<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____________ to ____________
Commission File Number
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1-10290
DQE, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1598483
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Cherrington Corporate Center, Suite 100
500 Cherrington Parkway, Coraopolis, Pennsylvania 15108-3184
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (412) 262-4700
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Aggregate market value of DQE Common Stock held by non-affiliates as of March
10, 2000 was $3,311,350,261.
There were 70,133,071 shares of DQE Common Stock outstanding as of March 10,
2000.
[X] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
<PAGE>
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Registrant Title of each class on which registered
- ----------- -------------------------------------- --------------------------
<S> <C> <C>
DQE Common Stock (no par value) New York Stock Exchange
Philadelphia Stock
Exchange
Chicago Stock Exchange
8 3/8% Public Income Notes due 2039 New York Stock Exchange
(issued by DQE Capital Corporation)
Guaranties of DQE Capital New York Stock Exchange
Corporation's
Public Income Notes
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Registrant Title of each class
- ----------- ---------------------------------------
<S> <C>
DQE Preferred Stock, Series A (Convertible)
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Part of Form 10-K
Into Which Document
Description Is Incorporated
- --------------------------------------- ----------------------
<S> <C>
DQE Annual Report to Shareholders Parts I and II
for the year ended December 31, 1999
Proxy Statement for DQE Annual Meeting Part III
of Shareholders to be held May 25, 2000
</TABLE>
<PAGE>
Table of Contents
Page
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GLOSSARY
PART I
ITEM 1. BUSINESS
Corporate Structure 1
Employees 2
Property, Plant and Equipment (PP&E) 2
Electric Utility Operations 2
Environmental Matters 3
Outlook 4
Other 5
Executive Officers of the Registrant 6
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 8
SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON 8
EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED FINANCIAL DATA 8
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations 9
Liquidity and Capital Resources 14
Rate Matters 16
Year 2000 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE 18
DISCLOSURES ABOUT MARKET RISK
ITEM 8. REPORT OF INDEPENDENT AUDITORS; 18
CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH 40
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Page
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF 40
THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN 40
BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 40
TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT 40
SCHEDULES AND REPORTS ON FORM 8-K
SCHEDULE II
SIGNATURES
<PAGE>
GLOSSARY OF TERMS
Competitive Transition Charge (CTC) -- During the electric utility restructuring
from the traditional Pennsylvania regulatory framework to customer choice,
electric utilities have the opportunity to recover transition costs from
customers through a per kilowatt-hour charge.
Customer Choice -- The Pennsylvania Electricity Generation Customer Choice and
Competition Act (see "Rate Matters" on page 16) gives consumers the right to
contract for electricity at market prices from PUC-approved electric generation
suppliers.
Decommissioning Costs -- Decommissioning costs are expenses to be incurred in
connection with the entombment, decontamination, dismantling, removal and
disposal of structures, systems and components of a power plant that has
permanently ceased the production of electric energy.
Deferred Energy Costs -- In conjunction with the Energy Cost Rate Adjustment
Clause, we historically recorded Duquesne Light's deferred energy costs to
offset differences between actual energy costs and the level of energy costs
recovered from our rate-regulated electric utility customers.
Divestiture -- The selling of major assets. We anticipate completing the
divestiture of our generation assets through the sale to Orion Power Holdings,
Inc.
Electronic Commerce -- The transaction of business using electronic media, such
as the Internet.
Energy Cost Rate Adjustment Clause (ECR) -- Until May 29, 1998, we had
historically recovered, through the ECR, Duquesne Light's cost of nuclear fuel,
fossil fuel and purchased power costs, when such amounts were not included in
base rates.
Federal Energy Regulatory Commission (FERC) -- The FERC is an independent five-
member commission within the United States Department of Energy. Among its many
responsibilities, the FERC sets rates and charges for the wholesale
transportation and sale of electricity.
Pennsylvania Public Utility Commission (PUC) -- The governmental body that
regulates all utilities (electric, gas, telephone, water, etc.) that do
business in Pennsylvania.
Price to Compare -- The PUC-determined market price of electric generation for
each utility during the CTC collection period. Customers will experience savings
if they can purchase power from an alternative electric generation supplier at a
lower price than the amount determined by the PUC.
Provider of Last Resort -- Under Pennsylvania's Customer Choice Act, the local
distribution utility is required to provide electricity for customers who cannot
or do not choose an alternative generation supplier, or whose supplier fails to
deliver. (See "Rate Matters" on page 16.)
Regulatory Assets -- Pennsylvania ratemaking practices grant regulated utilities
exclusive geographic franchises in exchange for the obligation to serve all
customers. Under this system, certain prudently-incurred costs are approved by
the PUC for deferral and future recovery with a return from customers. These
deferred costs are capitalized as regulatory assets by the regulated utility.
Restructuring Plan -- Our plan, approved by the PUC, for restructuring and
recovery of Duquesne Light's transition costs under Pennsylvania's Customer
Choice Act.
Transition Costs -- Transition costs are the net present value of a utility's
known or measurable costs related to electric generation that are recoverable
through the CTC.
Transmission and Distribution -- These terms have a special meaning in the
electric utility industry. Transmission is the flow of electricity from
generating stations over high voltage lines to substations where voltage is
reduced. Distribution is the flow of electricity over lower voltage facilities
to the ultimate customer (businesses and homes).
Watt -- A watt is the rate at which electricity is generated or consumed. A
kilowatt is equal to 1,000 watts. A kilowatt-hour (KWH) is a measure of the
quantity of electricity generated or consumed in one hour by one kilowatt of
power. A megawatt (MW) is 1,000 kilowatts or one million watts.
<PAGE>
PART I
ITEM 1. BUSINESS.
CORPORATE STRUCTURE
Part I of this Annual Report on Form 10-K should be read in conjunction with
our audited consolidated financial statements, which are set forth on pages 18
through 39 of this Report. Explanations of certain financial and operating terms
used in this Report are set forth in a GLOSSARY at the front of this Report.
DQE, Inc. is a multi-utility delivery and services company. Our subsidiaries
are Duquesne Light Company; AquaSource, Inc.; DQE Capital Corporation; DQE
Energy Services, Inc.; DQE Enterprises, Inc. (formerly Duquesne Enterprises,
Inc.); DQE Financial Corp. (formerly Montauk, Inc.); and DQE Systems, Inc.
(formerly DQEnergy Partners, Inc.).
Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the supply, transmission, distribution and sale of electric energy.
On December 3, 1999, Duquesne Light completed a power station asset exchange
with FirstEnergy Corp. This was the first phase of our Pennsylvania Public
Utility Commission (PUC)-approved plan to divest our generation assets. We
expect to complete this divestiture through the pending sale of our remaining
generation assets to Orion Power Holdings, Inc. Final sale agreements must be
approved by various regulatory agencies, including the PUC. We expect the sale
to close in the second quarter of 2000. After that time, we expect to meet our
energy supply obligations through a provider of last resort service agreement
with Orion. (See "Restructuring Plan" discussion on page 17.)
AquaSource, our second largest operating subsidiary, is a water resource
management company that acquires, develops and manages water and wastewater
utilities, bottled water operations and complementary businesses.
Our expanded business lines engage in a wide range of initiatives, including:
the distribution of propane; the production of landfill gas and synthetic fuels;
investments in electronic commerce, energy-related technology and communications
systems; energy facility development and operation; and independent power
production. DQE Capital provides financing for DQE and various affiliates.
Service Areas
Duquesne Light's electric utility operations provide service to approximately
580,000 direct customers in southwestern Pennsylvania (including in the City of
Pittsburgh), a territory of approximately 800 square miles. We have also
historically sold electricity to other utilities, and will continue to do so
until the generation asset sale is complete. (See "Restructuring Plan"
discussion on page 17.)
AquaSource's water operations currently provide service to approximately
430,000 water and wastewater customer connections in 18 states.
Our expanded business lines have operations and investments in several states
and Canada.
Regulation
DQE and Duquesne Light are subject to the accounting and reporting
requirements of the Securities and Exchange Commission (SEC). In addition,
Duquesne Light'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 our restructuring
plan under the Customer Choice Act (see "Rate Matters" on page 16), the
electricity supply segment of our 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). Pursuant to the PUC's
final restructuring order, our generation-related regulatory assets are being
recovered through a competitive transition charge (CTC) collected in connection
with providing transmission and distribution services, and these assets have
been reclassified accordingly. The balance of transition costs will be adjusted
by receipt of the proceeds from the pending generation asset sale. 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, 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 16.)
On December 15, 1999, the FERC issued its Order No. 2000, which calls on
transmission-owning utilities such as Duquesne Light to voluntarily join
regional transmission organizations. The goal of the order is to put
transmission facilities in a region under common control in an effort to reduce
costs. The order requires utilities to file a proposal for a regional
transmission organization, a description of efforts to join one, or reasons for
not joining one, by October 15, 2000. We are currently studying Order No. 2000,
and have not yet determined our response.
AquaSource's water utility operations are subject to regulation by the utility
regulatory bodies in their respective states. In the second quarter of 2000, we
anticipate filing a consolidated rate case in Texas, AquaSource's largest state.
1
<PAGE>
Business Segments
For the purposes of complying with SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS No. 131), we are required to
disclose information about our business segments separately. This information is
set forth in "Results of Operations" on page 9 and in "Business Segments and
Related Information," Note O to our consolidated financial statements on page
37.
EMPLOYEES
At December 31, 1999, DQE and its subsidiaries had 3,578 employees. This
reflects a reduction by approximately 1,100 employees through transfers to
FirstEnergy following the power station exchange and early retirement under the
divestiture-related program discussed below. In connection with the pending
generation asset sale to Orion, we anticipate a further reduction by
approximately 400 employees. Duquesne Light is party to a labor contract
expiring in September 2001 with the International Brotherhood of Electrical
Workers (IBEW), which represents the majority of Duquesne Light's employees. The
contract provides, among other things, employment security, income protection
and, in September 2000, a 3 percent wage increase. Duquesne Light and the IBEW
have agreed on a package of additional benefits and protections for union
employees affected by the divestiture of generation assets.
In connection with the power station exchange with FirstEnergy and the pending
generation asset sale to Orion, Duquesne Light developed early retirement
programs and enhanced available separation packages for eligible IBEW and
management employees. Duquesne Light expects to recover related costs through
the sale proceeds.
PROPERTY, PLANT AND EQUIPMENT (PP&E)
Investment in PP&E and Accumulated Depreciation
Our total investment in PP&E and the related accumulated depreciation balances
for major classes of property at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
PP&E and Related Accumulated Depreciation
at December 31,
- -------------------------------------------------------------------------------
(Millions of Dollars)
1999
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Accumulated Net
Investment Depreciation Investment
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric delivery $1,913.1 $ 726.8 $1,186.3
Electric production 2,013.0 1,764.2 248.8
Water distribution 185.5 10.2 175.3
Capital leases 26.3 7.6 18.7
Other 231.4 32.4 199.0
- ----------------------------------------------------------------------------------------------------
Total $4,369.3 $2,541.2 $1,828.1
====================================================================================================
<CAPTION>
1998
---------------------------------------------------------------------
Accumulated Net
Investment Depreciation Investment
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric delivery $1,858.4 $ 684.6 $1,173.8
Electric production 2,600.9 2,393.7 207.2
Water distribution 91.9 1.7 90.2
Capital leases 123.4 63.6 59.8
Other 206.1 22.1 184.0
- ----------------------------------------------------------------------------------------------------
Total $4,880.7 $3,165.7 $1,715.0
====================================================================================================
</TABLE>
Electric delivery PP&E includes: (1) high voltage transmission wires used in
delivering electricity from generating stations to substations; (2) substations
and transformers; (3) lower voltage distribution wires used in delivering
electricity to customers; (4) related poles and equipment; and (5) internal
telecommunication equipment, vehicles and office equipment. Electric production
PP&E includes fossil and, in 1998, nuclear generating stations. Electric
production accumulated depreciation reflects the write-down of production plant
values to the PUC-determined market value. (See "Restructuring Plan" discussion
on page 17.) Water distribution PP&E includes water systems and water treatment
facilities. Our capital leases are primarily associated with leased nuclear fuel
in 1998 and other electric plant. The Other PP&E is comprised of various
buildings and land, E-Fuel(R) facilities, landfill gas recovery equipment and
property related to our other expanded business lines.
Electric Utility Operations
We anticipate completing the divestiture of generation assets through the sale
to Orion in the second quarter of 2000. Certain obligations related to the
divested assets have been transferred to FirstEnergy, and others will be
transferred to Orion.
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Duquesne Light's fossil plants operated at an availability factor of 86
percent in 1999 and 80 percent in 1998. Duquesne Light's nuclear plants (which
all were acquired by FirstEnergy in December 1999) operated at an availability
factor of 84 percent in 1999 and 52 percent in 1998. The timing and duration of
scheduled maintenance and refueling outages, as well as the duration of forced
outages, affect the availability of power stations. Duquesne Light normally
experiences its peak demand in the summer. The 1999 customer system peak demand
of 2,756 megawatts (MW) occurred on July 6, 1999.
Fossil Fuel
Duquesne Light believes that sufficient coal for its coal-fired generating
units will be available from various sources to satisfy its requirements through
the closing of the pending generation asset sale. During 1999, approximately 2.0
million tons of coal were consumed at Duquesne Light's two wholly owned coal-
fired stations, Cheswick Power Station (Cheswick) and Elrama Power Station
(Elrama).
Duquesne Light owns Warwick Mine, an underground mine located in southwestern
Pennsylvania. The current estimated liability for mine closing, including final
site reclamation, mine water treatment and certain labor liabilities, is
$49.3 million. Duquesne Light has recorded a liability for this amount on the
consolidated balance sheet.
During 1999, 52 percent of Duquesne Light's coal supplies were provided by
contracts, including Warwick Mine, with the remainder satisfied through
purchases on the spot market.
ENVIRONMENTAL MATTERS
Various federal and state authorities regulate DQE and our subsidiaries with
respect to air and water quality and other environmental matters. Environmental
compliance obligations with respect to the plants transferred to FirstEnergy in
the power station exchange have been assumed by FirstEnergy. In addition,
FirstEnergy has contractually retained responsibility for operating the plants
we acquired in the exchange, including the day-to-day environmental compliance.
Upon completion of the generation asset sale, Orion will assume the
environmental obligations related to all of the plants sold, both those
originally owned by Duquesne Light and those acquired in the power station
exchange. The following discussion of air quality and acid rain compliance
primarily addresses environmental matters at the plants we both own and operate:
Cheswick, Elrama, Brunot Island and Phillips.
As required by Title V of the Clean Air Act Amendments (Clean Air Act), we
filed comprehensive air operating permit applications for Cheswick, Elrama,
Brunot Island and Phillips in 1995. Approval is still pending for these
applications. We filed our Title IV Phase II Clean Air Act compliance plan with
the PUC on December 27, 1995. We also filed Title IV Phase II permit
applications for oxides of nitrogen (NO\x\) emissions from Cheswick, Elrama and
Phillips with the Allegheny County Health Department and the Pennsylvania
Department of Environmental Protection (DEP) on December 23, 1997. On December
30, 1999, we amended the Cheswick and Elrama applications, and filed a Phase II
NO\x\ Averaging Plan. Approval also is pending for these applications.
Acid Rain Program Requirements. We believe we have satisfied all of the Phase
I Acid Rain Program requirements of the Clean Air Act. However, the Phase II
Acid Rain Program requires significant additional reductions of sulfur dioxide
(SO\2\) through the end of 2000. We currently own and operate 611 MW of coal
capacity equipped with SO\2\ emission-reducing equipment.
In 1999 we installed gas reburn NO\x\ reduction technology at Elrama Units 1,
2 and 3, and installed new, improved low NO\x\ burner technology at Elrama Unit
4. In 1998, Duquesne Light installed low-cost burner modifications to existing
low NO\x\ burner technology, and a new flue gas conditioning system, to maximize
the effects of combustion-related controls at Cheswick.
Ozone Reduction Requirements. In addition to the Phase II Acid Rain Program
requirements, we are responsible for NO\x\ reduction requirements to meet the
current Ozone Ambient Air Quality Standards under Title I of the Clean Air Act.
Compliance with the current ozone standard is based on pre-1997 ozone data,
using a one-hour average value approach. During the 1998 summer ozone season,
the western Pennsylvania "area" achieved compliance with the one-hour ozone
standard. Duquesne Light believes it will continue its current low NO\x\
emission levels under the maintenance plan being established by the DEP.
Duquesne Light further believes it will be able to meet any additional NO\x\
reduction levels specified under the maintenance plan, through reductions
required in 1999 under the Ozone Transport Commission control program described
below.
In September 1998, the Environmental Protection Agency (EPA) issued additional
ozone-related NO\x\ reduction requirements under Section 110 of the Clean Air
Act, which may affect our power plants and supersede reduction levels specified
for 2003 by the Ozone Transport Commission control program. Under this program,
the EPA requires states in the northeast and midwest to amend their
implementation plans to impose more stringent NO\x\ allowance caps on emissions
during the May to September control period. In response to a Federal court stay
of this program, the DEP has not finalized proposed implementation regulations,
but has indicated it will proceed with a similar control program under Section
126 of the Clean Air Act. Until the Federal stay is resolved and regulations are
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<PAGE>
implemented, the costs of compliance cannot be determined. However, we
anticipate that compliance would require additional capital and operational
costs beyond those already estimated through 2000. Such compliance costs will be
the responsibility of Orion following the generation asset sale.
Other. On November 3, 1999, the EPA and the Department of Justice filed suit
against seven electric utility companies, including FirstEnergy. The suit
alleges that the companies made illegal modifications to certain power plants,
including Sammis Unit 7. FirstEnergy acquired Duquesne Light's interest in
Sammis in the power station exchange. The ultimate outcome of this suit, and any
potential impact it may have on Duquesne, cannot be determined at this time.
In 1992, the DEP issued Residual Waste Management Regulations governing the
generation and management of non-hazardous residual waste, such as coal ash. We
have assessed our residual waste management sites, and the DEP has approved our
compliance strategies. We incurred capital costs of $0.5 million in 1999 to
comply with these DEP regulations. We expect the capital cost of compliance to
be approximately $5.0 million over the next two years with respect to sites we
will continue to own after the generation asset sale.
Under the Emergency Planning and Community Right-to-Know Act of 1986, certain
manufacturing and industrial companies are required to file annual toxic release
inventory reports. The first submission by coal- and oil-fired electric utility
generating stations was made on July 1, 1999, to report on emissions and
discharges for 1998. Toxic release inventory reporting does not involve emission
reductions. We do not anticipate any material impact resulting from this
requirement.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 and the Superfund Amendments and Reauthorization Act of 1986 established a
variety of informational and environmental action programs. Through our
investment in GSF Energy (GSF), we indirectly became involved in three hazardous
waste sites. GSF was a minor contributor of materials to each site, and other
solvent potentially responsible parties are involved. GSF believes that
available defenses, along with its overall limited involvement, will limit any
potential liability it may have for clean-up costs. Additionally, as part of
the GSF investment we are indemnified for any costs that GSF may incur related
to these sites by at least one financially responsible party. Accordingly, we
believe that these matters will not have a material adverse effect on our
financial position, results of operations or cash flows.
AquaSource's water and water-related operations are subject to the Federal
Safe Drinking Water Act, which provides for uniform minimum national water
quality standards, as well as governmental authority to specify treatment
processes to be used for drinking water. In the fourth quarter of 1999,
AquaSource met the water quality reporting requirement under the act by
providing timely reports to its customers. AquaSource's operations are also
subject to the Federal Clean Water Act, which regulates the discharge of
pollutants into waterways. In connection with its acquisition strategy,
AquaSource is aware of various compliance issues at its water and wastewater
facilities, and is communicating and working closely with appropriate regulators
to correct those issues in a timely manner. We do not believe that any of these
compliance issues will have a material effect on DQE's financial position,
results of operations or cash flows.
We are involved in various other environmental matters. We believe that such
matters, in total, will not have a materially adverse effect on our financial
position, results of operations or cash flows.
OUTLOOK
As discussed previously, we expect to close on the sale of our generation
assets to Orion during the second quarter of 2000. However, if the closing is
delayed we will experience electricity market price risks during the volatile
summer months. In that event, we would evaluate entering into advance purchase
power contracts to mitigate the risk of price spikes similar to those seen
during the summer of 1999. If the closing is delayed beyond September 24, 2000,
Orion could, under certain circumstances, terminate the transaction. In that
event, while exploring other divestiture options, we would continue to operate
the generating plants and would continue to collect CTC revenues at current
levels.
Prospectively, assuming that the sale to Orion closes as expected, the
electricity supply business will be a much smaller part of DQE than it has been
historically. Among the challenges we will face is changing the role of our
administrative infrastructure. While the number of electricity customers that
we serve will not change, our margins from these customers will decline to
reflect the fact that we are providing only the delivery service and not the
electricity itself. Our reduced electricity margins will necessitate a lower
level of support costs at the electricity business. We expect to retrain and
redeploy some of our administrative employees, but we must also reduce our
overall administrative costs to maintain profitability.
Also related to the generation divestiture, we will be changing the capital
structure of Duquesne Light. With the proceeds from the sale, we expect to
retire higher-cost series of outstanding debt and to reduce the level of equity
accordingly to create a capital structure appropriate for an electricity
delivery company.
As we continue our evolution into a multi-utility delivery company, we expect
to continue our aggregation strategy in the water distribution and propane
delivery businesses. Efforts during the beginning of 2000 will focus on
continuing to increase operating efficiencies, clustering investments in
4
<PAGE>
geographic regions and increasing returns on existing investments. Once
operating efficiencies have been realized, we expect to proceed with a
disciplined approach to growing these strategic businesses.
In addition to service-oriented delivery companies and an efficient support
infrastructure, another integral component of our multi-utility vision is the
use of electronic commerce channels to more efficiently offer products and
services to our growing customer base. We expect to continue adding to our
portfolio of technology-based investments, including those in electronic
commerce. We expect some of the companies in our current technology-based
portfolio of investments will consider additional capital raising activities,
including potential public stock offerings, during 2000 and beyond. Related to
such opportunities for market valuation of our investments, we see the potential
for substantial increases in the value of some of our investments. However, as
is the case with most early-stage companies, there is also the risk that the
companies we have invested in will not continue to develop and will not produce
acceptable returns. We have performed extensive due diligence and structured
these investments to mitigate these risks.
In summary, we will continue to focus on targeted investment opportunities
that add incremental value to our shareholders. We will maintain a disciplined
approach to evaluating opportunities to expand our distribution businesses, and
offer new products and services to our existing customer base. We face
considerable challenges in completing the transformation of our business from a
fully integrated electric utility into a multi-utility delivery company of the
future. We expect that with continued successful negotiation of these
challenges will come the opportunity for continued improvement in shareholder
value.
OTHER
Retirement Plan Measurement Assumptions
The discount rate used to determine the projected benefit obligation on our
retirement plans at December 31, 1999, increased to 7.5 percent. The effect of
this change on our retirement plan obligations is reflected in the amounts shown
in "Employee Benefits," Note N to the consolidated financial statements, on page
34. The resulting change in related expenses for subsequent years is not
expected to be material.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. We are
evaluating the impact on our financial statements and disclosures.
Market Risk
Market risk represents the risk of financial loss that may impact our
consolidated financial position, results of operations or cash flows due to
adverse changes in market prices and rates.
We manage our interest rate risk by balancing our exposure between fixed and
variable rates while attempting to minimize our interest costs. Currently, our
variable interest rate debt is approximately 25 percent of long-term borrowings.
This variable rate debt is low-cost, tax-exempt debt. We also manage our
interest rate risk by retiring and issuing debt from time to time and by
maintaining a balance of short-term, medium-term and long-term debt. A 10
percent increase in interest rates would have affected our variable rate debt
obligations by increasing interest expense by approximately $1.6 million for the
years ended December 31, 1999, 1998 and 1997. A 10 percent reduction in
interest rates would have increased the market value of our fixed rate debt by
approximately $32.5 million and $22.8 million as of December 31, 1999 and 1998.
Such changes would not have had a significant near-term effect on our future
earnings or cash flows.
________________________________
Except for historical information contained herein, the matters discussed in
this report are forward-looking statements that involve risks and uncertainties
including, but not limited to: the timing of the anticipated transfer of
generation assets to Orion and receipt of sale proceeds; the nature of final
regulatory approvals regarding the generation asset sale; the final outcome of
AYE's merger-related litigation; economic and business conditions with respect
to Internet and energy technology companies; economic, competitive, governmental
and technological factors affecting operations, markets, products, services and
prices; and other factors discussed in our filings with the Securities and
Exchange Commission.
5
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages as of March 10, 2000, and positions during
the past five years of our executive officers. Additional information is set
forth on page 67 of the DQE Annual Report to Shareholders for the year ended
December 31, 1999. The information is incorporated here by reference.
<TABLE>
<CAPTION>
Name Age Office
<S> <C> <C>
David D. Marshall 47 Chairman, President and Chief Executive Officer since
June 1999. President and Chief Executive Officer from
August 1996 to June 1999. Executive Vice President
from February 1995 to August 1996.
Morgan K. O'Brien 40 Executive Vice President - Corporate Development since
January 2000. Vice President - Corporate Development
from July 1999 to January 2000. Vice President from
October 1997 to July 1999. Controller from October
1995 to July 1999. Treasurer from November 1998 to
July 1999. Assistant Controller from December 1993
to October 1995.
Victor A. Roque 53 Executive Vice President since November 1998 and
General Counsel since November 1994. Vice President
from April 1995 to November 1998.
Gary L. Schwass 54 Executive Vice President and Chief Financial Officer
since February 1995. Vice President from January 1990
to February 1995. Treasurer from July 1989 to September 1996.
William J. DeLeo 49 Vice President and Chief Administrative Officer since
November 1998. Vice President - Corporate Services at
Duquesne Light since November 1998. Vice President -
Marketing and Corporate Performance at Duquesne
Light from April 1995 to November 1998.
Jack E. Saxer, Jr. 56 Vice President since April 1996. Assistant Vice President -
Administration of Duquesne Light Company from
January 1995 to April 1996.
James E. Wilson 34 Controller since July 1999. Assistant Controller from
1996 to July 1999. Controller for subsidiaries from
1995 to 1998.
</TABLE>
6
<PAGE>
ITEM 2. PROPERTIES.
Our principal properties consist of Duquesne Light's electric generating
stations, transmission and distribution facilities and supplemental properties
and appurtenances, comprising as a whole an integrated electric utility system,
located substantially in Allegheny and Beaver counties in southwestern
Pennsylvania. Substantially all of the electric utility properties are subject
to a mortgage lien of an Indenture of Mortgage and Deed of Trust dated as of
April 1, 1992. Certain pollution control facilities are subject to an
additional mortgage lien.
On December 3, 1999, Duquesne Light completed the power station exchange with
FirstEnergy Corporation, acquiring ownership of three fossil-powered plants
(located in Avon Lake and Niles, Ohio, and in New Castle, Pennsylvania) in
exchange for its ownership interests in two nuclear-powered plants (located in
Beaver Valley, Pennsylvania and Perry, Ohio) and three fossil-powered plants
(located in Bruce Mansfield, Pennsylvania and Sammis and Eastlake, Ohio).
Duquesne Light plans to complete the divestiture of its generation assets
(including the three newly-acquired plants) through the pending sale of
generation assets to Orion Power Holdings Inc. These properties have been used
in the electricity supply business segment.
<TABLE>
<CAPTION>
Share of Net Net Plant Output
Demonstrated Capability Year Ended
(Megawatts) December 31, 1999
Name and Location Type Summer Winter (Megawatt-hours)
- --------------------------- --------- ----------- -------------- -------------------
<S> <C> <C> <C> <C>
Cheswick Coal 562 570 3,031,366
Springdale, PA
Elrama Coal 474 487 1,752,001
Elrama, PA
Sammis Unit 7 (1) Coal 187 187 1,071,148
Stratton, OH
Eastlake Unit 5 (1) Coal 186 186 833,510
Eastlake, OH
Beaver Valley Unit 1 (1) Nuclear 385 385 2,657,210
Shippingport, PA
Beaver Valley Unit 2 (1) Nuclear 113 113 755,862
Shippingport, PA
Perry Unit 1 (1) Nuclear 161 164 1,141,338
North Perry, OH
Bruce Mansfield Unit 1 (1) Coal 228 228 1,004,164
Shippingport, PA
Bruce Mansfield Unit 2 (1) Coal 62 62 315,458
Shippingport, PA
Bruce Mansfield Unit 3 (1) Coal 110 110 522,458
Shippingport, PA
Brunot Island Oil 189 234 18,817
Brunot Island, PA
Avon Lake (2) Coal 731 739 301,109
Avon Lake, OH
New Castle (2) Coal 339 338 122,400
New Castle, PA
Niles (2) Coal 246 246 115,069
Niles, OH
----------- -------------- -------------------
Total 13,641,910
===================
Share of Capacity 1/1/99 - 2,657 2,726
12/3/99
=========== ==============
Share of Capacity 12/4/99 - 2,541 2,614
12/31/99
=========== ==============
</TABLE>
(1) Amounts represent Duquesne Light's share of the unit which was owned by
Duquesne Light in common with one or more other electric utilities (or, in
the case of Beaver Valley Unit 2, leased by Duquesne Light). Plant output
shown is from January 1, 1999 through December 3, 1999, the date of the
power station exchange. These plants were transferred to FirstEnergy in the
power station exchange.
(2) Plant output shown is from December 4, 1999 through December 31, 1999.
These plants were acquired from FirstEnergy in the power station exchange.
7
<PAGE>
Duquesne Light owns 17 transmission substations (including two acquired in the
power station exchange) and 557 distribution substations. Duquesne Light has 67
circuit-miles of transmission lines, comprised of 345,000, 138,000 and 69,000
volt lines. Street lighting and distribution circuits of 23,000 volts and less
include approximately 50,000 miles of lines and cable. These properties are
used in the electricity delivery business segment.
Duquesne Light owns, but does not operate, the Warwick Mine, including 4,849
acres owned in fee of unmined coal lands and mining rights, located on the
Monongahela River in Greene County, Pennsylvania. This property has been used
in the electricity supply business segment.
We own Duquesne Light's headquarters at 411 Seventh Avenue in Pittsburgh and
six E-Fuel(R) plants located in Kentucky, North Carolina, Ohio, Pennsylvania,
South Carolina and Virginia.
AquaSource owns, in the states in which it operates, approximately 840 water
systems and approximately 340 wastewater systems. These systems are comprised of
distribution and collection lines, pump stations, treatment plants, storage
tanks, reservoirs and related facilities. Properties are adequately maintained
and units of property are replaced as and when necessary. AquaSource owns a
substantial acreage of land, the greater part of which is located in watershed
areas and used for the discharge of treated effluent, with the balance being
principally sites of pumping and treatment plants, storage reservoirs, tanks and
standpipes. These properties are used in our water distribution business
segment.
Additional information relating to properties is set forth in "Property,
Plant and Equipment," Note C to the consolidated financial statements on page 26
of this Report. The information is incorporated here by reference.
ITEM 3. LEGAL PROCEEDINGS.
Eastlake Unit 5
From September 1995 until December 1999, we and a FirstEnergy subsidiary, The
Cleveland Electric Illuminating Company, had been involved in litigation
regarding the then jointly owned Eastlake facility. Upon closing the power
station exchange, we entered into a settlement agreement (approved by the United
States District Court for the Northern District of Ohio, Eastern Division)
dismissing the litigation. (See "Power Station Exchange" discussion, on
page 17.)
Termination of the AYE Merger
On October 5, 1998, we announced the unilateral termination of the merger
agreement with Allegheny Energy, Inc. (AYE). We believe 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 us to proceed with the merger, or in the alternative seeking
an unspecified amount of money damages. On October 28, 1998, the judge ruled in
our favor regarding termination of the merger agreement. AYE appealed to the
United States Court of Appeals for the Third Circuit, who on March 11, 1999,
remanded the case to the District Court for further proceedings. Trial was held
from October 20 through 28, 1999. On December 3, 1999, the District Court ruled
that we had properly terminated the merger agreement without breach, and granted
judgment in our favor on all claims and all requests for injunctive relief. On
December 14, 1999, AYE appealed this decision to the United States Court of
Appeals for the Third Circuit. Argument was heard by the Third Circuit on
March 9, 2000, and a decision is pending. We will continue to defend ourselves
vigorously against AYE's claims. The ultimate outcome of the appeal cannot be
determined at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Information relating to the market for DQE common stock and other matters
related to our holders is set forth inside of the back cover of the DQE Annual
Report to Shareholders for the year ended December 31, 1999 and on page 34 in
Note M and page 39 in Note Q hereto. The information is incorporated here by
reference. During 1999 and 1998, DQE declared quarterly dividends on our common
stock totaling $1.54 per share and $1.46 per share, respectively. (See
"Dividends" discussion on page 9.) At February 29, 2000, there were
approximately 61,000 holders of record of our common stock.
ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for each year of the eleven-year period ended December
31, 1999, are set forth on pages 20 and 21 of the DQE Annual Report to
Shareholders for the year ended December 31, 1999. The information is
incorporated here by reference.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Overall Performance
In the second quarter of 1998, the PUC issued an order related to our plan to
recover our transition costs from electric utility customers. As a result of
the order, we recorded an extraordinary charge against earnings of $82.5
million, or $1.06 per share. The following discussion of results of operations
excludes the impact of that charge.
1999 Compared to 1998
Our basic earnings per share were $2.65 in 1999 compared to $2.52 in 1998, an
increase of 5.2 percent. Earnings available for common shareholders increased by
$4.0 million, or 2.1 percent, due to additional acquisitions at AquaSource,
gains on the disposition of certain non-strategic investments, and higher sales
of electricity. Additionally, the average shares of outstanding common stock
declined by 2.2 million, or 2.9 percent. The lower average shares outstanding
reflect the 5.7 million shares of common stock we repurchased in 1999 for
approximately $217 million.
1998 Compared to 1997
Our basic earnings per share were $2.52 in 1998 compared to $2.57 in 1997, a
decrease of 1.9 percent. Earnings available for common shareholders decreased by
$3.3 million, or 1.6 percent, due to gains recorded on the disposition of
Chester Engineers and of Exide Electronics Group stock in 1997.
Dividends
Once all dividends on our Preferred Stock, Series A (Convertible), $100
liquidation preference per share (DQE Preferred Stock), have been paid,
dividends may be paid on our common stock as permitted by law and as declared by
the board of directors. However, payments of dividends on Duquesne Light's
common stock may be restricted by Duquesne Light's obligations to holders of
preferred and preference stock pursuant to Duquesne Light's Restated Articles of
Incorporation and by obligations of Duquesne Light's subsidiaries to holders of
their preferred securities. No dividends or distributions may be made on
Duquesne Light's common stock if Duquesne Light has not paid dividends or
sinking fund obligations on its preferred or preference stock. Further, the
aggregate amount of Duquesne Light's common stock dividend payments or
distributions may not exceed certain percentages of net income if the ratio of
total common shareholder's equity to total capitalization is less than specified
percentages. Because we own all of Duquesne Light's common stock, if Duquesne
Light cannot pay common dividends, we may not be able to pay dividends on our
common stock or DQE Preferred Stock.
We have continuously paid dividends on common stock since 1953. Our annualized
dividends per share were $1.60, $1.52 and $1.44 at December 31, 1999, 1998 and
1997. During 1999, we paid a quarterly dividend of $0.38 per share on each of
January 1, April 1, July 1 and October 1. We increased the quarterly dividend
declared in the fourth quarter of 1999 from $0.38 to $0.40 per share, payable
January 1, 2000. We expect that funds generated from operations will continue
to be sufficient to pay dividends. Our need for and the availability of funds
will be influenced by, among other things: new investment opportunities; the
economic activity within our service territories; environmental legislation; the
anticipated closing of our generation asset sale to Orion; and the planned
recapitalization of Duquesne Light. (See "Future Capital Requirements and
Availability" discussion on page 15 and "Rate Matters" on page 16.)
Results of Operations by Business Segment
Historically, Duquesne Light was 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, that was
(1) cost-based, (2) designed to recover operating expenses and investment in
electric utility assets, and (3) designed to provide a return on the investment.
As a result of the Customer Choice Act, supply of electricity is deregulated and
charged at a separate rate from the delivery of electricity. For the purposes of
complying with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, we are required to disclose information about our business
segments separately. Accordingly, we have used the PUC-approved separate rates
for 1999 to develop the financial information of the business segments for the
periods ended December 31, 1999, 1998 and 1997.
We report our results by the following four principal business segments,
determined by products, services and regulatory environment: (1) the
transmission and distribution by Duquesne Light of electricity (electricity
delivery business segment), (2) the supply by Duquesne Light of electricity
(electricity supply business segment), (3) the collection by Duquesne Light of
transition costs (CTC business segment), and (4) the distribution by AquaSource
of water (water distribution business segment). Upon the anticipated completion
of the sale of our generation assets, the electricity supply business segment
will be comprised solely of provider of last resort service. We also report an
"all other" category, which includes our expanded business lines and Duquesne
Light investments below the quantitative
9
<PAGE>
threshold for separate disclosure. Revenues in the "all other" category are
comprised of approximately one-third energy facility operations, one-third
landfill gas operations and one-third propane and other operating investments.
Income from financial investments is included in other income. Assets in the
"all other" category are comprised of approximately two-thirds financial
investments. The remaining one-third includes an equal portion of energy
facility assets, landfill gas recovery and processing assets and propane
distribution assets. Intercompany eliminations primarily relate to intercompany
sales of electricity, property rental, management fees and dividends.
We have changed the composition of our business segments, separately reporting
water distribution for the first time. We have provided the corresponding
information for earlier periods. Note O, "Business Segments and Related
Information," in the Notes to the Consolidated Financial Statements on page 37
shows the financial results of each principal business segment in tabular form.
These results are discussed below.
1999 Compared to 1998
Electricity Delivery Business Segment. The electricity delivery business
segment contributed $56.5 million to net income in 1999 compared to $57.2
million in 1998, a decrease of $0.7 million or 1.2 percent.
Operating revenues for this business segment are primarily derived from the
delivery of electricity. 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 also are affected by regional development. Sales to industrial customers
are influenced primarily by national and global economic conditions.
Operating revenues increased by $17.1 million or 5.3 percent compared to 1998
due to an increase in sales to electric utility customers of 2.7 percent in
1999. Residential and commercial sales increased as a result of warmer summer
temperatures during 1999 compared to 1998. Industrial sales increased primarily
due to an increase in electricity consumption by steel manufacturers. The
following table sets forth kilowatt-hours (KWH) delivered to electric utility
customers.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KWH Delivered
--------------------------------------------------------------
(In Millions)
--------------------------------------------------------------
1999 1998 Change
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 3,526 3,382 4.3%
Commercial 6,024 5,896 2.2%
Industrial 3,481 3,412 2.0%
- --------------------------------------------------------------------------
Sales to Electric Utility 13,031 12,690 2.7%
Customers
===========================================================================================
</TABLE>
Operating expenses for the electricity delivery business segment primarily are
made up of costs to operate and maintain the transmission and distribution
system; meter reading and billing costs; customer service; collection;
administrative expenses; and non-income taxes, such as gross receipts, property
and payroll taxes. Operating expenses increased by $15.0 million or 10.1 percent
compared to 1998, due to higher meter reading costs, higher gross receipts
taxes, and increased costs related to customer assistance programs. We have
completed installation of our Customer Advanced Reliability System, which
replaced the traditional meter-reading process by providing information on
customer electricity consumption on a real-time basis. This direct link with
customers will serve as a platform for offering additional services and
products, and is expected to reduce future costs.
Interest and other charges include interest on long-term debt, other interest
and preferred stock dividends of Duquesne Light. In 1999, there was $6.9 million
or 18.3 percent more interest and other charges allocated to the electricity
delivery business segment compared to 1998. The increase was the result of
additional short-term borrowings at Duquesne Light during the fourth quarter of
1999. Given the pending generation asset sale to Orion, all remaining Duquesne
Light financing costs after recapitalization will be borne by the electricity
delivery business segment.
Electricity Supply and CTC Business Segments. In 1999, the electricity supply
and CTC business segments reported net income of $86.6 million compared to
$71.9 million in 1998, an increase of $14.7 million or 20.4 percent.
For the electricity supply and CTC business segments, operating revenues are
derived primarily from the supply of electricity for delivery to retail
customers, the supply of electricity to wholesale customers and, beginning in
1999, the collection of generation-related 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 thus did not affect net
income. In 1999, due to the PUC's final restructuring order, fuel costs were
expensed as incurred, which impacted net income by the amount that fuel costs
exceeded amounts included in Duquesne Light's authorized supply rates. (See
"Rate Matters" on page 16.)
Energy requirements for our retail 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
10
<PAGE>
heating. Commercial energy requirements are also affected by regional
development. Energy requirements for industrial customers are primarily
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 customer energy
requirements, the energy market and transmission conditions, and the
availability of generating stations. We no longer will make short-term sales to
other utilities after the generation asset sale. (See "Rate Matters" on page
16.)
Operating revenues decreased by $39.7 million or 4.6 percent compared to 1998.
The decrease in revenues resulted primarily from two factors: (1) 26.4 percent
less energy supplied to electric utility customers due to greater participation
in customer choice, and (2) the 1998 inclusion in revenues of $23.3 million
related to deferred energy costs. Partially offsetting this decrease was a 75.3
percent increase in energy supplied to other utilities in 1999, due to our
decision to make 600 MW available during the first six months of 1999 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 Supplied
(In Millions)
--------------------------------------
1999 1998 Change
- -------------------------------------------------------------------
<S> <C> <C> <C>
Residential 2,533 3,190 (20.6)%
Commercial 3,811 5,580 (31.7)%
Industrial 2,581 3,358 (23.1)%
- ------------------------------------------------------
Sales to Electric 8,925 12,128 (26.4)%
Utility Customers
- ------------------------------------------------------
Sales to Other Utilities 3,347 1,909 75.3 %
- ------------------------------------------------------
Total Sales 12,272 14,037 (12.6)%
===================================================================
</TABLE>
Operating expenses for the electricity supply business segment are primarily
made up of energy costs; costs to operate and maintain the power stations;
administrative expenses; and non-income taxes, such as gross receipts, property
and payroll taxes.
Fluctuations in energy costs generally result from changes in the cost of
fuel; the mix between coal, nuclear generation and purchased power; total KWH
supplied; and generating station availability.
Operating expenses decreased $64.9 million or 12.0 percent from 1998, as a
result of lower energy costs and the reclassification of Beaver Valley Unit 2
lease costs to financing charges in 1999. (See "Power Station Exchange"
discussion on page 17.)
In 1999, fuel and purchased power expense decreased by $37.4 million or 14.2
percent compared to 1998. This decrease was the result of reduced energy supply
requirements, due to customer choice, and a favorable energy supply mix.
Generating station availability was improved in 1999.
Depreciation and amortization expense includes the depreciation of the power
stations' plant and equipment and accrued nuclear decommissioning costs and
amortization of transition costs. There was a decrease of $36.5 million or 23.0
percent compared to 1998. During 1998, prior to the PUC's May 29 final
restructuring order, we accelerated depreciation of generation assets to
minimize potential transition costs. Depreciation for the remainder of 1998 and
CTC amortization for 1999 were in accordance with PUC-approved rates.
Interest and other charges include interest on long-term debt, other interest
and preferred stock dividends of Duquesne Light. In 1999 there was a $30.7
million or 52.4 percent increase in interest and other charges compared to 1998.
The increase reflects $35.2 million of Beaver Valley Unit 2 lease-related costs
reclassified as financing costs in 1999, partially offset by a reduced
allocation of total financing cost to the electricity supply business segment.
Water Distribution Business Segment. The water distribution business segment
contributed $4.7 million to net income in 1999, compared to $1.6 million in
1998, an increase of $3.1 million or 193.8 percent. During 1999, AquaSource
acquired 46 water distribution utilities for $142 million, of which $133 million
was cash and $9 million was DQE Preferred Stock. These acquisitions more than
doubled the size of this business segment, and resulted in increases in
operating revenues, operating expenses and depreciation.
Operating revenues for this business segment are derived from the following:
billings related to water and sewer services for utilities owned by AquaSource
and utilities for which AquaSource is a contract operator; bottled water
delivery sales; and water-related construction and engineering projects.
Operating revenues increased by $91.5 million during 1999. The increase was
primarily the result of increased revenues from utility customers (approximately
$43 million), increased contract operations (approximately $22 million), and
bottled water delivery sales (approximately $21 million).
Operating expenses for the water distribution business segment are primarily
made up of costs to operate and maintain the water distribution systems; bottled
water costs; administrative expenses; and non-income taxes, such as
11
<PAGE>
property and payroll taxes. Operating expenses increased by $71.2 million as a
result of the 1999 acquisitions.
Depreciation and amortization expense includes depreciation of utility
delivery systems and the amortization of goodwill on acquisitions. The $10.4
million increase was attributable to increases in both depreciation and
amortization related to the larger size of the business.
Interest and other charges in the water delivery business segment are
primarily intercompany and are eliminated in consolidation. During 1999,
intercompany borrowings for acquisitions increased substantially.
All Other. The all other category contributed $56.1 million to net income in
1999 compared to $67.3 million in 1998, a decrease of $11.2 million or 16.6
percent.
Operating revenues increased in 1999 by $17.0 million or 28.1 percent compared
to 1998. This increase was primarily the result of increased revenues from our
propane delivery business acquisitions and other new investments through the
activities of the expanded business lines.
In 1999, operating expenses increased $49.2 million or 76.3 percent over 1998.
This increase was primarily the result of increased expenses from our propane
delivery business acquisitions and the growth of the expanded business lines'
start-up and developmental activities.
Depreciation and amortization expense primarily includes the depreciation of
plant and equipment of the expanded business lines and amortization of certain
investments. In 1999, depreciation and amortization expense increased by $2.8
million or 21.9 percent, primarily due to the acquisition of propane delivery
companies during 1999.
Other income primarily includes gains on investment dispositions, long-term
investment income, and interest and dividend income related to the expanded
business lines. Other income in 1999 was $27.9 million or 22.3 percent higher
than in 1998. This increase was the result of gains on the disposition of real
estate investments (approximately $29.4 million), and leases and other non-
strategic investments (approximately $14.6 million). The increase was also the
result of new investments made by the expanded business lines during late 1998
and throughout 1999.
Interest and other charges are made up of interest on long-term debt, other
interest and preferred stock dividends of the expanded business lines. An
increase of $13.7 million or 100.7 percent in 1999 was the result of higher
long-term debt interest expense, primarily related to the growth in our propane
delivery business. This debt and interest expense is primarily intercompany, and
is eliminated in consolidation.
1998 Compared to 1997
Electricity Delivery Business Segment. The electricity delivery business
segment contributed $57.2 million to net income in 1998 compared to $61.9
million in 1997, a decrease of $4.7 million or 7.6 percent. Operating revenues
for this business segment are primarily derived from the delivery of
electricity.
Operating revenues increased by $4.6 million or 1.5 percent compared to 1997,
due to an increase in sales to electric utility customers of 1.0 percent in
1998. Residential and commercial sales increased as a result of warmer summer
temperatures during 1998 compared to 1997. 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
KWH Delivered
---------------------------------------------------
(In Millions)
---------------------------------------------------
1998 1997 Change
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 3,382 3,273 3.3 %
Commercial 5,896 5,786 1.9 %
Industrial 3,412 3,501 (2.5)%
- -------------------------------------------------------------
Sales to Electric 12,690 12,560 1.0 %
Utility Customers
==============================================================================
</TABLE>
Operating expenses increased $10.1 million or 7.3 percent from 1997, primarily
as a result of higher costs of maintenance of the transmission and distribution
system, and costs related to start-up and installation of the Customer Advanced
Reliability System. The increase in system maintenance was primarily due to the
increase in frequency and severity of storms during 1998.
Depreciation and amortization expense increased $1.7 million or 3.8 percent
in 1998, due to additions to the plant and equipment balance throughout the
year, which was partially offset by retirements.
A decrease in other income of $1.5 million or 22.1 percent was the result of
lower interest income from a smaller amount of cash available for investing,
compared to the prior year.
In 1998, there was $0.9 million or 2.3 percent less in interest and other
charges compared to 1997. 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 Supply Business Segment. In 1998, the electricity supply business
segment reported net income of $71.9 million compared to $60.5 million in 1997,
an increase of $11.4 million or 18.8 percent.
12
<PAGE>
Operating revenues decreased by $3.7 million or 0.4 percent compared to 1997.
The decrease in revenues can be attributed to a decrease in energy supplied to
electric utility customers due to initial participation in customer choice, and
a decrease in energy costs that were recovered through the ECR. Partially
offsetting these decreases were increased energy supplied to other utilities of
32.2 percent in 1998, due to higher demand from other utilities and increased
capacity available to sell as a result of participation in customer choice. The
following table sets forth KWH supplied for customers who had not chosen an
alternative generation supplier.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
KWH Supplied
--------------------------------------
(In Millions)
--------------------------------------
1998 1997 Change
- -----------------------------------------------------------
<S> <C> <C> <C>
Residential 3,190 3,268 (2.4)%
Commercial 5,580 5,778 (3.4)%
Industrial 3,358 3,500 (4.1)%
- -------------------------------------------------
Sales to Electric 12,128 12,546 (3.3)%
Utility Customers
- -------------------------------------------------
Sales to Other 1,909 1,444 32.2 %
Utilities
- -------------------------------------------------
Total Sales 14,037 13,990 0.3 %
===========================================================
</TABLE>
Operating expenses increased $14.6 million or 2.8 percent from 1997 as a
result of increased energy costs, partially offset by decreased maintenance
costs and reduced Beaver Valley Unit 2 lease costs.
In 1998, fuel and purchased power expense increased by $39.1 million or 17.5
percent compared to 1997. This increase was the result of increased energy costs
due to an unfavorable power supply mix and higher purchased power prices.
Reduced availability of nuclear generating stations due to an increase in outage
hours required us to purchase power and generate power from higher fuel cost
fossil stations.
Maintenance expense decreased in 1998, primarily related to the reversal of
fossil station maintenance outage accruals for outages scheduled after the
planned divestiture of generation. (See "Rate Matters" on page 16.) A reduction
in nuclear station outage cost amortization in 1998 also contributed to the
decrease in maintenance expense.
A decrease in depreciation and amortization expense of $32.5 million, or 17.0
percent compared to 1997, was the result of reduced depreciation of generation
assets in accordance with the PUC's final restructuring order.
Other income decreased $3.7 million or 29.1 percent as the result of lower
interest income, due to a smaller amount of cash available for investing
compared to the prior year.
Interest and other charges decreased $5.2 million or 8.2 percent compared to
1997. The decrease reflected the refinancing of long-term debt at lower interest
rates and the maturity of approximately $75 million of long-term debt during
1998.
Water Distribution Business Segment. The water distribution business segment
contributed $1.6 million to net income in 1998 compared to a $0.4 million net
loss in 1997. During 1998, AquaSource acquired 33 water distribution utilities
for $156 million, of which $122 million was cash and $34 million was DQE
Preferred Stock. These acquisitions more than doubled the size of this business
segment, and resulted in increases in operating revenues, operating expenses,
and depreciation.
All Other. The all other category contributed $67.3 million to net income in
1998 compared to $78.6 million in 1997, a decrease of $11.3 million or 14.4
percent.
Operating revenues decreased in 1998 by $2.8 million, or 4.4 percent compared
to 1997. This decrease was primarily the result of the loss of operating
revenues from the sale of Chester Engineers by DQE Enterprises in the second
quarter of 1997.
In 1998, operating expenses increased $3.6 million or 5.9 percent over 1997.
The growth of the expanded business lines' start-up and developmental activities
and acquisitions accounted for most of the increase. Also, in the third quarter
of 1998 we wrote off costs related to the terminated merger with Allegheny
Energy, Inc. (AYE), resulting in an increase to other operating expenses of
$14.1 million. (See "Rate Matters" on page 16.) Offsetting in part the increases
to operating expenses was the 1997 sale of Chester Engineers, which resulted in
reduced operating costs of $7.8 million, and the recognition of the favorable
resolution of certain associated contingencies in 1998.
Other income primarily includes long-term investment income, and interest and
dividend income related to the expanded business lines and Duquesne Light
investments. Other income in 1998 was $6.0 million or 5.0 percent higher than in
1997. This increase was the result of new investments made by the expanded
business lines during late 1997 and throughout 1998, and a new investment made
at Duquesne Light in the fourth quarter of 1997. Other income in 1997 included
the gains on the sale of Chester Engineers and of Exide Electronics stock in
1997 of approximately $23 million ($13 million, net of tax), net of costs of the
sale and reserves for contingencies realized for the sale of Chester Engineers.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During 1999, we continued our strategy of acquiring and aggregating small to
mid-sized water distribution companies. Additionally, we began a similar
aggregation strategy with propane delivery companies, clustering our
acquisitions in three geographically diverse regions. These acquisition-related
investments have grown from $8 million in 1997 to $156 million in 1998 to $205
million in 1999. This acquisition focus corresponds with a decrease in our other
long-term investment level, which declined from $210 million in 1997 to $60
million in 1998 to $30 million in 1999.
Capital Expenditures
We spent approximately $147.2 million in 1999, $190.5 million in 1998 and
$116.0 million in 1997 for capital expenditures, of which $100.3 million in
1999, $113.3 million in 1998 and $90.4 million in 1997 was spent for electric
utility construction. Approximately $27.2 million was spent in 1999 for water
utility construction. The remaining capital expenditures were related to the
expanded business lines and other investments. The 1998 capital expenditure
level was higher, as it included $41 million related to facility construction
for the production of E-Fuel(R), a synthetic fuel. We estimate that we will
spend, excluding allowance for funds used during construction (AFC),
approximately $85 million (including $5 million relating to generation), $75
million and $75 million for electric utility construction in 2000, 2001 and
2002; and $45 million, $19 million and $24 million for water utility
construction in 2000, 2001 and 2002.
Acquisitions and Dispositions
In 1999 we invested $205 million in the acquisition of companies and closed on
the power station exchange with FirstEnergy. AquaSource acquired 46 water and
water-related companies for a total investment of approximately $142 million. Of
this total investment, $133 million was cash and $9 million was the issuance of
86,337 shares of DQE Preferred Stock. Also in 1999, DQE Systems acquired 18
propane delivery companies for a total investment of approximately $63 million,
all of which was cash. In the power station exchange with FirstEnergy, Duquesne
Light acquired three power plants and disposed of its partial interests in five
power plants. (See "Power Station Exchange" discussion on page 17.) During 1999,
we also disposed of several non-strategic real estate and lease investments.
Proceeds from these dispositions totaled $143 million. We expect to continue to
sell non-strategic investments. In early 2000 we signed a non-binding
memorandum of understanding with Itron, Inc., for the potential purchase of the
Itron-designed Customer Advanced Reliability System, which we currently lease.
In 1998, AquaSource acquired 33 water and water-related companies for a total
investment of approximately $156 million. Of this total investment, $122 million
was cash and $34 million was the issuance of 337,262 shares of DQE Preferred
Stock. Dispositions in 1998 relate to assets acquired through leasehold interest
investments. Dispositions in 1997 relate primarily to the sale of Chester
Engineers and of Exide Electronics stock.
Long-Term Investments
We have made long-term investments in the following areas: leases, affordable
housing, landfill and coal-bed methane gas reserves, and deposits in nuclear
decommissioning funds. The decommissioning trust held funding for nuclear
decommissioning costs related to Duquesne Light's nuclear-powered plants. During
1999, Duquesne Light invested approximately $60 million in the decommissioning
trust funds, in order to fully fund the decommissioning liability, prior to
transferring both the trust funds and the liability to FirstEnergy in the power
station exchange. (See "Power Station Exchange" discussion on page 17.) Cash
related to this funding was collected during the year through the CTC component
of customer bills. Other long-term investing activities during 1999, primarily
engaged in by the expanded business lines, totaled $30 million and included
landfill gas reserves, a joint venture that designs, engineers and constructs
landfill gas collection systems, affordable housing partnerships, and various
electronic commerce investments. These electronic commerce investments include
investments in securities convertible into 51 percent of the common stock of
Predictive Data, Inc., which offers an insurance product to replace security
deposits, and in securities convertible into 34 percent of the common stock of
OnLine Choice.com, which uses the Internet to create customer pools to purchase
goods and services, such as electricity, natural gas and telephone service at
lower prices through volume discounts.
During 1998, Duquesne Light invested approximately $9 million in the nuclear
decommissioning trust funds. Other long-term investing activities during 1998,
primarily engaged in by the expanded business lines, totaled $60 million and
included a joint venture in a commercial and industrial heating, ventilation and
air conditioning service and energy controls company, affordable housing
partnerships, landfill gas reserves, and various electronic commerce
investments. These electronic commerce investments include investments in
securities convertible into 26 percent of the equity of BroadPoint
Communications, Inc., which offers its more than 400,000 subscribers free long-
distance telephone service in exchange for listening to targeted advertisements,
and in securities convertible into 23 percent of the common stock of
Enermetrix.com, which provides an Internet auction-
14
<PAGE>
based service for the purchase of electricity and natural gas by commercial and
industrial customers from over 55 energy suppliers.
Investing activities during 1997 included approximately $9 million in the
nuclear decommissioning trust funds. Other long-term investing activities during
1997, primarily engaged in by the expanded business lines, totaled $210 million,
including $180 million in lease investments. We also invested in the common
stock of SatCon Technologies, a provider of energy management products and
components used in telecommunications, factory automation, aircraft, satellites,
and the automotive and fuel cell industries. We currently hold approximately
seven percent of SatCon common stock on a fully-diluted basis.
Financing
During 1999, in addition to capital provided from operations, we raised
capital to continue our water and propane delivery company acquisition program,
to effect the termination of the Beaver Valley Unit 2 lease, and to begin our
recapitalization program in anticipation of the generation divestiture. As
discussed on page 14, we invested $205 million in acquisitions, $147 million in
capital expenditures, and $90 million in nuclear decommissioning and other long-
term investments during 1999. Additionally, in connection with the power
station exchange, we paid approximately $234 million in termination costs and
$43 million in related taxes to cancel the Beaver Valley Unit 2 lease. Of this
total amount, $107 million represents costs previously approved for recovery
through the CTC. The remaining $170 million is included on the consolidated
balance sheet as divestiture costs. As part of this transaction, the lease
liability recorded on the consolidated balance sheet was eliminated; however the
underlying collateralized lease bonds ($359 million upon lease termination)
became obligations of Duquesne Light and are now recorded on the consolidated
balance sheet as debt, $9 million of which will mature in 2000. (See "Power
Station Exchange" discussion on page 17.) Prior to cancelling the Beaver Valley
Unit 2 lease, we paid approximately $42 million to terminate our nuclear fuel
lease (the nuclear fuel was transferred to FirstEnergy in the power station
exchange). During 1999 we repurchased 5.7 million shares of DQE common stock on
the open market for approximately $217 million. These purchases occurred
primarily in the fourth quarter. Additional capital was required for the
maturity of $75 million of mortgage bonds, the repurchase of approximately $2
million of DQE Preferred Stock and the payment of $117 million of dividends.
To meet these capital requirements, and to serve as a bridge until the
anticipated receipt of our generation divestiture proceeds, we undertook several
financing initiatives during 1999. At year-end, we had $343 million of
commercial paper borrowings outstanding, and $469 million of current debt
maturities. During 1999, the maximum amount of bank loans and commercial paper
borrowings outstanding was $368.9 million, the amount of average daily
borrowings was $46.3 million, and the weighted average daily interest rate was
5.6 percent. In the fourth quarter of 1999, we issued $290 million of first
mortgage bonds with a one-year term, callable in May 2000. The interest rate on
the bonds is 6.53 percent. This debt was used to fund the Beaver Valley Unit 2
lease termination costs. On a longer-term basis, in the third quarter we issued
$100 million of 8 3/8 percent notes, due in September 2039. In addition to these
financings, as previously discussed, we issued $9 million of DQE Preferred Stock
in conjunction with acquisitions by AquaSource.
During 1998, our requirement to access new sources of funding was much more
modest. While we invested $122 million in acquisitions, $191 million in capital
expenditures, and $69 million in nuclear decommissioning and other long-term
investments, our cash balance of $356 million at the beginning of the year
allowed us to minimize new financing activities. Additional capital was
required during the year for the retirement of approximately $200 million of
current maturities, the payment of $114 million of dividends, and common stock
repurchases of $14 million. During 1998, we issued $140 million of first
mortgage bonds to accomplish these debt retirements. Additionally, we issued
$34 million of DQE Preferred Stock and assumed approximately $22 million in
long-term debt in conjunction with acquisitions by AquaSource. We also issued a
$25 million note, maturing in 2019 with an annual interest rate of 8.0 percent,
in connection with an investment in landfill gas property and equipment.
During 1997, we invested $219 million in nuclear decommissioning and other
long-term investments, $116 million in capital expenditures and $8 million as we
began our water delivery acquisition program. These expenditures were all funded
with available capital and capital from internal sources. We also retired
approximately $50 million of maturing debt and paid $107 million of dividends.
Future Capital Requirements and Availability
We have entered into an agreement to sell Duquesne Light's generation assets
to Orion for $1.71 billion. (See "Auction Plan" discussion on page 17.) We
anticipate using the proceeds from this sale (currently estimated to be $1.1
billion, net of tax and transaction costs) to recapitalize Duquesne Light. This
process will include the retirement of short-term debt, the redemption of long-
term debt and the continued aggressive repurchase of outstanding common stock.
Through February 29, 2000 we have repurchased 1.4 million shares of DQE common
stock for approximately $61 million. In conjunction with the generation asset
sale to Orion, Duquesne Light expects to acquire the $359 million of 8.7 percent
collateralized lease bonds, previously assumed as part of the Beaver Valley Unit
2 lease termination. Additionally, maturing during 2000 will be $390
15
<PAGE>
million of first mortgage bonds ($290 million of which were issued in November
1999), $65 million of term loans, and $9 million of collateralized lease bonds.
We expect to meet our current obligations and debt maturities through 2004
with funds generated from operations, through new financings and short-term
borrowings, and through the proceeds from the sale of generation assets to
Orion. During January 2000, we issued $150 million of floating rate two-year
notes, callable in July 2000. The proceeds of this issuance were used to reduce
the amount of outstanding commercial paper.
We maintain two separate revolving credit agreements, one for $250 million
expiring in June 2000 and one for $225 million expiring in September 2000. We
have the option to convert each revolver into a term loan facility for a period
of one or two years, respectively, for any amounts then outstanding upon
expiration of the revolving credit period. Interest rates can, in accordance
with the option selected at the time of the borrowing, be based on one of
several indicators, including prime, Eurodollar, or certificate of deposit
rates. Facility fees are based on the unborrowed amount of the commitment. At
December 31, 1999 and 1998, no borrowings were outstanding. Related to these and
other credit facilities, we are subject to financial covenants requiring certain
cash coverage and debt-to-capital ratios. At December 31, 1999, we were in
compliance with all of our financial covenants.
Duquesne Light and an unaffiliated corporation have an agreement that entitles
Duquesne Light to sell, and the corporation to purchase, on an ongoing basis, up
to $50 million of accounts receivable. At various times during 1999 and in the
first quarter of 2000, Duquesne Light had sold receivables under the facility.
No amounts were outstanding at December 31, 1999 and 1998. The accounts
receivable sales agreement, which expires in February 2001, is one of many
sources of funds available to us. We may elect to extend the agreement upon
expiration, replace it with a similar facility, or terminate it.
In connection with customer choice, customer revenues from Duquesne Light's
operations are reduced by an amount equal to the generation rate applicable to
those customers choosing alternative generation suppliers. This reduction is
expected to be offset by lower generation and purchased power costs. An
additional impact is anticipated when the provider of last resort service
agreement with Orion takes effect, and all customers will be buying generation
either directly from alternative suppliers or indirectly from Orion. A further
impact on customer revenues is expected to occur when the CTC has been fully
collected, which is currently expected to occur in 2001 for most major rate
classes; elimination of the CTC will reduce customer rates, on average, by 25
percent for those rate classes. The foregoing statements are forward-looking
regarding the impact on cash flows of customer choice and Duquesne Light'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 timing of the generation asset sale closing and the receipt of
sale proceeds. (See "Restructuring Plan" on page 17.)
RATE MATTERS
Competition and the Customer Choice Act
Under Pennsylvania 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 costs.
The Customer Choice Act (effective January 1, 1997) enables Pennsylvania's
electric utility customers to purchase electricity at market prices from a
variety of electric generation suppliers (customer choice). As of January 2000,
all customers have customer choice. As of February 29, 2000, approximately 23
percent of Duquesne Light's customers had chosen alternative generation
suppliers, representing approximately 30 percent of Duquesne Light's non-
coincident peak load. Customers who have chosen an electricity generation
supplier other than Duquesne Light pay that supplier for generation charges, and
pay Duquesne Light the CTC (discussed below) and charges for transmission and
distribution. Customers who continue to buy their generation from Duquesne Light
pay for their service at current regulated tariff rates divided into generation,
transmission and distribution charges, and the CTC. Electricity delivery
(including transmission, distribution and customer service) remains regulated in
substantially the same manner as under historical regulation.
Rate Cap
An overall four-and-one-half-year rate cap from January 1, 1997, was
originally imposed on the transmission and distribution charges of Pennsylvania
electric utility companies under the Customer Choice Act. As part of a
settlement regarding recovery of deferred fuel costs (discussed below), we have
agreed to extend this rate cap for an additional six months through the end of
2001.
16
<PAGE>
Provider of Last Resort
Duquesne Light is required not only to deliver electricity, but also to serve
as the provider of last resort for all customers in its service territory. As
the provider of last resort, Duquesne Light must provide electricity for any
customer who cannot or does not choose an alternative electric generation
supplier, or whose supplier fails to deliver. While collecting the CTC,
Duquesne Light may charge only PUC-approved rates for the supply of electricity
as the provider of last resort. As part of the pending generation asset sale,
Orion has agreed to supply Duquesne Light, under a provider of last resort
service agreement, with all of the electric energy necessary to satisfy Duquesne
Light's provider of last resort obligations during the CTC collection period.
Under the Customer Choice Act, after the CTC collection period Duquesne Light
anticipates that it will supply electricity at market prices to fulfill its
provider of last resort obligations.
Restructuring Plan
In its May 29, 1998, final restructuring order, the PUC determined that
Duquesne Light should recover most of the above-market costs of its generation
assets, including plant and regulatory assets, through the collection of the CTC
from electric utility customers. The $1.49 billion of transition costs, net of
tax, was originally to be recovered over a seven-year period ending in 2005.
However, by applying expected net proceeds of the pending generation asset sale
to Orion to reduce transition costs, we currently anticipate early termination
of the CTC collection period in 2001 for most major rate classes. 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 Light 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 sale.
As part of our restructuring plan filing, we 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. We also requested recovery of an additional $31.2 million
($18.2 million, net of tax) in deferred fuel costs. Although the PUC initially
denied recovery of this additional amount, on October 26, 1999, Duquesne Light
and the Pennsylvania Office of the Consumer Advocate reached a settlement on
this issue which would permit recovery of the entire $42.7 million ($24.9
million, net of tax) in deferred fuel costs. The PUC approved this settlement on
February 11, 2000.
On December 18, 1998, the PUC approved Duquesne Light's auction plan, which
included an auction of its provider of last resort service obligations, as well
as an agreement to carry out the power station exchange with FirstEnergy.
Power Station Exchange. On December 3, 1999, Duquesne Light completed the
exchange of its partial interests in five power plants for three wholly owned
power plants of subsidiaries of FirstEnergy. Duquesne Light received three
fossil-powered plants (located in Avon Lake and Niles, Ohio, and in New Castle,
Pennsylvania) having an aggregate net demonstrated capacity of 1,323 MW. The
ownership interests transferred by Duquesne Light included its interests in the
nuclear-powered Beaver Valley, Pennsylvania and Perry, Ohio plants, and the
fossil-powered Bruce Mansfield, Pennsylvania and Sammis and Eastlake, Ohio
plants, having an aggregate net demonstrated capacity of 1,435 MW. Along with
ownership of the nuclear-powered plants, FirstEnergy assumed the decommissioning
liability for Beaver Valley and Perry, in exchange for the fully funded balance
in decommissioning trust funds previously maintained by Duquesne Light. During
1999, we funded approximately $60 million into the decommissioning trusts. These
amounts, which were collected through the CTC during the year, brought the fund
balances to approximately $122 million. In connection with the power station
exchange, we terminated the Beaver Valley Unit 2 lease in the fourth quarter of
1999. (See "Financing" discussion on page 15.)
Auction Plan. On September 24, 1999, Duquesne Light and the winning auction
bidder, Orion, entered into definitive agreements pursuant to which Orion will
purchase Duquesne Light's wholly owned Cheswick, Elrama, Phillips and Brunot
Island power stations, and the stations received from FirstEnergy in the power
station exchange, for approximately $1.71 billion (estimated to be $1.1 billion,
net of tax and transaction expenses). Under a provider of last resort service
agreement, Orion will supply Duquesne Light with all of the electric energy
necessary to satisfy Duquesne Light's obligations to its customers who have not
chosen an alternative electric generation supplier. This agreement, which
expires upon Duquesne Light's final collection of the CTC, in general
effectively transfers to Orion the financial risks and rewards associated with
Duquesne Light's provider of last resort obligations. While we retain the
collection risk for the electricity sales, a component of our regulated delivery
rates is designed to cover the cost of a normal level of uncollectible accounts.
Duquesne Light and Orion are currently discussing an extension of this provider
of last resort arrangement beyond the final CTC collection.
The Orion transactions must be approved by various regulatory agencies,
including the PUC, the FERC, and the Federal Trade Commission. Duquesne Light
currently expects the sale to close in the second quarter of 2000. The final
17
<PAGE>
accounting for the sale proceeds remains subject to PUC approval. Through
December 31, 1999, we have deferred approximately $219 million of costs related
to the power station exchange and the asset sale. Additional divestiture-
related costs will be deferred as incurred. We expect to fully recover these
costs through the divestiture process; however, any disallowed costs will be
written off.
Until the divestiture is complete, Duquesne Light is required to use an
interim CTC and price to compare for each rate class (approximately 2.9 cents
per KWH on average for the CTC, and approximately 3.8 cents per KWH on average
for the price to compare).
Termination of the AYE Merger
On October 5, 1998, we announced our unilateral termination of our merger
agreement with Allegheny Energy, Inc. (AYE). AYE filed suit in the United
States District Court for the Western District of Pennsylvania, seeking to
compel us to proceed with the merger, or in the alternative seeking an
unspecified amount of money damages. After holding a trial from October 20
through 28, 1999, the District Court ruled on December 3, 1999, that we had
properly terminated the merger agreement without breach, and granted judgment in
our favor on all claims and all requests for injunctive relief. On December 14,
1999, AYE appealed this ruling to the Third Circuit. Argument was heard on
March 9, 2000, and a decision is pending. We cannot determine the ultimate
outcome of AYE's appeal at this time.
YEAR 2000
We took comprehensive steps to ensure a smooth transition into the Year 2000.
Since 1994, we planned for the Year 2000 with an aggressive strategy to identify
information needs, replace or upgrade equipment and coordinate resources to
anticipate the new millennium. We experienced normal operations during the
transition, and continue to do so.
The total cost of implementing our Year 2000 plan was approximately $49
million, which includes costs related to total system replacements (i.e., the
Year 2000 solution comprised only a portion of the benefit resulting from such
replacements). These costs were primarily incurred as a result of software and
system changes and upgrades. Approximately $35 million was capital costs
attributable to the licensing and installation of new software for total system
replacements. The remaining $14 million was expensed as it was incurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information regarding market risk required by this Item is set forth in
Item 1 under the heading "Market Risk".
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
To the Directors and Shareholders of DQE, Inc.:
We have audited the accompanying consolidated balance sheets of DQE, Inc. and
its subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These financial statements and financial statement schedule are the
responsibility of DQE Inc.'s management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DQE, Inc. and its subsidiaries as
of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 28, 2000
18
<PAGE>
Statement of Consolidated Income
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(Thousands of Dollars, Except Per Share
Amounts)
---------------------------------------------
Year Ended December 31,
---------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues:
Electricity sales $1,093,537 $1,126,789 $1,124,318
Water sales 122,389 30,941 1,568
Other 125,275 96,821 104,288
- -----------------------------------------------------------------------------------------
Total Operating Revenues 1,341,201 1,254,551 1,230,174
- -----------------------------------------------------------------------------------------
Operating Expenses:
Fuel and purchased power 225,182 262,560 223,411
Other operating 437,679 343,442 320,610
Maintenance 75,400 74,908 82,869
Depreciation and amortization 196,319 219,920 239,980
Taxes other than income taxes 87,779 81,318 82,567
- -----------------------------------------------------------------------------------------
Total Operating Expenses 1,022,359 982,148 949,437
- -----------------------------------------------------------------------------------------
Operating Income 318,842 272,403 280,737
- -----------------------------------------------------------------------------------------
Other Income:
Long-term investment income 90,363 105,139 64,464
Gain on dispositions 44,027 6,809 34,364
Interest and other income 17,613 22,853 30,979
- -----------------------------------------------------------------------------------------
Total Other Income 152,003 134,801 129,807
- -----------------------------------------------------------------------------------------
Interest and Other Charges 158,707 109,534 115,638
- -----------------------------------------------------------------------------------------
Income Before Income Taxes and 312,138 297,670 294,906
Extraordinary Item
- -----------------------------------------------------------------------------------------
Income Taxes 110,722 100,982 95,805
- -----------------------------------------------------------------------------------------
Income Before Extraordinary Item 201,416 196,688 199,101
- -----------------------------------------------------------------------------------------
Extraordinary Item, Net of Tax -- (82,548) --
- -----------------------------------------------------------------------------------------
Net Income, After Extraordinary Item 201,416 114,140 199,101
- -----------------------------------------------------------------------------------------
Dividends on Preferred Stock 1,569 866 --
- -----------------------------------------------------------------------------------------
Earnings Available for Common Stock $ 199,847 $ 113,274 $ 199,101
=========================================================================================
Average Number of Common Shares
Outstanding (Thousands of Shares) 75,463 77,683 77,492
=========================================================================================
Basic Earnings Per Share of Common Stock:
Before Extraordinary Item $ 2.65 $ 2.52 $ 2.57
=========================================================================================
Extraordinary Item -- $ (1.06) --
=========================================================================================
After Extraordinary Item $ 2.65 $ 1.46 $ 2.57
=========================================================================================
Diluted Earnings Per Share of Common
Stock:
Before Extraordinary Item $ 2.62 $ 2.49 $ 2.56
=========================================================================================
Extraordinary Item -- $ (1.03) --
=========================================================================================
After Extraordinary Item $ 2.62 $ 1.46 $ 2.56
=========================================================================================
Dividends Declared Per Share of Common
Stock $ 1.54 $ 1.46 $ 1.38
=========================================================================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
------------------------------------------------
As of December 31,
------------------------------------------------
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 54,229 $ 108,176
- ------------------------------------------------------------------------------------------------------------------
Receivables:
Electric customer accounts receivable 82,314 87,262
Other electric utility receivables 32,582 25,412
Water customer accounts receivable 21,352 10,591
Other receivables 57,280 42,260
Less: Allowance for uncollectible accounts (9,280) (9,415)
- ------------------------------------------------------------------------------------------------------------------
Total Receivables - Net 184,248 156,110
- ------------------------------------------------------------------------------------------------------------------
Materials and supplies (at average cost):
Operating and construction 37,536 58,747
Coal 17,705 25,702
- ------------------------------------------------------------------------------------------------------------------
Total Materials and Supplies 55,241 84,449
- ------------------------------------------------------------------------------------------------------------------
Other current assets 81,939 15,233
- ------------------------------------------------------------------------------------------------------------------
Total Current Assets 375,657 363,968
- ------------------------------------------------------------------------------------------------------------------
Long-Term Investments:
Leveraged leases 409,461 388,113
Gas reserves 89,390 103,270
Affordable housing 79,752 131,395
Other leases 17,162 38,783
Nuclear decommissioning trust fund -- 62,697
Other 43,519 24,549
- ------------------------------------------------------------------------------------------------------------------
Total Long-Term Investments 639,284 748,807
- ------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Electric plant in service 3,856,719 4,379,703
Water plant in service 170,509 91,850
Construction work in progress 84,313 79,644
Property held under capital leases 26,327 123,374
Other 231,435 206,112
- ------------------------------------------------------------------------------------------------------------------
Gross property, plant and equipment 4,369,303 4,880,683
Less: Accumulated depreciation and amortization (2,541,236) (3,165,651)
- ------------------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment - Net 1,828,067 1,715,032
- ------------------------------------------------------------------------------------------------------------------
Other Non-Current Assets:
Transition costs 2,008,171 2,132,980
Regulatory assets 224,002 199,066
Divestiture costs 218,653 1,338
Other 315,158 204,787
- ------------------------------------------------------------------------------------------------------------------
Total Other Non-Current Assets 2,765,984 2,538,171
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 5,608,992 $ 5,365,978
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(Thousands of Dollars)
-----------------------------------------
As of December 31,
-----------------------------------------
CAPITALIZATION AND LIABILITIES 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Current debt maturities $ 469,248 $ 105,347
Notes payable 342,804 --
Accounts payable 106,143 117,911
Accrued liabilities 32,970 84,754
Dividends declared 31,427 33,009
Other 1,051 6,864
- -----------------------------------------------------------------------------------------
Total Current Liabilities 983,643 347,885
- -----------------------------------------------------------------------------------------
Non-Current Liabilities:
Deferred income taxes - net 1,020,103 910,228
Beaver Valley lease liability -- 475,570
Deferred income 126,434 156,579
Deferred investment tax credits 22,208 24,076
Capital lease obligations 16,863 36,596
Nuclear decommissioning liability -- 62,697
Other 186,617 253,649
- -----------------------------------------------------------------------------------------
Total Non-Current Liabilities 1,372,225 1,919,395
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Commitments and Contingencies (Notes B through N)
- -----------------------------------------------------------------------------------------
Capitalization:
Long-Term Debt 1,633,077 1,357,749
- -----------------------------------------------------------------------------------------
Preferred and Preference Stock:
DQE preferred stock 42,170 35,274
Preferred stock of subsidiaries 215,608 215,608
Preference stock of subsidiaries 25,279 26,914
- -----------------------------------------------------------------------------------------
Total preferred and preference stock before
deferred employee stock ownership plan
(ESOP) benefit 283,057 277,796
- -----------------------------------------------------------------------------------------
Deferred ESOP benefit (10,875) (14,240)
- -----------------------------------------------------------------------------------------
Total Preferred and Preference Stock 272,182 263,556
- -----------------------------------------------------------------------------------------
Common Shareholders' Equity:
Common stock - no par value (authorized - 994,935 993,404
187,500,000 shares;
issued - 109,679,154 shares)
Retained earnings 953,785 869,671
Treasury stock (at cost) (37,912,995 and (602,689) (385,976)
32,305,726 shares)
Accumulated other comprehensive income 1,834 294
- -----------------------------------------------------------------------------------------
Total Common Shareholders' Equity 1,347,865 1,477,393
- -----------------------------------------------------------------------------------------
Total Capitalization 3,253,124 3,098,698
- -----------------------------------------------------------------------------------------
Total Liabilities and Capitalization $ 5,608,992 $ 5,365,978
=========================================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Statement of Consolidated Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
-------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 201,416 $ 114,140 $ 199,101
Principal non-cash charges (credits) to net
income:
Depreciation and amortization 196,319 219,920 239,980
Deferred taxes 73,461 119,945 60,811
Capital lease, nuclear fuel and investment
amortization 60,470 80,574 67,671
Gain on disposition of investments (44,027) (6,809) (34,364)
Investment income (79,747) (111,904) (66,246)
Changes in working capital other than cash (75,668) (36,995) (36,758)
Extraordinary item, net of tax -- 82,548 --
Increase in ECR -- (19,219) (25,318)
Other 5,644 (81,857) (37,175)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided from Operating Activities 337,868 360,343 367,702
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (147,236) (190,548) (116,004)
Acquisition of water companies (133,023) (122,007) (6,611)
Acquisition of propane companies (63,364) -- --
Funding of nuclear decommissioning trust (59,861) (8,878) (8,762)
Generating stations divestiture costs (47,449) -- --
Long-term investments (29,671) (60,017) (210,360)
Proceeds from disposition of investments 143,094 6,809 86,300
Other (11,506) (22,466) (1,132)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (349,016) (397,107) (256,569)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Issuance of debt 386,624 140,000 --
Issuance of notes payable 342,804 -- --
Reductions of long-term obligations:
Capital leases (42,423) (12,897) (13,551)
Long-term debt (90,667) (198,272) (52,100)
Dividends on common and preferred stock (117,302) (114,218) (106,959)
Repurchase of common stock (216,713) (14,155) (30)
Beaver Valley 2 lease termination (277,226) -- --
Other (27,896) (11,930) 6,941
- ------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (42,799) (211,472) (165,699)
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and temporary cash (53,947) (248,236) (54,566)
investments
Cash and temporary cash investments at
beginning of year 108,176 356,412 410,978
- ------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of
year $ 54,229 $ 108,176 $ 356,412
============================================================================================================
Supplemental Cash Flow Information
- ------------------------------------------------------------------------------------------------------------
Cash Paid During The Year:
- ------------------------------------------------------------------------------------------------------------
Interest (net of amount capitalized) $ 100,083 $ 91,462 $ 95,413
- ------------------------------------------------------------------------------------------------------------
Income taxes $ 35,108 $ 27,978 $ 66,703
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
Statement of Consolidated Comprehensive Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(Thousands of Dollars)
------------------------------------------
Year Ended December 31,
------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $201,416 $114,140 $199,101
- ------------------------------------------------------------------------------------------
Other comprehensive income:
Unrealized holding gains (losses) arising 1,540 (3,448) 6,007
during the year,
net of tax of $1,081, $(2,445) and $3,776
Less: reclassification adjustment for gains -- -- (6,260)
included in net income, net of tax of
$0, $0 and $4,440
- ------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 1,540 (3,448) (253)
- ------------------------------------------------------------------------------------------
Comprehensive Income $202,956 $110,692 $198,848
==========================================================================================
</TABLE>
See notes to consolidated financial statements.
Statement of Consolidated Retained Earnings
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(Thousands of Dollars)
--------------------------------------------------
As of December 31,
--------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of $ 869,671 $ 869,749 $ 777,607
year
Net income 201,416 114,140 199,101
Dividends declared (117,302) (114,218) (106,959)
- ---------------------------------------------------------------------------
Balance at End of Year $ 953,785 $ 869,671 $ 869,749
===========================================================================
</TABLE>
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
DQE, Inc. is a multi-utility delivery and services company. Our subsidiaries
are Duquesne Light Company; AquaSource, Inc.; DQE Capital Corporation; DQE
Energy Services, Inc.; DQE Enterprises, Inc. (formerly Duquesne Enterprises,
Inc.); DQE Financial Corp. (formerly Montauk, Inc.); and DQE Systems, Inc.
(formerly DQEnergy Partners, Inc.).
Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the supply, transmission, distribution and sale of electric energy.
On December 3, 1999, Duquesne Light completed a power station asset exchange
with FirstEnergy Corp. This was the first phase of our Pennsylvania Public
Utility Commission (PUC)-approved plan to divest our generation assets. We
expect to complete this divestiture through the pending sale of our remaining
generation assets to Orion Power Holdings, Inc. Final sale agreements must be
approved by various regulatory agencies, including the PUC. We expect the sale
to close in the second quarter of 2000. After that time, we expect to meet our
energy supply obligations through a provider of last resort service agreement
with Orion. (See "Restructuring Plan" discussion, Note F, on page 28.)
AquaSource, our second largest operating subsidiary, is a water resource
management company that acquires, develops and manages water and wastewater
utilities, bottled water operations and complementary businesses.
Our expanded business lines engage in a wide range of initiatives, including:
the distribution of propane; the production of landfill gas and synthetic fuels;
investments in electronic commerce, energy-related technology and communications
systems; energy facility development and operation; and independent power
production. DQE Capital provides financing for DQE and various affiliates.
All material intercompany balances and transactions have been eliminated in
the preparation of the consolidated financial statements.
Basis of Accounting
DQE and Duquesne Light are subject to the accounting and reporting
requirements of the Securities and Exchange Commission (SEC). In addition,
Duquesne Light'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),
23
<PAGE>
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 our restructuring
plan under the Customer Choice Act (see "Rate Matters," Note F, on page 27), the
electricity supply segment of our 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). Pursuant to the PUC's
final restructuring order, our generation-related regulatory assets are being
recovered through a competitive transition charge (CTC) collected in connection
with providing transmission and distribution services, and these assets have
been reclassified accordingly. The balance of transition costs will be adjusted
by receipt of the proceeds from the pending generation asset sale. 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, 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 F, on page 27.) These regulatory
assets consist of a regulatory tax receivable, unamortized debt costs and
deferred employee costs.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period also may
be affected by the estimates and assumptions management is required to make.
Actual results could differ from those estimates.
Energy Cost Rate Adjustment Clause
Through the Energy Cost Rate Adjustment Clause (ECR), Duquesne Light
previously recovered (by the amount that such expenses were not included in base
rates) nuclear fuel, fossil fuel and purchased power expenses. Also through the
ECR, Duquesne Light passed to its customers the profits from short-term power
sales to other utilities. As a consequence of the PUC's final order regarding
Duquesne Light's restructuring plan, 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. (See "Restructuring Plan" discussion, Note F, on page 28.)
Revenues from Utility Sales
Duquesne Light's electric utility operations provide service to approximately
580,000 direct customers in southwestern Pennsylvania (including in the City of
Pittsburgh), a territory of approximately 800 square miles. We have also
historically sold electricity to other utilities, and will continue to do so
until the generation asset sale is complete. (See "Restructuring Plan"
discussion, Note F, on page 28.) Duquesne Light's meters are read monthly and
electric utility customers are billed on the same basis. Revenues are recorded
in the accounting periods for which they are billed, with the exception of
energy cost recovery revenues. (See "Energy Cost Rate Adjustment Clause"
discussion above.)
AquaSource's water utility operations currently provide service to
approximately 430,000 water and wastewater customer connections in 18 states.
Maintenance
Effective January 1, 1999, as a result of the PUC's final restructuring order,
all electric utility maintenance costs are expensed as incurred. Historically,
incremental maintenance costs incurred for refueling outages at Duquesne Light's
nuclear units (which all were acquired by FirstEnergy in December 1999) were
deferred for amortization over the period between refueling outages (generally
18 months). Duquesne Light would accrue, over the periods between outages,
anticipated costs for scheduled major fossil generating station outages.
Maintenance costs incurred for non-major scheduled outages and for forced
outages were charged to expense as such costs were incurred.
Depreciation and Amortization
Depreciation of property, plant and equipment is recorded on a straight-line
basis over the estimated remaining useful lives of properties. Goodwill,
representing the excess of the cost over the net tangible and identifiable
assets of acquired businesses, is stated at cost and is amortized on a straight-
line basis over the estimated future periods to be benefited (25 to 40 years).
Goodwill is included in other non-current assets on the consolidated balance
sheet. Amortization of gas reserve investments and depreciation of related
property are calculated on a units of production method over the total estimated
gas reserves. Amortization of interests in affordable housing partnerships is
based upon a method that approximates the equity method; amortization of certain
other leases is on the basis of benefits recorded over the lives of the
investments. Depreciation and amortization of other properties are calculated on
various bases. Amortization of transition costs represents the
24
<PAGE>
difference between CTC revenues billed to customers and the allowed return on
our unrecovered net transition cost balance (11 percent pre-tax).
In 1998 and 1997, Duquesne Light recorded nuclear decommissioning costs under
the category of depreciation and amortization expense, and accrued a liability,
equal to that amount, for nuclear decommissioning expense. In 1999, these costs
are included in transition cost amortization. On the consolidated balance sheet,
in 1998 the decommissioning trusts have been reflected in other long-term
investments, and the related liability has been recorded as other non-current
liabilities. Historically, trust fund earnings increased the fund balance and
the recorded liability. Fully funded trust funds and decommissioning liability
were transferred to FirstEnergy in the power station exchange. (See "Power
Station Exchange" discussion, Note F, on page 28.)
Income Taxes
We use the liability method in computing deferred taxes on all differences
between book and tax bases of assets. These book/tax differences occur when
events and transactions recognized for financial reporting purposes are not
recognized in the same period for tax purposes. The deferred tax liability or
asset is also adjusted in the period of enactment for the effect of changes in
tax laws or rates.
For the electricity delivery business segment, we recognize a regulatory asset
for the deferred tax liabilities that are expected to be recovered from
customers through rates. (See "Rate Matters," Note F, and "Income Taxes," Note
H, on pages 27 and 29.) Reversals of accumulated deferred income taxes are
included in income tax expense.
Investment tax credits (ITC) related to the electricity delivery business
segment generally were deferred. These prior credits are subsequently reflected,
over the lives of the related assets, as reductions to income tax expense.
Other Operating Revenues and Other Income
Other operating revenues include non-kilowatt-hour (KWH) electric utility
revenues and revenues from AquaSource's and the expanded business lines'
operating activities. Other income primarily is made up of income from long-term
investments entered into by the expanded business lines. The income is separated
from other revenues as the investment income does not result from operating
activities.
Property, Plant and Equipment
The asset values of our utility properties are stated at original construction
cost, which includes related payroll taxes, pensions and other fringe benefits,
as well as administrative costs. Also included in original construction cost is
an allowance for funds used during construction (AFC), which represents the
estimated cost of debt and equity funds used to finance construction.
Additions to, and replacements of, property units are charged to plant
accounts. Maintenance, repairs and replacement of minor items of property are
recorded as expenses when they are incurred. The costs of electricity delivery
business segment properties that are retired (plus removal costs and less any
salvage value) are charged to accumulated depreciation and amortization.
The asset values of the electricity supply business segment properties were
written down to market value in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in
conjunction with the PUC's final restructuring order.
Substantially all of the electric utility properties are subject to a first
mortgage lien.
Temporary Cash Investments
Temporary cash investments are short-term, highly liquid investments with
original maturities of three or fewer months. They are stated at market, which
approximates cost. We consider temporary cash investments to be cash
equivalents.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of the outstanding Employee Stock Ownership Plan shares, DQE Preferred
Stock and stock options. The treasury stock method is used in computing the
dilutive effect of stock options. This method assumes any proceeds obtained upon
the exercise of options would be used to purchase common stock at the average
market price during the period. The following table presents the numerators and
denominators used in computing the diluted earnings per share before 1998
extraordinary charge for 1999, 1998 and 1997.
25
<PAGE>
<TABLE>
<CAPTION>
Diluted Earnings Per Share
for the Year Ended December 31,
- -----------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Thousands of Dollars)
Earnings for common $199,847 $195,822 $199,101
Dilutive effect of:
ESOP dividends 2,121 2,183 2,269
Preferred stock dividends 1,569 866 --
- -----------------------------------------------------------------------------------------------
Diluted earnings for common $203,537 $198,871 $201,370
- -----------------------------------------------------------------------------------------------
Basic average shares 75,463 77,683 77,492
Dilutive effect of:
ESOP shares 1,128 1,169 1,226
DQE Preferred Stock 1,066 928 --
Stock options 19 59 3
- -----------------------------------------------------------------------------------------------
Diluted average shares 77,676 79,839 78,721
- -----------------------------------------------------------------------------------------------
Diluted Earnings $ 2.62 $ 2.49 $ 2.56
Per Share
===============================================================================================
</TABLE>
Stock-Based Compensation
We account for stock-based compensation using the intrinsic value method
prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of DQE common stock
at the date of the grant over the amount any employee must pay to acquire the
stock. Compensation cost for stock appreciation rights is recorded based on the
quoted market price of the stock at the end of the year.
Reclassification
The 1998 and 1997 consolidated financial statements have been reclassified to
conform with 1999 presentation.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. We are
evaluating the impact on our financial statements and disclosures.
B. CHANGES IN WORKING CAPITAL OTHER THAN CASH
<TABLE>
<CAPTION>
Changes in Working Capital Other than Cash
(Net of Dispositions and Acquisitions) for the Year Ended
December 31,
- ----------------------------------------------------------------------------------------
(Thousands of Dollars)
----------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Receivables $(17,303) $(19,080) $(14,476)
Materials and supplies 40,347 (10,942) (1,740)
Other current assets (67,634) (1,020) (519)
Accounts payable (15,859) 30,745 (4,993)
Other current liabilities (15,219) (36,698) (15,030)
- ----------------------------------------------------------------------------------------
Total $(75,668) $(36,995) $(36,758)
========================================================================================
</TABLE>
C. PROPERTY, PLANT AND EQUIPMENT
Following the power station exchange with FirstEnergy, we own the operating
generating units listed in the following table. We anticipate selling all of
these units to Orion in the second quarter of 2000. (See "Rate Matters," Note F,
on page 27.)
<TABLE>
<CAPTION>
Generating Units
- -----------------------------------------------------------------
Generating Fuel
Unit Capability Source
(Megawatts)
- -----------------------------------------------------------------
<S> <C> <C>
Cheswick 570 Coal
Elrama Units 1, 2, 3 and 4 487 Coal
Brunot Island Units 1a, 1b, 1c, 2a, 234 Fuel Oil
2b and 3
Avon Lake Units 6, 7, 9 and 10 (a) 739 Coal
New Castle Units 3, 4, 5, A and B (a) 338 Coal
Niles Units 1, 2 and A (a) 246 Coal
- ----------------------------------------------------------------------------
Total Generating Units 2,614
============================================================================
</TABLE>
(a) Acquired from FirstEnergy in the December 3, 1999 power station exchange.
Orion also will acquire our ownership interest in cold-reserved generating
units at Brunot Island Unit 4 and Phillips Power Station, with a combined
capacity of approximately 450 MW.
26
<PAGE>
D. LONG-TERM INVESTMENTS
We have made equity investments in affordable housing and gas reserve
partnerships as a limited partner. At December 31, 1999, we had investments in
11 affordable housing funds and 26 gas reserve sites. In 1999, we invested $8.2
million to acquire a 50 percent interest in a joint venture that designs,
engineers and constructs landfill gas collection systems. We are the lessor in
7 leveraged lease arrangements involving mining equipment, fossil generating
stations, waste-to-energy facilities, high speed service ferries and natural gas
processing equipment. These leases expire in various years beginning in 2011
through 2037. The recorded residual value of the equipment at the end of the
lease terms is approximately one percent of the original cost. Our aggregate
investment represents 20 percent of the aggregate original cost of the property,
and is either leased to a creditworthy lessee or is secured by guarantees of the
lessee's parent or affiliate. The remaining 80 percent was financed by non-
recourse debt, provided by lenders who have been granted, as their sole remedy
in the event of default by the lessees, an assignment of rentals due under the
leases and a security interest in the leased property. This debt amounted to
$944 million and $992 million at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Net Leveraged Lease Investments at December 31,
- -------------------------------------------------------
(Thousands of Dollars)
-------------------------------
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Rentals receivable - net $ 613,458 $ 632,879
Estimated residual value 11,510 22,029
Less: Unearned income (215,507) (266,795)
- -------------------------------------------------------
Leveraged lease 409,461 388,113
investments
Less: Deferred taxes (232,366) (185,639)
- -------------------------------------------------------
Net Leveraged $ 177,095 $ 202,474
Lease Investments
=======================================================
</TABLE>
Our other leases include investments in fossil generating stations, a waste-
to-energy facility, computers, vehicles and equipment. Our other investments are
primarily in marketable securities. Deferred income, as shown on the
consolidated balance sheet, primarily relates to our other lease investments and
certain gas reserve investments. Deferred amounts will be recognized as income
over the lives of the underlying investments for periods not exceeding 15 years
from the time of investment.
E. ACQUISITIONS
Through December 31, 1999, we had invested approximately $305 million for
AquaSource to acquire the stock or assets of water and water-related companies
through the purchase method of accounting. Approximately $43 million was in the
form of Preferred Stock, Series A (Convertible), $100 liquidation preference per
share (DQE Preferred Stock).
In 1999, DQE Systems invested approximately $63 million in the acquisition of
18 propane delivery companies in five states. These companies serve
approximately 71,000 customers. With respect to propane delivery company
acquisitions, we are implementing an aggregation strategy similar to that used
by AquaSource.
F. RATE MATTERS
Competition and the Customer Choice Act
Under Pennsylvania 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 costs.
The Customer Choice Act (effective January 1, 1997) enables Pennsylvania's
electric utility customers to purchase electricity at market prices from a
variety of electric generation suppliers (customer choice). As of January 2000,
all customers have customer choice. As of February 29, 2000, approximately 23
percent of Duquesne Light's customers had chosen alternative generation
suppliers, representing approximately 30 percent of Duquesne Light's non-
coincident peak load. Customers who have chosen an electricity generation
supplier other than Duquesne Light pay that supplier for generation charges, and
pay Duquesne Light the CTC (discussed below) and charges for transmission and
distribution. Customers who continue to buy their generation from Duquesne Light
pay for their service at current regulated tariff rates divided into generation,
transmission and distribution charges, and the CTC. Electricity delivery
(including transmission, distribution and customer service) remains regulated in
substantially the same manner as under historical regulation.
Rate Cap
An overall four-and-one-half-year rate cap from January 1, 1997, was
originally imposed on the transmission and distribution charges of Pennsylvania
electric utility companies under the Customer Choice Act. As part of a
settlement regarding recovery of deferred fuel costs (discussed below), we have
agreed to extend this rate cap for an additional six months through the end of
2001.
27
<PAGE>
Provider of Last Resort
Duquesne Light is required not only to deliver electricity, but also to serve
as the provider of last resort for all customers in its service territory. As
the provider of last resort, Duquesne Light must provide electricity for any
customer who cannot or does not choose an alternative electric generation
supplier, or whose supplier fails to deliver. While collecting the CTC,
Duquesne Light may charge only PUC-approved rates for the supply of electricity
as the provider of last resort. As part of the pending generation asset sale,
Orion has agreed to supply Duquesne Light, under a provider of last resort
service agreement, with all of the electric energy necessary to satisfy Duquesne
Light's provider of last resort obligations during the CTC collection period.
Under the Customer Choice Act, after the CTC collection period Duquesne Light
anticipates that it will supply electricity at market prices to fulfill its
provider of last resort obligations.
Restructuring Plan
In its May 29, 1998, final restructuring order, the PUC determined that
Duquesne Light should recover most of the above-market costs of its generation
assets, including plant and regulatory assets, through the collection of the CTC
from electric utility customers. The $1.49 billion of transition costs, net of
tax, was originally to be recovered over a seven-year period ending in 2005.
However, by applying expected net proceeds of the pending generation asset sale
to Orion (discussed below) to reduce transition costs, we currently anticipate
early termination of the CTC collection period in 2001 for most major rate
classes. 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 Light 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 sale.
As part of our restructuring plan filing, we 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. We also requested recovery of an additional $31.2 million
($18.2 million, net of tax) in deferred fuel costs. Although the PUC initially
denied recovery of this additional amount, on October 26, 1999, Duquesne Light
and the Pennsylvania Office of the Consumer Advocate reached a settlement on
this issue which would permit recovery of the entire $42.7 million ($24.9
million, net of tax) in deferred fuel costs. The PUC approved this settlement on
February 11, 2000.
On December 18, 1998, the PUC approved Duquesne Light's auction plan, which
included an auction of its provider of last resort service obligations, as well
as an agreement to carry out the power station exchange with FirstEnergy.
Power Station Exchange. On December 3, 1999, Duquesne Light completed the
exchange of its partial interests in five power plants for three wholly owned
power plants of subsidiaries of FirstEnergy. Duquesne Light received three
fossil-powered plants (located in Avon Lake and Niles, Ohio, and in New Castle,
Pennsylvania) having an aggregate net demonstrated capacity of 1,323 MW. The
ownership interests transferred by Duquesne Light included its interests in the
nuclear-powered Beaver Valley, Pennsylvania and Perry, Ohio plants, and the
fossil-powered Bruce Mansfield, Pennsylvania and Sammis and Eastlake, Ohio
plants, having an aggregate net demonstrated capacity of 1,435 MW. Along with
ownership of the nuclear-powered plants, FirstEnergy assumed the decommissioning
liability for Beaver Valley and Perry, in exchange for the fully funded balance
in decommissioning trust funds previously maintained by Duquesne Light. During
1999, we funded approximately $60 million into the decommissioning trusts. These
amounts, which were collected through the CTC during the year, brought the fund
balances to approximately $122 million. In connection with the power station
exchange, we terminated the Beaver Valley Unit 2 lease in the fourth quarter of
1999. (See "Leases," Note I, on page 30.)
Auction Plan. On September 24, 1999, Duquesne Light and the winning auction
bidder, Orion, entered into definitive agreements pursuant to which Orion will
purchase Duquesne Light's wholly owned Cheswick, Elrama, Phillips and Brunot
Island power stations, and the stations received from FirstEnergy in the power
station exchange, for approximately $1.71 billion (estimated to be $1.1 billion,
net of tax and transaction expenses). Under a provider of last resort service
agreement, Orion will supply Duquesne Light with all of the electric energy
necessary to satisfy Duquesne Light's obligations to its customers who have not
chosen an alternative electric generation supplier. This agreement, which
expires upon Duquesne Light's final collection of the CTC, in general
effectively transfers to Orion the financial risks and rewards associated with
Duquesne Light's provider of last resort obligations. While we retain the
collection risk for the electricity sales, a component of our regulated delivery
rates is designed to cover the cost of a normal level of uncollectible accounts.
Duquesne Light and Orion are currently discussing an extension of this provider
of last resort arrangement beyond the final CTC collection.
The Orion transactions must be approved by various regulatory agencies,
including the PUC, the FERC, and the
28
<PAGE>
Federal Trade Commission. Duquesne Light currently expects the sale to close in
the second quarter of 2000. The final accounting for the sale proceeds remains
subject to PUC approval. Through December 31, 1999, we have deferred
approximately $219 million of costs related to the power station exchange and
the asset sale. Additional divestiture-related costs will be deferred as
incurred. We expect to fully recover these costs through the divestiture
process; however, any disallowed costs will be written off.
Until the divestiture is complete, Duquesne Light is required to use an
interim CTC and price to compare for each rate class (approximately 2.9 cents
per KWH on average for the CTC, and approximately 3.8 cents per KWH on average
for the price to compare).
Termination of the AYE Merger
On October 5, 1998, we announced our unilateral termination of our merger
agreement with Allegheny Energy, Inc. (AYE). AYE filed suit in the United
States District Court for the Western District of Pennsylvania, seeking to
compel us to proceed with the merger, or in the alternative seeking an
unspecified amount of money damages. After holding a trial from October 20
through 28, 1999, the District Court ruled on December 3, 1999, that we had
properly terminated the merger agreement without breach, and granted judgment in
our favor on all claims and all requests for injunctive relief. On December 14,
1999, AYE appealed this ruling to the Third Circuit. Argument was heard on
March 9, 2000, and a decision is pending. We cannot determine the ultimate
outcome of AYE's appeal at this time.
G. SHORT-TERM BORROWING AND REVOLVING CREDIT ARRANGEMENTS
We maintain two separate revolving credit agreements, one for $250 million
expiring in June 2000 and one for $225 million expiring in September 2000. We
have the option to convert each revolver into a term loan facility for a period
of one or two years, respectively, for any amounts then outstanding upon
expiration of the revolving credit period. Interest rates can, in accordance
with the option selected at the time of the borrowing, be based on one of
several indicators, including prime, Eurodollar, or certificate of deposit
rates. Facility fees are based on the unborrowed amount of the commitment. At
December 31, 1999 and 1998, no borrowings were outstanding. Related to these and
other credit facilities, we are subject to financial covenants requiring certain
cash coverage and debt-to-capital ratios to use these facilities. At year-end,
we had $343 million of commercial paper borrowings outstanding. During 1999, the
maximum amount of bank loans and commercial paper borrowings outstanding was
$368.9 million, the amount of average daily borrowings was $46.3 million, and
the weighted average daily interest rate was 5.6 percent. In the fourth quarter
of 1999, we issued $290 million of first mortgage bonds with a one-year term,
callable in May 2000. The interest rate on the bonds is 6.53 percent.
H. INCOME TAXES
The annual federal corporate income tax returns have been audited by the
Internal Revenue Service (IRS) and are closed for the tax years through 1992.
The IRS is auditing our 1993 through 1997 returns, and the tax years 1998 and
1999 remain subject to IRS review. We do not believe that final settlement of
the federal income tax returns for the years 1993 through 1999 will have a
materially adverse effect on our financial position, results of operations or
cash flows.
<TABLE>
<CAPTION>
Deferred Tax Assets (Liabilities) at December 31,
- --------------------------------------------------------------------------------------
(Thousands of Dollars)
-------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Long-term investments $ 89,470 $ 234,890
Mine closing costs 20,460 16,546
Unbilled revenue 12,475 16,589
Unamortized ITC 9,215 9,990
Beaver Valley lease liability -- 167,440
Other 59,498 86,366
- --------------------------------------------------------------------------------------
Deferred tax assets 191,118 531,821
- --------------------------------------------------------------------------------------
Transition costs (442,271) (678,841)
Depreciation (403,354) (444,509)
Leveraged leases (232,366) (185,639)
Regulatory assets (76,091) (65,425)
Deferred energy costs (17,379) (17,379)
Reacquired debt costs (13,244) (12,976)
Other (26,516) (37,280)
- --------------------------------------------------------------------------------------
Deferred tax liabilities (1,211,221) (1,442,049)
- --------------------------------------------------------------------------------------
Net $(1,020,103) $ (910,228)
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Income Taxes
- ------------------------------------------------------------------------------
(Thousands of Dollars)
-----------------------------------------------------
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 7,400 $ 2,245 $ 3,911
State 29,861 26,946 31,083
Deferred - net:
Federal 84,376 80,104 69,324
State (8,048) 2,072 (93)
ITC deferred - net (2,867) (10,385) (8,420)
- ------------------------------------------------------------------------------
Income Taxes $110,722 $100,982 $95,805
==============================================================================
</TABLE>
29
<PAGE>
Total income taxes differ from the amount computed by applying the statutory
federal income tax rate to income before income taxes, as set forth in the
following table.
<TABLE>
<CAPTION>
Income Tax Expense Reconciliation
- ----------------------------------------------------------------------------------
(Thousands of Dollars)
---------------------------------------------------
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal taxes at $109,248 $104,185 $103,217
statutory rate (35%)
Increase (decrease) in
taxes resulting from:
State income taxes 14,178 18,370 20,143
Investment tax benefits (10,499) (14,884) (17,831)
Amortization of
deferred ITC (2,867) (10,385) (8,420)
Other 662 3,696 (1,304)
- ----------------------------------------------------------------------------------
Total Income
Tax Expense $110,722 $100,982 $ 95,805
==================================================================================
</TABLE>
I. LEASES
We lease office buildings, computer equipment, and other property and
equipment. For most of 1999, we also leased nuclear fuel and a portion of Beaver
Valley Unit 2.
<TABLE>
<CAPTION>
Capital Leases at December 31,
- --------------------------------------------------------------------------
(Thousands of Dollars)
----------------------------------
1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Nuclear fuel $ -- $100,756
Electric plant 19,632 19,923
Other 6,695 2,695
- --------------------------------------------------------------------------
Total 26,327 123,374
Less: Accumulated amortization (7,649) (63,604)
- --------------------------------------------------------------------------
Capital Leases - Net (a) $18,678 $ 59,770
==========================================================================
</TABLE>
(a) Includes $1,746 in 1999 and $2,037 in 1998 of capital leases with
associated obligations retired.
In 1987, Duquesne Light sold and leased back its 13.74 percent interest in
Beaver Valley Unit 2; the sale was exclusive of transmission and common
facilities. In conjunction with the PUC restructuring order, it was determined
that costs related to the lease were transition costs to be recovered through
the CTC. Duquesne Light terminated the lease in connection with the power
station exchange with FirstEnergy. The lease liability recorded on the
consolidated balance sheet was eliminated; however, the underlying
collateralized lease bonds ($359.2 million upon lease termination) became
obligations of Duquesne Light, and are now recorded as debt on the consolidated
balance sheet. (See "Power Station Exchange" discussion, Note F, on page 28.)
<TABLE>
<CAPTION>
Summary of Rental Expense
- --------------------------------------------------------------------------------------
(Thousands of Dollars)
------------------------------------------------
Year Ended December 31,
------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating leases $51,723 $57,324 $60,684
Amortization of capital leases 18,889 12,943 16,847
Interest on capital leases 2,942 4,386 3,435
- --------------------------------------------------------------------------------------
Total Rental Payments $73,554 $74,653 $80,966
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Future Minimum Lease Payments
- -------------------------------------------------------------------------------
(Thousands of Dollars)
--------------------------------------
Operating Capital
Year Ended December 31, Leases Leases
- -------------------------------------------------------------------------------
<S> <C> <C>
2000 $10,285 $ 4,535
2001 10,276 4,036
2002 10,176 4,014
2003 1,735 3,446
2004 1,248 2,914
2005 and thereafter -- 14,497
- -------------------------------------------------------------------------------
Total $33,720 $ 33,442
- -------------------------------------------------------------------------------
Less: Amount representing interest (16,510)
- -------------------------------------------------------------------------------
Present value (a) $ 16,932
===============================================================================
</TABLE>
(a) Includes current obligations of $.07 million at December 31, 1999.
Future minimum lease payments for operating leases are related principally to
certain corporate offices. Future minimum lease payments for capital leases are
related principally to building leases.
Future payments due to us as of December 31, 1999, under subleases of certain
corporate office space, are approximately $6.1 million in 2000, $6.1 million in
2001 and $6.6 million thereafter.
J. COMMITMENTS AND CONTINGENCIES
We anticipate completing the divestiture of our generation assets through the
pending generation asset sale to Orion in the second quarter of 2000. Certain
obligations related to the divested assets will be transferred to Orion upon
completion of that sale. (See "Restructuring Plan" discussion, Note F, on
page 28.)
Construction, Investments and Acquisitions
We estimate that we will spend, excluding AFC, approximately $85 million
(including $5 million for generation), $75 million and $75 million in 2000, 2001
and 2002 for electric utility construction; and $45 million, $19 million and $24
million for water utility construction in 2000, 2001 and 2002.
30
<PAGE>
Guarantees
As part of our investment portfolio in affordable housing, we have received
fees in exchange for guaranteeing a minimum defined yield to third-party
investors. A portion of the fees received has been deferred to absorb any
required payments with respect to these transactions. Based on an evaluation of
and recent experience with the underlying housing projects, we believe that such
deferrals are ample for this purpose.
Employees
Duquesne Light is party to a labor contract expiring in September 2001 with
the International Brotherhood of Electrical Workers (IBEW), which represents the
majority of Duquesne Light's employees. The contract provides, among other
things, employment security, income protection and, in September 2000, a 3
percent wage increase. Duquesne Light and the IBEW have agreed on a package of
additional benefits and protections for union employees affected by the
divestiture of generation assets.
In connection with the power station exchange with FirstEnergy and the pending
generation asset sale to Orion, Duquesne Light developed early retirement
programs and enhanced available separation packages for eligible IBEW and
management employees. Duquesne Light expects to recover related costs through
the sale proceeds.
Other
In 1992, the Pennsylvania Department of Environmental Protection (DEP) issued
Residual Waste Management Regulations governing the generation and management of
non-hazardous residual waste, such as coal ash. We have assessed our residual
waste management sites, and the DEP has approved our compliance strategies. We
incurred capital costs of $0.5 million in 1999 to comply with these DEP
regulations. We expect the capital cost of compliance to be approximately $5.0
million over the next two years with respect to sites we will continue to own
after the generation asset sale. We are seeking to recover these costs through
the generation asset sale proceeds.
Duquesne Light's current estimated liability for closing Warwick Mine,
including final site reclamation, mine water treatment and certain labor
liabilities, is $49.3 million. Duquesne Light has recorded a liability for this
amount on the consolidated balance sheet.
We are involved in various other legal proceedings and environmental matters.
We believe that such proceedings and matters, in total, will not have a
materially adverse effect on our financial position, results of operations or
cash flows.
K. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-Term Debt at December 31,
- -------------------------------------------------------------------------------------------------
(Thousands of Dollars)
---------------------------------
Interest Principal Outstanding
Rate Maturity 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First mortgage bonds (a) 6.450%-8.375% 2003-2038 $ 643,000 (b) $ 743,000 (c)
Pollution control notes Adjustable (d) 2009-2030 417,985 417,985
Collateralized lease bonds 8.70% 2001-2016 350,162 (e) --
Public income notes 8.38% 2039 100,000 --
Term loans 6.47%-7.47% 2001 85,000 (f) 150,000
Economic development revenue
bonds 5.5%-8.75% 2001-2024 10,565 10,760
Sinking fund debentures 5.00% 2010 2,791 2,791
Miscellaneous 30,135 36,641
Less: Unamortized debt discount
and premium - net (6,561) (3,428)
- -------------------------------------------------------------------------------------------------
Total Long-Term Debt $1,633,077 $1,357,749
=================================================================================================
</TABLE>
(a) Includes $100 million of first mortgage bonds not callable until 2003.
Redemption prices for 2000 range from par to a premium of 4.92%.
(b) Excludes $390 million related to current maturities during 2000, of which
$290 million are first mortgage bonds issued in November 1999.
(c) Excludes $75.0 million related to current maturities during 1999.
(d) The pollution control notes have adjustable interest rates. The interest
rates at year-end averaged 3.8 percent in 1999 and 3.9 percent in 1998.
(e) Excludes $9.1 million related to current maturities during 2000.
(f) Excludes $65 million related to current maturities during 2000.
31
<PAGE>
At December 31, 1999, sinking fund requirements and maturities of long-term
debt outstanding for the next five years were $175.1 million in 2000, $95.3
million in 2001, $11.8 million in 2002, $116.2 million in 2003, and $118.3
million in 2004.
Total interest and other charges were $158.7 million in 1999, $109.5 million
in 1998 and $115.6 million in 1997. Interest costs attributable to debt were
$107.7 million, $95.0 million and $101.2 million in 1999, 1998 and 1997,
respectively. Of these amounts, $0.8 million in 1999, $2.2 million in 1998 and
$2.3 million in 1997 were capitalized as AFC. Debt discount or premium and
related issuance expenses are amortized over the lives of the applicable issues.
Interest and other charges in 1999 also includes $35.2 million related to the
Beaver Valley Unit 2 lease expense, previously classified as other operating
expenses.
At December 31, 1999, the fair value of long-term debt, including current
maturities and sinking fund requirements, estimated on the basis of quoted
market prices for the same or similar issues, or current rates offered for debt
of the same remaining maturities, was $2,089.3 million. The principal amount
included in the consolidated balance sheet is $2,108.2 million.
At December 31, 1999 and 1998, we were in compliance with all of our debt
covenants.
L. PREFERRED AND PREFERENCE STOCK
<TABLE>
<CAPTION>
Preferred and Preference Stock at December 31,
- ---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
----------------------------------------------------
1999 1998
Call Price ----------------------------------------------------
Per Share Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Preferred Stock of DQE:
Series A Preferred Stock (a) -- 421,702 $ 42,170 352,742 $ 35,274
- ---------------------------------------------------------------------------------------------------
Preferred Stock Series of
Subsidiaries:
3.75% (b) $51.00 148,000 7,407 148,000 7,407
4.00% (b) 51.50 549,709 27,486 549,709 27,486
4.10% (b) 51.75 119,860 6,012 119,860 6,012
4.15% (b) 51.73 132,450 6,643 132,450 6,643
4.20% (b) 51.71 100,000 5,021 100,000 5,021
$2.10 (b) 51.84 159,000 8,039 159,000 8,039
9.00% (c) -- 10 3,000 10 3,000
8.375% (d) -- 6,000,000 150,000 6,000,000 150,000
6.5% (e) -- 15 1,500 15 1,500
6.5% (f) -- 10 500 10 500
- ---------------------------------------------------------------------------------------------------
Total Preferred Stock of
Subsidiaries 215,608 215,608
- ---------------------------------------------------------------------------------------------------
Preference Stock Series of
Subsidiaries:
Plan Series A (g) 36.06 752,018 25,279 779,394 26,914
- ---------------------------------------------------------------------------------------------------
Deferred ESOP benefit (10,875) (14,240)
- ---------------------------------------------------------------------------------------------------
Total Preferred and
Preference Stock $272,182 $263,556
===================================================================================================
</TABLE>
(a) 1,000,000 authorized shares; no par value; convertible;
$100 liquidation preference per share; annual dividends range from
3.4 percent to 4.4 percent
(b) 4,000,000 authorized shares; $50 par value; cumulative;
$50 per share involuntary liquidation value
(c) 500 authorized shares; $300,000 par value; these shares were redeemed
at par value on March 2, 2000
(d) Cumulative Monthly Income Preferred Securities, Series A (MIPS);
6,000,000 authorized shares; $25 involuntary liquidation value
(e) 1,500 authorized shares; $100,000 par value;
$100,000 involuntary liquidation value; holders entitled to
6.5 percent annual dividend each September
(f) Preferred stock: 100 authorized shares; $50,000 par value;
$50,000 per share involuntary liquidation value; holders
entitled to 6.5 percent annual dividend each September
(g) Preference stock: 8,000,000 authorized shares;
$1 par value; cumulative $35.50 per share involuntary
liquidation value; non-redeemable
32
<PAGE>
As of December 31, 1999, 421,702 shares of DQE Preferred Stock had been issued
and were outstanding. No additional shares have been issued in 2000. The DQE
Preferred Stock ranks senior to DQE's common stock as to the payment of
dividends and the distribution of assets on liquidations, dissolution or
winding-up of DQE. Dividends are paid quarterly on each January 1, April 1, July
1 and October 1. Holders of DQE Preferred Stock are entitled to vote on all
matters submitted to a vote of the holders of DQE common stock, voting together
with the holders of common stock as a single class. Each share of DQE Preferred
Stock is entitled to three votes. Each share of DQE Preferred Stock is
convertible at our option into the number of shares of DQE common stock computed
by dividing the DQE Preferred Stock's $100 liquidation value by the five-day
average closing sales price of DQE common stock for the five trading days
immediately prior to the conversion date. Each unredeemed share of DQE Preferred
Stock will automatically be converted on the first day of the first month
commencing after the sixth anniversary of its issuance.
In May 1996, Duquesne Capital L.P. (Duquesne Capital), a special-purpose
limited partnership of which Duquesne Light is the sole general partner, issued
$150.0 million principal amount of 8 3/8 percent Monthly Income Preferred
Securities (MIPS) Series A, with a stated liquidation value of $25.00. The
holders of MIPS are entitled to annual dividends of 8 3/8 percent, payable
monthly. The sole assets of Duquesne Capital are Duquesne Light's 8 3/8 percent
debentures. These debt securities may be redeemed at Duquesne Light's option on
or after May 31, 2001. Duquesne Light has guaranteed the payment of
distributions on, and redemption price and liquidation amount in respect of the
MIPS, if Duquesne Capital has funds available for such payment from the debt
securities. Upon maturity or prior redemption of such debt securities, the MIPS
will be mandatorily redeemed.
Holders of Duquesne Light's preferred stock are entitled to cumulative
quarterly dividends. If four quarterly dividends on any series of preferred
stock are in arrears, holders of the preferred stock are entitled to elect a
majority of Duquesne Light's board of directors until all dividends have been
paid. Holders of Duquesne Light's preference stock are entitled to receive
cumulative quarterly dividends, if dividends on all series of preferred stock
are paid. If six quarterly dividends on any series of preference stock are in
arrears, holders of the preference stock are entitled to elect two of Duquesne
Light's directors until all dividends have been paid. At December 31, 1999,
Duquesne Light had made all dividend payments. Preferred and preference
dividends of subsidiaries included in interest and other charges were $16.6
million, $16.7 million and $16.7 million in 1999, 1998 and 1997. Total preferred
and preference stock had involuntary liquidation values of $285.3 million and
$278.4 million, which exceeded par by $26.9 million at December 31, 1999 and
1998.
In December 1991, we established an Employee Stock Ownership Plan (ESOP) to
provide matching contributions for a 401(k) Retirement Savings Plan for
Management Employees. (See "Employee Benefits," Note N, on page 34.) We issued
and sold 845,070 shares of preference stock, plan series A, to the trustee of
the ESOP. As consideration for the stock, we received a note valued at $30
million from the trustee. The preference stock has an annual dividend rate of
$2.80 per share, and each share of the preference stock is exchangeable for one
and one-half shares of DQE common stock. At December 31, 1999, $10.9 million of
preference stock issued in connection with the establishment of the ESOP had
been offset, for financial statement purposes, by the recognition of a deferred
ESOP benefit. Dividends on the preference stock and cash contributions from DQE
are used to fund the repayment of the ESOP note. We were not required to make a
cash contribution for 1998. We made cash contributions of approximately $0.2
million for 1999 and $1.1 million for 1997. These cash contributions were the
difference between the ESOP debt service and the amount of dividends on
ESOP shares ($2.1 million in 1999, $2.2 million in 1998 and $2.3 million in
1997). As shares of preference stock are allocated to the accounts of
participants in the ESOP, we recognize compensation expense, and the amount of
the deferred compensation benefit is amortized. We recognized compensation
expense related to the 401(k) plans of $3.6 million in 1999, $1.6 million in
1998 and $3.2 million in 1997. Although outstanding preferred stock is
generally callable on notice of not less than 30 days, at stated prices plus
accrued dividends, the outstanding MIPS and preference stock are not currently
callable. None of the remaining Duquesne Light preferred or preference stock
issues has mandatory purchase requirements.
M. EQUITY
<TABLE>
<CAPTION>
Changes in the Number of Shares of DQE Common Stock
Outstanding as of December 31,
- -------------------------------------------------------------------------------------
(Thousands of Shares)
-------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1 77,373 77,680 77,273
Reissuances 61 70 408
Repurchases (5,668) (377) (1)
- -------------------------------------------------------------------------------------
December 31 (71,766) 77,373 77,680
=====================================================================================
</TABLE>
33
<PAGE>
We have continuously paid dividends on common stock since 1953. Our annualized
dividends per share were $1.60, $1.52 and $1.44 at December 31, 1999, 1998 and
1997. During 1999, we paid a quarterly dividend of $0.38 per share on January 1,
April 1, July 1 and October 1. We increased the quarterly dividend declared in
the fourth quarter of 1999 from $0.38 to $0.40 per share, payable January 1,
2000. During 1998, we paid a quarterly dividend of $0.36.
Once all dividends on DQE Preferred Stock have been paid, dividends may be
paid on our common stock as permitted by law and as declared by the board of
directors. However, payments of dividends on Duquesne Light's common stock may
be restricted by Duquesne Light's obligations to holders of preferred and
preference stock, pursuant to Duquesne Light's Restated Articles of
Incorporation, and by obligations of Duquesne Light's subsidiaries to holders of
their preferred securities. No dividends or distributions may be made on
Duquesne Light's common stock if Duquesne Light has not paid dividends or
sinking fund obligations on its preferred or preference stock. Further, the
aggregate amount of Duquesne Light's common stock dividend payments or
distributions may not exceed certain percentages of net income, if the ratio of
total common shareholder's equity to total capitalization is less than specified
percentages. Because we own all of Duquesne Light's common stock, if Duquesne
Light cannot pay common dividends, we may not be able to pay dividends on our
common stock or DQE Preferred Stock. No part of the retained earnings of DQE was
restricted at December 31, 1999.
Effective December 31, 1998, DQE adopted SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. The objective of the
statement is to report a measure of all changes in equity of a business
enterprise that result from recognized transactions and other economic events of
the period, other than transactions with owners in their capacity as owners
(comprehensive income).
<TABLE>
<CAPTION>
Accumulated Other Comprehensive Income Balances as of December 31,
- ---------------------------------------------------------------------------------
(Thousands of Dollars)
--------------------------------
1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
January 1 $ 294 $ 3,742
Unrealized gains (losses), net 1,540 (3,448)
- ---------------------------------------------------------------------------------
December 31 $1,834 $ 294
=================================================================================
</TABLE>
N. EMPLOYEE BENEFITS
Pension and Postretirement Benefits
We maintain retirement plans to provide pensions for all eligible employees.
Upon retirement, an eligible employee receives a monthly pension based on his or
her length of service and compensation. The cost of funding the pension plan is
determined by the unit credit actuarial cost method. Our policy is to record
this cost as an expense and to fund the pension plans by an amount that is at
least equal to the minimum funding requirements of the Employee Retirement
Income Security Act of 1974, but which does not exceed the maximum tax-
deductible amount for the year. Pension costs charged to expense or construction
were $12.8 million for 1999, $12.0 million for 1998 and $12.7 million for 1997.
In 1999, we offered an early retirement program for certain employees affected
by the generation asset divestiture. The total increase in the projected benefit
obligation to the retirement plans is estimated to be $29.4 million. Of this
amount, $17.4 million is recognized as special termination benefits in the table
on page 35. The remaining $12.0 million is reflected in the unrecognized
actuarial gain/loss account in the table.
In addition to pension benefits, we provide certain health care benefits and
life insurance for some retired employees. Participating retirees make
contributions, which may be adjusted annually, to the health care plan. The life
insurance plan is non-contributory. Health care benefits terminate when covered
individuals become eligible for Medicare benefits or reach age 65, whichever
comes first. We fund actual expenditures for obligations under the plans on a
"pay-as-you-go" basis. We have the right to modify or terminate the plans.
We accrue the actuarially determined costs of the aforementioned
postretirement benefits over the period from the date of hire until the date the
employee becomes fully eligible for benefits. We have elected to amortize the
transition obligation over a 20-year period.
We sponsor several qualified and nonqualified pension plans and other
postretirement benefit plans for our employees. The following tables provide a
reconciliation of the changes in the plans' benefit obligations and fair value
of plan assets over the two-year period ending December 31, 1999, a statement of
the funded status as of December 31, 1999 and 1998, and summary of assumptions
used in the measurement of our benefit obligation:
34
<PAGE>
<TABLE>
<CAPTION>
Funded Status of the Pension and Postretirement Benefit Plans at December 31,
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
-----------------------------------------------------------------------------
Pension Postretirement
-----------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 605,597 $ 554,302 $ 46,358 $ 46,330
Service cost 15,976 14,042 2,212 1,832
Interest cost 40,249 37,723 3,134 3,078
Actuarial (gain) loss (73,622) 26,231 4,607 (3,003)
Benefits paid (29,533) (26,592) (2,306) (1,879)
Plan amendments -- -- (207) --
Curtailments 8,372 -- 4,400 --
Settlements (41) (109) -- --
Special termination benefits 17,376 -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 584,374 605,597 58,198 46,358
- -----------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning 681,244 605,457 -- --
of year
Actual return on plan assets 99,929 91,561 -- --
Employer contributions -- 10,706 -- --
Benefits paid (29,420) (26,480) -- --
- -----------------------------------------------------------------------------------------------------------------------
Fair value of plan at end of year 751,753 681,244 -- --
- -----------------------------------------------------------------------------------------------------------------------
Funded status 167,379 75,647 (58,198) 46,358
Unrecognized net actuarial (gain) loss (289,579) (173,974) 5,253 (1,795)
Unrecognized prior service cost 32,160 36,285 (207) --
Unrecognized net transition obligation 8,264 10,227 21,463 23,607
- -----------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (81,776) $ (51,815) $(31,689) $(24,546)
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Weighted-Average Assumptions as of December 31,
- ------------------------------------------------------------------------------------
Pension Postretirement
---------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate used to determine
projected benefits obligation 7.50% 6.50% 7.50% 6.50%
Assumed rate of return on plan
assets 7.50% 7.50% --% --%
Assumed change in compensation
levels 4.25% 4.25% --% --%
Ultimate health care cost trend
rate --% --% 6.00% 5.00%
</TABLE>
All of our plans for postretirement benefits, other than pensions, have no
plan assets. The aggregate benefit obligation for those plans was $58.2 million
as of December 31, 1999, and $46.4 million as of December 31, 1998. The
accumulated postretirement benefit obligation comprises the present value of the
estimated future benefits payable to current retirees, and a pro rata portion of
estimated benefits payable to active employees after retirement.
In 1999, we offered an early retirement program for certain employees affected
by the generation asset divestiture. The total increase in the projected benefit
obligation of the postretirement benefits is estimated to be $4 million. This
increase is reflected in the unrecognized actuarial gain/loss account in the
above table.
Pension assets consist primarily of common stocks exclusive of DQE common
stock, United States obligations and corporate debt securities.
35
<PAGE>
<TABLE>
<CAPTION>
Components of Net Pension Cost as of December 31,
- -----------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
-----------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net pension cost:
Service cost $ 15,976 $ 14,043 $ 12,340
Interest cost 40,249 37,723 36,571
Expected return on plan assets (45,945) (41,067) (38,265)
Amortization of unrecognized net transition
obligation 1,788 1,812 1,812
Amortization of prior service cost 3,467 3,515 3,515
Recognized net actuarial loss (gain) (2,753) (4,014) (3,243)
- -----------------------------------------------------------------------------------------------------------------
Net pension cost 12,782 12,012 12,730
Curtailment cost (14) -- 477
Settlement cost 78 224 652
Special termination benefits 17,376 -- 5,409
- -----------------------------------------------------------------------------------------------------------------
Net Pension Cost After Curtailments,
Settlements and Special Termination
Benefits $ 30,222 $ 12,236 $ 19,268
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Components of Postretirement Cost as of December 31,
- ----------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
----------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of postretirement cost:
Service cost $2,212 $1,832 $1,603
Interest cost 3,134 3,078 3,048
Amortization of unrecognized net transition
obligation 1,660 1,687 1,686
- ----------------------------------------------------------------------------------------------------------------
Net postretirement cost 7,006 6,597 6,337
Curtailment cost 2,443 -- 218
- ----------------------------------------------------------------------------------------------------------------
Net Postretirement Cost After Curtailments $9,449 $6,597 $6,555
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Effect of a One Percent Change in Health Care Cost Trend Rates as of December 31, 1999
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
------------------------------
One Percent One Percent
Increase Decrease
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components of
net periodic postretirement health care benefit cost 632 $ (544)
Effect on the health care component of the accumulated
postretirement benefit obligation $5,875 $(5,143)
</TABLE>
Retirement Savings Plan and Other Benefit Options
We sponsor separate 401(k) retirement plans for our management and IBEW-
represented employees.
The 401(k) Retirement Savings Plan for Management Employees provides that we
match employee contributions to a 401(k) account up to a maximum of six percent
of an employee's eligible salary. Our match consists of a $0.25 base match per
eligible contribution dollar, and an additional $0.25 incentive match per
eligible contribution dollar, if board-approved targets are achieved. In 1999,
more than 60 percent of management employees achieved their incentive targets.
We are funding our matching contributions to the 401(k) Retirement Savings Plan
for Management Employees with payments to an ESOP established in December 1991.
(See "Preferred and Preference Stock," Note L, on page 32.)
The 401(k) Retirement Savings Plan for IBEW-Represented Employees provides
that we will match employee contributions to a 401(k) account up to a maximum of
four percent of an employee's eligible salary. Our match consists of a $0.25
base match per eligible contribution dollar and an additional
36
<PAGE>
$0.25 incentive match per eligible contribution dollar, if certain targets are
met. In 1999, all IBEW-represented employees achieved their incentive targets.
Our shareholders have approved a long-term incentive plan through which we may
grant management employees options to purchase, during the years 1987 through
2006, up to a total of 9.9 million shares of DQE common stock at prices equal to
the fair market value of such stock on the dates the options were granted. At
December 31, 1999, approximately 3.7 million of these shares were available for
future grants.
As of December 31, 1999, 1998 and 1997, active grants totaled 1,031,434;
1,230,946 and 1,084,041 shares. Exercise prices of these options ranged from
$17.5834 to $43.4375 at December 31, 1999; from $15.8334 to $43.4375 at
December 31, 1998; and from $15.8334 to $33.7813 at December 31, 1997.
Expiration dates of these grants ranged from 2001 to 2009 at December 31, 1999;
from 2000 to 2008 at December 31, 1998; and from 2000 to 2007 at December 31,
1997. As of December 31, 1999, 1998 and 1997, stock appreciation rights (SARs)
had been granted in connection with 933,014; 867,104 and 635,995 of the options
outstanding. During 1999, 45,265 SARs were exercised; 254,225 options were
exercised at prices ranging from $17.5834 to $35.0625; and 33,000 options were
cancelled. During 1998, 233,532 SARs were exercised; 170,476 options were
exercised at prices ranging from $15.8334 to $31.5625; and no options were
cancelled. During 1997, 694,984 SARs were exercised; 638,494 options were
exercised at prices ranging from $8.2084 to $30.75; and no options were
cancelled. Of the active grants at December 31, 1999, 1998 and 1997, 132,105;
750,463; and 402,816 were not exercisable.
O. BUSINESS SEGMENTS AND RELATED INFORMATION
We report our results by the following four principal business segments,
determined by products, services and regulatory environment: (1) the
transmission and distribution by Duquesne Light of electricity (electricity
delivery business segment), (2) the supply by Duquesne Light of electricity
(electricity supply business segment), (3) the collection by Duquesne Light of
transition costs (CTC business segment), and (4) the distribution by AquaSource
of water (water distribution business segment). We also report an "all other"
category, which includes our expanded business lines and Duquesne Light
investments below the quantitative threshold for separate disclosure.
<TABLE>
<CAPTION>
Business Segments as of December 31,
- ----------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
-------------------------------------------------------------------------------------------------
Electricity Electricity Water
Delivery Supply CTC Distribution All Other Eliminations Consolidated
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
- ----------------------------------------------------------------------------------------------------------------------
Operating revenues $ 338.6 $437.7 $ 377.9 $122.4 $ 77.4 $(12.8) $1,341.2
Operating expenses 163.5 457.3 16.6 99.2 113.7 (24.2) 826.1
Depreciation and
amortization expense 46.0 26.3 95.6 12.8 15.6 -- 196.3
- ----------------------------------------------------------------------------------------------------------------------
Operating income
(loss) 129.1 (45.9) 265.7 10.4 (51.9) 11.4 318.8
Other income 7.4 12.4 (1.3) 4.3 153.2 (24.0) 152.0
Interest and other
charges 44.6 43.9 45.4 7.6 27.3 (10.1) 158.7
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes 91.9 (77.4) 219.0 7.1 74.0 (2.5) 312.1
Income taxes 35.4 (35.9) 90.9 2.4 17.9 -- 110.7
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 56.5 $(41.5) $ 128.1 $ 4.7 $ 56.1 $ (2.5) $ 201.4
======================================================================================================================
Assets $1,535.4 $425.7 $2,226.8 $446.1 $975.0 $ -- $5,609.0
======================================================================================================================
Capital expenditures $ 69.9 $ 30.4 $ -- $ 27.2 $ 19.7 $ -- $ 147.2
======================================================================================================================
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
(Millions of Dollars)
---------------------------------------------------------------------------------
Electricity Electricity Water All
Delivery Supply Distribution Other Eliminations Consolidated
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
- -----------------------------------------------------------------------------------------------------------
Operating revenues $ 321.5 $ 855.3 $ 30.9 $ 60.4 $(13.6) $1,254.5
Operating expenses 148.5 538.8 28.0 64.5 (17.6) 762.2
Depreciation and
amortization expense 46.3 158.4 2.4 12.8 -- 219.9
- -----------------------------------------------------------------------------------------------------------
Operating income (loss) 126.7 158.1 0.5 (16.9) 4.0 272.4
Other income 5.3 9.0 2.4 125.3 (7.2) 134.8
Interest and other charges 37.7 58.6 0.5 13.6 (0.9) 109.5
- -----------------------------------------------------------------------------------------------------------
Income before taxes
and extraordinary item 94.3 108.5 2.4 94.8 (2.3) 297.7
Income taxes 37.1 36.6 0.8 27.5 (1.0) 101.0
- -----------------------------------------------------------------------------------------------------------
Income before
extraordinary item 57.2 71.9 1.6 67.3 (1.3) 196.7
Extraordinary item, net
of tax -- (82.6) -- -- -- (82.6)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) after
extraordinary item $ 57.2 $ (10.7) $ 1.6 $ 67.3 $ (1.3) $ 114.1
===========================================================================================================
Assets $1,448.8 $2,711.5 $232.0 $973.7 $ -- $5,366.0
===========================================================================================================
Capital expenditures $ 71.7 $ 41.6 $ 7.7 $ 69.5 $ -- $ 190.5
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(Millions of Dollars)
----------------------------------------------------------------------------------------
Electricity Electricity Water All Eliminations Consolidated
Delivery Supply Distribution Other
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
- -----------------------------------------------------------------------------------------------------------
Operating revenues $ 316.9 $ 859.0) $ 1.6 $ 63.2 $(10.5) $1,230.2
Operating expenses 138.4 524.2 2.1 60.9 (16.1) 709.5
Depreciation and
amortization
expense 44.6 190.9 0.1 4.4 -- 240.0
- -----------------------------------------------------------------------------------------------------------
Operating income
(loss) 133.9 143.9 (0.6) (2.1) 5.6 280.7
Other income 6.8 12.7 -- 119.3 (9.0) 129.8
Interest and other
charges 38.6 63.8 -- 14.1 (0.9) 115.6
- -----------------------------------------------------------------------------------------------------------
Income before
taxes 102.1 92.8 (0.6) 103.1 (2.5) 294.9
Income taxes 40.2 32.3 (0.2) 24.5 (1.0) 95.8
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 61.9 $ 60.5 $(0.4) $ 78.6 $ (1.5) $ 199.1
===========================================================================================================
Assets $1,476.1 $2,201.2 $10.1 $1,007.0 $ -- $4,694.4
===========================================================================================================
Capital
expenditures $ 57.6 $ 32.8 $ 2.3 $ 23.3 $ -- $ 116.0
===========================================================================================================
</TABLE>
38
<PAGE>
P. NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
Non-Cash Investing and Financing Activities for the Year Ended December 31,
- --------------------------------------------------------------------------------------------
(Thousands of Dollars)
--------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumption of debt in conjunction with Beaver
Valley 2 lease termination $359,236 $ -- $ --
Preferred stock issued in conjunction with
acquisitions $ 8,634 $33,726 $ 2,548
Note payable issued in conjunction with
purchase of property $ -- $25,000 $ --
Assumption of debt in conjunction with
acquisitions $ -- $21,627 $ --
Capital lease obligations recorded $ -- $ 7,855 $27,514
On December 3, 1999, we acquired three power plants and disposed of our ownership interests
in five power plants in the power station exchange with FirstEnergy.
============================================================================================
</TABLE>
Q. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The earnings in the following table include per share gains in 1999 of $.04 on
a leveraged lease investment in the first quarter, and $.06, $.16 and $.06 from
real estate sales in the second, third and fourth quarters, respectively.
Additionally, included in the fourth quarter of 1999 is $.20 per share in
earnings related to accounting for transition cost recovery. This earnings
increase primarily relates to synchronizing the beginning of the transition cost
recovery period with the functional unbundling of customer bills and the
application of specific customer rates to the collection of transition cost. The
final PUC approval of Duquesne Light's transition cost accounting is anticipated
during the third quarter of 2000.
<TABLE>
<CAPTION>
Summary of Selected Quarterly Financial Data (Thousands of Dollars, Except Per Share Amounts)
- -------------------------------------------------------------------------------------------------------------
[The quarterly data reflect seasonal weather variations in the electric utility's service territory.]
- -------------------------------------------------------------------------------------------------------------
1999 (a) First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $316,988 $315,025 $384,155 $325,033
Operating income 61,562 64,663 88,573 104,044
Net income 48,465 41,606 49,217 62,128
Basic earnings per share: 0.62 0.55 0.64 0.84
Diluted earnings per share: 0.62 0.54 0.63 0.83
Stock price:
High 44 3/16 43 1/16 41 1/16 41
Low 37 7/8 38 15/16 37 1/8 33 7/8
=============================================================================================================
<CAPTION>
1998 (a) First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $298,775 $303,510 $343,530 $308,736
Operating income 61,817 64,949 88,646 56,991
Income before extraordinary item 45,130 40,204 62,069 49,285
Extraordinary item -- (82,548) -- --
Net income after extraordinary 45,130 (42,344) 62,069 49,285
item
Basic earnings per share:
Before extraordinary item 0.58 0.52 0.80 0.62
Extraordinary item -- (1.06) -- --
After extraordinary item 0.58 (0.54) 0.80 0.62
Diluted earnings per share:
Before extraordinary item 0.58 0.51 0.78 0.62
Extraordinary item -- (1.03) -- --
After extraordinary item 0.58 (0.52) 0.78 0.62
Stock price:
High 37 1/4 37 5/16 39 1/4 43 15/16
Low 32 5/16 31 5/8 34 1/4 37 3/4
=============================================================================================================
</TABLE>
(a) Restated to conform with 1999 presentation.
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to our Directors is set forth in the Proxy Statement for
the DQE Annual Meeting of Shareholders to be held May 25, 2000. The information
is incorporated here by reference. Information relating to the executive
officers is set forth in Part I of this Report under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is set forth in the Proxy
Statement for the DQE Annual Meeting of Shareholders to be held May 25, 2000.
The information is incorporated here by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to the ownership of equity securities of DQE by our
directors, officers and certain beneficial owners is set forth under the caption
"Beneficial Ownership of Stock" in the Proxy Statement for the DQE Annual
Meeting of Shareholders to be held May 25, 2000. Information is incorporated
here by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following information is set forth here in Item 8 (Consolidated
Financial Statements and Supplementary Data) on pages 18 through 39 of this
Report. The following financial statements and Report of Independent Auditors
are incorporated here by reference:
Report of Independent Auditors.
Statement of Consolidated Income for the Three Years Ended December 31, 1999.
Consolidated Balance Sheet, December 31, 1998 and 1999.
Statement of Consolidated Cash Flows for the Three Years Ended December 31,
1999.
Statement of Consolidated Comprehensive Income for the Three Years Ended
December 31, 1999.
Statement of Consolidated Retained Earnings for the Three Years Ended December
31, 1999.
Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule and the related Report of
Independent Auditors are filed here as a part of this Report:
Schedule for the Three Years Ended December 31, 1999:
II - Valuation and Qualifying Accounts.
The remaining schedules are omitted because of the absence of the conditions
under which they are required or because the information called for is shown in
the financial statements or notes to the consolidated financial statements.
(a)(3) Exhibits are set forth in the Exhibit Index below, incorporated here by
reference. Documents other than those designated as being filed here are
incorporated here by reference. Documents incorporated by reference to a DQE
Annual Report on Form 10-K, a Quarterly Report on Form 10-Q or a Current Report
on Form 8-K are at Securities and Exchange Commission File No. 1-10290.
Documents incorporated by reference to a Duquesne Light Company Annual Report on
Form 10-K, a Quarterly Report on Form 10-Q or a Current Report on Form 8-K are
at Securities and Exchange Commission File No. 1-956. The Exhibits include the
management contracts and compensatory plans or arrangements required to be filed
as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K.
(b) We filed three reports on Form 8-K during the fiscal quarter ended
December 31, 1999, and one to date in 2000.
A report was filed December 8, 1999, to report the judge's decision in favor
of DQE in the AYE lawsuit regarding termination of the merger agreement. No
financial statements were filed with this report.
A report was filed December 20, 1999, to report the power station exchange
between Duquesne Light and FirstEnergy Corporation. No financial statements
were filed with this report.
A report was filed December 27, 1999, to report certain earnings adjustments.
No financial statements were filed with this report.
A report was filed February 1, 2000, to disclose information regarding
DQE Enterprise's investments. No financial statements were filed with this
report.
40
<PAGE>
Exhibits Index
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
<S> <C> <C>
2.1 Generation Exchange Agreement by and between Exhibit 2.1 to the Form 8-K
Duquesne Light Company, on the one hand, and Current Report of DQE
The Cleveland Electric Illuminating Company, dated March 26, 1999.
Ohio Edison Company and Pennsylvania Power
Company, on the other, dated as of March 25, 1999.
2.2 Nuclear Generation Conveyance Agreement by and Exhibit 2.2 to the Form 8-K
between Duquesne Light Company, on the one hand, Current Report of DQE
and Pennsylvania Power Company and the Cleveland dated March 26, 1999.
Electric Illuminating Company, on the other, dated
as of March 25, 1999.
2.3 Asset Purchase Agreement, dated as of September 24, Exhibit 2.1 to the Form 8-K
1999, by and between Duquesne Light Company, Current Report of DQE
Orion Power Holdings, Inc., and The Cleveland dated September 24, 1999.
Electric Illuminating Company, Ohio Edison and
Pennsylvania Power Company.
2.4 POLR Agreement, dated as of September 24, 1999 Exhibit 2.2 to the Form 8-K
by and between Duquesne Light Company and Orion Current Report of DQE
Power Holdings, Inc. dated September 24, 1999.
3.1 Articles of Incorporation of DQE effective Exhibit 3.1 to the Form 10-K
January 5, 1989. Annual Report of DQE for the
year ended December 31, 1989.
3.2 Articles of Amendment of DQE effective Exhibit 3.2 to the Form 10-K
April 27, 1989. Annual Report of DQE for the
year ended December 31, 1989.
3.3 Articles of Amendment of DQE effective Exhibit 3.3 to the Form 10-K
February 8, 1993. Annual Report of DQE for the
year ended December 31, 1992.
3.4 Articles of Amendment of DQE effective Exhibit 3.4 to the Form 10-K
May 24, 1994. Annual Report of DQE for the
year ended December 31, 1994.
3.5 Articles of Amendment of DQE effective Exhibit 3.5 to the Form 10-K
April 20, 1995. Annual Report of DQE for the
year ended December 31, 1995.
3.6 Statement with respect to the Preferred Stock, Exhibit 3.1 to the Form 10-Q
Series A (Convertible), as filed with the Quarterly Report of DQE
Pennsylvania Department of State on for the quarter ended
August 29, 1997. September 30, 1997.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
<S> <C> <C>
3.7 By-Laws of DQE, as amended through June 29, 1999 Exhibit 3.1 to the Form 10-Q
and as currently in effect. Quarterly Report of DQE for
the quarter ended June 30, 1999.
4.1 Indenture dated March 1, 1960, relating to Exhibit 4.3 to the Form 10-K
Duquesne Light Company's 5% Sinking Fund Annual Report of DQE for the
Debentures. year ended December 31, 1989.
4.2 Indenture of Mortgage and Deed of Trust dated as Exhibit 4.3 to Registration
of April 1, 1992, securing Duquesne Light Statement (Form S-3) No. 33-52782.
Company's First Collateral Trust Bonds.
4.3 Supplemental Indentures supplementing the said
Indenture of Mortgage and Deed of Trust -
Supplemental Indenture No. 1. Exhibit 4.4 to Registration
Statement (Form S-3) No. 33-52782.
Supplemental Indenture No. 2 through Exhibit 4.4 to Registration
Supplemental Indenture No. 4. Statement (Form S-3) No. 33-63602.
Supplemental Indenture No. 5 through Exhibit 4.6 to the Form 10-K
Supplemental Indenture No. 7. Annual Report of Duquesne
Light Company for the year
ended December 31, 1993.
Supplemental Indenture No. 8 and Exhibit 4.6 to the Form 10-K
Supplemental Indenture No. 9. Annual Report of Duquesne
Light Company for the year
ended December 31, 1994.
Supplemental Indenture No. 10 through Exhibit 4.4 to the Form 10-K
Supplemental Indenture No. 12. Annual Report of Duquesne
Light Company for the year
ended December 31, 1995.
Supplemental Indenture No. 13. Exhibit 4.3 to the Form 10-K
Annual Report of Duquesne
Light Company for the year
ended December 31, 1996.
Supplemental Indenture No. 14. Exhibit 4.3 to the Form 10-K
Annual Report of Duquesne
Light Company for the year
ended December 31, 1997.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
<S> <C> <C>
Supplemental Indenture No. 15. Exhibit 4.3 to the Form 10-K
Annual Report of Duquesne
Light Company for the year
ended December 31, 1999.
Supplemental Indenture No. 16. Exhibit 4.3 to the Form 10-K
Annual Report of Duquesne
Light Company for the year
ended December 31, 1999.
4.4 Amended and Restated Agreement of Limited Exhibit 4.4 to the Form 10-K
Partnership of Duquesne Capital L.P., dated Annual Report of Duquesne
as of May 14, 1996. Light Company for the year
ended December 31, 1996.
4.5 Payment and Guarantee Agreement, dated as of May Exhibit 4.5 to the Form 10-K
14, 1996, by Duquesne Light Company with Annual Report of Duquesne
respect to MIPS. Light Company for the year
ended December 31, 1996.
4.6 Indenture, dated as of May 1, 1996, by Duquesne Exhibit 4.6 to the Form 10-K
Light Company to the First National Bank of Annual Report of Duquesne
Chicago as Trustee. Light Company for the year
ended December 31, 1996.
4.7 Indenture, dated as of Filed herewith. August 1, Exhibit 4.1 to the Form 8-A
1999, from DQE Capital Corporation and DQE to of DQE Capital Corporation and
The First National Bank of Chicago, as Trustee DQE, filed September 16, 1999.
4.8 Form of Note. Exhibit 4.2 to the Form 8-A
of DQE Capital Corporation and
DQE, filed September 16, 1999.
10.1 Deferred Compensation Plan for the Directors of Exhibit 10.1 to the Form 10-K
Duquesne Light Company, as amended to date. Annual Report of DQE for the
year ended December 31, 1992.
10.2 Incentive Compensation Program for Certain Exhibit 10.2 to the Form 10-K
Executive Officers of Duquesne Light Company, as Annual Report of DQE for the
amended to date. year ended December 31, 1992.
10.3 Description of Duquesne Light Company Pension Exhibit 10.3 to the Form 10-K
Service Supplement Program. Annual Report of DQE for the
year ended December 31, 1992.
10.4 Duquesne Light Company Outside Directors' Exhibit 10.59 to the Form 10-K
Retirement Plan, as amended to date. Annual Report of Duquesne
Light Company for the year
ended December 31, 1996.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
<S> <C> <C>
10.5 DQE, Inc. 1996 Stock Plan for Non-Employee Exhibit 10.5 to the Form 10-K
Directors. Annual Report of DQE for the
year ended December 31, 1996.
10.6 Duquesne Light/DQE Charitable Giving Program, Exhibit 10.1 to the Form 10-Q
as amended. Quarterly Report of DQE for
the quarter ended March 31, 1998.
10.7 Performance Incentive Program for DQE, Inc. and Exhibit 10.7 to the Form 10-K
Subsidiaries. Formerly known as the Duquesne Annual Report of DQE for the
Light Company Performance Incentive Program. year ended December 31, 1996.
10.8 Employment Agreement dated as of January 1, 2000 Filed here.
between DQE, Duquesne Light Company and
David D. Marshall.
10.9 Employment Agreement dated as of August 30, 1994 Exhibit 10.10 to the Form 10-K
between DQE, Duquesne Light Company and Annual Report of DQE for the
Gary L. Schwass. year ended December 31, 1994.
10.10 Non-Competition and Confidentiality Agreement dated Exhibit 10.14 to the Form 10-K
as of October 3, 1996 by and among DQE, Inc., Annual Report of DQE for the
Duquesne Light Company and David D. Marshall, year ended December 31, 1996.
together with a schedule listing substantially
identical agreements with Victor A. Roque and
James E. Cross.
10.11 Schedule to Exhibit 10.14 to the Form 10-K Annual Exhibit 10.12 to the Form 10-K
Report of DQE for the year ended December 31, 1996, Annual Report of DQE for the
listing a Non-Competition and Confidentiality year ended December 31, 1999.
Agreement dated as of October 3, 1996, with
William J. DeLeo, substantially identical to the
agreement filed as Exhibit 10.14 to the 1996 10-K.
10.12 Schedule to Exhibit 10.14 to the Form 10-K Annual Filed here.
Report of DQE for the year ended December 31, 1996,
listing a Non-Competition and Confidentiality
Agreement dated as of January 24, 1997, with
Morgan K. O'Brien, substantially identical to the
agreement filed as Exhibit 10.14 to the 1996 10-K.
10.13 Severance Agreement dated April 4, 1997, between Exhibit 10.1 to the Form 10-Q
the Company and David D. Marshall, together with a Quarterly Report of DQE for
schedule describing substantially identical the quarter ended March 31, 1997.
agreements with Gary L. Schwass, Victor A. Roque
and James E. Cross.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
<S> <C> <C>
10.14 Schedule to Exhibit 10.1 to the Form 10-Q Quarterly Exhibit 10.14 to the Form 10-K
Report of DQE for the quarter ended March 31, 1997, Annual Report of DQE for the
listing a Severance Agreement dated as of April 4, year ended December 31, 1999.
1997, with William J. DeLeo, substantially identical
to the agreement filed as Exhibit 10.1 to the March
31, 1997 10-Q.
10.15 Schedule to Exhibit 10.1 to the Form 10-Q Quarterly Filed here.
Report of DQE for the quarter ended March 31, 1997,
listing a Severance Agreement dated as of April 4,
1997, with Morgan K. O'Brien, substantially identical
to the agreement filed as Exhibit 10.1 to the March
31, 1997 10-Q.
10.16 Form of Stock Purchase Agreement between AquaSource Exhibit 10.71 to the Form 10-K
and each Class B Stockholder, dated February 16, Annual Report of DQE for the
1999. year ended December 31, 1998.
12.1 Ratio of Earnings to Fixed Charges. Filed here.
13.1 Pages 20, 21, 67 and the inside back cover of the DQE Filed here.
Annual Report to Shareholders for the year ended
December 31, 1999. The Report, except those portions
specifically incorporated by reference here, is not
to be deemed "filed" for any purpose under the
Securities Exchange Act of 1934 or otherwise.
21.1 Subsidiaries of the registrant:
DQE's only significant subsidiary is Duquesne Light
Company, incorporated in Pennsylvania.
23.1 Independent Auditors' Consent. Filed here.
24.1 Power of Attorney. Filed here.
27.1 Financial Data Schedule. Filed here.
</TABLE>
Copies of the exhibits listed above will be furnished, upon request, to
holders or beneficial owners of any class of our stock as of February 29, 2000,
subject to payment in advance of the cost of reproducing the exhibits requested.
45
<PAGE>
SCHEDULE II
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998 and 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Additions
----------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Year Expenses Accounts Deductions of Year
----------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Reserve Deducted from the Asset
to which it applies:
Allowance for uncollectible accounts $ 9,415 $ 9,272 $ 3,260 (A) $12,667 (B) $ 9,280
-------- --------- -------- --------- --------
Year Ended December 31, 1998
Reserve Deducted from the Asset
to which it applies:
Allowance for uncollectible accounts $15,016 $11,278 $ 3,290 (A) $20,169 (B) $ 9,415
-------- --------- -------- --------- --------
Year Ended December 31, 1997
Reserve Deducted from the Asset
to which it applies:
Allowance for uncollectible accounts $18,688 $11,000 $ 3,934 (A) $18,606 (B) $15,016
-------- --------- -------- --------- --------
</TABLE>
Notes: (A) Recovery of accounts previously written off.
(B) Accounts receivable written off.
46
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DQE
(Registrant)
Date: March 29, 2000 By: /s/ David D. Marshall
--------------------------
(Signature)
David D. Marshall
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David D. Marshall Chairman, President, Chief Executive Officer and Director March 29, 2000
- --------------------------
David D. Marshall
/s/ Gary L. Schwass Executive Vice President and Chief Financial Officer March 29, 2000
- --------------------------
Gary L. Schwass
/s/ James E. Wilson Controller March 29, 2000
- -------------------------- (Principal Accounting Officer)
James E. Wilson
* Director
- --------------------------
Daniel Berg
* Director
- --------------------------
Doreen E. Boyce
* Director
- --------------------------
Robert P. Bozzone
* Director
- --------------------------
Sigo Falk
* Director
- --------------------------
William H. Knoell
* Director
- --------------------------
Thomas J. Murin
* Director
- --------------------------
Steven S. Rogers
Director
- --------------------------
Eric W. Springer
*By /s/ Gary L. Schwass March 29, 2000
- --------------------------
Gary L. Schwass
Attorney-in-Fact
</TABLE>
47
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of the 1st day of January,
2000 and between DQE, Inc. (hereinafter called the "Company"), a Pennsylvania
corporation,
and
David D. Marshall, an individual residing in Allegheny County,
Pennsylvania (hereinafter called the "Executive");
WITNESSETH THAT:
WHEREAS, the Executive has been employed by the Company for a number
of years in executive capacities and with increasing responsibilities; and
WHEREAS, the Executive and the Company are mutually desirous that such
satisfactory employment relationship shall continue under the terms and
conditions hereinafter provided; and
WHEREAS, the Executive, the Company and Duquesne Light Company are
parties to an Employment Agreement, dated as of August 30, 1994 (the "Prior
Agreement"), which sets forth the terms and conditions of the Executive's
employment by the Company, and the parties intend to replace the Prior Agreement
with this Agreement effective as of the date first above written (the "Effective
Date"); and
WHEREAS, the execution and delivery of this Agreement have been duly
authorized by the Compensation Committee of the Board of Directors of the
Company and ratified by the Board of Directors of the Company (the "Board");
NOW, THEREFORE, the Company and the Executive, each intending to be
legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term.
-------------------
(a) Employment. the Company hereby offers to employ the Executive as
----------
the Chairman of the Board and Chief Executive Officer of the Company, and the
Executive hereby accepts such employment with the Company, for the term set
forth in Paragraph 1(b).
(b) Term. The term of the Executive's employment under this
----
Agreement shall commence on January 1, 2000 and end on December 31, 2002,
subject to the extension of such term as hereinafter provided and earlier
expiration of such term as provided in Paragraph 7. The term of this Agreement
shall be extended automatically for one additional year as of each annual
anniversary date hereof unless, no later than ninety (90) days prior to such
anniversary date, either the Board, on behalf of the Company, or the Executive
gives written
<PAGE>
notice to the other, in accordance with Paragraph 12, that the term of this
Agreement shall not be so extended.
2. Duties. During the period of employment as provided in Paragraph l(b)
------
hereof, the Executive shall serve as Chairman of the Board and Chief Executive
Officer of the Company and perform all duties consistent with such positions at
the direction of the Board. The Executive shall devote his entire time during
reasonable business hours (reasonable sick leave and vacations excepted) and
best efforts to fulfill faithfully, responsibly and satisfactorily his duties
hereunder.
3. Base Salary. For services performed by the Executive for the Company
-----------
pursuant to this Agreement during the period of employment as provided in
Paragraph l(b) hereof, the Company shall pay the Executive a base salary at the
rate of at least $500,000.00 per year, payable in substantially equal
semimonthly installments (or otherwise in accordance with the Company's regular
payroll practices). Any compensation which may be paid to the Executive under
any additional compensation or incentive plan of the Company or which may be
otherwise authorized from time to time by the Board (or an appropriate committee
thereof) shall be in addition to the base salary to which the Executive shall be
entitled under this Agreement.
4. Salary Increases. During the period of employment as provided in
----------------
Paragraph l(b) hereof, the base salary of the Executive shall be periodically
reviewed by the Compensation Committee of the Board to determine whether or not
the same should be increased in light of the duties and responsibilities of the
Executive and the performance thereof, and, if it is determined that an increase
is merited, such increase shall be promptly put into effect and the base salary
of the Executive as so increased shall constitute the base salary of the
Executive for purposes of Paragraph 3.
5. Other Benefits. In addition to the base salary to be paid to the
--------------
Executive pursuant to Paragraph 3 hereof, the Executive shall also be entitled
to the following:
(a) Participation in Plans. The Executive shall be eligible for
----------------------
participation in any bonus, incentive (short-term or long-term), stock option or
similar plan or program now in effect or hereafter established by the Company in
the same manner and to the same extent as, and subject to the same criteria
pertaining to, other senior executives of the Company, as the case may be. The
Executive shall also participate in the various benefit plans maintained in
force by the Company from time to time, including qualified and nonqualified
pension, supplemental pension, disability, medical, group life insurance,
supplemental life insurance coverage, business travel insurance, sick leave, and
other similar retirement and welfare benefit plans, programs and arrangements.
Without limiting the scope of the foregoing, the Company shall continue in force
and effect the existing nonqualified pension arrangements (the "Nonqualified
Arrangements") under which the Company has agreed to pay to the Executive or his
beneficiary an additional pension representing (i) the additional benefit the
Executive would have accrued under the Retirement Plan for Employees of Duquesne
Light Company (the "Retirement Plan") and the Supplemental Retirement Plan for
Nonrepresented Employees of Duquesne Light Company (the "Supplemental Plan") but
for certain limitations on such benefits set forth in the Internal Revenue Code
and (ii) the additional benefits the Executive would have accrued under the
-2-
<PAGE>
Retirement Plan and the Supplemental Plan if he were credited thereunder with a
total number of years of Continuous Service (as defined in such Plans) equal to
the sum of (A) two (2) times the actual years of Continuous Service accumulated
by the Executive to age sixty (60), not to exceed thirty-five (35), plus (B)
such Continuous Service as may be accrued by the Executive after age sixty (60)
under the terms of such Plans.
(b) Fringe Benefits. The Executive shall be entitled to perquisites
---------------
of office, fringe benefits and other similar benefits no less favorable than
those available to the Executive immediately prior to the effective date of this
Agreement, or, if greater, those available to the Executive at any time during
the term of this Agreement.
(c) Expense Reimbursement. The Company shall reimburse the
---------------------
Executive, upon proper accounting, for reasonable business expenses and
disbursements incurred by him in the course of the performance of his duties
under this Agreement.
(d) Vacation. The Executive shall be entitled to five (5) weeks of
--------
vacation during each year of this Agreement, or such greater period as the Board
shall approve, without reduction in salary or other benefits.
6. Covenants of the Employee. In order to induce the Company to enter
-------------------------
into this Agreement, the Executive hereby agrees as follows:
(a) Confidentiality. Except for acts with the consent of or as
---------------
directed by the Board or as may be required by law, the Executive shall keep
confidential and shall not divulge to any other person or entity, during the
term of employment or thereafter any of the business secrets or other
confidential information regarding the Company, or any of its affiliates, which
has not otherwise become public knowledge; provided, however, that nothing in
this Agreement shall preclude the Executive from disclosing information to
parties retained to perform services for the Company, or any of its affiliates.
(b) Records. All papers, books and records of every kind and
-------
description relating to the business and affairs of the Company, or any of its
affiliates, whether or not prepared by the Executive, other than personal notes
prepared by or at the direction of the Executive, shall be the sole and
exclusive property of the Company, and the Executive shall surrender them to the
Company at any time upon request by the Board.
(c) Enforcement. The Executive agrees and warrants that the
-----------
covenants contained herein are reasonable, that valid consideration has been and
will be received therefor and that the agreements set forth herein are the
result of arms-length negotiations between the parties hereto. The Executive
recognizes that the provisions of this Paragraph 6 are vitally important to the
continuing welfare of the Company, and its affiliates, and that money damages
constitute a totally inadequate remedy for any violation thereof. Accordingly,
in the event of any such violation by the Executive, the Company, and its
affiliates, in addition to any other remedies they may have, shall have the
right to institute and maintain a proceeding to compel specific performance
thereof or to issue an injunction restraining any action by the Executive in
violation of this Paragraph 6.
-3-
<PAGE>
7. Termination. Unless earlier terminated in accordance with the
-----------
following provisions of this Paragraph 7, the Company shall continue to employ
the Executive and the Executive shall remain employed by the Company during the
entire term of this Agreement as set forth in Paragraph l(b). Paragraph 8 hereof
sets forth certain obligations of the Company in the event that the Executive's
employment hereunder is terminated. Certain capitalized terms used in this
Paragraph 7 and Paragraph 8 hereof are defined in Paragraph 7(c) below.
(a) Death or Disability. Except to the extent otherwise expressly
-------------------
stated herein, including without limitation, as provided in Paragraph 8(a) with
respect to certain post-Date of Termination payment obligations of the Company,
this Agreement shall terminate immediately as of the Date of Termination in the
event of the Executive's death or in the event that the Executive becomes
disabled. The Executive will be deemed to be disabled upon the earlier of (i)
the end of a twelve (12) consecutive month period during which, by reason of
physical or mental injury or disease, the Executive has been unable to perform
substantially the Executive's usual and customary duties under this Agreement
and (ii) the date that a reputable physician selected by the Company determines
in writing that the Executive will, by reason of physical or mental injury or
disease, be unable to perform substantially the Executive's usual and customary
duties under this Agreement for a period of at least twelve (12) consecutive
months. At any time and from time to time, upon reasonable request therefor by
the Company, the Executive shall submit to reasonable medical examination for
the purpose of determining the existence, nature and extent of any such
disability. In accordance with Paragraph 12, the Company shall promptly give the
Executive written notice of any such determination of the Executive's disability
and of the decision of the Company to terminate the Executive's employment by
reason thereof. In the event of disability, until the Date of Termination the
base salary payable to the Executive under Paragraph 3 hereof shall be reduced
dollar-for-dollar by the amount of disability benefits, if any, paid to the
Executive in accordance with any disability policy or program of the Company.
(b) Notification of Discharge for Cause or Resignation for Good
-----------------------------------------------------------
Reason. In accordance with the procedures hereinafter set forth, the Company may
- ------
discharge the Executive from his employment hereunder for Cause and the
Executive may resign from his employment hereunder for Good Reason. Any
discharge of the Executive by the Company for Cause or resignation by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the Executive (in the case of discharge) or the Company (in the case of
resignation) given in accordance with Paragraph 12 of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive's employment under the
provision so indicated and (iii) if the Date of Termination is to be other than
the date of receipt of such notice, specifies the termination date (which date
shall in all events be within fifteen (15) days after the giving of such
notice). In the case of a discharge of the Executive for Cause, a Notice of
Termination shall include a copy of a resolution duly adopted by the affirmative
vote of not less than two-thirds (2/3) of the entire membership of the Board
(not including the Executive) at a meeting of the Board called and held for the
purpose (after reasonable notice to the Executive and reasonable opportunity for
the Executive, together with the Executive's counsel, to be heard before the
Board prior to such vote), finding that in the good
-4-
<PAGE>
faith opinion of the Board the Executive was guilty of conduct constituting
Cause. No purported termination of the Executive's employment for Cause shall be
effective without a Notice of Termination. The failure by the Executive to set
forth in the Notice of Termination any fact or circumstance which contributes to
a showing of Good Reason shall not waive any right of the Executive hereunder or
preclude the Executive from asserting such fact or circumstances in enforcing
the Executive's rights hereunder.
(c) Definitions. For purposes of this Paragraph 7 and Paragraph 8
-----------
hereof, the following capitalized terms shall have the meanings set forth below:
(i) "Accrued Obligations" shall mean, as of the Date of
-------------------
Termination, the sum of (A) the Executive's base salary under Paragraph 3
through the Date of Termination to the extent not theretofore paid, (B) the
amount of any bonus, incentive compensation, deferred compensation and
other cash compensation accrued by the Executive as of the Date of
Termination to the extent not theretofore paid and (C) any vacation pay,
expense reimbursements and other cash entitlements accrued by the Executive
as of the Date of Termination to the extent not theretofore paid.
(ii) "Cause" shall mean either of the following that is
-----
materially and demonstrably detrimental to the goodwill of the Company or
materially damaging to the relationships of the Company with its customers,
suppliers or employees: (A) conviction of the Executive of a felony
involving moral turpitude or (B) gross negligence or willful misconduct by
the Executive in the performance of his duties under this Agreement.
(iii) "Change in Control" shall mean (A) any person (as such
-----------------
term is used in Section 13(d) of the Securities Exchange Act of 1934 (the
"Act"), excluding a corporation at least 80% of the ownership of which
after acquiring its interest is owned directly by the holder of common
stock of the Company immediately prior to such acquisition ("Person")), is
the beneficial owner, directly or indirectly, of 20% or more of the
outstanding stock of the Company requiring the filing of a report with the
Securities and Exchange Commission under Section 13(d) of the 1934 Act; (B)
a purchase by any Person of shares pursuant to a tender or exchange offer
to acquire any stock of the Company (or securities convertible into stock)
for cash, securities or any other consideration provided that, after
closing of the offer, such Person is the beneficial owner (as defined in
Rule 13d-3 under the 1934 Act), directly or indirectly, of 20% or more of
the outstanding stock of the Company (calculated as provided in Paragraph
(d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire
stock); (C) public announcement of a transaction approved by the Board
which involves (1) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of stock of the Company would be converted into cash, securities or
other property, other than a consolidation or merger of the Company in
which holders of its stock immediately prior to the consolidation or merger
own at least 80% of the common stock of the surviving corporation
immediately after the consolidation or merger, or (2) any consolidation or
merger in which the Company is the continuing or surviving corporation but
in which the common shareholders of the Company immediately prior to the
consolidation or merger do not hold at least 80% of
-5-
<PAGE>
the outstanding common stock of the continuing or surviving corporation
(except where such holders of common stock hold at least 80% of the common
stock of the corporation which owns all of the common stock of the
Company), or (3) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially
all the assets of the Company (except to an entity 80% of the common stock
of which is owned by the holders of the common stock of the Company
immediately prior to such transaction or by an entity 80% of which is owned
directly or indirectly by the Company), or (4) any merger or consolidation
of the Company where, after the merger or consolidation, one Person owns
100% of the shares of stock of the Company (except where the common holders
of the Company's stock immediately prior to such merger or consolidation
own at least 80% of the outstanding stock of such Person immediately after
such merger or consolidation); or (D) a change in the majority of the
members of the Board within a 24-month period unless the election or
nomination for election by the Company's shareholders of each new director
was approved by the vote of at least two-thirds of the directors then still
in office who were in office at the beginning of the 24-month period. With
respect to subparagraph (C) above, upon the Board's determination that the
transaction subject to the public announcement thereunder will not be
closed, a Change in Control shall not be deemed to have occurred from such
date forward and this Agreement shall continue in effect as if no Change in
Control had occurred except to the extent termination requiring payments
under Paragraph 8(b) hereof occurs prior to such Board's determination.
(iv) "Date of Termination" shall mean (A) in the event of a
-------------------
discharge of the Executive by the Company for Cause or a resignation by the
Executive for Good Reason, the date the Executive (in the case of
discharge) or the Company (in the case of resignation) receives a Notice of
Termination, or any later date specified in such Notice of Termination, as
the case may be, (B) in the event of a discharge of the Executive without
Cause or a resignation by the Executive without Good Reason, the date the
Executive (in the case of discharge) or the Company (in the case of
resignation) receives notice of such termination of employment, (C) in the
event of the Executive's death, the date of the Executive's death, and (D)
in the event of termination of the Executive's employment by reason of
disability pursuant to Paragraph 7(a), the date the Executive receives
written notice of such termination.
(v) "Good Reason" shall mean any of the following: (A) the
-----------
assignment to the Executive of any duties inconsistent in any respect with
the Executive's positions with the Company as set forth in this Agreement
(including status, offices, titles and reporting requirements), authority,
duties or responsibilities as contemplated by Paragraph 2, or any action by
the Company which results in diminution in such positions, authority,
duties or responsibilities, excluding for this purpose any isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company, as appropriate, promptly after receipt of written
notice thereof given by the Executive in accordance with Paragraph 12; (B)
any failure by the Company to comply with any of the provisions of this
Agreement, other than any isolated, insubstantial and inadvertent failure
not occurring in bad faith and which is remedied by the Company, as
appropriate, promptly after receipt of written notice thereof given by the
Executive in accordance with
-6-
<PAGE>
Paragraph 12; (C) the Company's requiring the Executive to be based at any
office or location other than the principal executive office of the Company
or at any office or location not within thirty-five (35) miles of the
principal executive office of the Company in Pittsburgh, Pennsylvania; or
(D) any purported termination by the Company of the Executive's employment
otherwise than as expressly permitted by this Agreement.
(vi) "Monthly Bonus Amount" shall mean one-twelfth (1/12) of the
--------------------
Executive's target annual bonus for the fiscal year in which the Date of
Termination occurs.
8. Obligations of the Company Upon Termination.
-------------------------------------------
(a) Discharge for Cause, Resignation without Good Reason, Death or
--------------------------------------------------------------
Disability. In the event of a discharge of the Executive for Cause or
- ----------
resignation by the Executive without Good Reason, or in the event this Agreement
terminates pursuant to Paragraph 7(a) by reason of the death or disability of
the Executive:
(i) the Company shall pay all Accrued Obligations to the
Executive, or to his heirs or estate in the event of the Executive's death,
in a lump sum in cash within thirty (30) days after the Date of
Termination; and
(ii) the Executive, or his beneficiary, heirs or estate in the
event of the Executive's death, shall be entitled to receive all benefits
accrued by him as of the Date of Termination under the Retirement Plan, the
Supplemental Plan, the Nonqualified Arrangements (but only to the extent
not previously paid or distributed to the Executive through the purchase of
annuity contracts or otherwise) and all other qualified and nonqualified
retirement, pension, profit sharing and similar plans of the Company in
such manner and at such time as are provided under the terms of such plans
and arrangements; and
(iii) except as otherwise provided in Paragraph 16 hereof, all
other obligations of the Company hereunder shall cease forthwith.
(b) Discharge without Cause or Resignation for Good Reason. If the
------------------------------------------------------
Executive is discharged other than for Cause or disability or the Executive
resigns with Good Reason:
(i) The Company shall pay to the Executive in a lump sum in cash
within thirty (30) days after the Date of Termination the aggregate of the
following amounts:
(A) all Accrued Obligations; and
(B) a lump sum amount equal to the actuarial equivalent of
the additional benefit the Executive would have accrued under the
Retirement Plan, the Supplemental Plan and the Nonqualified
Arrangements if the Executive's actual service with the Company
had ended on the last day of
-7-
<PAGE>
the then remaining term of this Agreement (taking into account
any extensions of such term in effect immediately prior to the
Date of Termination pursuant to Paragraph l(b)) and had his
covered compensation for each calendar year during such
additional period equaled his highest covered compensation for
any of the three most recent calendar years ended prior to the
Date of Termination (for purposes of the foregoing, actuarial
equivalence shall be determined in accordance with the Retirement
Plan, the Supplemental Plan and the Nonqualified Arrangements, as
appropriate).
(ii) The Executive shall receive (A) the balance of the base
salary which as of the Date of Termination remains to be paid to the
Executive pursuant to Paragraph 3 for the then-remaining term of this
Agreement (taking into account any extensions of such term in effect
immediately prior to the Date of Termination pursuant to Paragraph l(b))
and (B) the product of (1) the Monthly Bonus Amount multiplied by (2) the
number of full calendar months within the period from the Date of
Termination through and including the last day of the then-remaining term
of this Agreement (taking into account any extensions of such term in
effect immediately prior to the Date of Termination pursuant to Paragraph
l(b)). If the Executive's termination of employment occurs within two years
following the occurrence of a Change in Control, the foregoing amount shall
be paid to the Executive in a lump sum in cash within thirty (30) days
after the Date of Termination. If the Executive's termination of employment
does not occur within two years following the occurrence of a Change in
Control, the foregoing amount shall be paid to the Executive in
substantially equal installments over the then-remaining term of this
Agreement (taking into account any extensions of such term in effect
immediately prior to the Date of Termination pursuant to Paragraph l(b));
provided, however, that the obligation of the Company to make these
installment payments to the Executive shall terminate forthwith if any of
the following shall occur: (1) the Executive shall have breached any of his
obligations under this Agreement or (2) the Executive in any way competes
with or solicits the employees of the Company, or any of its affiliates.
(iii) For the then-remaining term of this Agreement (taking into
account any extensions of such term in effect immediately prior to the Date
of Termination pursuant to Paragraph l(b)), the Company shall either (A)
arrange to provide the Executive, at the Company's cost, with life,
disability and health-and-accident insurance coverage providing
substantially similar benefits to those which the Executive was receiving
immediately prior to the Date of Termination, to the extent the Company
continues to maintain benefit plans providing for such benefits for
executives generally or (B) in lieu of providing such coverage, pay to the
Executive within thirty (30) days after the Date of Termination a lump sum
amount in cash equal to two (2) times the projected cost to the Company of
providing the extended benefit coverage referred to in clause (A) (as such
cost shall be calculated by the Company's benefit consultants, using
reasonable assumptions). Notwithstanding the foregoing, the benefits
described above may be discontinued prior to the end of the period provided
in this subparagraph to the extent, but only to the extent, that the
Executive receives substantially similar benefits from a subsequent
employer.
-8-
<PAGE>
(iv) The Executive shall be entitled to receive all benefits
accrued by him as of the Date of Termination under the Retirement Plan, the
Supplemental Plan, the Nonqualified Arrangements (but only to the extent
not previously paid or distributed to the Executive through the purchase of
annuity contracts or otherwise) and all other qualified and nonqualified
retirement, pension, profit sharing and similar plans of the Company in
such manner and at such time as are provided under the terms of such plans.
(v) All stock options, stock appreciation rights, dividend
equivalent accounts and other stock interests or stock-based rights awarded
to the Executive on or before the Date of Termination under the Company's
Long-Term Incentive Plan, the Executive Incentive Plan or any similar plan
of the Company shall become fully vested and nonforfeitable as of the Date
of Termination and the exercise period thereof shall not terminate before
the earlier to occur of (A) the first anniversary of the Date of
Termination and (B) the last day of the stated term of such stock options,
stock appreciation rights, dividend equivalent accounts and other stock
interests or stock-based rights; provided, however, that if such full
vesting and termination date extension with respect to all or any portion
of such stock or stock-related awards would constitute a violation of
applicable law or the terms of any such plan of the Company, then in lieu
of the vesting of such awards (or such portion thereof), the Company shall
redeem such award (or such portion thereof) by paying to the Executive in a
lump sum in cash within thirty (30) days of the Date of Termination an
amount which represents the fair value of such award as of the Date of
Termination (reduced by any amount payable by the Executive under the terms
of such award (or such portion thereof) as an exercise or purchase price
with respect thereto).
(vi) Except as otherwise provided in Paragraph 16 hereof, all
other obligations of the Company hereunder shall cease forthwith.
(c) Certain Additional Payments.
---------------------------
(i) If Independent Tax Counsel (as defined below) shall determine
that the aggregate payments made, and benefits provided, to the Executive
pursuant to this Agreement and any other payments, and benefits provided,
to the Executive from the Company, its affiliates and plans, which
constitute "parachute payments" as defined in Section 280G of the Internal
Revenue Code (or any successor provision thereto) ("Parachute Payments")
would be subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code (the "Excise Tax") and if the amount of the Parachute Payments
in excess of 300% of the "base amount" (as defined in Section 280G of the
Internal Revenue Code, the "Base Amount") is greater than 10% of the total
value of the Parachute Payments, then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount
(determined by Independent Tax Counsel) such that after payment by the
Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up
Payment and any interest or penalties imposed with respect to such taxes,
the Executive retains from the Gross-Up Payment an amount equal to the
Excise Tax imposed upon the payments. For purposes of this Paragraph 8(d),
"Independent Tax Counsel" shall mean a lawyer, a certified public
accountant with a nationally recognized
-9-
<PAGE>
accounting firm, or a compensation consultant with a nationally recognized
actuarial and benefits consulting firm with expertise in the area of
executive compensation tax law, who shall be selected by the Company and
shall be reasonably acceptable to the Executive, and whose fees and
disbursements shall be paid by the Company.
(ii) If Independent Tax Counsel shall determine that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written
opinion that the Executive has substantial authority not to report any
Excise Tax on the Executive's Federal income tax return. If the Executive
is subsequently required to make a payment of any Excise Tax, then the
Independent Tax Counsel shall determine the amount of such additional
payment ("Gross-Up Underpayment"), and any such Gross-Up Underpayment shall
be promptly paid by the Company to or for the benefit of the Executive. The
fees and disbursements of the Independent Tax Counsel shall be paid by the
Company.
(iii) The Executive shall notify the Company in writing within 15
days of any claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of a Gross-Up Payment. If the
Company notify the Executive in writing that it desires to contest such
claim and that it will bear the costs and provide the indemnification as
required by this sentence, the Executive shall: (A) give the Company any
information reasonably requested by the Company relating to such claim, (B)
take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including, without
limitation, accepting legal representation with respect to such claim by an
attorney reasonably selected by the Company, (C) cooperate with the Company
in good faith in order to effectively contest such claim, and (D) permit
the Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax,
including interest and penalties with respect thereto, imposed as a result
of such representation and payment of costs and expenses. The Company shall
control all proceedings taken in connection with such contest; provided,
however, that if the Company directs the Executive to pay such claim and
sue for a refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income
tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect
to such advance.
(iv) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to subparagraph (iii) above, the Executive becomes
entitled to receive any refund with respect to such claim, the Executive
shall, within 10 days, pay to the Company the amount of such refund,
together with any interest paid or credited thereon after taxes applicable
thereto.
-10-
<PAGE>
(v) If Independent Tax Counsel shall make a determination that
Parachute Payments would be subject to the Excise Tax, but the amount of
Parachute Payments in excess of 300% of the Base Amount is not greater than
10% of the total value of the Parachute Payments, then such Parachute
Payments shall be reduced (but not below zero) but only to the extent the
Independent Tax Counsel shall determine is necessary that no portion
thereof shall be subject to the Excise Tax. The determination of
Independent Tax Counsel under this subparagraph (v) shall be final and
binding on all parties hereto. No additional payments by the Company or
return of payments by the Executive shall be required or made if a later
determination which based on case law, an IRS holding or otherwise would
result in a recalculation of the Excise Tax implications. Unless the
Executive gives prior written notice specifying a different order to the
Company to effectuate the limitations described above, the Company shall
reduce or eliminate the Parachute Payments by first reducing or eliminating
those payments or benefits which are not payable in cash and then by
reducing or eliminating other Parachute Payments, in each case in reverse
order beginning with payments or benefits which are to be paid the farthest
in time from the employment termination date. Any notice given by the
Executive pursuant to the preceding sentence shall take precedence over the
provisions of any other plan, arrangement of agreement governing the
Executive's rights and entitlements to any benefits or compensation.
9. Indemnification. The Company shall defend and hold the Executive
---------------
harmless to the fullest extent permitted by applicable law in connection with
any claim, action, suit, investigation or proceeding arising out of or relating
to performance by the Executive of services for, or action of the Executive as a
Director, officer or employee of the Company, or of any other person or
enterprise at the request of the Company. Expenses incurred by the Executive in
defending a claim, action, suit or investigation or criminal proceeding shall be
paid by the Company in advance of the final disposition thereof upon the receipt
by the Company of an undertaking by or on behalf of the Executive to repay said
amount unless it shall ultimately be determined that the Executive is entitled
to be indemnified hereunder; provided, however, that this indemnification
arrangement shall not apply to a nonderivative action commenced by the Company
against the Executive. The foregoing shall be in addition to any indemnification
rights the Executive may have by law, contract, charter, by-law or otherwise.
10. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the heirs and representatives of the Executive and the successors and
assigns of the Company. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation, or otherwise) to all or a significant portion of
its assets, by agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company, as the case may be, would be required to
perform this Agreement if no such succession had taken place. Regardless whether
such agreement is executed, this Agreement shall be binding upon any successor
of the Company in accordance with the operation of law and such successor shall
be deemed "the Company" or the "Company", as the case may be, for purposes of
this Agreement.
11. Dispute Resolution.
------------------
-11-
<PAGE>
(a) Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement or the breach thereof (including the arbitrability of any
controversy or claim), shall be settled by arbitration in accordance with the
internal laws of the Commonwealth of Pennsylvania by three arbitrators, one of
whom shall be appointed by the Board, one by the Executive and the third of whom
shall be appointed by the first two arbitrators. If the first two arbitrators
cannot agree on the appointment of a third arbitrator, then the third arbitrator
shall be appointed by the American Arbitration Association. The arbitration
shall be conducted in accordance with the rules of the American Arbitration
Association, except with respect to the selection of arbitrators which shall be
as provided in this Paragraph 11(a). Except as otherwise provided in Paragraph
11(b), the cost of any arbitration proceeding hereunder shall be borne equally
by the Company and the Executive. The award of the arbitrators shall be binding
upon the parties. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
(b) Legal Expenses. In the event that it shall be necessary or
--------------
desirable for the Executive to retain legal counsel and/or incur other costs and
expenses in connection with the enforcement of any or all of his rights under
this Agreement, and provided that the Executive substantially prevails in the
enforcement of such rights, the Company shall pay (or the Executive shall be
entitled to recover from the Company, as the case may be) the Executive's
reasonable attorneys' fees and costs and expenses in connection with the
enforcement of the Executive's rights including the enforcement of any
arbitration award.
12. Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed within the continental United States by first class
certified mail, return receipt requested, postage prepaid, addressed as follows:
(a) to the Company, the Board or the Company, to:
the Company, Inc.
411 Seventh Avenue
Pittsburgh, PA 15219
Attention: Board of Directors
with a copy to:
Victor A. Roque, Esq.
Vice President and General Counsel
Duquesne Light Company
411 Seventh Avenue - 16th Floor
Pittsburgh, PA 15219
-12-
<PAGE>
(b) to the Executive, to:
David D. Marshall
10476 Olde Villa Drive
Gibsonia, PA 15044
Addresses may be changed by written notice sent to the other party at the last
recorded address of that party.
13. No Assignment. Except as otherwise expressly provided herein, this
-------------
Agreement is not assignable by any party and no payment to be made hereunder
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or other charge.
14. Execution in Counterparts. This Agreement may be executed by the
-------------------------
parties hereto in two or more counterparts, each of which shall be deemed to be
an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
15. Jurisdiction and Governing Law. Jurisdiction over disputes with
------------------------------
regard to this Agreement shall be exclusively in the courts of the Commonwealth
of Pennsylvania, and this Agreement shall be construed and interpreted in
accordance with and governed by the laws of the Commonwealth of Pennsylvania,
other than the conflict of laws provisions of such laws.
16. Survival. The provisions of this Paragraph 16 and of Paragraphs 8, 9,
--------
10, 11, 13, 15, 17, 18 and 19 of this Agreement shall survive the termination of
this Agreement to the extent necessary or appropriate to effectuate the
respective purposes of such provisions.
17. No Mitigation Required. The Executive shall not be required to
----------------------
mitigate damages or the amount of any payment provided for under this Agreement
by seeking other employment or otherwise, and, except as otherwise expressly
provided in Paragraph 8(b)(iii), in no event shall the amount of any payment
provided for under this Agreement be reduced by any compensation earned by the
Executive as the result of employment by another employer or otherwise after the
Date of Termination.
18. Severability. If any provision of this Agreement shall be adjudged by
------------
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement.
19. Prior Understandings. This Agreement embodies the entire understanding
--------------------
of the parties hereof, and supersedes all other oral or written agreements or
understandings between them regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
each of the parties hereto. The headings in this Agreement are for convenience
and reference only and shall not be construed as part of this Agreement or to
limit or otherwise affect the meaning hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
-13-
<PAGE>
Attest: DQE, INC.
/s/ Diane S. Eismont By /s/ Jack E. Saxer, Jr.
- --------------------------------- -------------------------------
Diane S. Eismont, Secretary Title: Vice President
EXECUTIVE
By /s/ David D. Marshall
------------------------------
David D. Marshall
-14-
<PAGE>
Exhibit 10.12
Schedule to Exhibit 10.14 to the Form 10-K Annual Report
of DQE for the year ended December 31, 1996
A Non-Competition and Confidentiality Agreement which was substantially
identical to that filed as Exhibit 10.14 was entered into with the following
parties, differing only as to the date executed:
Morgan K. O'Brien DQE, Inc.
<PAGE>
Exhibit 10.15
Schedule to Exhibit 10.1 to the Form 10-Q Quarterly Report
of DQE for the quarter ended March 31, 1997
A Severance Agreement which was substantially identical to that filed as Exhibit
10.1 was entered into with the following party, materially differing only as
follows:
Other Party Material Differences
----------- --------------------
Morgan K. O'Brien "Severance Benefit" under Section 3a:
aggregate lump sum payment of $110,848.
<PAGE>
DQE EXHIBIT 12.1
DQE and Subsidiaries
Calculation of Ratio of Earnings to Fixed Charges
and Preferred and Preference Stock Dividend Requirements
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on long-term debt $ 79,454 $ 81,076 $ 87,420 $ 88,478 $ 95,391
Other interest 28,212 14,556 13,823 10,926 7,033
Portion of lease payments representing
an interest factor 42,973 44,146 44,208 44,357 44,386
Dividend requirement 14,684 15,612 21,649 14,385 7,374
---------- --------- ---------- --------- ------------
Total Fixed Charges $165,323 $155,390 $167,100 $158,146 $154,184
---------- --------- ---------- --------- ------------
EARNINGS:
Income from continuing operations $201,416 $196,688 $199,101 $179,138 $170,563
Income taxes 110,722* 100,982* 95,805* 87,388* 96,661
Fixed charges as above 165,323 155,390 167,100 158,146 154,184
---------- --------- ---------- --------- ------------
Total Earnings $477,461 $453,060 $462,006 $424,672 $421,408
---------- --------- ---------- --------- ------------
RATIO OF EARNINGS TO FIXED CHARGES 2.89 2.92 2.76 2.69 2.73
========== ========= ========== ========= ============
</TABLE>
*Earnings related to income taxes reflect a $3.0 million, $12.0 million, $17.0
million, $12.0 million and $13.0 million decrease for the twelve months ended
December 31, 1999, 1998, 1997, 1996 and 1995, 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 2.86, 2.99, 2.87, 2.76 and 2.82
for the twelve months ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
<PAGE>
Exhibit 13.1
1999 Financial Statements at a Glance
Detailed financial information can be found beginning on page 27.
Selected Financial Data
<TABLE>
<CAPTION>
1999 1998 1997 1996
<S> <C> <C> <C> <C>
Selected Income Statement Items:
Revenues from sales of electricity $ 1,094 $ 1,127 $ 1,124 $ 1,144
Fuel and purchased power expenses 225 263 223 237
- -------------------------------------------------------------------------------------------------------------------------
Net electric revenues 869 864 901 907
Water revenues 122 31 2 --
Other revenues 125 97 104 93
- -------------------------------------------------------------------------------------------------------------------------
Net operating revenues 1,116 992 1,007 1,000
- -------------------------------------------------------------------------------------------------------------------------
Operating and maintenance expenses 513 419 403 388
Depreciation and amortization 196 220 240 223
Taxes other than income taxes 88 81 83 86
- -------------------------------------------------------------------------------------------------------------------------
Non-energy operating expenses 797 720 726 697
- -------------------------------------------------------------------------------------------------------------------------
Operating income 319 272 281 303
Investment and other income 152 135 130 73
Interest and other charges 159 109 116 110
Income taxes 111 101 96 87
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 201 $ 197* $ 199 $ 179
=========================================================================================================================
Basic EPS $ 2.65 $ 2.52* $ 2.57 $ 2.32
=========================================================================================================================
Diluted EPS $ 2.62 $ 2.49* $ 2.56 $ 2.31
=========================================================================================================================
Expanded Business Lines EPS $ 0.70 $ 0.66 $ 0.79 $ 0.43
=========================================================================================================================
Capitalization Ratios:
Common shareholders' equity 41.4% 47.8% 48.3% 45.6%
Preferred and preference stock 8.4% 8.4% 7.3% 7.3%
Long-term debt 50.2% 43.8% 44.4% 47.1%
Total capitalization $ 3,253 $ 3,099 $ 3,103 $ 3,055
=========================================================================================================================
Selected Common Stock Information:
Average shares outstanding 75.5 77.7 77.5 77.3
Shares outstanding at year-end 71.8 77.4 77.7 77.3
Market capitalization $ 2,485 $ 3,400 $ 2,729 $ 2,241
Dividends declared $ 116 $ 113 $ 107 $ 101
Dividends paid per share $ 1.52 $ 1.44 $ 1.36 $ 1.28
Book value per share at year-end $ 18.78 $ 19.18 $ 19.30 $ 18.01
Dividend payout ratio 57.4% 57.1% 52.9% 55.2%
Dividend yield at year-end 4.6% 3.5% 4.1% 4.7%
Price-earnings ratio at year-end 13.1 17.4 13.7 12.5
=========================================================================================================================
Other Financial Information:
Ratio of earnings to fixed charges (pre-tax) 2.89 2.92* 2.76 2.69
Return on average common equity 14.1% 13.1% 13.8% 13.2%
</TABLE>
* Net income after Pennsylvania restructuring charge: $114; Basic EPS after
Pennsylvania restructuring charge: $1.46; Diluted EPS after Pennsylvania
restructuring charge: $1.46; Ratio of earnings to fixed charges (pre-tax)
after Pennsylvania restructuring charge: 2.39.
** Adjusted for 3-for-2 stock split in 1995.
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income Statement Items:
Revenues from sales of electricity $1,149 $ 1,146 $ 1,132 $ 1,127 $ 1,163 $ 1,110 $ 1,097
Fuel and purchased power expenses 232 244 238 239 254 229 220
- --------------------------------------------------------------------------------------------------------------------------------
Net electric revenues 917 902 894 888 909 881 877
Water revenues -- -- -- -- -- -- --
Other revenues 81 90 63 37 38 31 48
- --------------------------------------------------------------------------------------------------------------------------------
Net operating revenues 998 992 957 925 947 912 925
- --------------------------------------------------------------------------------------------------------------------------------
Operating and maintenance expenses 384 421 415 365 385 388 353
Depreciation and amortization 203 166 158 132 123 123 123
Taxes other than income taxes 89 88 71 84 94 80 93
- --------------------------------------------------------------------------------------------------------------------------------
Non-energy operating expenses 676 675 644 581 602 591 569
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 322 317 313 344 345 321 356
Investment and other income 52 43 31 42 36 46 (3)
Interest and other charges 107 110 120 132 142 157 165
Income taxes 96 93 80 112 105 88 75
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 171 $ 157 $ 144 $ 142 $ 134 $ 122 $ 113
================================================================================================================================
Basic EPS $ 2.20 $ 1.98 $ 1.81 $ 1.78 $ 1.67 $ 1.49 $ 1.35
================================================================================================================================
Diluted EPS $ 2.18 $ 1.98 $ 1.81 $ 1.78 $ 1.66 $ 1.48 $ 1.34
================================================================================================================================
Expanded Business Lines EPS $ 0.32 $ 0.19 $ 0.07 $ 0.01 -- -- --
================================================================================================================================
Capitalization Ratios:
Common shareholders' equity 47.5% 46.4% 44.2% 43.1% 41.6% 39.0% 37.7%
Preferred and preference stock 2.5% 3.5% 4.8% 4.9% 5.2% 6.8% 7.8%
Long-term debt 50.0% 50.1% 51.0% 52.0% 53.2% 54.2% 54.5%
Total capitalization $2,801 $ 2,750 $ 2,781 $ 2,716 $ 2,669 $ 2,770 $ 2,827
================================================================================================================================
Selected Common Stock Information:
Average shares outstanding 77.7 79.0** 79.5** 79.4** 80.1** 81.6** 83.7**
Shares outstanding at year-end 77.6 78.5** 79.5** 79.4** 79.4** 80.6** 83.0**
Market capitalization $2,386 $ 1,550 $ 1,829 $ 1,708 $ 1,621 $ 1,337 $ 1,321
Dividends declared $ 94 $ 89 $ 86 $ 81 $ 78 $ 75 $ 73
Dividends paid per share $ 1.19 $ 1.12 $ 1.07 $ 1.01 $ 0.96 $ 0.91 $ 0.85
Book value per share at year-end $17.13 $ 16.27 $ 15.47 $ 14.75 $ 14.00 $ 13.38 $ 12.85
Dividend payout ratio 54.1% 56.4% 58.8% 56.9% 57.6% 60.7% 63.1%
Dividend yield at year-end 4.2% 5.7% 4.6% 5.0% 5.0% 5.8% 5.7%
Price-earnings ratio at year-end 14.0 9.9 12.7 12.1 12.3 11.1 11.8
================================================================================================================================
Other Financial Information:
Ratio of earnings to fixed 2.73 2.57 2.29 2.24 2.10 1.90 1.78
charges (pre-tax)
Return on average common equity 13.1% 12.5% 12.0% 12.4% 12.2% 11.3% 10.6%
</TABLE>
* Net income after Pennsylvania restructuring charge: $114; Basic EPS after
Pennsylvania restructuring charge: $1.46; Diluted EPS after Pennsylvania
restructuring charge: $1.46; Ratio of earnings to fixed charges (pre-tax)
after Pennsylvania restructuring charge: 2.39.
** Adjust for 3-for-2 stock split in 1995.
<PAGE>
Shareholder Reference Guide
Common Stock
Trading Symbol: DQE
Stock Exchanges Listed and Traded:
New York, Philadelphia, Chicago
Number of Common Shareholders of Record
at Year-End: 64,503
DQE Web Site
You can interact with us via e-mail, view current and historical stock
information and learn more about DQE and our subsidiaries by visiting our web
site at www.dqe.com.
Shareholder Information Line
Shareholders and potential investors are invited to call 1-888-247-0401 for the
latest information on earnings and dividends.
Shareholder Services/Assistance
You can write to us at:
DQE Shareholder Relations
400 Fairway Drive, Suite 100
Moon Township, PA 15108
or call us at:
Toll-free: 1-800-247-0400
In Pittsburgh: 1-412-393-6167
Fax: 1-412-393-6087
By telephone, representatives are available from
7:30 a.m. to 4 p.m. (Eastern time) to assist you with the
following services:
Direct purchase of initial shares
Direct deposit of dividends
Automatic cash contributions
Dividend reinvestment
Stock transfer requirements
Dividend payment inquiries
Change of address
Lost stock certificate
Please feel free to call at other times. Our Message Center is available 24
hours a day. You can record a message, and our staff will follow up on the next
business day.
Financial Community Inquiries
Analysts, investment managers and brokers should direct their inquiries to:
1-412-393-1238; Fax: 1-412-393-1077.
Written inquiries should be sent to:
DQE Investor Relations Department
400 Fairway Drive, Suite 300
Moon Township, PA 15108
Stock Certificate Transfers
Individuals who are not participants in the dividend reinvestment plan and who
want to transfer stock certificates should send their certificates and related
documents to our transfer agent:
BankBoston, N.A.
c/o Boston EquiServe
P.O. Box 8040
Boston, MA 02266-8040
Dividend reinvestment plan participants who want to transfer their shares should
send their certificates and related documents to DQE Shareholder Relations.
Direct Deposit of Dividends
Your DQE quarterly dividends can be deposited automatically into a personal
checking or savings account. Call Shareholder Relations toll-free for more
information.
Dividend Tax Status
The company estimates that all common stock dividends paid in 1999 are taxable
as dividend income. This estimate is subject to audit by the Internal Revenue
Service.
Electri Stock
The following investor services are available through DQE's dividend
reinvestment and stock purchase plan:
Direct Purchase of DQE Stock
DQE offers non-shareholders the ability to purchase common stock directly
through the company. Call, write, or visit our web site at www.dqe.com for a
prospectus on this popular program.
Automatic Cash Contributions
Through this program, current reinvestment plan participants can make regular
cash contributions to purchase additional shares of DQE common stock by having
funds automatically withdrawn from their bank accounts.
Other Features and Services
. Purchase and sale of plan shares at nominal commissions
. Acceptance of certificates for safekeeping
. Re-registration of some or all of a shareholder's holdings
. Creation of new accounts as gifts for family, friends or institutions you
support, including a complimentary gift certificate, upon request
<PAGE>
DQE Officers
David D. Marshall, 47, Chairman of the Board, President and Chief Executive
Officer. Previously held senior executive positions in finance at Central
Vermont Public Service. Joined the company in 1985. Directorships included on
page nine.
Morgan K. O'Brien, 40, Executive Vice President, Corporate Development.
Previously held senior financial positions at DQE, Duquesne Light, PNC Bank and
Deloitte & Touche. Joined the company in 1991.
Victor A. Roque, 53, Executive Vice President and General Counsel. Formerly Vice
President, General Counsel and Secretary for Orange and Rockland Utilities.
Joined the company in 1994. Directorships include the Pennsylvania Business
Roundtable (economic development), the Hill House Association (provider of
social services), the Urban League of Pittsburgh, and the United Way Good
Neighbors Advisory Committee. Member, Salvation Army Greater Pittsburgh Advisory
Board.
Gary L. Schwass, 54, Executive Vice President and Chief Financial Officer.
Previously served in a variety of senior executive positions in finance and
management with Consumers Power Company. Joined the company in 1985.
Directorships include Chair, Western Pennsylvania Development Credit Corporation
(promotes small business through lending activities), Chair, Finance Committee,
and Treasurer, Holy Family Foundation (supports families in crisis), and
Financial Executives Institute, Pittsburgh Chapter (association of corporate
financial officers).
William J. DeLeo, 49, Vice President and Chief Administrative Officer.
Previously held senior management positions with Duquesne Light, Gulf Oil and
Price Waterhouse. Joined the company in 1985. Directorships include the
Pittsburgh Civic Light Opera.
Jack E. Saxer, Jr., 56, Vice President. Previously held senior financial
positions with Gulf Oil and Chevron. Joined the company in 1989. Directorships
include Point Venture (venture capital) and Pittsburgh Consumer Health Coalition
(healthcare advocacy for the disadvantaged).
Frosina C. Cordisco, 48 David R. High, 45 Suzanne F. Karlovich, 39
Treasurer Associate General Counsel General Auditor
Diane S. Eismont, 55 Thomas W. Hubbell, 50 M. Beth Straka, 35
Corporate Secretary Assistant Vice President, Assistant Vice President,
Information Technology Corporate Communications
James E. Wilson, 34
Controller
- -------------------------------------------------------------------------------
<PAGE>
DQE EXHIBIT 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement No.
33-60966 of DQE, Inc. on Form S-3, Post Effective Amendment No. 3 to
Registration Statement No. 33-29147 of DQE, Inc. on Form S-8, Registration
Statement Nos. 33-66488 and 33-72582 of DQE, Inc. on Form S-8, Post Effective
Amendment No. 1 to Registration Statement Nos. 33-46773 and 33-87974 of DQE,
Inc. on Form S-8, Amendment No. 1 to Registration Statement No. 333-32433 of
DQE, Inc. on Form S-4 and Amendment No. 1 to Registration Statement Nos.
333-80377 and 333-80377-1 of DQE Capital Corporation on Form S-3 of our report
dated January 28, 1999, appearing in and incorporated by reference in the Annual
Report on Form 10-K of DQE, Inc. for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 29, 2000
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of DQE,
Inc., which company proposes to file with the Securities and Exchange Commission
an Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint Gary L. Schwass, Diane S. Eismont and Victor A. Roque,
and each of them severally, his true and lawful attorney, for him and in his
name, place and stead, and in his office and capacity as aforesaid, to sign and
file said Form 10-K and any amendments thereto, and any and all other documents
to be signed and filed with the Securities and Exchange Commission in connection
therewith, hereby granting to Gary L. Schwass, Diane S. Eismont and Victor A.
Roque, and each of them severally, full power and authority to do and perform
each and every act as fully, to all intents and purposes, as he might or could
do if personally present, hereby ratifying and confirming in all respects all
that Gary L. Schwass, Diane S. Eismont and Victor A. Roque, and each of them
severally, may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 25th day
of February, 2000.
/s/ Daniel Berg
-----------------------------
Daniel Berg, Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of DQE,
Inc., which company proposes to file with the Securities and Exchange Commission
an Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint Gary L. Schwass, Diane S. Eismont and Victor A. Roque,
and each of them severally, her true and lawful attorney, for her and in her
name, place and stead, and in her office and capacity as aforesaid, to sign and
file said Form 10-K and any amendments thereto, and any and all other documents
to be signed and filed with the Securities and Exchange Commission in connection
therewith, hereby granting to Gary L. Schwass, Diane S. Eismont and Victor A.
Roque, and each of them severally, full power and authority to do and perform
each and every act as fully, to all intents and purposes, as she might or could
do if personally present, hereby ratifying and confirming in all respects all
that Gary L. Schwass, Diane S. Eismont and Victor A. Roque, and each of them
severally, may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 25th day
of February, 2000.
/s/ Doreen E. Boyce
-------------------------
Doreen E. Boyce, Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of DQE,
Inc., which company proposes to file with the Securities and Exchange Commission
an Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint Gary L. Schwass, Diane S. Eismont and Victor A. Roque,
and each of them severally, his true and lawful attorney, for him and in his
name, place and stead, and in his office and capacity as aforesaid, to sign and
file said Form 10-K and any amendments thereto, and any and all other documents
to be signed and filed with the Securities and Exchange Commission in connection
therewith, hereby granting to Gary L. Schwass, Diane S. Eismont and Victor A.
Roque, and each of them severally, full power and authority to do and perform
each and every act as fully, to all intents and purposes, as he might or could
do if personally present, hereby ratifying and confirming in all respects all
that Gary L. Schwass, Diane S. Eismont and Victor A. Roque, and each of them
severally, may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 26th day
of February, 2000.
/s/ Robert P. Bozzone
-------------------------
Robert P. Bozzone, Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of DQE,
Inc., which company proposes to file with the Securities and Exchange Commission
an Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint Gary L. Schwass, Diane S. Eismont and Victor A. Roque,
and each of them severally, his true and lawful attorney, for him and in his
name, place and stead, and in his office and capacity as aforesaid, to sign and
file said Form 10-K and any amendments thereto, and any and all other documents
to be signed and filed with the Securities and Exchange Commission in connection
therewith, hereby granting to Gary L. Schwass, Diane S. Eismont and Victor A.
Roque, and each of them severally, full power and authority to do and perform
each and every act as fully, to all intents and purposes, as he might or could
do if personally present, hereby ratifying and confirming in all respects all
that Gary L. Schwass, Diane S. Eismont and Victor A. Roque, and each of them
severally, may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 28th day
of February, 2000.
/s/ Sigo Falk
------------------------
Sigo Falk, Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of DQE,
Inc., which company proposes to file with the Securities and Exchange Commission
an Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint Gary L. Schwass, Diane S. Eismont and Victor A. Roque,
and each of them severally, his true and lawful attorney, for him and in his
name, place and stead, and in his office and capacity as aforesaid, to sign and
file said Form 10-K and any amendments thereto, and any and all other documents
to be signed and filed with the Securities and Exchange Commission in connection
therewith, hereby granting to Gary L. Schwass, Diane S. Eismont and Victor A.
Roque, and each of them severally, full power and authority to do and perform
each and every act as fully, to all intents and purposes, as he might or could
do if personally present, hereby ratifying and confirming in all respects all
that Gary L. Schwass, Diane S. Eismont and Victor A. Roque, and each of them
severally, may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 6th day
of February, 2000.
/s/ William H. Knoell
-------------------------
William H. Knoell, Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of DQE,
Inc., which company proposes to file with the Securities and Exchange Commission
an Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint Gary L. Schwass, Diane S. Eismont and Victor A. Roque,
and each of them severally, his true and lawful attorney, for him and in his
name, place and stead, and in his office and capacity as aforesaid, to sign and
file said Form 10-K and any amendments thereto, and any and all other documents
to be signed and filed with the Securities and Exchange Commission in connection
therewith, hereby granting to Gary L. Schwass, Diane S. Eismont and Victor A.
Roque, and each of them severally, full power and authority to do and perform
each and every act as fully, to all intents and purposes, as he might or could
do if personally present, hereby ratifying and confirming in all respects all
that Gary L. Schwass, Diane S. Eismont and Victor A. Roque, and each of them
severally, may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 26th day
of February, 2000.
/s/ Thomas J. Murrin
-------------------------
Thomas J. Murrin, Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of DQE,
Inc., which company proposes to file with the Securities and Exchange Commission
an Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint Gary L. Schwass, Diane S. Eismont and Victor A. Roque,
and each of them severally, his true and lawful attorney, for him and in his
name, place and stead, and in his office and capacity as aforesaid, to sign and
file said Form 10-K and any amendments thereto, and any and all other documents
to be signed and filed with the Securities and Exchange Commission in connection
therewith, hereby granting to Gary L. Schwass, Diane S. Eismont and Victor A.
Roque, and each of them severally, full power and authority to do and perform
each and every act as fully, to all intents and purposes, as he might or could
do if personally present, hereby ratifying and confirming in all respects all
that Gary L. Schwass, Diane S. Eismont and Victor A. Roque, and each of them
severally, may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 29th day
of February, 2000.
/s/ Steven S. Rogers
-------------------------
Steven S. Rogers, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,458,517
<OTHER-PROPERTY-AND-INVEST> 1,008,834
<TOTAL-CURRENT-ASSETS> 375,657
<TOTAL-DEFERRED-CHARGES> 2,765,984
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,608,992
<COMMON> 73,119
<CAPITAL-SURPLUS-PAID-IN> 923,650
<RETAINED-EARNINGS> 953,785
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,347,865<F1>
4,500
267,682<F2>
<LONG-TERM-DEBT-NET> 1,633,077
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 342,804
<LONG-TERM-DEBT-CURRENT-PORT> 469,248
0
<CAPITAL-LEASE-OBLIGATIONS> 16,863
<LEASES-CURRENT> 685
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,526,953
<TOT-CAPITALIZATION-AND-LIAB> 5,608,992
<GROSS-OPERATING-REVENUE> 1,341,201
<INCOME-TAX-EXPENSE> 110,722<F3>
<OTHER-OPERATING-EXPENSES> 1,022,359
<TOTAL-OPERATING-EXPENSES> 1,022,359
<OPERATING-INCOME-LOSS> 318,842
<OTHER-INCOME-NET> 152,003
<INCOME-BEFORE-INTEREST-EXPEN> 470,845
<TOTAL-INTEREST-EXPENSE> 158,707<F4>
<NET-INCOME> 201,416
1,569
<EARNINGS-AVAILABLE-FOR-COMM> 199,847
<COMMON-STOCK-DIVIDENDS> 115,733
<TOTAL-INTEREST-ON-BONDS> 79,454
<CASH-FLOW-OPERATIONS> 337,868
<EPS-BASIC> 2.65
<EPS-DILUTED> 2.62
<FN>
<F1>Includes $(602,689) of Treasury Stock at cost
<F2>Includes $14,404 of Preference Stock
<F3>Non-Operating Expense
<F4>Includes $16,632 of Preferred and Preference Stock Dividends
</FN>
</TABLE>
