authority to issue shall be:
(a) 4,000,000 shares of Preferred Stock, of the par value of $50 per
share; and
(b) 8,000,000 shares of Preference Stock, of the par value of $1 per
share; and
(c) 90,000,000 shares of Common Stock, of the par value of $1 per
share.
The designations, preferences, qualifications, limitations, restrictions and the
special or relative rights in respect of the Preferred Stock and the six series
thereof presently outstanding, the Preference Stock and the one series thereof
presently outstanding, and the Common Stock of the Company, and a statement of
the authority hereby vested in the Board of Directors of the Company to fix and
determine the designations, preferences, qualifications, limitations,
restrictions, and special or relative rights of all series of the Preferred
Stock other than the six series thereof presently outstanding, and of all series
of Preference Stock other than the one series thereof presently outstanding,
shall be as follows:
Division A -- THE PREFERRED STOCK.
1.1. Series. Except for the six series presently outstanding, the
provisions of which are set forth in Division E hereof, the Board of Directors
is hereby expressly authorized, at any time or from time to time, to divide any
or all of the shares of Preferred Stock into series, and in the resolution or
resolutions providing for the issue of shares of a particular series, before
issuance, to fix and determine the designation
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and the relative rights and preferences of the series, so established (except as
otherwise expressly provided herein for all series), to the fullest extent now
or hereafter permitted by the laws of the Commonwealth of Pennsylvania,
including the variations between different series in the following respects:
(a) the distinctive serial designation of such series;
(b) the annual dividend rate of such series, and the date from which
dividends shall commence to accrue;
(c) the redemption price or prices for shares of such series and the terms
and conditions on which such shares may be redeemed;
(d) the sinking fund provisions, if any, for the redemption or purchase of
shares of such series;
(e) the preferential amount or amounts payable upon shares of such series
in the event of the voluntary or involuntary liquidation of the
Company;
(f) the voting rights, if any, of such series in addition to those provided
in Subdivision 1.5 of this Division A and in Subdivision 4.1 of
Division D hereof;
(g) the terms and conditions, if any, upon which shares of such series may
be converted and the class or classes or series of shares of the
Company into which such shares may be converted; and
(h) such other terms, limitations and relative rights and preferences, if
any, of shares of any such series as the Board of Directors may, at the
time of such resolution, lawfully fix and determine under the laws of
the Commonwealth of Pennsylvania.
All shares of Preferred Stock shall be of equal rank with each other, regardless
of series, and shall be identical with each other in all respects except as
provided pursuant to the preceding sentence or in Division E hereof. The Board
of Directors is hereby expressly authorized to fix the number of shares which
shall constitute any series of Preferred Stock, which number, unless the Board
of Directors shall have otherwise provided in establishing such series, may at
any time or from time to time be increased or decreased, but not below the
number of shares thereof then outstanding.
1.2. Dividends. Out of the assets of the Company available for dividends,
the holders of each series of the Preferred Stock at the time outstanding shall
be entitled to receive, if and when declared payable by the Board of Directors,
a dividend in cash at, but not exceeding, the fixed dividend rate for the
particular series, payable quarterly on the first day of January, April, July
and October in each year, or on such other days as may be provided for any
particular series by the Board of Directors pursuant to Subdivision 1.1 hereof,
and such dividends on each series of the Preferred Stock shall be cumulative, so
that in no event shall any dividend, whether in cash, stock or other property,
be declared or paid upon or set apart for, or any distribution be made or
ordered in respect of, the Preference Stock, the Common Stock or any other class
of stock ranking junior to the Preferred Stock as to dividends or assets nor
shall any moneys or other consideration be set aside for or applied to the
purchase of Common Stock or the purchase or redemption of the Preference Stock
or any such junior stock, unless all dividends on each of the then outstanding
series of the Preferred Stock for all past quarter-yearly dividend periods shall
have been paid, or declared and a sum sufficient for the payment thereof set
apart, and the full dividend thereon for the then current quarter-yearly
dividend period shall have been or concurrently shall be paid or declared.
Dividends on shares of the six presently outstanding series of Preferred Stock
shall commence to accrue and be cumulative from the
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dates set forth in Division E hereof. Dividends on all shares of the Preferred
Stock of each series other than such six presently outstanding series shall
commence to accrue and be cumulative on such date as shall be provided for such
series by the Board of Directors pursuant to Subdivision 1.1 hereof; but in the
event of the issue of additional shares of Preferred Stock of any series
subsequent to the date of the initial issue of shares of such series, all
dividends paid on the Preferred Stock of such series prior to the issue of such
additional shares, and all dividends declared payable to the holders of
Preferred Stock of such series of record on a date prior to such issue, shall be
deemed to have been paid in respect to the additional shares so issued. Any
dividends declared or paid on the Preferred Stock in an amount less than full
cumulative dividends accrued or in arrears upon all Preferred Stock outstanding
shall, if more than one series be outstanding, be divided between the different
series in proportion to the aggregate amounts which would be distributable to
the Preferred Stock of each series if full cumulative dividends to the next
preceding quarterly dividend date were declared and paid thereon.
As used herein, the expression "dividends accrued or in arrears" means, in
respect of each share of the Preferred Stock of any series, that amount which
shall be equal to simple interest upon the par value of such share at an annual
rate equal to the percentage that the fixed dividend rate for such series is of
such par value from the date from which cumulative dividends on such share
commence to accrue to the date as of which the computation is to be made, less
the aggregate amount (without interest thereon) of all dividends theretofore and
on such date paid (or deemed to have been paid) or declared and set aside for
payment in respect thereof.
1.3. Preference of the Preferred Stock on Liquidation, Etc. In the event
of any liquidation, dissolution or winding up of the Company, the holders of the
Preferred Stock of each series shall be entitled to receive in cash, for each
share thereof, the fixed liquidation price for such series, plus, in case such
liquidation, dissolution or winding up shall have been voluntary, the fixed
liquidation premium, if any, for such series, together in all cases with an
amount equal to all dividends accrued or in arrears thereon to the date fixed
for such payment, before any distribution of assets shall be made to the holders
of the Preference Stock, the Common Stock or any other class of stock ranking
junior to the Preferred Stock as to dividends or assets; but the holders of the
Preferred Stock shall be entitled to no further participation in such
distribution. If upon any such liquidation, dissolution or winding up, the
assets distributable among the holders of the Preferred Stock shall be
insufficient to permit the payment of the full preferential amounts aforesaid,
then such assets shall be distributed among the holders of all series of the
Preferred Stock then outstanding, ratably per share in proportion to the full
preferential amounts per share to which they are respectively entitled as
hereinbefore provided. A consolidation or merger of the Company, a sale or
transfer of all or substantially all of its assets as an entirety, or any
purchase or redemption of stock of the Company of any class, shall not be
regarded as a "liquidation, dissolution or winding up" of the Company within the
meaning of this Subdivision 1.3.
1.4. Redemption, Repurchase and Retirement of the Preferred Stock. The
Company, at its option, expressed by vote of its Board of Directors, may at any
time or from time to time redeem the whole or any part of the Preferred Stock or
of any series thereof at the applicable redemption price for each such series to
be redeemed.
Notice of any proposed redemption of any shares of Preferred Stock shall be
given by mailing a copy of such notice, postage prepaid, to the holders of
record of the shares of Preferred Stock to be redeemed, at their respective
addresses then appearing on the books of the Company, not less than 30 nor more
than 90 days prior to the date designated for such redemption and by publishing
such notice at least once in each of three successive calendar weeks, in each
case on any day in the week (the first publication to be not less than 30 nor
more than 90 days prior to the redemption date) in a daily newspaper printed in
the English
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language and published and of general circulation in the City of Pittsburgh,
Commonwealth of Pennsylvania, and in a like newspaper published in the Borough
of Manhattan, City and State of New York; provided that if notice of redemption
shall be published as aforesaid, then mailing thereof as aforesaid shall not be
a condition precedent to the redemption, and failure so to mail such notice or
any defect in the mailing thereof shall not affect the validity of the
redemption proceedings. In the case of the redemption of less than all of the
shares of any series of the Preferred Stock at the time outstanding, the shares
to be redeemed shall be determined by lot or in such other impartial manner as
the Board of Directors shall determine. From and after the date fixed in any
such notice as the date of redemption, unless default shall be made by the
Company in providing funds sufficient for such redemption at the time and at the
place or places specified for the payment pursuant to such notice, all dividends
on the shares called for redemption shall cease to accrue; and from and after
the date so fixed, unless default be made as aforesaid, or from and after the
date of the earlier deposit by the Company with a bank or trust company having
an aggregate capital and surplus of at least $2,000,000 and doing business in
the City of Pittsburgh, Commonwealth of Pennsylvania or in the Borough of
Manhattan, City and State of New York, in trust for the benefit of the holders
of the shares of Preferred Stock so called for redemption, of all funds
necessary for such redemption as aforesaid (provided in the latter case that
there shall have been mailed as aforesaid to holders of record of the shares to
be redeemed a notice of the redemption thereof containing a statement that such
deposit has been or is to be made, or the Company shall have executed and
delivered to a Transfer Agent for the Preferred Stock or to the bank or trust
company with which such deposit is made an instrument, purporting to be
irrevocable, authorizing it to mail such notice), all rights of the holders of
the shares so called for redemption as stockholders of the Company shall cease
and determine, except only the right to receive the redemption price of such
shares when due, and such shares shall be deemed to be no longer outstanding.
Any funds so deposited remaining unclaimed by holders of shares so called for
redemption at the end of a period of five years after the redemption date shall
revert to the general funds of the Company and such funds and any interest which
shall have been allowed thereon shall be paid to the Company, and thereafter the
holders of the shares called for redemption in respect of which such unclaimed
funds were held shall look only to the Company for the satisfaction of such
rights, if any, as they may have to the payment of the redemption price of such
shares.
The Company may not purchase or redeem any of its Preferred Stock so long as
dividend arrearages exist on outstanding Preferred Stock of any series unless
the redemption or purchase offer is made applicable to all Preferred Stock
outstanding. Where purchases are made, the price paid shall not exceed the
current redemption price applicable to the shares purchased. Any shares of
Preferred Stock purchased, redeemed or otherwise acquired shall forthwith be
cancelled and restored to the status of authorized but unissued shares of
Preferred Stock without series designation.
1.5. Restrictions on Certain Corporate Action.
(A) So long as any shares of the Preferred Stock are outstanding, the
Company shall not, without the consent (given in writing or by vote of the
Preferred Stock as a class at a meeting called for the purpose) of the holders
of at least two-thirds of the then issued and outstanding shares of Preferred
Stock,
(1) amend, alter or repeal any of the rights, preferences or powers of
the outstanding Preferred Stock of any series fixed herein or determined by
the Board of Directors as provided herein, so as to affect adversely any
such rights, preferences or powers; or
(2) create or authorize any shares of any class of stock ranking prior
to the Preferred Stock as to dividends or assets or issue any shares of any
such class of prior stock more than 180 days after the vote of the Preferred
Stock pursuant to this clause (2) authorizing or creating such shares.
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(B) So long as any shares of the Preferred Stock are outstanding, the
Company shall not, without the consent (given in writing or by vote of the
Preferred Stock as a class at a meeting called for the purpose) of the holders
of at least a majority of the then issued and outstanding shares of Preferred
Stock,
(1) create or authorize any shares of the Preferred Stock in addition
to the 4,000,000 shares thereof hereby authorized, or any shares of any
other class of stock ranking on a parity with the Preferred Stock as to
dividends or assets; or
(2) after 700,000 shares of the Preferred Stock shall have been
issued, issue, sell or otherwise dispose of any of the remaining shares of
Preferred Stock now authorized or any additional shares of the Preferred
Stock subsequently authorized, or any shares of any other class of stock
ranking on a parity with the Preferred Stock as to dividends or assets,
unless, after giving effect to such issuance and to the elimination of any
indebtedness or shares of Preferred Stock, or of any shares of any other
class of stock ranking prior to or on a parity with the Preferred Stock as
to dividends or assets, to be retired in connection with such issuance,
(a) the consolidated income of the Company and its subsidiaries
available for interest charges, as hereinafter defined, for any period
of 12 consecutive calendar months within the 15 calendar months
immediately preceding the issuance, sale or disposition of such shares,
shall have been at least 1 1/2 times the sum of (i) the aggregate
annual interest charges on all indebtedness of the Company and its
subsidiaries consolidated (excluding inter-company items) to be
outstanding and (ii) the aggregate annual dividend requirements on all
shares of the Preferred Stock and of all other classes of stock ranking
prior to or on a parity with the Preferred Stock as to dividends or
assets to be outstanding; provided, that the earnings of any property
acquired by the Company or any subsidiary during or after the period
for which income is computed or which is to be acquired in connection
with the issuance of any such additional shares, if capable of being
separately determined or estimated under generally accepted accounting
principles, may be included in the foregoing computations as if such
property had been owned for the whole of such period; and
(b) the Common Stock equity, as hereinafter defined, of the
Company shall be not less than the aggregate amount payable on
involuntary dissolution, liquidation or winding up of the Company in
respect of all shares of the Preferred Stock and all shares of stock of
any class ranking prior thereto or on a parity therewith as to
dividends or assets, to be outstanding; provided that if, for the
purpose of meeting the requirements of this clause (b), it shall have
been necessary to take into consideration any earned surplus of the
Company, the Company shall not thereafter pay any dividends on shares
of its Common Stock which would result in reducing the Common Stock
equity to an amount less than the aggregate amount payable on
involuntary dissolution, liquidation or winding up of the Company in
respect of all outstanding shares of the Preferred Stock and of any
stock of the Company ranking prior thereto or on a parity therewith as
to dividends or assets.
(3) merge or consolidate with or into any other corporation or
corporations or sell, lease or otherwise dispose of all or substantially all
of its assets, unless such merger, consolidation, sale, lease or other
disposition or the issuance or assumption of all securities to be issued or
assumed in connection therewith, shall have been ordered, permitted or
approved by the Securities and Exchange Commission under the provisions of
the Public Utility Holding Company Act of 1935 as now in effect or as
hereafter amended or by any successor commission or other regulatory
authority of the
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United States of America having jurisdiction in the premises; but the
provisions of this clause (3) shall not apply to a purchase or other
acquisition by the Company of franchises (including franchises and rights
granted by corporate charter) or assets of another corporation; or
(4) issue any unsecured notes, debentures or other securities
representing unsecured indebtedness or assume any such unsecured securities
for purposes other than
(a) the refunding of outstanding unsecured indebtedness
theretofore issued or assumed by the Company;
(b) the reacquisition, redemption or other retirement of any
indebtedness pursuant to authorization by the Securities and Exchange
Commission under the provisions of the Public Utility Holding Company
Act of 1935 as now in effect or as hereafter amended or by any successor
commission or other regulatory authority of the United States of America
having jurisdiction in the premises; or
(c) the reacquisition, redemption or other retirement of all
outstanding shares of the Preferred Stock or of any other class of stock
ranking on a parity therewith as to dividends or assets or any shares of
any class of stock ranking prior thereto as to dividends or assets;
if immediately after such issue or assumption the total principal amount of
such unsecured securities issued or assumed by the Company and then
outstanding would exceed 20% of the aggregate of (i) the total principal
amount of all bonds or other securities representing secured indebtedness
issued or assumed by the Company and then to be outstanding and (ii) the
total of the capital stock and earned and capital surplus of the Company as
then to be stated on its books plus any premiums on capital stock of the
Company of any class then carried on its books.
(C) So long as any shares of the Preferred Stock are outstanding, the
Company shall not declare or pay any dividends on any shares of its capital
stock of any class ranking junior to the Preferred Stock as to dividends or
assets (hereinafter in this Paragraph (C) called "junior stock"), other than
dividends payable in shares of junior stock, or make any other distribution on
junior stock, or purchase or redeem or otherwise acquire for value any shares of
junior stock, other than by the issuance in exchange therefor, or by the
application of the proceeds of the issuance and sale, of capital stock of the
Company ranking junior to the Preferred Stock as to dividends and assets, each
such declaration, payment, distribution, purchase or acquisition being
hereinafter referred to as a "junior stock payment", in contravention of the
following restrictions, namely:
(a) no junior stock payment shall be declared or made in an amount
which, together with all other such junior stock payments declared or made
in the 12 months' period ending on (and including) the date of the
declaration or making of such junior stock payment, would in the aggregate
exceed 50% of the consolidated net income of the Company and its
subsidiaries available for dividends on junior stock, as hereinafter
defined, for a period of 12 consecutive calendar months within the 15
calendar months immediately preceding the declaration or making of such
junior stock payment, if, after giving effect to such payment, the ratio
(hereinafter referred to as the capitalization ratio) of the Common Stock
equity of the Company, as hereinafter defined, to its total capitalization,
as hereinafter defined, would be less than 20%;
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(b) no junior stock payment shall be declared or made in an amount
which, together with all other such junior stock payments declared or made
in the 12 months' period ending on (and including) the date of the
declaration or making of such junior stock payment, would in the aggregate
exceed 75% of the consolidated net income of the Company and its
subsidiaries available for dividends on junior stock for a period of 12
consecutive calendar months within the 15 calendar months immediately
preceding the declaration or making of such junior stock payment, if, after
giving effect to such payment, the capitalization ratio would be 20% or
more, but less than 25%.
(D) Notwithstanding the foregoing provisions of this Subdivision 1.5, it
shall not be necessary to obtain any affirmative vote or written consent of
holders of the Preferred Stock under any provision of this Subdivision 1.5 in
respect of any matter therein specified, if, in connection with the
accomplishment of such matter, provision is to be made for the redemption or
retirement of all of the Preferred Stock at the time outstanding.
(E) (a) The term "consolidated income of the Company and its subsidiaries
available for interest charges" shall mean and include an amount computed as
follows: From the total gross operating revenues and other income of the
Company and its subsidiaries consolidated, there shall first be eliminated
profits realized or losses sustained from the sale or other disposition of
capital assets by the Company or any of its subsidiaries, or from the
reacquisition of any securities of the Company or any of its subsidiaries, and
taxes on or in respect of any such profits. There shall then be deducted, on a
consolidated basis, all operating expenses, including therein rentals,
expenditures for ordinary repairs and maintenance and charges to and
appropriations out of income for reserves for renewals, replacements,
retirements and depreciation, taxes (including income and excess profits taxes
and other taxes based on or measured by income or undistributed earnings or
income), miscellaneous interest charges, insurance charges, and other
appropriate items, but not including therein (A) interest charges on account of
outstanding securities of the Company or any of its subsidiaries, (B) charges
for amortization of debt and stock discount or premium and expense, or (C)
charges for amortization of electric plant acquisition adjustments and
amortization of adjustments of cost of property, or charges to reserves or
expense in respect of any thereof. There shall also be deducted the amount, if
any, by which the expenditures for ordinary repairs and maintenance and charges
to and appropriations out of income for reserves for renewals, replacements,
retirements, and depreciation are less than an amount equal to 15% of the
consolidated gross operating revenues, after deducting from such consolidated
gross operating revenues an amount equal to the cost to the Company and its
subsidiaries of electric energy and steam purchased and resold and rentals paid
by the Company and its subsidiaries for property used in the generation,
transmission, distribution or sale of electric energy and steam and included or
reflected in operating expense accounts during the period for which income is
being computed.
(b) The term "consolidated net income of the Company and its subsidiaries
available for dividends on junior stock" shall mean and include an amount
computed as follows: To the "consolidated income of the Company and its
subsidiaries available for interest charges" as defined above, there shall be
credited interest charged to construction and there shall be deducted interest
on outstanding securities of the Company and its subsidiaries and charges for
amortization of debt and stock discount or premium and expense and all dividends
paid or accrued upon any shares of Preferred Stock of the Company or any class
of stock ranking prior to or on a parity with the Preferred Stock as to
dividends; but there shall not be deducted any write-off or charge-off against
surplus of expenses in connection with the issuance, redemption or retirement of
any securities of the Company or any of its subsidiaries, including any amount
paid in excess of the principal amount or par or stated value of the securities
of the Company or any of its subsidiaries, or interest or dividends on the
securities redeemed or retired from the date on which the funds required for
such redemption or retirement are deposited in trust for such purpose to the
date of redemption or retirement.
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(c) The term "Common Stock equity" shall mean the aggregate of the par
value of, or stated capital represented by, the outstanding shares of Common
Stock of the Company, plus the capital surplus and earned surplus of the Company
plus any premiums on Common Stock of the Company then carried on its books. For
the purpose of computing the Common Stock equity, the surplus accounts of the
Company shall be adjusted to eliminate (1) the amount, if any, by which the
expenditures of the Company for ordinary repairs and maintenance and charges to
and appropriations out of income for reserves for renewals, replacements,
retirements and depreciation are less than an amount equal to 15% of the gross
operating revenues of the Company, after deducting from such gross operating
revenues an amount equal to the cost to the Company of electric energy and steam
purchased and resold and rentals paid by the Company for property used by it in
the generation, transmission, distribution or sale of electric energy and steam
and included or reflected in its operating expense accounts for the period
commencing August 1, 1947 and ending on the last day of the third month
preceding the date as of which the Common Stock equity is being computed; (2)
any amounts on the books of the Company known, or estimated if not known, to
represent the excess, if any, of recorded value over original cost of used or
useful utility plant and other property, and any item set forth on the asset
side of the balance sheet of the Company as a result of accounting convention,
such as unamortized debt discount and expense, or capital stock discount and
expense, unless any such amount or item, as the case may be, is being amortized
or is being provided for by a reserve; and (3) the excess, if any, of the
aggregate amount payable on involuntary dissolution, liquidation or winding up
upon all outstanding shares of Preferred Stock of the Company of all classes
over the aggregate stated or par value of such shares.
(d) The term "total capitalization" of the Company shall mean the aggregate
of (1) the Common Stock equity, (2) the principal amount of all outstanding
indebtedness of the Company maturing more than 12 months after the date of issue
or assumption thereof and (3) the par value of, or stated capital represented
by, and any premiums carried on the books of the Company in respect of, the
outstanding shares of all classes of stock of the Company other than the Common
Stock.
Division B -- THE PREFERENCE STOCK
2.1. Series, Rank. Except for the one series presently outstanding, the
provisions of which are set forth in Division F hereof, the Board of Directors
is hereby expressly authorized, at any time or from time to time, to divide any
or all of the shares of Preference Stock into series, and in the resolution or
resolutions providing for the issue of shares of a particular series, before
issuance, to fix and determine the designations, preferences, qualifications,
privileges, limitations, restrictions, options, conversion rights, and other
special or relative rights in respect of the Preference Stock as a class, or of
the particular series so established (except as otherwise expressly provided
herein for all series), or both, to the fullest extent now or hereafter
permitted by the laws of the Commonwealth of Pennsylvania, including the rights
of the Preference Stock as a class and the variations between different series
in the following respects:
(a) the distinctive serial designations;
(b) the annual dividend rates, and the dates from which dividends shall
commence to accrue;
(c) the redemption price or prices for shares and the terms and conditions
on which such shares may be redeemed;
(d) the sinking fund provisions, if any, for the redemption or purchase of
shares;
(e) the preferential amount or amounts payable upon shares in the event of
the voluntary or involuntary liquidation of the Company;
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(f) the voting rights, if any, of such series in addition to those provided
in Subdivision 2.5 of this Division B and in Subdivision 4.1 of
Division D hereof;
(g) the terms and conditions, if any, upon which shares may be converted
and the class or classes or series of shares of the Company into which
such shares may be converted; and
(h) such other terms, limitations and relative rights and preferences, if
any, of shares of Preference Stock as a class and of any such series of
Preference Stock as the Board of Directors may, at the time of such
resolution, lawfully fix and determine under the laws of the
Commonwealth of Pennsylvania.
The Preference Stock shall constitute a class of stock ranking "junior to the
Preferred Stock as to dividends and assets" as that phrase is used in Division A
hereof. So long as any shares of Preferred Stock shall be outstanding, the
preferences, privileges, rights and powers granted to or imposed upon the
Preference Stock or any series thereof shall have no effect whatever on the
preferences, privileges, rights and powers of the Preferred Stock which shall
retain its rights and shall be and remain prior in all respects to the
Preference Stock. All shares of Preference Stock shall be of equal rank with
each other, regardless of series, and shall be identical with each other in all
respects except as provided pursuant to the first sentence of this Subdivision
2.1. The Board of Directors is hereby expressly authorized to fix the number of
shares which shall constitute any series of Preference Stock, which number,
unless the Board of Directors shall have otherwise provided in establishing such
series, may at any time or from time to time be increased or decreased, but not
below the number of shares thereof then outstanding.
2.2. Dividends. Out of the assets of the Company available for dividends,
the holders of each series of the Preference Stock at the time outstanding shall
be entitled to receive, if and when declared payable by the Board of Directors,
a dividend in cash at, but not exceeding, the fixed dividend rate for the
particular series, payable quarterly on the first day of January, April, July
and October in each year, or on such other days as may be provided for any
particular series in Division F or by the Board of Directors pursuant to
Subdivision 2.1 hereof, and such dividends on each series of the Preference
Stock shall be cumulative, so that in no event shall any dividend, whether in
cash, stock or other property, be declared or paid upon or set apart for, or any
distribution be made or ordered in respect of, the Common Stock or any other
class of stock ranking junior to the Preference Stock as to dividends or assets
nor shall any moneys or other consideration be set aside for or applied to the
purchase of Common Stock or the purchase or redemption of any such junior stock,
unless all dividends on each of the then outstanding series of the Preference
Stock for all past quarter-yearly dividend periods shall have been paid, or
declared and a sum sufficient for the payment thereof set apart, and the full
dividend thereon for the then current quarter-yearly dividend period shall have
been or concurrently shall be paid or declared. Dividends on all shares of the
Preference Stock of each series shall commence to accrue and be cumulative on
such date as shall be provided for such series in Division F or by the Board of
Directors pursuant to Subdivision 2.1 hereof; but in the event of the issue of
additional shares of Preference Stock of any series subsequent to the date of
the initial issue of shares of such series, all dividends paid on the Preference
Stock of such series prior to the issue of such additional shares, and all
dividends declared payable to the holders of Preference Stock of such series of
record on a date prior to such issue, shall be deemed to have been paid in
respect to the additional shares so issued. Any dividends declared or paid on
the Preference Stock in an amount less than full cumulative dividends accrued or
in arrears upon all Preference Stock outstanding shall, if more than one series
be outstanding, be divided among the different series in proportion to the
aggregate amounts which would be distributable to the Preference Stock of each
series if full cumulative dividends to the next preceding quarterly dividend
date were declared and paid thereon.
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As used herein, the expression "dividends accrued or in arrears" means, in
respect of each share of the Preference Stock of any series, that amount which
shall be equal to simple interest upon the par value of such share at an annual
rate equal to the percentage that the fixed dividend rate for such series is of
such par value from the date from which cumulative dividends on such share
commence to accrue to the date as of which the computation is to be made, less
the aggregate amount (without interest thereon) of all dividends theretofore and
on such date paid (or deemed to have been paid) or declared and set aside for
payment in respect thereof.
2.3. Preference of the Preference Stock on Liquidation, Etc. In the event
of any liquidation, dissolution or winding up of the Company, the holders of the
Preference Stock of each series shall be entitled to receive in cash, for each
share thereof, the fixed liquidation price for such series, plus, in case such
liquidation, dissolution or winding up shall have been voluntary, the fixed
liquidation premium, if any, for such series, together in all cases with an
amount equal to all dividends accrued or in arrears thereon to the date fixed
for such payment, before any distribution of assets shall be made to the holders
of the Common Stock or any other class of stock ranking junior to the Preference
Stock as to dividends or assets; but the holders of the Preference Stock shall
be entitled to no further participation in such distribution. If upon any such
liquidation, dissolution or winding up, the assets distributable among the
holders of the Preference Stock shall be insufficient to permit the payment of
the full preferential amounts aforesaid, then such assets shall be distributed
among the holders of all series of the Preference Stock then outstanding,
ratably per share in proportion to the full preferential amounts per share to
which they are respectively entitled as hereinbefore provided. A consolidation
or merger of the Company, a sale or transfer of all or substantially all of its
assets as an entirety, or any purchase or redemption of stock of the Company of
any class, shall not be regarded as a "liquidation, dissolution or winding up"
of the Company within the meaning of this Subdivision 2.3.
2.4. Redemption, Repurchase and Retirement of the Preference Stock. The
Company, at its option, expressed by vote of its Board of Directors, may at any
time or from time to time redeem the whole or any part of the Preference Stock
or of any series thereof at the applicable redemption price for each such series
to be redeemed.
Notice of any proposed redemption of any shares of Preference Stock shall be
given by mailing a copy of such notice, postage prepaid, to the holders of
record of the shares of Preference Stock to be redeemed, at their respective
addresses then appearing on the books of the Company, not less than 30 nor more
than 90 days prior to the date designated for such redemption and by publishing
such notice at least once in each of three successive calendar weeks, in each
case on any day in the week (the first publication to be not less than 30 nor
more than 90 days prior to the redemption date) in a daily newspaper printed in
the English language and published and of general circulation in the City of
Pittsburgh, Commonwealth of Pennsylvania, and in a like newspaper published in
the Borough of Manhattan, City and State of New York; provided that if notice of
redemption shall be published as aforesaid, then mailing thereof as aforesaid
shall not be a condition precedent to the redemption, and failure so to mail
such notice or any defect in the mailing thereof shall not affect the validity
of the redemption proceedings. In the case of the redemption of less than all
of the shares of any series of the Preference Stock at the time outstanding, the
shares to be redeemed shall be determined by lot or in such other impartial
manner as the Board of Directors shall determine. From and after the date fixed
in any such notice as the date of redemption, unless default shall be made by
the Company in providing funds sufficient for such redemption at the time and at
the place or places specified for the payment pursuant to such notice, all
dividends on the shares called for redemption shall cease to accrue; and from
and after the date so fixed, unless default be made as aforesaid, or from and
after the date of the earlier deposit by the Company with a bank or trust
company having an aggregate capital and surplus of at least $2,000,000 and doing
business in the City of Pittsburgh,
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Commonwealth of Pennsylvania or in the Borough of Manhattan, City and State of
New York, in trust for the benefit of the holders of the shares of Preference
Stock so called for redemption, of all funds necessary for such redemption as
aforesaid (provided in the latter case that there shall have been mailed as
aforesaid to holders or record of the shares to be redeemed a notice of the
redemption thereof containing a statement that such deposit has been or is to be
made, or the Company shall have executed and delivered to a Transfer Agent for
the Preference Stock or to the bank or trust company with which such deposit is
made an instrument, purporting to be irrevocable, authorizing it to mail such
notice), all rights of the holders of the shares so called for redemption as
stockholders of the Company shall cease and determine, except only the right to
receive the redemption price of such shares when due, and such shares shall be
deemed to be no longer outstanding. Any funds so deposited remaining unclaimed
by holders of shares so called for redemption at the end of a period of five
years after the redemption date shall revert to the general funds of the Company
and such funds and any interest which shall have been allowed thereon shall be
paid to the Company, and thereafter the holders of the shares called for
redemption in respect of which such unclaimed funds were held shall look only to
the Company for the satisfaction of such rights, if any, as they may have to the
payment of the redemption price of such shares.
The Company may not purchase or redeem any of its Preference Stock so long
as dividend arrearages exist on outstanding Preference Stock of any series
unless the redemption or purchase offer is made applicable to all Preference
Stock outstanding. Where purchases are made, the price paid shall not exceed
the current redemption price applicable to the shares purchased. Any shares of
Preference Stock purchased, redeemed or otherwise acquired shall forthwith be
cancelled and restored to the status of authorized but unissued shares of
Preference Stock without series designation.
2.5. Restrictions on Certain Corporate Action.
(A) So long as any shares of the Preference Stock are outstanding, the
Company shall not, without the consent (given in writing or by vote of the
Preference Stock as a class at a meeting called for the purpose) of the holders
of at least two-thirds of the then issued and outstanding shares of Preference
Stock,
(1) amend, alter or repeal any of the rights, preferences or powers of
the outstanding Preference Stock of any series so as to affect adversely
any such rights, preferences or powers; or
(2) create or authorize any shares of any class of stock ranking prior
to the Preference Stock as to dividends or assets; provided, however, that
the foregoing shall not apply to the authorization of shares or Preferred
Stock of the par value of $50 per share in addition to the 4,000,000 shares
of such stock presently authorized.
(B) So long as any shares of the Preference Stock are outstanding, the
Company shall not, without the consent (given in writing or by vote of the
Preference Stock as a class at a meeting called for the purpose) of the holders
of at least a majority of the then issued and outstanding shares of Preference
Stock,
(1) create or authorize any shares of (i) Preferred Stock of the par
value of $50 per share in addition to the 4,000,000 shares of such stock
presently authorized, or (ii) Preference Stock in addition to the 8,000,000
shares of such stock presently authorized, or (iii) any other class of stock
ranking on a parity with the Preference Stock as to dividends or assets; or
(2) merge or consolidate with or into any other corporation or
corporations or sell, lease, or otherwise dispose of all or substantially
all of its assets, unless such merger, consolidation, sale, lease or other
disposition or the issuance or assumption of all securities to be issued or
assumed in
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connection therewith, shall have been ordered, permitted or approved by the
Securities and Exchange Commission under the provisions of the Public
Utility Holding Company Act of 1935 as now in effect or as hereafter amended
or by any successor commission or other regulatory authority of the United
States of America having jurisdiction in the premises; but the provisions of
this clause (2) shall not apply to the purchase or other acquisition by the
Company of franchises (including franchises and rights granted by corporate
charter) or assets of another corporation.
(C) Notwithstanding the foregoing provisions, it shall not be necessary to
obtain any affirmative vote or written consent of holders of Preference Stock
under any provision of subparagraphs (A) and (B) of this Subdivision 2.5 in
respect of any matter therein specified, if, in connection with the
accomplishment of such matter, provision is to be made simultaneously for the
concurrent redemption or retirement in full of all of the Preference Stock at
the time outstanding.
Division C -- THE COMMON STOCK
3.1. Dividends. Out of any assets of the Company available for dividends
remaining after full cumulative dividends, up to the then current dividend
period, on the Preferred Stock and Preference Stock then outstanding shall have
been paid, or declared and sums sufficient for the payment thereof set apart,
and after or concurrently with making payment of or declaring full dividends on
the Preferred Stock and Preference Stock then outstanding for the then current
dividend period for such stock, then, and not otherwise, subject to the
restrictions set forth in paragraph (C) of Subdivision 1.5 of Division A and in
any resolution or resolutions providing for the issue of shares of a particular
series of Preferred Stock or of Preference Stock, dividends may be paid upon the
Common Stock to the exclusion of the Preferred Stock and the Preference Stock.
3.2. Distribution of Assets. In the event of any liquidation, dissolution
or winding up on the Company, after there shall have been paid or set aside in
cash for the holders of the Preferred Stock and the Preference Stock the full
preferential amounts to which they are entitled under the provisions of the
foregoing Division A and Division B, the holders of the Common Stock shall be
entitled to receive pro rata all of the remaining assets of the Company
available for distribution to its stockholders. The Board of Directors by vote
of a majority of the members thereof may distribute in kind to the holders of
the Common Stock such remaining assets of the Company or may sell, transfer or
otherwise dispose of any or all of the remaining assets of the Company and
receive payment therefor wholly or in part in cash or in stock or obligations
and may sell all or any part of the consideration received therefor and
distribute the balance thereof in kind to the holders of the Common Stock.
Division D -- PROVISIONS APPLICABLE TO THE PREFERRED STOCK,
THE PREFERENCE STOCK AND THE COMMON STOCK
4.1. Voting Rights.
(A) Common Stock. Except as hereinafter in this Subdivision 4.1 provided,
the holders of the Common Stock shall have exclusive voting rights for the
election of directors and for all other purposes and shall be entitled to one
vote for each share held. The holders of the Common Stock shall not have
cumulative voting rights in the election of Directors.
(B) Preferred Stock. The holders of the Preferred Stock shall have no
voting rights except as follows:
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(a) as provided in Subdivision 1.5 of Division A hereof;
(b) as may be provided with respect to any particular series of the
Preferred Stock (other than the six presently outstanding series thereof) by
the Board of Directors pursuant to Subdivision 1.1 hereof; and
(c) if and whenever dividends payable on any of the Preferred Stock
shall be in default in an amount equal to four or more full quarter-yearly
dividends per share, then the holders of the Preferred Stock of all series
voting together as a class shall be entitled to elect the smallest number of
Directors necessary to constitute a majority of the full Board of Directors
of the Company until such time as all arrears in dividends on the Preferred
Stock and the current dividend thereon shall have been paid or declared and
set apart for payment, whereupon all voting rights and all rights to notice
of stockholders' meetings given by this clause (c) shall be divested from
the Preferred Stock (subject, however, to being at any time or from time to
time similarly revived and divested).
On any matter on which the holders of Preferred Stock shall be entitled to
vote they shall be entitled to one vote for each share held, except as
hereinafter in this Subdivision 4.1 provided.
So long as the holders of the Preferred Stock shall have the right to elect
Directors under the provisions of this Subdivision 4.1, the holders of the
Common Stock voting separately as a class (subject to any voting rights which
may be granted to the Preference Stock or any series thereof) shall be entitled
to elect the remaining Directors.
In all elections for Directors by class vote of the holders of the Preferred
Stock or the Preference Stock, every holder of such class of stock entitled to
vote shall have the right, in person or by proxy, to multiply the number of
votes to which such stockholder may be entitled by the number of Directors for
the election of whom he is entitled to vote at such meeting, and such
stockholder may cast the whole number of such votes for one candidate or may
distribute them among any two or more candidates. The candidates receiving the
highest number of votes up to the number of Directors to be elected by such
class shall be elected. The foregoing provisions of this paragraph shall not be
changed with respect to any class of stock unless the holders of record of not
less than two-thirds of the number of shares of such class of stock then
outstanding shall consent thereto in writing or by voting therefor in person or
by proxy at the meeting of stockholders at which any such change is considered.
Upon the accrual of the right of the holders of the Preferred Stock to elect
a majority of the Board of Directors as above provided in this Subdivision 4.1,
the Secretary of the Company shall call a special meeting of the stockholders of
the Company for the purpose of electing a new Board of Directors, to be held not
less than 45 or more than 60 days after the accrual of such right; provided,
that no such special meeting shall be called if the date of such accrual of such
right shall be less than 120 days prior to the date fixed by the by-laws of the
Company for the next annual meeting of stockholders.
The notice of any such special meeting and of any annual meeting of the
Company at which the holders of the Preferred Stock shall have the right to
elect Directors shall state (1) that by reason of the fact that the Company has
defaulted in the payment of dividends payable on the Preferred Stock in an
amount equal to four or more full quarter-yearly dividends per share, the
holders of the Preferred Stock, voting together as a class, are entitled to
elect the smallest number of Directors necessary to constitute a majority of the
full Board of Directors; (2) that any holder of Preferred Stock has the right at
any reasonable time to inspect and make copies of the list or lists of the
holders of Preferred Stock maintained at the principal office of the Company or
at the office of any transfer agent for the Preferred Stock; and (3) the
substance
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of the next succeeding paragraph with respect to the number of shares of
Preferred Stock required to be represented at any meeting or adjournment thereof
for the election of Directors of the Company at which such holders have the
right to elect Directors.
At any such special or annual meeting at which the holders of the Preferred
Stock shall have the right to elect Directors, the presence in person or by
proxy of the holders of a majority of the outstanding Common Stock shall be
required to constitute a quorum of such class for the election of Directors and
the presence in person or by proxy of the holders of a majority of the
outstanding Preferred Stock shall be required to constitute a quorum of such
class for the election of Directors; provided, however, that in the absence of
such a quorum of the holders of the Preferred Stock, no election of Directors
shall be held but a majority of the holders of the Preferred Stock who are
present in person or by proxy shall have power to adjourn the meeting for
election of directors to a date not less than 25 nor more than 60 days from the
date of such original meeting. At any such adjourned meeting the presence in
person or by proxy of the holders of 35% of the outstanding Preferred Stock
shall constitute a quorum of such class for the election of Directors.
In the event any such special or annual meeting of stockholders shall be
adjourned as aforesaid, the Secretary of the Company shall, within 10 days after
the date of the original meeting, cause notice of the adjourned meeting to be
given to all stockholders of the Company entitled to vote thereat. Such notice
shall contain substantially the statements hereinabove required with respect to
the original meeting, and shall further state that the required quorum of the
holders of the Preferred Stock was not present at such original meeting and that
the holders of 35% of the outstanding Preferred Stock will constitute a quorum
of such class for the election of Directors at such adjourned meeting.
If the requisite quorum of holders of Preferred Stock shall not be present
at such adjourned meeting, then in case the original meeting was a special
meeting called as aforesaid, the Directors of the Company then in office shall
remain in office until the next annual meeting of the stockholders of the
Company and until their successors have been elected and shall qualify; or, if
such original meeting was an annual meeting of stockholders, all members of the
Board of Directors to be elected at such meeting shall be elected by a vote of
the holders of a majority of the shares of Common Stock of the Company present
in person or represented by proxy at such adjourned meeting.
Whenever, under the foregoing provisions of this Subdivision 4.1, the rights
of the holders of the Preferred Stock to elect a majority of the Board of
Directors of the Company shall terminate, the Secretary of the Company shall
call a special meeting of the holders of the Common Stock of the Company (and of
any other shares of stock of the Company at the time entitled to vote for the
election of Directors) for the purpose of electing a new Board of Directors,
unless the annual meeting of stockholders is to convene within 120 days after
such termination.
If, at any meeting held for the purposes of electing Directors upon the
accrual or termination of the right of holders of the Preferred Stock to elect
Directors as provided in this Subdivision 4.1, any Director shall not be re-
elected, his term of office shall end upon the election of his successor,
notwithstanding that the term for which he was originally elected shall not at
the time have expired.
Any vacancy among Directors occurring during any period for which members of
the Board of Directors shall have been elected by the holders of Preferred Stock
pursuant to this Subdivision 4.1 may be filled (i) by a plurality vote, at any
annual meeting of stockholders or at a special meeting which may be called for
the purpose and in the manner hereinabove in this Subdivision 4.1 provided, of
the shares of the class by which the Director whose place is to be filled (or
his predecessor in the case of a Director who has
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succeeded to a vacancy) was elected or (ii) pending such action, by the
affirmative vote of a majority of the remaining Directors elected by vote of the
shares of the class by which such Director (or his predecessor) was elected, or
succeeding to a director or directors so elected. In any such case, any Director
so elected shall hold office, subject to the provisions of this Subdivision 4.1,
until the next annual meeting of stockholders and until his successor shall have
been duly elected and qualified.
(C) Preference Stock. The holders of the Preference Stock shall have no
voting rights except as follows:
(a) as provided in Subdivision 2.5 of Division B hereof;
(b) as may be provided with respect to any particular series of the
Preference Stock (other than the presently outstanding series thereof) by
the Board of Directors pursuant to Subdivision 2.1 hereof; and
(c) if and whenever dividends payable on any series of the Preference
Stock shall be in default in an amount equivalent to one and one-half times
the annual dividend rate or more per share and thereafter until all
dividends on the Preference Stock in arrears shall have been paid or
declared and set apart for payment, the holders of the Preference Stock of
all series voting together as a class shall be entitled to elect two
members of the Board of Directors. Upon any such election holders of the
Preference Stock will have the right to cumulate their votes as provided in
Part B of this Subdivision 4.1. When all dividends in arrears on the
Preference Stock and the current dividend thereon shall have been paid or
declared and set apart for payment, all voting rights given by this
paragraph shall be divested from the Preference Stock, subject to being at
any time, and from time to time, similarly revived and divested.
On any matter on which the holders of Preference Stock shall be entitled to
vote they shall be entitled to one vote for each share held, except as
specifically provided above in this Subdivision 4.1.
Upon the accrual of the right of the holders of the Preference Stock to
elect two members of the Board of Directors as herein provided, the Secretary of
the Company shall call a special meeting of the stockholders of the Company for
the purpose of electing a new Board of Directors, to be held not less than 45
nor more than 60 days after the accrual of such right; provided, that no such
special meeting shall be called if the date of such accrual of such right shall
be less than 120 days prior to the date fixed by the by-laws of the Company for
the next annual meeting of stockholders.
The notice of any such special meeting and of any annual meeting of the
Company at which the holders of the Preference Stock shall have the right to
elect two Directors shall state (1) that by reason of the fact that the Company
has defaulted in the payment of dividends payable on the Preference Stock in an
amount equivalent to one and one-half times the annual dividend rate or more per
share, the holders of the Preference Stock, voting together as a class, are
entitled to elect two members of the Board of Directors; (2) that any holder of
Preference Stock has the right at any reasonable time to inspect and make copies
of the list or lists of the holders of Preference Stock maintained at the
principal office of the Company or at the office of any transfer agent for the
Preference Stock; and (3) the substance of the next succeeding paragraph with
respect to the number of shares of Preference Stock required to be represented
at any meeting or adjournment thereof for the election of Directors of the
Company at which such holders have the right to elect two members of the Board
of Directors.
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At any such special or annual meeting at which the holders of the
Preference Stock shall have the right to elect Directors, the presence in person
or by proxy of the holders of a majority of the outstanding Preference Stock
shall be required to constitute a quorum of such class; provided, however, that
the absence of a quorum of the holders of the Preference Stock shall not prevent
the election at any such meeting or adjournment thereof of Directors by any
other class of stock of the Company entitled to elect Directors if the required
quorum of such other class is present; provided further that in the absence of a
quorum of the holders of Preference Stock a majority of the holders of the
Preference Stock who are present in person or by proxy shall have power to
adjourn the election of the Directors to be elected by the Preference Stock to a
date not less than 25 days nor more than 60 days from the date of such original
meeting. At any such adjourned meeting the presence in person or by proxy of
the holders of 25% of the outstanding Preference Stock shall constitute a quorum
of such class for the election of Directors.
In the event any such election of Directors by the Preference Stock shall
be adjourned as aforesaid, the Secretary of the Company shall within 10 days
after the date of the original meeting, cause notice of the adjourned meeting to
be given to all holders of the Preference Stock. Such notice shall contain
substantially the statements herein required with respect to the original
meeting, and shall further state that the required quorum of the holders of the
Preference Stock was not present at such original meeting and that the holders
of 25% of the outstanding Preference Stock will constitute a quorum of such
class for the election of Directors at such adjourned meeting.
If the requisite quorum of holders of the Preference Stock shall not be
present at such adjourned meeting of the holders of the Preference Stock, no
members of the Board of Directors shall be elected by the holders of the
Preference Stock, subject, however, to their right to elect Directors at the
next annual meeting of stockholders.
Whenever, under the foregoing paragraphs of this Part C, the rights of the
holders of the Preference Stock to elect two members of the Board of Directors
of the Company shall terminate, the terms of such Directors shall be deemed to
have expired as of such time and their positions on the Board of Directors shall
be deemed to be vacant.
Any vacancy, other than vacancies resulting from the expiration of their
terms, among Directors elected by the holders of Preference Stock pursuant
hereto may be filled (i) by plurality vote of the shares of the Preference Stock
at any annual meeting of stockholders or at a special meeting of the holders of
the Preference Stock which may be called for such purpose, or (ii) pending such
action, by the affirmative vote of the remaining Director elected by vote of the
shares of the Preference Stock, or succeeding to a director or directors so
elected. In any such case, any Director so elected shall hold office, subject
to the provisions of this Subdivision 4.1, until the next annual meeting of
stockholders or the next special meeting of the holders of the Preference Stock
called pursuant to clause (i) above and until his successor shall have been duly
elected and qualified.
4.2. Preemptive Rights. Upon any issue for money or other consideration
of any stock of the Company that may be authorized from time to time, no holder
of stock irrespective of the kind of such stock shall have any preemptive or
other right to subscribe for, purchase, or receive any proportionate or other
share of the stock so issued, but the Board of Directors may dispose of all or
any portion of such stock as and when it may determine, free of any such rights,
whether by offering the same to stockholders or by sale or other disposition as
said Board may deem advisable.
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4.3. Amendments to By-laws. The Board of Directors may make, amend and
repeal the By-Laws with respect to those matters which are not, by statute,
reserved exclusively to the stockholders, subject always to the power of the
stockholders to change such action.
4.4. General. The Company may issue and dispose of any of its authorized
shares for such consideration as may be fixed by the Board of Directors subject
to the laws then applicable. The consideration received by the Company from the
issuance and sale of any additional shares of capital stock without par value
shall be entered in the capital stock account.
Division E -- STATEMENTS WITH RESPECT TO SERIES OF PREFERRED STOCK
The designations of the six series of Preferred Stock outstanding on the
date of filing of these Restated Articles, and the rates of dividends thereon,
the price or prices at and the terms and conditions on which shares thereof may
be redeemed, the amounts payable in event of voluntary or involuntary
liquidation (the amount payable upon involuntary liquidation being hereinafter
referred to as the "fixed liquidation price" and the amount of premium payable
in addition to the fixed liquidation price upon voluntary liquidation being
hereinafter referred to as the "fixed liquidation premium"), and the additional
terms and conditions thereof, are as follows:
5.1. 4% Preferred Stock. Effective August 25, 1950, there was created and
established an initial series of Preferred Stock consisting of and limited to
530,000 shares, having the following relative rights and preferences:
(a) Designation. The said initial series of Preferred Stock shall be
designated "4% Preferred Stock".
(b) Dividend Rate. The fixed dividend rate shall be 4% per annum.
Dividends on said initial series of Preferred Stock shall commence to
accrue and be cumulative from November 1, 1950.
(c) Redemption. The redemption price for the 4% Preferred Stock shall be
the sum of the following: the par value per share plus a premium of $4
per share if redeemed on or prior to December 31, 1951; of $3.50 per
share if redeemed thereafter and on or prior to December 31, 1954; of
$3 per share if redeemed thereafter and on or prior to December 31,
1957; of $2.50 per share if redeemed thereafter and on or prior to
December 31, 1960; of $2 if redeemed thereafter and on or prior to
December 31, 1963; and of $1.50 if redeemed at any time thereafter,
plus, in any case, an amount equal to all dividends accrued or in
arrears on such stock to the date of redemption.
(d) Liquidation. The fixed liquidation price for the 4% Preferred Stock
shall be the par value per share thereof; and the fixed liquidation
premium thereon shall be an amount per share equal to the redemption
premium at the time applicable thereto.
5.2. 3.75% Preferred Stock. Effective September 13, 1950, there was
created and established a series of Preferred Stock consisting of and limited to
150,000 shares, having the following relative rights and preferences:
(a) Designation. The said series of Preferred Stock shall be designated
"3.75% Preferred Stock".
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(b) Dividend Rate. The fixed dividend rate shall be 3.75% per annum.
(c) Redemption. The redemption price for the 3.75% Preferred Stock shall
be the sum of the following: the par value per share plus a premium of
$2.50 per share if redeemed on or prior to December 31, 1951; of $2.00
per share if redeemed thereafter and on or prior to December 31, 1954;
of $1.50 per share if redeemed thereafter and on or prior to December
31, 1957; and of $1.00 per share if redeemed at any time thereafter,
plus, in any case, an amount equal to all dividends accrued or in
arrears on such stock to the date of redemption.
(d) Liquidation. The fixed liquidation price for the 3.75% Preferred
Stock shall be the par value per share thereof; and the fixed
liquidation premium thereon shall be an amount per share equal to the
redemption premium at the time applicable thereto.
5.3. 4.15% Preferred Stock. Effective September 17, 1952, there was
created and established a series of Preferred Stock consisting of and limited to
140,000 shares, having the following relative rights and preferences:
(a) Designation. The said series of Preferred Stock shall be designated as
"4.15% Preferred Stock".
(b) Dividend Rate. The fixed dividend rate shall be 4.15% per annum.
(c) Redemption. The redemption price for the 4.15% Preferred Stock shall
be the sum of the following: the par value per share plus a premium of
$2.98 per share if redeemed on or prior to December 31, 1955; of $2.48
per share if redeemed thereafter and on or prior to December 31, 1958;
of $2.23 per share if redeemed thereafter and on or prior to December
31, 1961; and of $1.73 per share if redeemed at any time thereafter,
plus, in any case, an amount equal to all dividends accrued or in
arrears on such stock to the date of redemption.
(d) Liquidation. The fixed liquidation price for 4.15% Preferred Stock
shall be the par value per share thereof; and the fixed liquidation
premium thereon shall be an amount per share equal to the redemption
premium at the time applicable thereto.
5.4. 4.20% Preferred Stock. Effective December 8, 1953, there was created
and established a series of Preferred Stock initially consisting of 100,000
shares, having the following relative rights and preferences:
(a) Designation. The said series of Preferred Stock shall be designated as
"4.20% Preferred Stock".
(b) Dividend Rate. The fixed dividend rate shall be 4.20% per annum.
(c) Redemption. The redemption price for the 4.20% Preferred Stock shall
be the sum of the following: the par value per share plus a premium of
$3.46 per share if redeemed on or prior to December 31, 1958; of $2.96
per share if redeemed thereafter and on or prior to December 31, 1963;
of $2.21 per share if redeemed thereafter and on or prior to December
31, 1968; and of $1.71 per share if redeemed at any time thereafter,
plus, in any case, an amount equal to all dividends accrued or in
arrears on such stock to the date of redemption.
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(d) Liquidation. The fixed liquidation price for the 4.20% Preferred
Stock shall be the par value per share thereof; and the fixed
liquidation premium thereon shall be an amount per share equal to the
redemption premium at the time applicable thereto.
5.5. 4.10% Preferred Stock. Effective June 29, 1954, there was created and
established a series of Preferred Stock initially consisting of 120,000 shares,
having the following relative rights and preferences:
(a) Designation. The said series of Preferred Stock shall be designated as
"4.10% Preferred Stock".
(b) Dividend Rate. The fixed dividend rate shall be 4.10% per annum.
(c) Redemption. The redemption price for the 4.10% Preferred Stock shall
be the sum of the following: the par value per share plus a premium of
$3.25 per share if redeemed on or prior to December 31, 1959; of $2.75
per share if redeemed thereafter and on or prior to December 31, 1964;
of $2.25 per share if redeemed thereafter and on or prior to December
31, 1969; and of $1.75 per share if redeemed at any time thereafter,
plus, in any case, an amount equal to all dividends accrued or in
arrears on such stock to the date of redemption.
(d) Liquidation. The fixed liquidation price for the 4.10% Preferred
Stock shall be the par value per share thereof; and the fixed
liquidation premium thereon shall be an amount per share equal to the
redemption premium at the time applicable thereto.
5.6. $2.10 Preferred Stock. Effective January 20, 1955, there was created
and established a series of Preferred Stock initially consisting of 160,000
shares, having the following relative rights and preferences:
(a) Designation. The said series of Preferred Stock shall be designated
as "$2.10 Preferred Stock".
(b) Dividend Rate. The fixed dividend rate shall be 4.20% per annum.
(c) Redemption. The redemption price for the $2.10 Preferred Stock shall
be the sum of the following: the par value per share plus a premium of
$3.34 per share if redeemed on or prior to December 31, 1959; of $2.84
per share if redeemed thereafter and on or prior to December 31, 1964;
of $2.34 per share if redeemed thereafter and on or prior to December
31, 1969; and of $1.84 per share if redeemed at any time thereafter,
plus, in any case, an amount equal to all dividends accrued or in
arrears on such stock to the date of redemption.
(d) Liquidation. The fixed liquidation price for the $2.10 Preferred
Stock shall be the par value per share thereof; and the fixed
liquidation premium thereon shall be an amount per share equal to the
redemption premium at the time applicable thereto.
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<PAGE>
Division F -- STATEMENT WITH RESPECT TO
PREFERENCE STOCK, PLAN SERIES A
The designation of the series of Preference Stock outstanding on the date of
filing of these Restated Articles, and the rate of dividends thereon, the price
or prices at and the terms and conditions on which shares thereof may be
redeemed, the amount payable in event of voluntary or involuntary liquidation,
and the additional terms and conditions thereof, are as follows:
6.1. Designation and Amount; Special Purpose Issue.
(A) The shares of this series of Preference Stock shall be designated as
"Preference Stock, Plan Series A" and the number of shares constituting such
series shall be three million five hundred thousand (3,500,000) (such series
being hereinafter called the "Series A Preference Stock"); provided, however,
that the Board of Directors shall, to the extent not prohibited by applicable
law, have the power to (i) increase the number of shares constituting the Series
A Preference Stock to a number not greater than the number of shares of the
Preference Stock then authorized and unissued and (ii) decrease the number of
shares constituting the Series A Preference Stock to a number not less than the
number of shares of such series then outstanding, and any such increase or
decrease may be effected without the consent or approval of the holders of the
shares of Series A Preference Stock or any other capital stock then outstanding
unless such consent or approval shall be specifically required by applicable
law.
(B) The shares of Series A Preference Stock shall be issued to one or more
trustees each of which shall be acting on behalf of an employee stock ownership
plan or other employee benefit plan of the Company or any Affiliate of the
Company (any such employee stock ownership plan or other employee benefit plan
of the Company or such Affiliate, as the same may be amended from time to time,
being hereinafter sometimes called a "Plan"). Any transfer of shares of Series
A Preference Stock, including a distribution to participants in a Plan and
whether or not registered on the books of the Company, to any person other than
the Company or the trustee of a Plan shall be deemed to constitute an
irrevocable election by the transferee to exchange such shares for shares of DQE
Common Stock as provided in Subdivision 6.4, notwithstanding the non-delivery to
the Company of the certificates representing such shares of Series A Preference
Stock or a notice of exchange, and, upon such transfer and without further act
by the Company, the transferee shall have the right to receive a certificate or
certificates for shares of DQE Common Stock as provided in, and subject to the
conditions of, Subdivision 6.4 but shall not have any of the preferences,
limitations, voting rights and special rights ascribed to shares of Series A
Preference Stock hereunder. The pledge of Series A Preference Stock as
collateral under any credit agreement for the financing or refinancing of the
purchase of the Series A Preference Stock for the benefit of a Plan shall not
constitute a transfer for purposes of this Subdivision 6.1. Certificates
representing shares of Series A Preference Stock shall be legended to reflect
the foregoing provisions of this Subdivision 6.1(B). Notwithstanding the
foregoing provisions of this Subdivision 6.1(B), shares of Series A Preference
Stock (i) may be exchanged for shares of DQE Common Stock as otherwise provided
in Subdivision 6.4 hereof and (ii) shall be redeemable by the Company upon the
terms and conditions provided in Subdivisions 6.5, 6.6 and 6.7 hereof.
6.2. Dividends.
Subject to the provisions for adjustment hereinafter set forth, the dividend
rate on the Series A Preference Stock shall be $2.80 per share per annum,
payable quarterly, and the dates for the payment of dividends on the Series A
Preference Stock shall be the first Business Day of January, April, July and
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October of each year (each a "Dividend Payment Date") commencing January 2,
1992, such dividend to be paid to the holders of record on the related Record
Date; provided, however, that if, as of a given Dividend Payment Date after
January 2, 1992, $.70 is less than the amount determined by (A) multiplying
(i) the amount of each cash dividend or other distribution per share of
DQE Common Stock the Record Date for which occurred during the period
commencing on the immediately preceding Dividend Payment Date and
ending on the day next preceding such Dividend Payment Date,
excluding, however, from the operation of this clause (i) any dividend
or distribution which (x) constituted on Extraordinary Distribution or
(y) was otherwise previously included in an Extraordinary Distribution
Adjustment Amount, by
(ii) the number of shares of DQE Common Stock for which each share of
Series A Preference Stock was exchangeable as of the Record Date for
such dividend or distribution
and (B) taking the sum of the products resulting from such multiplications, then
the dividend per share of Series A Preference Stock payable on such Dividend
Payment Date shall be an amount equal to such sum (any such dividend being
hereinafter called a "DQE Common Stock Equivalent Dividend"); and provided,
further, that the Company may, subject to the immediately preceding proviso,
pay, at any time or times during the period from and including the Record Date
with respect to any Dividend Payment Date to and including such Dividend Payment
Date, all or any portion of the dividend otherwise payable on such Dividend
Payment Date to the holders of record as of such Record Date. Dividends on the
Series A Preference Stock shall begin to accrue and be cumulative from the date
of the initial issuance of shares of such series. Dividends accrued on the
Series A Preference Stock for any period less than a full quarterly period shall
be computed on the basis of a 360-day year of twelve 30-day months, and shall be
calculated based upon the dividend rate in effect during the quarterly period
ended on the next preceding Dividend Payment Date.
6.3. Liquidation, Dissolution or Winding-up. The liquidation value for the
Series A Preference Stock shall be $35.50 per share, whether the transaction
giving rise to the payment of such liquidation price shall be voluntary or
involuntary (such amount being hereinafter called the "Liquidation Price").
6.4. Exchange for DQE Common Stock.
(A) A holder of shares of Series A Preference Stock shall be entitled, at
any time prior to the close of business on the date, if any, fixed for
redemption of such shares pursuant to Subdivision 6.5, 6.6, or 6.7 hereof, to
cause any or all of such shares to be exchanged for shares of DQE Common Stock,
initially at an exchange ratio equal to one (1) share of DQE Common Stock for
each share of Series A Preference Stock, which exchange ratio shall be adjusted
as hereinafter provided (such exchange ratio, as so adjusted, rounded to the
nearest thousandth, being hereinafter sometimes referred to as the "Exchange
Ratio").
(B) Any holder of shares of Series A Preference Stock desiring to exchange
such shares for shares of DQE Common Stock shall surrender the certificate or
certificates representing the shares of Series A Preference Stock being
exchanged, duly assigned or endorsed for transfer to the Company (or accompanied
by duly executed stock powers relating thereto), at the principal executive
office of the Company or such office or offices in the continental United States
of an agent for exchange as may from time to time be designated by notice to the
holders of Series A Preference Stock, accompanied by written notice of exchange.
Such notice of exchange shall specify (i) the number of shares of Series A
Preference Stock to be exchanged and the name or names in which the holder
giving such notice wishes the certificate or
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<PAGE>
certificates for DQE Common Stock, and for any shares of Series A Preference
Stock not to be so exchanged, to be registered and (ii) the address to which
such holder wishes delivery to be made of such new certificates to be delivered
upon such exchange.
(C) Upon surrender of a certificate representing a share or shares of
Series A Preference Stock for exchange, the Company or the exchange agent, if
any, shall cause to be delivered by hand (with receipt to be acknowledged) or by
first class mail, postage prepaid, to the holder thereof or to such holder's
designee, at the address designated by such holder, a certificate or
certificates for the number of shares of DQE Common Stock to which such holder
shall be entitled upon such exchange. In the event that there shall have been
surrendered a certificate or certificates representing shares of Series A
Preference Stock, only part of which are to be exchanged, the Company or the
exchange agent, if any, shall similarly cause to be delivered to such holder or
such holder's designee a new certificate or certificates representing the number
of shares of Series A Preference Stock which shall not have been exchanged.
(D) The exchange of shares of Series A Preference Stock for shares of DQE
Common Stock made at the option of the holder thereof shall be deemed to be
effective as of the earlier of (i) the delivery to such holder or such holder's
designee of the certificates representing the shares of DQE Common Stock
delivered upon such exchange and (ii) the commencement of business, at the
principal executive office of the Company, on the second Business Day after the
surrender of the certificate or certificates for the shares of Series A
Preference Stock to be exchanged in accordance with the provisions of subsection
(B) of this Subdivision 6.4. At and after the time at which an exchange becomes
effective, (i) the person or persons entitled to receive the DQE Common Stock
deliverable upon such exchange shall, as between the Company and such person or
persons, be deemed to be the record holder or holders of such shares of DQE
Common Stock, no allowance or adjustment to be made in respect of dividends or
other distributions payable to holders of DQE Common Stock in respect of any
period prior to such time of effectiveness and (ii) such person or persons shall
not have any of the preferences, limitations, voting rights and special rights
ascribed to shares of Series A Preference Stock hereunder.
(E) The Company may, but shall not be obligated to, deliver to holders of
Series A Preference Stock a fractional share or shares of DQE Common Stock
deliverable upon any exchange of shares of Series A Preference Stock. If the
Company shall elect not to deliver a fractional share or shares, the Company
shall either (i) make a cash payment in an amount equal to the Fair Market Value
of such fractional share or shares of DQE Common Stock or (ii) deliver scrip or
other evidence of ownership in such form and upon such terms and conditions as
the Company shall deem advisable and as shall be required or permitted by
applicable law.
(F) Anything herein to the contrary notwithstanding, upon the exchange of
shares of Series A Preference Stock as contemplated herein, the Company shall
have the right to elect to deliver, or cause to be delivered, either (i)
authorized but previously unissued, or previously issued but not then
outstanding, shares of DQE Common Stock upon acquisition thereof from DQE or
(ii) authorized, previously issued and then outstanding shares of DQE Common
Stock upon acquisition thereof other than from DQE.
(G) If, at the time of any exchange of shares of Series A Preference Stock
as contemplated by this Subdivision 6.4, there shall be in effect any
shareholder rights plan pursuant to which DQE shall have undertaken to issue to
holders of DQE Common Stock rights to acquire securities of DQE, the Company
shall, upon such exchange, deliver to the holder or holders of the shares of DQE
Common Stock for which such shares of Series A Preference Stock shall have been
exchanged all rights appurtenant to such shares of DQE Common Stock to the
extent such rights shall be separately tradable.
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<PAGE>
(H) The Company shall purchase or otherwise acquire shares of DQE Common
Stock, either from DQE or in the open market or otherwise, or a combination
thereof, at such time or times and in such number or numbers as shall be
necessary in order to enable the Company to deliver shares of DQE Common Stock
pursuant to this Subdivision 6.4, all subject, however, to Subdivision 6.7(D).
6.5. Redemption At the Option of the Company.
(A) The Series A Preference Stock shall be redeemable, in whole or in
part, at the option of the Company (i) at any time on or after December 19, 1999
and (ii) if permitted by subsection (C) of this Subdivision 6.5, at any time
prior to December 19, 1999, at the following percentages of the Liquidation
Price:
<TABLE>
<CAPTION>
If Redeemed During
the Twelve-Month Period Percentage of
Beginning December 19, Liquidation Price
----------------------- -----------------
<S> <C>
1991 107.90
1992 107.11
1993 106.32
1994 105.53
1995 104.74
1996 103.95
1997 103.16
1998 102.37
1999 101.58
2000 100.79
</TABLE>
and thereafter at 100% of the Liquidation Price, plus, in each case, an amount
equal to all dividends accrued or in arrears thereon to the date fixed as the
date of redemption.
(B) [This paragraph is intentionally deleted].
(C) Notwithstanding anything to the contrary in subsection (A) of this
Subdivision 6.5, if a Plan pursuant to which shares of Series A Preference Stock
are then held by a trustee shall have been terminated, the Company may elect to
redeem any or all of such shares at any time prior to December 19, 1999 on the
terms set forth in subsection (A) of this Subdivision 6.5.
(D) Anything herein to the contrary notwithstanding, if any shares of
Series A Preference Stock called for redemption shall have been (i) exchanged
for shares of DQE Common Stock in accordance with Subdivision 6.4 or (ii)
redeemed with the redemption price being paid, in whole or in part, in shares of
DQE Common Stock in accordance with subsection (E) of this Subdivision 6.5,
then, in either case, there shall be paid over to the Company and/or returned to
its general funds all money which, in connection with such redemption, shall
have been set aside by the Company or deposited with a transfer or redemption
agent and which shall be in excess of the amount, if any, payable to the holders
of such shares of Series A Preference Stock pursuant to subsection (A) of this
Subdivision 6.5.
(E) Anything herein to the contrary notwithstanding, the Company, at its
option, may make payment of the redemption price required upon redemption of
shares of Series A Preference Stock pursuant to this Subdivision 6.5 or
subsections (A) and (B) of Subdivision 6.6 hereof in cash or in shares of DQE
Common
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<PAGE>
Stock, or in a combination of such shares and cash, any such shares of DQE
Common Stock to be valued for such purpose at their Fair Market Value determined
as of the date of redemption.
6.6. Other Redemption Rights.
(A) Notwithstanding anything to the contrary in subsection (A) of
Subdivision 6.5, if
(i) there shall have been a change in the federal income tax
laws of the United States of America or a determination by a court of
competent jurisdiction, which, in either case, has the effect of terminating
or materially reducing the deductibility for federal income tax purposes of
dividends paid on any shares of Series A Preference Stock when such
dividends are used as provided under Section 404(k)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"), as in effect on the date
shares of Series A Preference Stock are initially issued, or
(ii) a Plan pursuant to which shares of Series A Preference Stock
are then held by a trustee shall have been determined by the Internal
Revenue Service not to be qualified within the meaning of Section 401(a) or
Section 4975(e)(7), whichever may be applicable, of the Code,
the Company may elect to redeem any or all of such shares of Series A Preference
Stock at a redemption price equal to the Liquidation Price plus an amount equal
to all dividends accrued or in arrears thereon to the date fixed as the date of
redemption; provided, however, that the notice of any such redemption shall be
given on or prior to the first day which is nine months after the later of (x)
the date of the enactment of such change, the date of such determination or the
date of issuance of such regulations, as the case may be, and (y) the effective
date of such change, determination or regulations, as the case may be.
(B) Subject to any restriction of applicable law, each share of Series A
Preference Stock shall be redeemed by the Company for cash or, if the Company so
elects, in shares of DQE Common Stock, or a combination of such shares and cash
(any shares of DQE Common Stock to be valued for such purpose in accordance with
the provisions of Subdivision 6.5(E)), at a redemption price equal to the
Liquidation Price plus an amount equal to all dividends accrued or in arrears
thereon to the date fixed as the date of redemption, such redemption to be
effected at the option of the holder in the event that the Plan as to which such
holder acts as trustee is not determined by the Internal Revenue Service to be
qualified within the meaning of Section 401(a) or Section 4975(e)(7), whichever
may be applicable, of the Code.
(C) Subject to any restriction of applicable law, each share of Series A
Preference Stock shall be redeemed by the Company for cash or, if the Company so
elects, in shares of DQE Common Stock, or a combination of such shares and cash
(any such shares of DQE Common Stock to be valued for such purpose at their Fair
Market Value on the next preceding Appraisal Date), at a redemption price equal
to the greater of (a) the Liquidation Price plus an amount equal to all
dividends accrued or in arrears thereon to the next preceding Appraisal Date and
(b) an amount equal to the aggregate Fair Market Value of the number of shares
of DQE Common Stock for which each share of Series A Preference Stock could have
been exchanged on the next preceding Appraisal Date, such redemption to be
effected at the option of the holder when and to the extent necessary for such
holder to satisfy an investment election provided to participants in accordance
with, the Plan as to which such holder acts as trustee.
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<PAGE>
6.7. Merger, Consolidation, Other Combination, etc.
(A) If DQE shall consummate any merger, consolidation, share exchange or
similar business combination transaction, pursuant to which the outstanding
shares of DQE Common Stock are exchanged solely for, or changed, reclassified or
converted solely into, stock of any successor or resulting company (including
DQE or the Company) that constitutes "qualifying employer securities" with
respect to a holder of Series A Preference Stock within the meaning of Section
409(1) of the Code and Section 407(d)(5) of the Employee Retirement Income
Security Act of 1974, as amended, or any successor provisions of law (together
with, if applicable, a cash payment or scrip or other evidence of ownership in
lieu of fractional shares, if any), after such transaction each share of Series
A Preference Stock shall be exchangeable, otherwise on the terms and conditions
provided by Subdivision 6.4, for the number and kind of "qualifying employer
securities" receivable in such transaction by a holder of the number of shares
of DQE Common Stock for which such share of Series A Preference Stock could have
been exchanged immediately prior to such transaction (together with, if
applicable, a cash payment or scrip or other evidence of ownership of fractional
shares, if any); provided, however, that if, by virtue of the structure of such
transaction, a holder of DQE Common Stock is required to make an election with
respect to the nature and kind of consideration to be received in such
transaction, then each share of Series A Preference Stock shall be exchangeable
for the number and kind of "qualifying employer securities" (together with, if
applicable, a cash payment or scrip or other evidence of ownership of fractional
shares, if any) receivable in such transaction by a holder of the number of
shares of DQE Common Stock for which a share of Series A Preference Stock could
have been exchanged immediately prior to such transaction if such holder of DQE
Common Stock had failed to exercise any rights of election to receive any kind
or amount of stock, securities, cash or other property (other than "qualifying
employer securities" and cash payment or scrip or other evidence of ownership,
if applicable, in lieu of fractional shares) receivable upon such transaction
(provided that, if the kind or amount of "qualifying employer securities"
receivable upon such transaction is not the same for each non-electing share,
then the kind and amount of "qualifying employer securities" deemed, for
purposes of this subsection (A), to be receivable upon such transaction for each
non-electing share shall be the kind and amount so receivable per share by a
plurality of the non-electing shares, shares held by the Company not to be
counted in determining such plurality). The rights of the holders of the Series
A Preference Stock shall successively be subject to adjustments pursuant to
Subdivision 6.8 after any such transaction as nearly equivalent as practicable
to the adjustments provided for by Subdivision 6.8 prior to such transaction.
(B) If DQE shall consummate any merger, consolidation, share exchange or
similar business combination transaction, pursuant to which the outstanding
shares of DQE Common Stock are exchanged for, or changed, reclassified or
converted into, stock or securities or cash or any other property (payable in
kind), or any combination thereof, other than any such consideration which is
constituted solely of "qualifying employer securities" (as referred to in
subsection (A) of this Subdivision 6.7) and cash payments or scrip or other
evidence of ownership in lieu of fractional shares, after such transaction each
share of Series A Preference Stock shall be exchangeable, otherwise on the terms
and conditions provided by Subdivision 6.4, for the aggregate amount of stock,
securities, cash or other property (payable in like kind) receivable in such
transaction by a holder of the number of shares of DQE Common Stock for which
such shares of Series A Preference Stock could have been exchanged immediately
prior to such transaction; provided, however, that if, by virtue of the
structure of such transaction, a holder of DQE Common Stock is required to make
an election with respect to the nature and kind of consideration to be received
in such transaction, then each share of Series A Preference Stock shall be
exchangeable for the aggregate amount of stock, securities, cash or other
property (payable in kind) receivable in such transaction by a holder of the
number of shares of DQE Common Stock for which such share of Series A Preference
Stock could have been exchanged immediately prior to such transaction if such
holder of DQE Common Stock had failed to exercise any rights of election as to
the kind or amount of stock, securities, cash or other property
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<PAGE>
receivable upon such transaction (provided that, if the kind or amount of stock,
securities, cash or other property receivable upon such transaction is not the
same for each non-electing share, then the kind and amount of stock, securities,
cash or other property deemed, for purposes of this subsection (B), to be
receivable upon such transaction for each non-electing share shall be the kind
and amount so receivable per share by a plurality of the non-electing shares,
shares held by the Company not to be counted in determining such plurality).
(C) If DQE shall enter into any agreement providing for any merger,
consolidation, share exchange or similar business combination transaction
described in subsection (B) of this Subdivision 6.7, then the Company shall as
soon as practicable after it has actual notice thereof (and in any event at
least ten (10) Business Days before consummation of such transaction), give
notice of such agreement and the material terms thereof to each holder of Series
A Preference Stock and each such holder shall have the right, subject to any
restrictions of applicable law, to elect, by written notice to the Company, to
receive, immediately prior to the consummation of such transaction (and only if
such transaction is consummated), from the Company, in redemption and retirement
of such Series A Preference Stock and in lieu of the consideration provided in
subsection (B) of this Subdivision 6.7, a cash payment equal to the amount
payable in respect of shares of Series A Preference Stock upon redemption
pursuant to Subdivision 6.5(A). No such notice of redemption shall be effective
unless given to the Company prior to the close of business on the second
Business Day prior to consummation of such transaction, unless the Company or
the successor of the Company shall waive such prior notice, but any notice of
redemption so given prior to such time may be withdrawn by notice of withdrawal
given to the Company prior to the close of business on the second Business Day
prior to consummation of such transaction.
(D) If and to the extent that shares of Series A Preference Stock are to be
exchangeable for consideration other than DQE Common Stock as a result of any
merger, consolidation, share exchange or similar business combination
transaction described in subsection (A) or (B) of this Subdivision 6.7 and are
not to be redeemed pursuant to subsection (C) of this Subdivision 6.7, (i) the
Company shall take such actions as shall be necessary or appropriate in order
that the DQE Common Stock, if any, then held by it as contemplated by
Subdivision 6.4(H) shall be exchanged for, or changed, reclassified or converted
into, such consideration and (ii) the covenant contained in Subdivision 6.4(H)
shall thereafter be deemed to relate to such consideration and not to DQE Common
Stock.
(E) If the Company shall consummate any merger, consolidation, share
exchange or similar business combination transaction, the shares of Series A
Preference Stock shall by virtue of such merger, consolidation, share exchange
or similar business combination transaction be exchanged for, or changed,
reclassified or converted into, preferred or preference stock of such successor
or resulting company (or in the event such successor or resulting company is the
Company, such shares shall remain outstanding as shares of Series A Preference
Stock of the Company), in each case, having in respect to such company insofar
as practicable the same preferences, limitations, voting rights and special
rights (including the redemption rights provided by Subdivisions 6.5 and 6.6 and
this Subdivision 6.7), that the Series A Preference Stock had immediately prior
to such transaction. The rights of the preferred or preference stock of such
successor or resulting company issued in exchange for the Series A Preference
Stock, or, if the Company be the surviving corporation of such transaction, the
Series A Preference Stock, shall successively be subject to adjustment pursuant
to Subdivision 6.8 after any such transaction as nearly equivalent as
practicable to the adjustments provided for by Subdivision 6.8 prior to such
transaction. The Company shall not consummate any such merger, consolidation,
share exchange or similar business combination transaction unless the successor
or resulting company shall make appropriate provision for the authorization and
issuance of preferred or preference stock in exchange for the Series A
Preference Stock as aforesaid or into which the Series A Preference Stock shall
be changed, reclassified or converted.
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<PAGE>
6.8. Anti-dilution Adjustments.
(A) if DQE shall, at any time or from time to time while any of the shares
of Series A Preference Stock are outstanding, (i) pay a dividend or make any
other distribution in respect of the DQE Common Stock in shares of DQE Common
Stock, (ii) subdivide the outstanding shares of DQE Common Stock or (iii)
combine the outstanding shares of DQE Common Stock into a smaller number of
shares, in each case whether by reclassification of shares, recapitalization of
DQE (including a recapitalization effected by a merger or consolidation to which
Subdivision 6.7 hereof does not apply) or otherwise, the Exchange Ratio in
effect immediately prior to such action shall be adjusted by multiplying such
Exchange Ratio by a fraction, the numerator of which is the number of shares of
DQE Common Stock outstanding immediately after such event, and the denominator
of which is the number of shares of DQE Common Stock outstanding immediately
before such event. An adjustment made pursuant to this subsection (A) of
Subdivision 6.8 shall be given effect, in the case of such a dividend or
distribution, as of the Record Date therefor and, in the case of such a
subdivision, or combination, as of the effective date thereof.
(B) (i) If DQE shall, at any time or from time to time while any of the
shares of Series A Preference Stock are outstanding, issue, sell or exchange
shares of DQE Common Stock (other than pursuant to (a) any right or warrant to
purchase or acquire shares of DQE Common Stock (including as such a right or
warrant any security convertible into or exchangeable for shares of DQE Common
Stock), (b) any right to purchase or acquire DQE Common Stock pursuant to any
shareholder rights plan or any rights agreement relating thereto or (c) any
employee or director incentive, compensation or benefit plan or arrangement
(including any employment, severance or consulting agreement) of DQE or any
Affiliate of DQE heretofore or hereafter adopted) for a consideration having a
Fair Market Value on the date of issuance, sale or exchange less than the Fair
Market Value of such shares of DQE Common Stock on the date of issuance, sale or
exchange thereof, then, subject to the provisions of subsections (D) and (E) of
this Subdivision 6.8, the Exchange Ratio in effect immediately prior to such
issuance, sale or exchange shall be adjusted by multiplying such Exchange Ratio
by a fraction, the numerator of which shall be the product of
(a) the Fair Market Value of a share of DQE Common Stock on the day
immediately preceding the first public announcement of such issuance, sale
or exchange and
(b) the sum of the number of shares of DQE Common Stock outstanding
on such day plus the number of shares of DQE Common Stock so issued, sold or
exchanged by DQE,
and the denominator of which shall be the sum of
(c) the Fair Market Value of all the shares of DQE Common Stock
outstanding on the day immediately preceding the first public announcement
of such issuance, sale or exchange and
(d) the Fair Market Value of the consideration received by DQE in
respect of such issuance, sale or exchange of shares of DQE Common Stock, as
of the date of such receipt.
(ii) If DQE shall, at any time or from time to time while any shares of
Series A Preference Stock are outstanding, issue, sell or exchange any right or
warrant to purchase or acquire shares of DQE Common Stock (including as such a
right or warrant any security convertible into or exchangeable for shares of DQE
Common Stock), other than any such issuance to holders of shares of DQE Common
Stock as a dividend or distribution (including by way of a reclassification of
shares or a recapitalization of DQE) and other than pursuant to (a) any
shareholder rights plan or any rights agreement relating thereto or (b) any
employee or director incentive, compensation or benefit plan or arrangement
(including any employment,
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<PAGE>
severance or consulting agreement) of DQE or any Affiliate of DQE heretofore or
hereafter adopted, for a consideration having a Fair Market Value on the date of
such issuance, sale or exchange less than the Non-Dilutive Amount, then, subject
to the provisions of subsections (D) and (E) of this Subdivision 6.8, the
Exchange Ratio in effect immediately prior to such issuance, sale or exchange
shall be adjusted by multiplying such Exchange Ratio by a fraction, the
numerator of which shall be the product of
(a) the Fair Market Value of a share of DQE Common Stock on the day
immediately preceding the first public announcement of such issuance, sale
or exchange and
(b) the sum of the number of shares of DQE Common Stock outstanding on
such day plus the maximum number of shares of DQE Common Stock which could
be acquired pursuant to such right or warrant at the time of the issuance,
sale or exchange of such right or warrant (assuming shares of DQE Common
Stock could be acquired pursuant to such right or warrant at such time),
and the denominator shall be the sum of
(c) the Fair Market Value of all the Shares of DQE Common Stock
outstanding on the day immediately preceding the first public announcement
of such issuance, sale or exchange,
(d) the Fair Market Value of the consideration received by DQE in
respect of such issuance, sale or exchange of such right or warrant, as of
the date of such receipt, and
(e) the Fair Market Value as of the time of such issuance of the
consideration which DQE would receive upon exercise in full of all such
rights or warrants.
(C) If DQE shall, at any time or from time to time while any of the shares
of Series A Preference Stock are outstanding, make or authorize an Extraordinary
Distribution in respect of the DQE Common Stock, whether by dividend,
distribution, reclassification of shares or recapitalization of DQE (other than
a recapitalization or reclassification effected by a merger, consolidation or
other combination to which Subdivision 6.7 applies) or effect a Pro Rata
Repurchase of DQE Common Stock, the Exchange Ratio in effect immediately prior
to the Record Date for such Extraordinary Distribution or the Effective Date of
such Pro Rata Repurchase, as the case may be, shall, subject to subsections (D)
and (E) of this Subdivision 6.8, be adjusted by multiplying such Exchange Ratio
by a fraction, the numerator of which shall be the product of
(i) the difference of (x) the number of shares of DQE Common Stock
outstanding immediately before such Extraordinary Distribution or Pro
Rata Repurchase minus (y) in the case of a Pro Rata Repurchase, the
number of shares of DQE Common Stock thereby repurchased by DQE and
(ii) the Fair Market Value of a share of DQE Common Stock on the applicable
Valuation Date, in the case of an Extraordinary Distribution, or on the
applicable Effective Date, in the case of a Pro Rata Repurchase, as the
case may be,
and the denominator of which shall be the difference of
(i) the product of
(x) the number of shares of DQE Common Stock outstanding immediately
before such Extraordinary Distribution or Pro Rata Repurchase and
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(y) the Fair Market Value of a share of DQE Common Stock on the
applicable Valuation Date, in the case of an Extraordinary
Distribution, or on the applicable Effective Date, in the case of a
Pro Rata Repurchase, as the case may be,
minus
(ii) the Extraordinary Distribution Adjustment Amount relating to such
Extraordinary Distribution or the aggregate purchase price paid in
connection with such Pro Rata Repurchase, as the case may be.
An adjustment made pursuant to this subsection (C) of Subdivision 6.8 shall be
given effect, in the case of an Extraordinary Distribution, as of the Record
Date therefor and, in the case of a Pro Rata Repurchase, as of the Effective
Date thereof.
(D) Not withstanding any other provisions of this Subdivision 6.8, the
Company shall not be required to make any adjustment of the Exchange Ratio
unless such adjustment would require an increase or decrease of at least one
percent (1%) in the Exchange Ratio. Any lesser adjustment shall be carried
forward and shall be made no later than the time of, and together with, the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least one percent
(1%) in the Exchange Ratio.
(E) If DQE shall pay a dividend or make any other distribution on the DQE
Common Stock or issue any DQE Common Stock, other capital stock or other
security of DQE or any rights or warrants to purchase or acquire any such
security, which transaction does not result in an adjustment to the Exchange
Ratio pursuant to the foregoing provisions of this Subdivision 6.8, the Board of
Directors shall in its sole discretion consider whether such action is of such a
nature that it adversely affects the holders of the Series A Preference Stock
and that an adjustment to the Exchange Ratio should equitably be made in respect
of such transaction. If in such case the Board of Directors determines that an
adjustment to the Exchange Ratio should be made, an adjustment shall be made
effective as of such date, as determined by the Board of Directors. The
determination of the Board of Directors as to whether an adjustment to the
Exchange Ratio should be made pursuant to this subsection (E), and, if so, as to
what adjustment should be made and when, shall be final and binding on the
Company and all shareholders of the Company. The Board of Directors may, but
shall not be obligated to, make such additional adjustments in the Exchange
Ratio, in addition to those required by this Subdivision 6.8, as shall be
necessary in order that any dividend or distribution in shares of capital stock
of DQE, subdivision, reclassification or combination of shares of stock of DQE
or any recapitalization of DQE, or the exercise of the rights of exchange set
forth in Subdivisions 6.4 and 6.7 shall not be taxable to holders of the Series
A Preference Stock.
(F) Whenever an adjustment to the Exchange Ratio is made pursuant hereto,
the Company shall forthwith deliver to the transfer agents, if any, for the
Series A Preference Stock, and file with the Secretary of the Company, a
statement signed by two officers of the Company stating the adjusted Exchange
Ratio determined as provided herein and the voting rights of the Series A
Preference Stock reflecting a correlative adjustment. Such statement shall set
forth in reasonable detail such facts as shall be necessary to show the reason
and the manner of computing such adjustment, including any determination of Fair
Market Value involved in such computation. Promptly after each adjustment to
the Exchange Ratio, the Company shall mail a notice thereof and of the Exchange
Ratio, as so adjusted, as well as the voting rights of the Series A Preference
Stock reflecting a correlative adjustment, to each holder of Series A Preference
Stock.
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6.9. Definitions. The terms defined in this Subdivision 6.9 shall for all
purposes of the terms and provisions of the Preference Stock, Plan Series A of
the Company have the meanings specified below, unless the context clearly
requires otherwise:
"Adjustment Period" shall mean, with respect to any date as of which
the Fair Market Value of a security is to be determined, the period of five
(5) consecutive trading days ending on and including such date.
"Affiliate" of any specified person shall mean any other person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For the purposes of this
definition, (a) "control" when used with respect to any specified person
means the power to direct the management and policies of such person,
directly or indirectly, whether through the ownership of voting securities,
by contract or otherwise, and the term "controlling" and "controlled" have
meanings correlative to the foregoing, and (b) "person" means any
individual, corporation, partnership, joint venture, trust or unincorporated
organization.
"Appraisal Date" shall mean the date or dates established from time to
time by the Company for purposes of valuing the DQE Common Stock.
"Board of Directors" shall mean the Board of Directors of the Company
or, to the extent not prohibited by applicable law, any duly authorized
committee thereof.
"Business Day" shall mean any day other than a Saturday, Sunday or
other day which is a legal holiday in Pennsylvania or is otherwise a day on
which banking institutions in Pennsylvania are authorized by law or other
governmental action to remain closed.
"Code" shall have the meaning specified in Subdivision 6.6(A).
"Composite Tape" shall mean the Composite Tape for New York Stock
Exchange transactions.
"Current Market Price" of DQE Common Stock or any other class of
publicly traded capital stock or other security of DQE or any other issuer
for a day shall mean the last reported sales price, regular way, on such
day, or, if no sale takes place on such day, the average of the reported
closing bid and asked prices, regular way, on such day, in either case as
reported on the Composite Tape or, if such security is not listed or
admitted to trading on the NYSE, on the principal national securities
exchange on which such security is listed or admitted to trading or, if such
security is not listed or admitted to trading on any national securities
exchange, on the NASDAQ National Market System or, if such security is not
quoted on the NASDAQ National Market System, the average of the closing bid
and asked prices on such day in the over-the-counter market as reported by
NASDAQ or, if bid and asked prices for such security on each such day shall
not have been reported by NASDAQ, the average of the bid and asked prices
for such day as furnished by any NYSE member firm regularly making a market
in such security selected for such purpose by the Board of Directors.
"Dividend Payment Date" shall have the meaning specified in
Subdivision 6.2.
"DQE" shall mean DQE, Inc., a corporation organized and existing under
the laws of the Commonwealth of Pennsylvania.
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<PAGE>
"DQE Common Stock" shall mean the Common Stock of DQE, of the par
value of $1 per share.
"DQE Common Stock Equivalent Dividend" shall have the meaning
specified in Subdivision 6.2(A).
"Effective Date" shall have the meaning specified in the definition of
"Pro Rata Repurchase" in this Subdivision 6.9.
"Exchange Ratio" shall have the meaning specified in Subdivision
6.4(A).
"Extraordinary Distribution" shall mean any dividend or other
distribution (the Record Date for which occurs while any shares of Series A
Preference Stock are outstanding) of
(a) Cash, if the sum of
(i) the amount of such cash dividend or distribution,
(ii) the aggregate amount of all other cash dividends and
distributions made during the period of twelve consecutive
calendar months ended the day next preceding the Record
Date for such dividend or distribution (portions of a
calendar month being counted as such), excluding, however,
from such aggregate amount any dividend or distribution
which was previously included in a DQE Common Stock
Equivalent Dividend theretofore paid, and
(iii) the aggregate amount of all Pro Rata Repurchases (for this
purpose, including only the excess of the aggregate
purchase price of each such Pro Rata Purchase over the
aggregate Fair Market Value of the Shares for DQE Common
Stock repurchased thereby as determined as of the
Effective Date of such Pro Rata Repurchase), the Effective
dates of which fall within the aforesaid twelve-month
period,
exceeds fifteen percent (15%) of the aggregate Fair Market Value
of all shares of DQE Common Stock outstanding on the Record Date
for such dividend or distribution and/or
(b) shares of capital stock of DQE (other than shares of DQE Common
Stock), other securities of DQE, evidences of indebtedness of DQE
or any other person or any other property (including shares of
any Affiliate of DQE), or any combination thereof.
"Extraordinary Distribution Adjustment Amount" shall mean, with
respect to any Extraordinary Distribution, the sum of
(a) the Fair Market Value of such Extraordinary Distribution and
(b) the aggregate amount of cash dividends and other distributions
paid or made during the twelve-month period applicable to the
determination that such Extraordinary Distribution was an
Extraordinary Distribution, excluding, however, from such
aggregate amount any dividend or distribution which (i)
constituted an Extraordinary
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<PAGE>
Distribution, (ii) was otherwise previously included in an
Extraordinary Distribution Adjustment Amount or (iii) was
previously included in a DQE Common Stock Equivalent Dividend
theretofore paid.
"Fair Market Value" shall mean, as to cash, the amount of such cash,
and, as to shares of publicly traded capital stock or securities of any
issuer, the average of the Current Market Prices of such shares or
securities for each day of the Adjustment Period; provided, however, that
for purposes of subsection (C) of Subdivision 6.6 hereof, the Fair Market
Value of shares of publicly traded capital stock or securities shall be the
Current Market Price of such shares or securities on the next preceding
Appraisal Date. The "Fair Market Value" of any security which is not
publicly traded or of any other property shall mean the fair value thereof
as determined by an independent investment banking or appraisal firm
experienced in the valuation of such securities or property selected in good
faith by the Board of Directors, or, if no such investment banking or
appraisal firm is in the good faith judgment of the Board of Directors
available to make such determination, as determined in good faith by the
Board of Directors.
"Liquidation Price" shall have the meaning specified in Subdivision
6.3.
"NASDAQ" shall mean the National Association of Securities Dealers,
Inc. Automated Quotation System.
"NASDAQ National Market System" shall mean the National Market System
of NASDAQ.
"Non-Dilutive Amount" in respect of an issuance, sale or exchange by
DQE of any right or warrant to purchase or acquire shares of DQE Common
Stock (including any security convertible into or exchangeable for shares of
DQE Common Stock) shall mean (a) the product of (i) the Fair Market Value of
a share of DQE Common Stock on the trading day immediately preceding the
first public announcement of such issuance, sale or exchange and (ii) the
maximum number of shares of DQE Common Stock which could be acquired on such
date upon the exercise in full of such rights and warrants (including upon
the conversion or exchange of all such convertible or exchangeable
securities), whether or not exercisable (or convertible or exchangeable) at
such date, minus (b) the aggregate amount payable pursuant to such right or
warrant to purchase or acquire such maximum number of shares of DQE Common
Stock; provided, however, that in no event shall the Non-Dilutive Amount be
less than zero. For purposes of the foregoing sentence, in the case of a
security convertible into or exchangeable for shares of DQE Common Stock,
the amount payable pursuant to a right or warrant to purchase or acquire
shares of DQE Common Stock shall be deemed to be the Fair Market Value of
such security on the date of the issuance, sale or exchange of such security
by DQE.
"NYSE" shall mean the New York Stock Exchange, Inc., and its
successors and assigns.
"Plan" shall have the meaning specified in Subdivision 6.1(B)
"Pro Rata Repurchase" shall mean any purchase of shares of DQE Common
Stock by DQE or any Affiliate thereof, whether for cash, shares of capital
stock of DQE, other securities of DQE, evidences of indebtedness of DQE or
any other person or any other property (including shares of an Affiliate of
DQE), or any combination thereof, effected while any of the shares of Series
A Preference Stock are outstanding, pursuant to any tender offer or exchange
offer subject to Section 13(e) of the Securities Exchange act of 1934, as
amended (the "Exchange Act"), or any successor
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<PAGE>
provision of law, or pursuant to any other offer available to substantially
all holders of DQE Common Stock; provided, however, that no purchase of
shares by DQE or any Affiliate thereof made in open market transactions
shall be deemed a Pro Rata Repurchase. For purposes of Subdivision 6.8 and
this Subdivision 6.9, shares shall be deemed to have been purchased by DQE
or any Affiliate thereof "in open market transactions" if they have been
purchased substantially in accordance with the requirements of Rule 10b-18,
as such rule is in effect under the Exchange Act on the date shares of
Series A Preference Stock are initially issued by the Company, or on such
other terms and conditions as the Board of Directors shall have determined
are reasonably designed to prevent such purchases from having a material
effect on the trading market for the DQE Common Stock. The "Effective Date"
of a Pro Rata Repurchase shall mean the applicable expiration date
(including all extensions thereof) of any tender offer which is a Pro Rata
Repurchase, or the date of purchase with respect to any Pro Rata Repurchase
which is not a tender offer.
"Record date", with respect to any dividend or other distribution on
shares of capital stock, shall mean the date and time determined by the
Board of Directors as of which the holders of record of such shares which
are entitled to receive such dividend or other distribution shall be
determined.
"Series A Preference Stock" shall have the meaning specified in
Subdivision 6.1(A)
"Valuation Date" with respect to an Extraordinary Distribution shall
mean the date that is five Business Days prior to the record date for such
Extraordinary Distribution.
6.10. Miscellaneous.
(A) All notices referred to herein shall be in writing, and all notices
hereunder shall be deemed to have been given upon the earlier of receipt thereof
or three (3) Business Days after the mailing thereof if sent by first class mail
with postage prepaid, addressed: (i) if to the Company, to its principal
executive office, Attention: Secretary, or to the transfer agent, if any, for
the Series A Preference Stock, or other agent of the Company designated as
permitted herein or (ii) if to any holder of the Series A Preference Stock to
such holder at the address of such holder as listed in the stock record books of
the Company (which may include the records of any transfer agent for the Series
A Preference Stock) or (iii) to such other address as the Company or any such
holder, as the case may be, shall have designed by notice similarly given.
(B) The Company shall pay any and all stock transfer and documentary stamp
taxes that may be payable in respect of any issuance or delivery of shares of
Series A Preference Stock or shares of DQE Common Stock or other securities
delivered on account of Series A Preference Stock pursuant hereto or
certificates representing such shares or securities. The Company shall not,
however, be required to pay any such tax which may be payable in respect of any
transfer involved in the issuance or delivery of shares of Series A Preference
Stock or the delivery of DQE Common Stock or other securities in a name other
than that in which the shares of Series A Preference Stock with respect to which
such shares or other securities are issued or delivered were registered, or in
respect of any payment to any person with respect to any such shares or
securities other than a payment to the registered holder thereof, and the
Company shall not be required to make any such issuance, delivery or payment
unless and until the person otherwise entitled to such issuance, delivery or
payment has paid to the Company the amount of any such tax or has established,
to the satisfaction of the Company, that such tax has been paid or is not
payable.
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<PAGE>
(C) In the event that a holder of shares of Series A Preference Stock shall
not by written notice designate the name in which shares of DQE Common Stock to
be delivered upon exchange of such shares should be registered or to whom
payment upon redemption of shares of Series A Preference Stock should be made or
the address to which the certificate or certificates representing such shares,
or such payment, should be sent, the Company shall be entitled to cause the
registration of such shares to be made, and to make such payment, in the name of
the holder of such Series A Preference Stock as shown on the records of the
Company and to send the certificate or certificates representing such shares, or
such payment, to the address of such holder shown on the records of the Company.
(D) The Company may appoint, and from time to time discharge and change, a
transfer agent and/or exchange agent for the Series A Preference Stock. Upon
any such appointment or discharge of a transfer agent or exchange agent, the
Company shall send notice thereof to each holder of record of Series A
Preference Stock.
6/th/. Personal Liability of Directors.
(a) To the fullest extent that the laws of the Commonwealth of
Pennsylvania, as in effect on January 27, 1987 or as thereafter amended, permit
elimination or limitation of the liability of directors, no Director of the
Company shall be personally liable for monetary damages as such for any action
taken, or any failure to take action, as a Director.
(b) This Article 6th shall not apply to any action filed prior to January
27, 1987, nor to any breach of performance or failure of performance of duty by
a Director occurring prior to January 27, 1987. Any amendment or repeal of this
Article 6th which has the effect of increasing Director liability shall operate
prospectively only, and shall not affect any action taken, or any failure to
act, prior to its adoption.
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<PAGE>
Exhibit 3.2
-----------
DUQUESNE LIGHT COMPANY
BY-LAWS
EFFECTIVE June 30, 1999
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meeting. The Company shall hold an annual
---------------
stockholders' meeting for election of Directors at a date, location (within or
outside Pennsylvania) and time set by the Board of Directors. Annual meetings
shall be general meetings, open for the transaction of any business within the
powers of the Company without special notice of such business, except in cases
in which special notice is required by statute, the Articles or these By-Laws.
SECTION 2. Special Meetings. Special meetings of the stockholders
-----------------
may be called at any time by the Chairman of the Board or President or by the
Board of Directors.
SECTION 3. Notice of Meetings. Written notice of every meeting of
-------------------
the stockholders shall be given to each stockholder entitled to vote at such
meeting, at least five days (or such other period as required by statute) before
the meeting, by the Chairman of the Board or Secretary. Failure to
<PAGE>
give notice of any annual meeting or irregularity in the notice shall not affect
the validity of any proceedings at such meeting (other than proceedings of which
special notice is required by law, the Articles or these By-Laws).
SECTION 4. Quorum. At all meetings of stockholders, a majority of
-------
the outstanding shares of capital stock entitled to vote, represented by
stockholders in person or by proxy, shall constitute a quorum.
SECTION 5. Judges of Election. Three judges of election shall be
-------------------
appointed by the Board of Directors for any meeting of stockholders. The judges
of election shall act as
tellers of any ballot vote taken at the meeting and certify the result.
SECTION 6. Voting and Proxies. Any stockholder having the right to
-------------------
vote at any meeting shall be entitled to one vote for each share of stock held.
Any stockholder entitled to vote at any meeting of stockholders may
vote either in person or by proxy, but no proxy which is dated more than three
years prior to the meeting at which it is offered shall confer the right to
vote. Every proxy shall be in writing, signed by a stockholder or duly
authorized attorney in fact.
2
<PAGE>
SECTION 7. Stockholder Action by Written Consent. Any action
-------------------------------------
required or permitted to be taken at a meeting of the stockholders or of a class
of stockholders may be taken without a meeting if, prior to or subsequent to the
action, a written consent or consents thereto by all of the stockholders who
would be entitled to vote at a meeting for such purpose shall be filed with the
Secretary of the Company.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. Election and Powers. The business and affairs of the
--------------------
Company shall be managed by its Board of Directors. The Board may exercise all
the powers of the Company except such as are by statute, the Articles or these
By-Laws conferred upon or reserved to the stockholders. At each annual meeting
the stockholders shall elect directors to hold office until the succeeding
annual meeting. Each director shall hold office until a successor is elected
and qualified, or until such director's earlier death, resignation or removal in
the manner provided in Section 10 of this Article II. The number of directors
which shall constitute the full Board of Directors shall be not less than one as
fixed by the Board of Directors.
3
<PAGE>
SECTION 2. Eligibility for Election. No person who is an employee of
-------------------------
the Company, except the Chairman of the Board or President, shall be eligible to
serve as a Director of the Company after retiring as an employee. The mandatory
retirement age for directors is 70 except for directors completing a current
term of office
SECTION 3. Regular Meetings. At the first meeting of the Board
-----------------
following the annual election of directors, executive officers of the Company
shall be elected. Regular meetings shall be held as fixed by the Board of
Directors.
SECTION 4. Special Meetings. Special meetings of the Board of
-----------------
Directors shall be held whenever called by the Chairman of the Board, the
President or a majority of the Board of Directors.
SECTION 5. Place of Meetings. The Board of Directors may hold its
------------------
regular and special meetings at such places as it designates.
SECTION 6. Notice of Meetings. No notice of regular meetings of the
-------------------
Board of Directors need be given. Notice of the place, day and hour of every
special meeting shall be given to each director at least one day before the
meeting, by personal delivery by, telephone or by facsimile or electronic
4
<PAGE>
communication, at the director's residence or usual place of business or, in the
alternative, by mailing the notice at least three days before the meeting to the
director's last known mailing address. The failure to give notice shall not
affect the validity of any meeting as to any director who attends the meeting or
waives notice in writing. No notice of adjourned meetings of the Board of
Directors need be given. All regular and special meetings of the Board of
Directors shall be general meetings open for the transaction of any business
without special notice of such business.
SECTION 7. Quorum. At all meetings of the Board of Directors, a
-------
majority of the directors shall constitute a quorum for the transaction of
business. Except in cases in which it is by law, the Articles or these By-Laws
otherwise provided, a majority of the quorum shall decide any questions.
SECTION 8. Vacancies. Any vacancy that shall occur in the Board of
----------
Directors by reason of death, resignation, removal, increase in the number of
Directors or any other cause whatever may be filled by a vote at any properly
called meeting or by the unanimous written consent of the stockholders of the
class entitled to elect such Director. In the absence of or pending action by
such stockholders, any such vacancy may be filled by a majority of the then
members of the Board which the stockholders of such class are entitled to
5
<PAGE>
elect, whether or not a quorum, or by the sole remaining such Director. Any
Director elected by the Board shall serve until a successor is elected by
stockholder vote as aforesaid.
SECTION 9. Compensation. The directors may be compensated for their
-------------
services on a periodic basis and/or receive a fixed sum for attendance at each
regular, special or Committee meeting and every adjournment thereof. The amount
shall be fixed by resolution of the Board of Directors. The directors shall be
reimbursed for all reasonable traveling expenses incurred in attending meetings.
Directors who are employees of the Company or an affiliate shall not be paid for
their services as directors.
SECTION 10. Removal. Any Director or Directors or the entire Board
--------
of Directors may be removed from office at any time without assigning any cause
by a vote at any properly called meeting or by the unanimous written consent of
the stockholders of the class entitled to elect such Directors.
SECTION 11. Indemnification of Directors and Officers.
------------------------------------------
(a) Right of Indemnification. Except as prohibited by law, every
-------------------------
Director and officer of the Company shall be entitled as of right to be
indemnified by the Company against reasonable expense and any liability paid or
incurred by such person in connection with any actual or threatened claim,
6
<PAGE>
action, suit or proceeding, civil, criminal, administrative, investigative or
other, whether brought by or in the right of the Company or otherwise, by reason
of such person being or having been a Director or officer of the Company or by
reason of the fact that such person is or was serving at the request of the
Company as a director, officer, employee, fiduciary or other representative of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity (such claim, action, suit or proceeding hereinafter being referred
to as "action"); provided, however, that no such right of indemnification shall
exist with respect to an action brought by a Director or officer against the
Company (other than a suit for indemnification as provided in paragraph (b)).
Such indemnification shall include the right to have expenses incurred by such
person in connection with an action paid in advance by the Company prior to
final disposition of such action, subject to such conditions as may be
prescribed by law. Persons who are not Directors or officers of the Company may
be similarly indemnified in respect of service to the Company or to another such
entity at the request of the Company to the extent the Board of Directors at any
time denominates such person as entitled to the benefits of this Section. As
used herein, "expense" shall include fees and expenses of counsel selected by
such person; and "liability" shall include amounts of judgments, excise taxes,
fines and penalties, and amounts paid in settlement.
7
<PAGE>
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
--------------------------------
this Section is not paid in full by the Company within thirty days after a
written claim has been received by the Company, the claimant may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim, and, if successful in whole or in part, the claimant shall also be
entitled to be paid the expense of prosecuting such claim. It shall be a
defense to any such action that the conduct of the claimant was such that under
Pennsylvania law the Company would be prohibited from indemnifying the claimant
for the amount claimed, but the burden of proving such defense shall be on the
Company. Neither the failure of the Company (including its Board of Directors,
independent legal counsel and its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because the conduct of the claimant was not such
that indemnification would be prohibited by law, nor an actual determination by
the Company (including its Board of Directors, independent legal counsel or its
stockholders) that the conduct of the claimant was such that indemnification
would be prohibited by law, shall be a defense to the action or create a
presumption that the conduct of the claimant was such that indemnification would
be prohibited by law.
8
<PAGE>
(c) Insurance and Funding. The Company may purchase and maintain
----------------------
insurance to protect itself and any person eligible to be indemnified hereunder
against any liability or expense
asserted or incurred by such person in connection with any action, whether or
not the Company would have the power to indemnify such person against such
liability or expense by law or under the provisions of this Section 11. The
Company may create a trust fund, grant a security interest, cause a letter of
credit to be issued or use other means (whether or not similar to the foregoing)
to ensure the payment of such sums as may become necessary to effect
indemnification as provided herein.
(d) Non-Exclusivity; Nature and Extent of Rights. The right of
---------------------------------------------
indemnification provided for herein (1) shall not be exclusive of any other
rights, whether existing now or later, to which those seeking indemnification
may be entitled under any agreement, by-law or charter provision, vote of
stockholders or Directors or otherwise, (2) shall be deemed to create
contractual rights in favor of persons entitled to indemnification, (3) shall
continue as to persons who have ceased to have the status pursuant to which they
were entitled or were denominated as entitled to indemnification and shall inure
to the benefit of the heirs and legal representatives of persons entitled to
indemnification hereunder and (4) shall be applicable to actions, suits or
proceedings commenced after adoption, whether arising from acts or omissions
occurring before or after the adoption hereof. The right of
9
<PAGE>
indemnification may not be amended, modified or repealed so as to limit the
indemnification provided herein with respect to any acts or omissions occurring
prior to the adoption of any such amendment or repeal.
SECTION 12. Personal Liability of Directors.
--------------------------------
(a) To the fullest extent that the laws of the Commonwealth of
Pennsylvania, as in effect on January 27, 1987 or as thereafter amended, permit
elimination or limitation of the liability of directors, no Director of the
Company shall be personally liable for monetary damages as such for any action
taken, or any failure to take any action, as a Director.
(b) This Section 12 shall not apply to any action filed prior to
January 27, 1987, nor to any breach of performance or failure of performance of
duty by a Director occurring prior to January 27, 1987. Any amendment or repeal
of this Section 13 which has the effect of increasing Director liability shall
operate prospectively only, and shall not affect action taken, or any failure to
act, prior to its adoption.
10
<PAGE>
ARTICLE III
COMMITTEES
Committees. The Board of Directors may by resolution designate and
-----------
discontinue such standing or special committees as it deems desirable. Each
committee shall have such powers and perform such duties, not inconsistent with
law, as may be assigned by the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. Executive Officers. The executive officers of the Company
-------------------
shall be a a President, one or more Vice Presidents, a Secretary, a Treasurer, a
Controller and may include a Chairman of the Board. The Chairman of the Board
will not be considered an officer solely by virtue of holding that title and
shall be chosen from among the Directors. The executive officers shall be
elected annually by the Board of Directors at its first meeting following the
annual meeting, and each such officer shall hold office until the corresponding
meeting in the next year and until a successor has been duly chosen and
qualified, or until such officer's earlier death, resignation or removal. Any
vacancy in the above offices may be
11
<PAGE>
filled for the unexpired portion of the term by the Board of Directors, at any
regular or special meeting. Any number of offices may be held by the same
person.
SECTION 2. Chairman of the Board. The Chairman of the Board shall
----------------------
preside at any meeting of the stockholders or of the Board of Directors and
shall have all the powers and authority vested in a presiding officer by law or
practice to conduct an orderly meeting. In addition to any specific powers
conferred by these By-Laws, the Chairman of the Board shall have the powers and
duties assigned by the Board of Directors.
SECTION 3. President. In addition to any specific powers conferred
----------
by these By-Laws, the President shall have the powers and duties assigned by the
Board of Directors. At the request or in the absence or disability of the
Chairman of the Board, the President shall preside at any meeting of the
stockholders or of the Board of Directors.
SECTION 4. Chief Executive Officer. The Board of Directors shall
------------------------
designate the Chairman of the Board or President or the person holding both of
such offices or such other person as the Board may decide to perform the
functions of the Chief Executive Officer. The Chief Executive Officer shall
carry out the policies approved by the Board of Directors. In addition to any
specific powers conferred by these By-Laws, the Chief Executive Officer shall
have supervision over, and shall
12
<PAGE>
exercise general executive powers concerning, all the operations and business of
the Company. The Chief Executive Officer shall also have and exercise such
powers and duties as assigned by the Board of Directors and may delegate
executive and other powers and duties to any other officer.
SECTION 5. Vice Presidents. At the request of the President, or in
----------------
the absence or disability of the President, any Vice President shall perform the
duties of the President, and when so acting shall have the powers of the
President, unless otherwise determined by the Board of Directors. Each Vice
President shall also have and exercise such powers and duties as assigned by the
Board of Directors or the Chief Executive Officer.
SECTION 6. Secretary. The Secretary shall perform all duties
----------
incident to the office of a secretary of a corporation, and such other duties as
assigned by the Board of Directors or the Chief Executive Officer.
SECTION 7. Treasurer. The Treasurer shall perform all the duties
----------
incident to the office of a treasurer of a corporation, and such other duties as
assigned by the Board of Directors or the Chief Executive Officer.
13
<PAGE>
SECTION 8. Controller. The Controller shall perform all duties
-----------
incident to the office of a controller of a corporation, and such other duties
as assigned by the Board of Directors or the Chief Executive Officer.
SECTION 9. Assistant Officers. The Board of Directors may elect one
-------------------
or more Assistant Vice Presidents, Assistant Secretaries and Assistant
Treasurers. Each assistant officer shall hold office for such period and shall
have such authority and perform such duties as the Board of Directors or the
Chief Executive Officer may prescribe.
SECTION 10. Certain Powers of Officers. Except in cases in which the
--------------------------
signing and execution shall have been expressly delegated by the Board of
Directors to some other officer, employee or agent of the Company, the Chairman
of the Board or President or a Vice President may sign and execute in the name
of the Company all authorized deeds, mortgages, bonds, contracts or other
instruments; provided, however, that a Vice President may delegate to any
General Manager or Manager reporting to such officer authority to sign and
execute in the name of the Company all authorized contracts and similar
instruments pursuant to a policy approved by the Board of Directors.
14
<PAGE>
SECTION 11. Compensation. The Board of Directors shall have the
-------------
power to fix the compensation of the Chairman of the Board, the Chief Executive
Officer, the President and any Vice President of the Company. The Chief
Executive Officer shall have the power to fix the compensation of the Secretary,
the Treasurer, the Controller and assistant officers.
ARTICLE V
STOCK
SECTION 1. Certificates. Every stockholder shall be entitled to a
-------------
certificate or certificates of stock of the Company in a form prescribed by the
Board of Directors, duly numbered and sealed with the corporate seal of the
Company, and setting forth the number and kind of shares represented thereby;
provided however, that the Board of Directors shall have the power to provide
for uncertificated shares of any class or series of stock or any part thereof.
The certificates shall be signed by Chairman of the Board, the President or a
Vice President and by the Treasurer or the Secretary. The Board of Directors
may also appoint one or more Transfer Agents and/or Registrars for its stock of
any class and may require stock certificates to be countersigned and/or
registered by one or more of such Transfer Agents and/or Registrars.
15
<PAGE>
SECTION 2. Transfer of Shares. The Board of Directors shall have
-------------------
power and authority to make all rules and regulations concerning the issue,
transfer, and registration of certificates of stock.
SECTION 3. Record Dates. The Board of Directors shall have the
-------------
authority to fix in advance a date, not exceeding ninety (90) days preceding any
meeting of stockholders, or the date for payment of any dividend, or the date
for the allotment of rights, or the date when any change, conversion, or
exchange of capital stock shall go into effect (each a "stockholder event"), as
a record date, in connection with such stockholder event, and in such case only
such stockholders as shall be stockholders of record on the date so fixed shall
be entitled to participate in such stockholder event, notwithstanding any
transfer of any stock on the books of the Company after any such record date.
SECTION 4. Mutilated, Lost or Destroyed Certificates.
-----------------------------------------
The holder of any certificate representing shares of stock of the Company shall
immediately notify the Company of any mutilation, loss or destruction thereof,
and the Board of Directors may, in its discretion, cause one or more new
certificates, for the same number of shares in the aggregate, to be issued to
such holder upon the surrender of the mutilated certificate, or in case of loss
or destruction of the certificate, upon satisfactory proof of such loss or
destruction
16
<PAGE>
and the deposit of indemnity by way of bond or otherwise, in such form and
amount and with such sureties or security as the Board of Directors may require
to indemnify the Company against loss or liability by reason of the issuance of
such new certificate or certificates, and the failure of such holder to comply
with such requirements shall constitute a waiver by such holder of any right to
receive such new certificate or certificates.
ARTICLE VI
DIVIDENDS AND FINANCE
SECTION 1. Dividends. Subject to the provisions of the Articles, the
----------
Board of Directors may, in its discretion, declare what, if any, dividends shall
be paid upon the stock of the Company. Except as otherwise provided by the
Articles, dividends shall be payable upon such dates as the Board of Directors
may designate. Before payment of any dividend there may be set aside out of any
funds of the Company available for dividends such sum or sums as the Directors,
in their absolute discretion, think proper as a reserve fund to meet
contingencies, for equalizing dividends, or for repairing or maintaining any
property of the Company, or for such other purposes as the Directors shall think
conducive to the interests of the Company, and the Directors may abolish any
such reserve in the manner in which it is created.
17
<PAGE>
SECTION 2. Checks, Drafts, Etc. Unless otherwise provided by
--------------------
resolution of the Board of Directors, all checks, drafts, or orders for the
payment of money, notes, and other evidences of indebtedness, issued in the name
of the Company, shall be signed by the Treasurer or an Assistant Treasurer and
countersigned by the President or a Vice President.
SECTION 3. Fiscal Year. The fiscal year of the Company shall be the
------------
calendar year, unless otherwise provided by the Board of Directors.
ARTICLE VII
SUNDRY PROVISIONS
SECTION 1. Seal. The Corporate Seal of the Company shall contain
-----
within a circle the words "Duquesne Light Company", and in an inner circle the
word "SEAL".
SECTION 2. Inspection of Books and Records. The Board of Directors
--------------------------------
may determine whether and, if allowed, when and under what conditions and
regulations, the books and records of the Company shall be open to the
inspection of stockholders, and the rights of stockholders in this respect are
and shall be limited accordingly, except as otherwise provided by statute. No
stockholder has the right to inspect any book or record or receive any statement
for an improper purpose.
18
<PAGE>
SECTION 3. Bonds. The Board of Directors may require any officers,
------
agents, or employees of the Company to give a bond to the Company, conditioned
upon the faithful discharge of their duties, with one or more sureties and in
such amount as may be satisfactory to the Board of Directors.
SECTION 4. Voting Upon Stock in Other Corporations. Any stock in
----------------------------------------
other corporations, which may be held by the Company, may be represented and
voted at any meeting of stockholders of such other corporations by the Chairman
of the Board, the President or a Vice President of the Company or by proxy
executed in the name of the Company by the Chairman of the Board, the President
or a Vice President.
SECTION 5. Amendments. Except as otherwise provided by statute, the
-----------
holders of the Common Stock shall have the power to adopt, amend and repeal the
By-Laws of the Company by vote at any properly held meeting or by written
consent. The Board of Directors may also adopt, amend and repeal the By-Laws
with respect to those matters which are not, by statute, reserved exclusively to
the stockholders, subject always to the power of the stockholders to change such
action. In the case of a meeting of stockholders, written notice shall be given
to each stockholder entitled to vote that the purpose, or one of the purposes,
of the meeting is to consider the adoption, amendment or repeal of the By-Laws,
and there shall be included in, or
19
<PAGE>
enclosed with, the notice a copy of the proposed amendment or a summary of the
changes to be effected thereby. No such notice is required where stockholders
act by written consent.
SECTION 6. Participation in Meeting by Telephone. One or more
--------------------------------------
Directors may participate in a meeting of the Board of Directors or a committee
of the Board of Directors by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can communicate with each other.
SECTION 7. Informal Action by Directors or Committees.
-------------------------------------------
Any action which may be taken at a meeting of the Board of Directors or a
committee of the Board of Directors may be taken without a meeting if a consent
or consents in writing setting forth the action so taken shall be signed by all
of the Directors or the members of the committee and shall be filed with the
Secretary of the Company.
(DLCBYLAWS)
20
<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,
Six Months Ended -----------------------
June 30, 1999 1998 1997 1996 1995 1994
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on long-term debt $ 36,551 $ 75,810 $ 81,592 $ 82,505 $ 89,139 $ 94,646
Other interest 656 1,290 752 1,632 2,599 1,095
Monthly Income Preferred Securities dividend requirements 6,281 12,562 12,562 7,921 - -
Amortization of debt discount, premium and expense - net 1,298 5,266 5,828 5,973 6,252 6,381
Portion of lease payments representing an interest factor 23,677 44,146 44,208 44,357 44,386 44,839
-------- -------- -------- -------- -------- --------
Total Fixed Charges $ 68,463 $139,074 $144,942 $142,388 $142,376 $146,961
-------- -------- -------- -------- -------- --------
EARNINGS:
Income from continuing operations $ 64,444 $148,548 $141,820 $149,860 $151,070 $147,449
Income taxes 41,624* 74,912* 73,838* 83,008* 92,894* 84,191*
Fixed charges as above 68,463 139,074 144,943 142,388 142,376 146,961
-------- -------- -------- -------- -------- --------
Total Earnings $174,531 $362,534 $360,601 $375,256 $386,340 $378,601
-------- -------- -------- -------- -------- --------
RATIO OF EARNINGS TO FIXED CHARGES 2.55 2.61 2.49 2.64 2.71 2.58
======== ======== ======== ======== ======== ========
</TABLE>
Duquesne's share of the fixed charges of an unaffiliated coal supplier,
which amounted to approximately $1.2 million for the six months ended June 30,
1999, has been excluded from the ratio.
*Earnings related to income taxes reflect a $2.0 million decrease for the six
months ended June 30, 1999, and a $12 million, $17 million, $12 million, $13.5
million and $13.5 million decrease for the twelve months ended December 31,
1998, 1997, 1996, 1995 and 1994, respectively, due to a financial statement
reclassification related to Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. The ratio of earnings to fixed charges,
absent this reclassification, equals 2.58 for the six months ended June 30,
1999, and 2.69, 2.61, 2.72, 2.81 and 2.67 for the twelve months ended December
31, 1998, 1997, 1996, 1995 and 1994, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,455,491
<OTHER-PROPERTY-AND-INVEST> 189,265
<TOTAL-CURRENT-ASSETS> 201,080
<TOTAL-DEFERRED-CHARGES> 2,171,389
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,017,225
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 769,153
<RETAINED-EARNINGS> 15,440
<TOTAL-COMMON-STOCKHOLDERS-EQ> 784,593
4,500
224,440<F1>
<LONG-TERM-DEBT-NET> 1,060,469
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 19,500
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 175,000
0
<CAPITAL-LEASE-OBLIGATIONS> 14,992
<LEASES-CURRENT> 40,016
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,693,715
<TOT-CAPITALIZATION-AND-LIAB> 4,017,225
<GROSS-OPERATING-REVENUE> 555,215
<INCOME-TAX-EXPENSE> 35,251
<OTHER-OPERATING-EXPENSES> 406,477
<TOTAL-OPERATING-EXPENSES> 441,728
<OPERATING-INCOME-LOSS> 113,487
<OTHER-INCOME-NET> 14,392
<INCOME-BEFORE-INTEREST-EXPEN> 127,879
<TOTAL-INTEREST-EXPENSE> 63,435<F2>
<NET-INCOME> 64,444
1,980
<EARNINGS-AVAILABLE-FOR-COMM> 62,464
<COMMON-STOCK-DIVIDENDS> 66,254
<TOTAL-INTEREST-ON-BONDS> 37,849
<CASH-FLOW-OPERATIONS> 136,857
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes $13,832 of Preference Stock.
<F2>Includes $6,281 of Monthly Income Preferred Securities dividend requirements.
</FN>
</TABLE>
