<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
-------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____________ to ____________
Commission File Number
--------------------------
1-10290
DQE, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1598483
---------------- --------------
(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
-----------------------------------------------------------------
(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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
DQE Common Stock, no par value - 63,536,518 shares outstanding as of June 30,
2000 and 59,211,780 shares outstanding as of July 31, 2000.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DQE Condensed Statement of Consolidated Income (Unaudited)
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<TABLE>
<CAPTION>
(Thousands of Dollars, Except Per Share Amounts)
-------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Electricity sales $ 266,265 $ 254,167 $ 517,218 $ 520,922
Water sales 36,069 30,166 62,026 52,320
Other 32,180 27,464 70,331 52,056
-----------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 334,514 311,797 649,575 625,298
-----------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Fuel and purchased power 92,709 49,669 143,336 96,580
Other operating 106,359 101,364 205,340 198,152
Maintenance 18,685 23,434 36,374 43,771
Depreciation and amortization 85,377 52,890 155,773 110,620
Taxes other than income taxes 21,098 23,246 44,694 45,920
-----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 324,228 250,603 585,517 495,043
-----------------------------------------------------------------------------------------------------------------------
Operating Income 10,286 61,194 64,058 130,255
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Other Income 37,400 40,474 70,761 79,771
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Interest and Other Charges 31,713 37,736 65,236 74,223
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Income Before Income Taxes 15,973 63,932 69,583 135,803
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Income Taxes 1,026 22,326 9,532 45,732
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Net Income 14,947 41,606 60,051 90,071
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Dividends on Preferred Stock (953) 336 (542) 728
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Earnings Available for Common Stock $ 15,900 $ 41,270 $ 60,593 $ 89,343
=======================================================================================================================
Net Income 14,947 41,606 60,051 90,071
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Other Comprehensive Income:
Unrealized holding gains (losses),
net of tax of $(171), $941, $5,756 and $681 (241) 1,326 8,116 960
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Total Other Comprehensive Income (241) 1,326 8,116 960
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Comprehensive Income $ 14,706 $ 42,932 $ 68,167 $ 91,031
=======================================================================================================================
Average Number of Common Shares
Outstanding (Thousands of Shares) 67,088 75,776 69,012 76,493
=======================================================================================================================
Earnings Per Share of Common Stock:
Basic $ 0.24 $ 0.55 $ 0.87 $ 1.17
Diluted $ 0.23 $ 0.54 $ 0.85 $ 1.16
=======================================================================================================================
Comprehensive Earnings Per Share of Common
Stock:
Basic $ 0.23 $ 0.56 $ 1.00 $ 1.18
Diluted $ 0.22 $ 0.55 $ 0.98 $ 1.17
=======================================================================================================================
Dividends Declared Per Share of Common Stock $ 0.40 $ 0.38 $ 0.80 $ 0.76
=======================================================================================================================
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
DQE Condensed Consolidated Balance Sheet (Unaudited)
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<TABLE>
<CAPTION>
(Thousands of Dollars)
----------------------------------------
June 30, December 31,
ASSETS 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 297,605 $ 54,229
Receivables 174,431 184,248
Other current assets 47,355 137,180
-----------------------------------------------------------------------------------------------------------
Total Current Assets 519,391 375,657
-----------------------------------------------------------------------------------------------------------
Long-Term Investments 702,153 639,284
-----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 2,402,591 4,369,303
Less: Accumulated depreciation (683,296) (2,541,236)
-----------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment - Net 1,719,295 1,828,067
-----------------------------------------------------------------------------------------------------------
Other Non-Current Assets:
Transition costs 554,431 2,008,171
Regulatory assets 224,411 224,002
Divestiture costs -- 218,653
Other 320,910 315,158
-----------------------------------------------------------------------------------------------------------
Total Other Non-Current Assets 1,099,752 2,765,984
-----------------------------------------------------------------------------------------------------------
Total Assets $4,040,591 $ 5,608,992
===========================================================================================================
CAPITALIZATION AND LIABILITIES
-----------------------------------------------------------------------------------------------------------
Current Liabilities:
Notes payable and current debt maturities $ 81,563 $ 812,052
Other current liabilities 45,027 171,591
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Total Current Liabilities 126,590 983,643
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Non-Current Liabilities:
Deferred income taxes - net 831,227 1,020,103
Deferred income 116,449 126,434
Other non-current liabilities 277,340 225,688
-----------------------------------------------------------------------------------------------------------
Total Non-Current Liabilities 1,225,016 1,372,225
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Commitments and Contingencies (Note D)
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Capitalization:
Long-Term Debt 1,422,987 1,633,077
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Preferred Stock:
DQE preferred stock 25,720 42,170
Preferred stock of subsidiaries 211,108 215,608
Preference stock of subsidiaries 11,420 14,404
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Total Preferred Stock 248,248 272,182
-----------------------------------------------------------------------------------------------------------
Common Shareholders' Equity:
Common stock - no par value
(authorized - 187,500,000
shares; issued - 109,679,154 shares) 995,218 994,935
Retained earnings 960,479 953,785
Treasury stock (at cost) (46,142,636 and 37,912,995 shares) (947,312) (602,689)
Accumulated other comprehensive income 9,365 1,834
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Total Common Shareholders' Equity 1,017,750 1,347,865
-----------------------------------------------------------------------------------------------------------
Total Capitalization 2,688,985 3,253,124
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Total Liabilities and Capitalization $4,040,591 $ 5,608,992
===========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DQE Condensed Statement of Consolidated Cash Flows (Unaudited)
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<TABLE>
<CAPTION>
(Thousands of Dollars)
--------------------------------------
Six Months Ended June 30,
--------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Operations $ 185,059 $ 208,860
Changes in working capital other than cash (73,616) (45,457)
Other 18,846 (41,380)
---------------------------------------------------------------------------------------------------------
Net Cash Provided from Operating Activities 130,289 122,023
---------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Sale of generation assets 1,705,000 --
Proceeds from disposition of investments 49,449 49,297
Acquisitions (32,000) (116,870)
Long-term investments (62,232) (31,541)
Capital expenditures (76,781) (71,355)
Divestiture costs (89,649) --
Other (2,220) (8,023)
---------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided from Investing Activities 1,491,567 (178,492)
---------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Issuance of debt 149,746 --
Increase in notes payable -- 174,538
Dividends on common and preferred stock (53,357) (58,037)
Reduction of commercial paper (342,803) --
Repurchase of common stock (344,623) (70,727)
Reductions of long-term obligations - net (749,197) (9,097)
Other (38,246) (13,599)
---------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided from Financing Activities (1,378,480) 23,078
---------------------------------------------------------------------------------------------------------
Net increase in cash and temporary cash investments 243,376 (33,391)
Cash and temporary cash investments at beginning of period 54,229 108,790
---------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 297,605 $ 75,399
=========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<S> <C> <C>
Non-Cash Investing and Financing Activities:
Preferred stock issued in conjunction with long-term investments $ -- $ 3,528
=========================================================================================================
Capital lease obligations recorded $ -- $ 5,988
=========================================================================================================
Equity funding obligations recorded $ -- $ 1,232
=========================================================================================================
</TABLE>
4
<PAGE>
Notes to Condensed Consolidated Financial
Statements (Unaudited)
A. CONSOLIDATION, RECLASSIFICATION
AND 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.; DQE Financial
Corp.; and DQE Systems, Inc.
Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the transmission and distribution of electric energy. On April 28,
2000, Duquesne Light completed the Pennsylvania Public Utility Commission (PUC)-
approved sale of our generation assets to Orion Power Midwest, L.P. (See
"Generation Asset Sale" discussion, Note B, on page 6.)
AquaSource, our second largest operating subsidiary, is a water resource
management company that acquires, develops and manages water and wastewater
utilities and complementary businesses.
Our expanded business lines engage in a wide range of initiatives,
including: the distribution of propane; the production of landfill gas;
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.
In the opinion of management, the unaudited condensed consolidated
financial statements included in this report reflect all adjustments that are
necessary for a fair presentation of the results of interim periods and are
normal, recurring adjustments. Prior periods have been reclassified to conform
with current accounting presentations.
These statements should be read with the financial statements and notes
included in our Annual Report on Form 10-K for the year ended December 31, 1999
filed with the Securities and Exchange Commission (SEC). The results of
operations for the three and six months ended June 30, 2000, are not necessarily
indicative of the results that may be expected for the full year. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may also
be affected by the estimates and assumptions management is required to make.
Actual results could differ from those estimates.
DQE and Duquesne Light are subject to the accounting and reporting
requirements of the SEC. In addition, Duquesne Light's electric utility
operations are subject to regulation by the PUC and the Federal Energy
Regulatory Commission (FERC) with respect to rates for interstate sales,
transmission of electric power, accounting and other matters.
As a result of our PUC-approved restructuring plan (see "Rate Matters,"
Note B, below), the electricity supply segment 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, 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 was adjusted by
receipt of the generation asset sale proceeds during the second quarter of
2000. 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 B, below.)
These regulatory assets consist of a regulatory tax receivable, unamortized
debt costs and deferred employee costs.
B. 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 Pennsylvania Electricity Generation Customer Choice and Competition Act
(Customer Choice Act) enables Pennsylvania's electric utility customers to
purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). All customers now have customer choice. As of
July 31, 2000, approximately 26.9 percent of Duquesne Light's customers had
chosen alternative generation suppliers, representing approximately 12.5 percent
of Duquesne Light's non-coincident peak load. The remaining customers are
provided with electricity through our provider of last resort service agreement
with Orion (discussed below). Customers pay their electricity generation
supplier for generation charges, and pay Duquesne Light the CTC and charges for
transmission and distribution. Electricity delivery (including transmission,
distribution and customer service) remains regulated in substantially the same
manner as under historical regulation.
5
<PAGE>
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, we previously agreed to
extend this rate cap for an additional six months through the end of 2001.
However, if Duquesne Light's amended provider of last resort arrangement is
approved, this rate cap will be extended through 2003, with a possible further
extension through 2004. (See "Provider of Last Resort" discussion below.)
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. Although no longer a generation supplier, as the provider of last
resort, Duquesne Light must provide electricity for any customer who 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 generation asset sale, Orion 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. 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. In April 2000,
Duquesne Light and Orion entered into an agreement that, as amended in June
2000 and subject to PUC and other approvals, would extend this provider of last
resort arrangement beyond the final CTC collection through 2004. We anticipate
a determination by the PUC later this year.
Generation Asset Sale
On April 28, 2000, Duquesne Light completed the sale of our generation
assets to Orion. Orion purchased the wholly owned Cheswick, Elrama, Phillips
and Brunot Island power stations, as well as the stations received from
FirstEnergy Corp. in the December 3, 1999 power station exchange, for
approximately $1.7 billion.
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. Originally, transition costs were to be
recovered over a seven-year period ending in 2005. As we have regularly stated
in our reports, however, by applying the net proceeds of the generation asset
sale to reduce transition costs, we anticipated early termination of the CTC
collection period in 2001. On August 4, 2000, Duquesne Light submitted its
final sale-related filing to the PUC, seeking approval for the accounting
treatment of the asset sale proceeds. Pursuant to this filing, we now
anticipate early termination of the CTC collection period in the first quarter
of 2002 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. The unrecovered balance of
transition costs that remain following the generation asset sale, previously
anticipated to be approximately $2.1 billion ($1.5 billion net of tax), was
approximately $550 million ($330 million net of tax) at June 30, 2000. Duquesne
Light is allowed to earn an 11 percent pre-tax return on this net amount, which
remains subject to PUC review. We cannot predict the ultimate outcome of the
PUC's determinations regarding our filing, the accounting treatment sought, or
the balance of transition costs.
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. On May 17, 2000, the Third
Circuit unanimously affirmed the District Court's ruling. In early June 2000,
AYE announced it would not pursue further appeals in this matter.
AquaSource Rate Application
AquaSource filed consolidated, statewide water and sewer rate change
applications with the Texas Natural Resource Conservation Commission (TNRCC) and
17 municipalities on June 15, 2000. The requested rate increases are to be
phased in over twelve months, with the first increase becoming effective July
17, 2000 and the second phase becoming effective on July 17, 2001. AquaSource
proposes to replace the more than 100 separate tariffs of its acquired companies
with single water and sewer tariffs using uniform system-wide rates. AquaSource
is also requesting substantial changes to the customer service rules, extension
policies, water rationing plans and customer service applications to create
uniformity and to achieve conformity with recent regulatory changes. If this
request is approved, annual water and sewer revenues will increase approximately
$7 million after the phase-in period is completed.
Subject to possible suspension by a later interim or final rate order,
AquaSource's proposed rates were implemented on the July 17, 2000 effective date
and are being charged (subject to refund with interest) pending the final order
on each application by the regulatory authority having jurisdiction. In Texas,
certain municipalities have original jurisdiction within its corporate limits
over the rates and services of investor-owned water and sewer utilities. The
TNRCC has statewide original jurisdiction over the rates and services in all
other areas, and has appellate jurisdiction over all municipal rate orders.
6
<PAGE>
The regulatory authority (TNRCC or municipality) must call a hearing on
the rate change application upon receipt of protests by 1,000 (or 10 percent,
if less) of the affected customers subject to its original jurisdiction within
60 days of the July 17, 2000 effective date. In addition, the regulatory
authority may call a hearing upon its own motion within 120 days of this
effective date. If a hearing is not called before the expiration of the
120-day period, the rates are deemed approved by operation of law. The
regulatory authority may set interim rates or order an escrow of increased
revenues at any time during the rate case. If an interim rate or escrow is
ordered, the regulatory authority must render its final decision within 335
days after the effective date of the interim rates or escrow; otherwise, the
proposed rates are approved as a matter of law.
On July 11, the City of Ingram became the first municipality to act on the
rate application, by denying the proposed increase and establishing rates lower
than requested. AquaSource has appealed that municipal rate order to the TNRCC.
AquaSource anticipates similar ratemaking action by other municipalities, after
which it will file appeals. It is customary for the TNRCC to consolidate all
municipal appeals with the general rate case and to issue one uniform rate order
affecting all service areas. While there is no statutory deadline for decision,
the Company expects the TNRCC's final order to be issued within 12 to 18 months
of the July 17, 2000 effective date.
C. RECEIVABLES
The components of receivables for the periods indicated are as follows:
<TABLE>
<CAPTION>
(Thousands of Dollars)
--------------------------------------
June 30, June 30, December 31,
2000 1999 1999
--------------------------------------------------------------------
<S> <C> <C> <C>
Electric customers $ 101,829 $ 86,136 $ 82,314
Water customers 32,686 27,606 21,352
Other utility 11,551 22,154 32,582
Other 40,326 86,301 57,280
Less: (Allowance for
uncollectible
accounts) (11,961) (10,669) (9,280)
--------------------------------------------------------------------
Receivables - net 174,431 211,528 184,248
Less: Receivables sold -- (50,000) --
--------------------------------------------------------------------
Total $ 174,431 $ 161,528 $ 184,248
====================================================================
</TABLE>
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 $40 million of accounts receivable. The accounts receivable sales
agreement expires in February 2001, and was recently amended to reduce the sale
and purchase entitlement from $50 million. The agreement 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.
D. COMMITMENTS AND CONTINGENCIES
Construction
We estimate that in 2000 we will spend, excluding the allowance for funds
used during construction, approximately $85 million (including $5 million for
generation) for electric utility construction, and $45 million for water
utility construction.
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.
Environmental Matters
AquaSource is aware of various compliance issues at its wastewater
facilities, and is communicating and working closely with state regulators to
correct these issues in a timely manner. We do not believe that any of these
issues, or the settlement thereof, will have a material effect on DQE's
financial position, results of operations or cash flows. (See "Legal
Proceedings" on page 19.)
Other
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.
E. 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.
Intercompany charges include costs for certain administrative functions as
well as interest charges on borrowings from DQE Capital.
7
<PAGE>
Business Segments for the Three Months Ended:
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<TABLE>
<CAPTION>
(Millions of Dollars)
-------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
-------------------------------------------------------------------------------------------
June 30, 2000
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 85.4 $ 101.6 $ 91.8 $ 36.1 $ 25.8 $ (6.2) $ 334.5
Operating expenses 46.6 115.0 4.0 37.8 41.6 (6.2) 238.8
Depreciation and
amortization expense 14.1 -- 61.6 4.3 5.4 -- 85.4
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 24.7 (13.4) 26.2 (6.0) (21.2) -- 10.3
Other income 5.0 -- -- 1.4 32.4 (1.4) 37.4
Interest and other charges 18.4 3.3 2.0 0.3 8.6 (0.9) 31.7
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 11.3 (16.7) 24.2 (4.9) 2.6 (0.5) 16.0
Income taxes 4.7 (3.7) 9.9 (2.3) (8.6) 1.1 1.1
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
intercompany charges 6.6 (13.0) 14.3 (2.6) 11.2 (1.6) 14.9
Intercompany charges - net 0.5 (1.7) -- (5.6) 5.7 1.1 --
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7.1 $ (14.7) $ 14.3 $ (8.2) $ 16.9 $ (0.5) $ 14.9
=================================================================================================================================
Assets $2,328.1 $ -- $ 554.4 $ 474.9 $ 683.2 $ -- $4,040.6
=================================================================================================================================
Capital expenditures $ 22.1 $ 4.7 $ -- $ 15.2 $ 5.3 $ -- $ 47.3
=================================================================================================================================
<CAPTION>
(Millions of Dollars)
-------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
-------------------------------------------------------------------------------------------
June 30, 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 81.1 $ 102.8 $ 89.4 $ 30.2 $ 12.7 $ (4.4) $ 311.8
Operating expenses 41.4 109.4 3.9 24.3 23.1 (4.4) 197.7
Depreciation and
amortization expense 13.0 9.1 25.4 2.3 3.1 -- 52.9
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 26.7 (15.7) 60.1 3.6 (13.5) -- 61.2
Other income 1.4 3.0 -- 1.0 36.2 (1.1) 40.5
Interest and other charges 9.2 11.8 12.0 0.1 5.2 (0.5) 37.8
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 18.9 (24.5) 48.1 4.5 17.5 (0.6) 63.9
Income taxes 7.4 (11.8) 20.0 0.5 6.4 (0.2) 22.3
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
intercompany charges 11.5 (12.7) 28.1 4.0 11.1 (0.4) 41.6
Intercompany charges - net (0.4) (1.3) -- (2.1) 4.0 (0.2) --
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 11.1 $ (14.0) $ 28.1 $ 1.9 $ 15.1 $ (0.6) $ 41.6
=================================================================================================================================
Assets (1) $1,535.4 $ 425.7 $2,226.8 $ 446.1 $ 975.0 $ -- $5,609.0
=================================================================================================================================
Capital expenditures $ 15.2 $ 9.1 $ -- $ 11.7 $ 8.4 $ -- $ 44.4
=================================================================================================================================
</TABLE>
(1) Relates to assets as of December 31, 1999.
8
<PAGE>
Business Segments for the Six Months Ended:
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Millions of Dollars)
-------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
-------------------------------------------------------------------------------------------
June 30, 2000
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 172.8 $ 180.4 $ 188.2 $ 62.1 $ 55.4 $ (9.3) $ 649.6
Operating expenses 85.3 204.6 8.2 61.2 79.8 (9.3) 429.8
Depreciation and
amortization expense 23.2 5.2 107.6 8.0 11.8 -- 155.8
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 64.3 (29.4) 72.4 (7.1) (36.2) -- 64.0
Other income 7.4 4.0 -- 2.7 59.7 (3.0) 70.8
Interest and other charges 29.6 5.5 13.4 0.6 18.0 (1.9) 65.2
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 42.1 (30.9) 59.0 (5.0) 5.5 (1.1) 69.6
Income taxes 10.6 (13.1) 24.3 (2.3) (8.3) (1.7) 9.5
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
intercompany charges 31.5 (17.8) 34.7 (2.7) 13.8 0.6 60.1
Intercompany charges - net (1.0) (2.6) -- (8.6) 13.8 (1.6) --
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 30.5 $ (20.4) $ 34.7 $ (11.3) $ 27.6 $ (1.0) $ 60.1
================================================================================================================================
Assets $2,328.1 $ -- $ 554.4 $ 474.9 $ 683.2 $ -- $4,040.6
================================================================================================================================
Capital expenditures $ 33.5 $ 4.7 $ -- $ 28.9 $ 9.7 $ -- $ 76.8
================================================================================================================================
<CAPTION>
(Millions of Dollars)
-------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
-------------------------------------------------------------------------------------------
June 30, 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 163.4 $ 209.4 $ 182.4 $ 52.3 $ 26.5 $ (8.7) $ 625.3
Operating expenses 80.4 219.1 8.0 43.5 42.1 (8.7) 384.4
Depreciation and
amortization expense 27.3 18.0 55.0 3.9 6.4 -- 110.6
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 55.7 (27.7) 119.4 4.9 (22.0) -- 130.3
Other income 2.6 5.4 -- 2.0 72.0 (2.3) 79.7
Interest and other charges 18.1 23.5 23.7 0.7 9.3 (1.1) 74.2
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 40.2 (45.8) 95.7 6.2 40.7 (1.2) 135.8
Income taxes 15.1 (22.2) 39.8 1.1 13.9 (2.0) 45.7
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
intercompany charges 25.1 (23.6) 55.9 5.1 26.8 0.8 90.1
Intercompany charges - net (0.6) (1.6) -- (2.1) 6.3 (2.0) --
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 24.5 $ (25.2) $ 55.9 $ 3.0 $ 33.1 $ (1.2) $ 90.1
=================================================================================================================================
Assets (1) $1,535.4 $ 425.7 $2,226.8 $ 446.1 $ 975.0 $ -- $5,609.0
=================================================================================================================================
Capital expenditures $ 28.6 $ 12.1 $ -- $ 18.3 $ 12.4 $ -- $ 71.4
=================================================================================================================================
</TABLE>
(1) Relates to assets as of December 31, 1999.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Part I, Item 2 of this Quarterly Report on Form 10-Q should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31,
1999 filed with the Securities and Exchange Commission (SEC), and the condensed
consolidated financial statements, which are set forth on pages 2 through 9 in
Part I, Item 1 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.; DQE Financial
Corp.; and DQE Systems, Inc.
Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the transmission and distribution of electric energy. On April 28,
2000, Duquesne Light completed the Pennsylvania Public Utility Commission (PUC)-
approved sale of our generation assets to Orion Power MidWest, L.P. (See
"Generation Asset Sale" discussion on page 16.)
AquaSource, our second largest operating subsidiary, is a water resource
management company that acquires, develops and manages water and wastewater
utilities and complementary businesses.
Our expanded business lines engage in a wide range of initiatives,
including: the distribution of propane; the production of landfill gas;
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.
Before completing the generation asset sale, we also historically sold
electricity to other utilities. (See "Generation Asset Sale" discussion on
page 16.)
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 in several states and Canada.
Regulation
DQE and Duquesne Light are subject to the accounting and reporting
requirements of the SEC. In addition, Duquesne Light's electric utility
operations are subject to regulation by the PUC and the Federal Energy
Regulatory Commission (FERC) with respect to rates for interstate sales,
transmission of electric power, accounting and other matters.
As a result of our PUC-approved restructuring plan (see "Rate Matters" on
page 15), the electricity supply segment 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, 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 was adjusted by
receipt of the proceeds from the generation asset sale during the second quarter
of 2000. 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 15.)
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. On June 15, 2000,
AquaSource filed consolidated rate applications in Texas, the state with its
largest investment level. (See "AquaSource Rate Application" discussion on
page 17.)
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" below and in "Business Segments and Related
Information," Note E to our condensed consolidated financial statements on
page 7.
RESULTS OF OPERATIONS
Overall Performance
Comparison of Three Months Ended June 30, 2000 and June 30, 1999. Basic
earnings per share were $0.24 in the second quarter of 2000 compared to $0.55 in
the second quarter of 1999, a decrease of 56.4 percent. The average shares of
outstanding common stock declined by 8.7 million, or 11.5 percent. The lower
average shares outstanding reflect the 6.8 million shares of common stock we
repurchased during the second quarter of 2000 and 5.7 million we repur-
10
<PAGE>
chased in 1999. Net income decreased from $41.6 million in the second quarter of
1999 to $14.9 million in the second quarter of 2000, a decrease of 64.2 percent.
The lower earnings level for the second quarter can be attributed to three
items: (1) a $0.16 per share decrease in our recorded earnings related to
transition costs in the second quarter of 2000 compared to the second quarter of
1999, due to the collection of transition costs from our generation asset sale,
(2) an $0.08 charge for terminating a coal-bed methane project, and (3) an $0.08
charge related to an AquaSource purchase accounting adjustment regarding 1999
acquisitions.
Comprehensive income consists of net income plus unrealized holding gains
in marketable securities. Comprehensive earnings per share were $0.23 for the
second quarter of 2000 and $0.56 for the second quarter of 1999.
Comparison of Six Months Ended June 30, 2000 and June 30, 1999. Basic
earnings per share were $0.87 in the first six months of 2000 compared to $1.17
in the first six months of 1999, a decrease of 25.6 percent. The average shares
of outstanding common stock declined by 7.5 million, or 9.8 percent. The lower
average shares outstanding reflect the 8.4 million shares of common stock we
repurchased during the first six months of 2000 and 5.7 million we repurchased
in 1999. Net income decreased from $90.1 million in the first six months of 1999
to $60.1 million in the first six months of 2000, a decrease of 33.3 percent.
The lower earnings level for the first six months of 2000 can be attributed
to the same factors as discussed above related to the second quarter.
Comprehensive income consists of net income plus unrealized holding gains
in marketable securities. Comprehensive earnings per share were $1.00 for the
first six months of 2000 and $1.18 for the first six months of 1999.
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 Pennsylvania Electricity Generation Customer Choice and
Competition Act (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.
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). With the completion of our
generation asset sale on April 28, 2000, the electricity supply business segment
is now 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 threshold for separate disclosure.
Revenues in the "all other" category are comprised of energy facility
operations, landfill gas operations and propane and other operating investments.
Income from financial investments is included in other income. Assets in the
"all other" category are comprised of financial investments, energy facility
assets, landfill gas recovery and processing assets and propane distribution
assets. Intercompany eliminations primarily relate to intercompany sales of
electricity, property rental and dividends. Intercompany charges include costs
for certain administrative functions as well as interest charges on borrowings
from DQE Capital.
Additional information on our business segments is set forth in Note E,
"Business Segments and Related Information," in the Notes to the Consolidated
Financial Statements on page 7.
Electricity Delivery Business Segment.
Comparison of Three Months Ended June 30, 2000 and June 30, 1999. The
electricity delivery business segment contributed $7.1 million to net income in
the second quarter of 2000 compared to $11.1 million in the second quarter of
1999, a decrease of $4.0 million or 36.0 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 $4.3 million or 5.3 percent compared to the
second quarter of 1999. This increase is due to higher sales to electric utility
customers of 2.7 percent in the second quarter of 2000. The higher sales can be
attributed to warmer weather in 2000 as well as increased consumption by steel
manufacturers. The following table sets forth kilowatt-hours (KWH) delivered to
electric utility customers.
<TABLE>
<CAPTION>
------------------------------------------------
KWH Delivered
----------------------
(In Millions)
----------------------
Second Quarter 2000 1999 Change
------------------------------------------------
<S> <C> <C> <C>
Residential 773 752 2.8%
Commercial 1,492 1,457 2.4%
Industrial 901 873 3.2%
---------------------------------------
Sales to Electric
Utility Customers 3,166 3,082 2.7%
================================================
</TABLE>
11
<PAGE>
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 $4.5 million or 9.2 percent
from the second quarter of 1999. This increase is attributed to a higher level
of overhead expenses being allocated to the delivery business segment due to the
sale of our generation assets.
Other income was $7.4 million for the second quarter of 2000 compared to
$0.6 million in the second quarter of 1999, an increase of $6.8 million. Due to
the sale of our generating assets, more other income was allocated to this
segment in 2000. The increased other income is due to greater cash at Duquesne
Light from the generation sale proceeds.
Interest and other charges include interest on long-term debt, other
interest and preferred stock dividends of Duquesne Light. In the second quarter
of 2000, there was $9.3 million more interest and other charges allocated to the
electricity delivery business segment compared to the second quarter of 1999.
Given the generation asset sale to Orion, all remaining Duquesne Light financing
costs after recapitalization are borne by the electricity delivery business
segment.
Comparison of Six Months Ended June 30, 2000 and June 30, 1999. The
electricity delivery business segment contributed $30.5 million to net income in
the first six months of 2000 compared to $24.5 million in the first six months
of 1999, an increase of $6.0 million or 24.5 percent.
Operating revenues increased by $9.4 million or 5.8 percent compared to the
first six months of 1999 due to an increase of 3.1 percent in sales to electric
utility customers. The increase is primarily attributable to increased
consumption by steel manufacturers. The following table sets forth KWH delivered
to electric utility customers.
<TABLE>
<CAPTION>
------------------------------------------------
KWH Delivered
----------------------
(In Millions)
----------------------
First Six Months 2000 1999 Change
------------------------------------------------
<S> <C> <C> <C>
Residential 1,677 1,668 0.5%
Commercial 2,977 2,898 2.7%
Industrial 1,834 1,724 6.4%
---------------------------------------
Sales to Electric
Utility Customers 6,488 6,290 3.1%
================================================
</TABLE>
Operating expenses were $2.5 million or 2.6 percent higher than 1999,
primarily due to the allocation of more overhead expenses as a result of the
generation asset sale.
Other income was $6.6 million higher than the first six months of 1999.
This increase was the result of increased cash at Duquesne Light from the
generation sale proceeds. A greater amount of other income was allocated to the
electricity delivery business segment in 2000 because of the generation asset
sale.
Interest and other charges include interest on long-term debt, other
interest and preferred stock dividends of Duquesne Light. In the first six
months of 2000, there was $11.5 million or 63.5 percent more interest and other
charges allocated to the electricity delivery business segment compared to the
first six months of 1999.
Electricity Supply and CTC Business Segments.
Comparison of Three Months Ended June 30, 2000 and June 30, 1999. In the
second quarter of 2000, the electricity supply and CTC business segments
reported a net loss of $0.4 million compared to net income of $14.1 million in
the second quarter of 1999, a decrease of $14.5 million.
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 the collection
of generation-related transition costs from electricity delivery customers.
Energy requirements for residential and commercial customers are also
influenced by weather conditions. Warmer summer and colder winter seasons lead
to increased customer use of electricity for cooling and heating. Commercial
energy requirements are also affected by regional development. Energy
requirements for industrial customers are 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.
Operating revenues were relatively consistent in the second quarters of
2000 and 1999. The following table sets forth KWH supplied for customers who
have not chosen an alternative generation supplier, including unbilled provider
of last resort KWH supplied.
<TABLE>
<CAPTION>
--------------------------------------------------
KWH Supplied
--------------------------------------------------
(In Millions)
--------------------------------------------------
Second Quarter 2000 1999 Change
--------------------------------------------------
<S> <C> <C> <C>
Residential 643 634 1.4%
Commercial 1,251 987 26.7%
Industrial 979 838 16.8%
-----------------------------------------
Sales to Electric
Utility Customers 2,873 2,459 16.8%
-----------------------------------------
Sales to Other Utilities 301 788 (61.8)%
-----------------------------------------
Total Sales 3,174 3,247 (2.2)%
==================================================
</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.
12
<PAGE>
Fluctuations in energy costs generally result from changes in the cost of
fuel; total KWH supplied; and generating station availability. In the second
quarter of 1999, fluctuations also resulted from the mix between coal, nuclear
generation and purchased power.
Operating expenses increased $3.9 million or 3.2 percent from the second
quarter of 1999, as a result of the generation asset sale. During the second
quarter of 2000 operating costs consisted of purchased power costs related to
the Orion provider of last resort supply agreement. (See "Provider of Last
Resort" discussion on page 16.) The cost under the provider of last resort
agreement, approximately $0.04 per KWH, is equal to the customer shopping
credit. During 1999,the average production cost, both fuel and non-fuel
operating and maintenance costs, was approximately $0.025 per KWH.
Depreciation and amortization expense includes the amortization of
transition costs and, in the second quarter of 1999, accrued nuclear
decommissioning costs. There was an increase of $27.4 million or 80.1 percent
compared to the second quarter of 1999. This increase was due to a higher level
of transition cost amortization in the second quarter of 2000.
Interest and other charges include interest on debt, other interest and
preferred stock dividends of Duquesne Light. In the second quarter of 2000 there
was an $18.5 million decrease in interest and other charges compared to the
second quarter of 1999. The decrease reflects less interest expense allocated to
this segment in the second quarter of 2000 due to the generation asset sale.
Comparison of Six Months Ended June 30, 2000 and June 30, 1999. In the
first six months of 2000, the electricity supply and CTC business segments
reported net income of $14.3 million compared to $30.7 million in the first six
months of 1999, a decrease of $16.4 million or 53.4 percent.
Operating revenues decreased by $23.2 million or 5.9 percent compared to
the first six months of 1999. The decrease in revenues resulted from a 45.2
percent decrease in energy supplied to other utilities in the first six months
of 2000 compared to the first six months of 1999, due to the generation asset
sale. The following table sets forth KWH supplied for customers who have not
chosen an alternative generation supplier, including unbilled provider of last
resort KWH supplied.
<TABLE>
<CAPTION>
--------------------------------------------------
KWH Supplied
----------------------
(In Millions)
----------------------
First Six Months 2000 1999 Change
--------------------------------------------------
<S> <C> <C> <C>
Residential 1,326 1,457 (9.0)%
Commercial 2,130 2,139 (0.4)%
Industrial 1,827 1,660 10.1%
-----------------------------------------
Sales to Electric
Utility Customers 5,283 5,256 0.5%
-----------------------------------------
Sales to Other Utilities 795 1,450 (45.2)%
-----------------------------------------
Total Sales 6,078 6,706 (9.4)%
==================================================
</TABLE>
Operating expenses decreased $21.0 million or 8.6 percent from the first
six months of 1999, as a result of lower power production costs through the date
of the generation asset sale. Partially offsetting this decrease was an increase
in purchased power costs in 2000 from the higher rate per KWH due to the
customer shopping credit.
There was an increase of $40.1 million or 55.2 percent in depreciation and
amortization expense compared to the first six months of 1999. This increase was
due to a higher level of transition cost amortization in the first six months of
2000.
Interest and other charges include interest on debt, other interest and
preferred stock dividends of Duquesne Light. In the first six months of 2000
there was a $28.3 million or 60.0 percent decrease in interest and other charges
compared to the first six months of 1999. The decrease reflects less interest
expense allocated to the electricity supply and CTC business segments in 2000
due to the generation asset sale.
Water Distribution Business Segment.
Comparison of Three Months Ended June 30, 2000 and June 30, 1999. The water
distribution business segment had an $8.2 million net loss in the second quarter
of 2000, compared to $1.9 million of net income in the second quarter of 1999, a
decrease of $10.1 million.
During the second quarter of 2000, there was an increase in intercompany
charges stemming from increased borrowings from DQE Capital and increased use of
corporate administrative services. Before intercompany charges, net income
declined $6.6 million from the second quarter of 1999.
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;
water-related construction and engineering projects; and bottled water delivery
sales. Operating revenues increased by $5.9 million during the second quarter of
2000. The increase was primarily the result of acquisitions during the first
half of 1999.
Operating expenses for the water distribution business segment are
primarily made up of costs to operate and maintain the water distribution
systems; administrative expenses; non-income taxes, such as property and payroll
taxes; and bottled water costs. Operating expenses increased by $13.5 million as
a result of a $6.0 million purchase accounting adjustment related to 1999
acquisitions, higher repairs and maintenance costs, and higher contractor costs
related to the Texas rate applications and various systems implementations.
Depreciation and amortization expense includes depreciation of utility
delivery systems and the amortization of goodwill on acquisitions. The increase
of $2.0 million was due to the larger size of the business.
Comparison of Six Months Ended June 30, 2000 and June 30, 1999. The water
distribution business segment had an $11.3 million net loss in the first six
months of 2000, compared to $3.0 million of net income in the first six months
of 1999, a decrease of $14.3 million.
13
<PAGE>
During the first six months of 2000, there was an increase in intercompany
charges stemming from increased borrowings from DQE Capital and increased use of
corporate administrative services. Before intercompany charges, net income
declined $7.8 million from the first six months of 1999.
Operating revenues were $9.8 million higher in the first six months of
2000. This increase is primarily the result of acquisitions during the first
half of 1999.
Operating expenses increased by $17.7 million due to a $6.0 million
purchase accounting adjustment related to 1999 acquisitions, higher repairs and
maintenance costs, and higher contractor costs related to the Texas rate
applications and various systems implementations.
Depreciation and amortization expense includes depreciation of utility
delivery systems and the amortization of goodwill on acquisitions. The $4.1
million increase was attributable to increases in both depreciation and
amortization related to the larger size of the business.
All Other.
Comparison of Three Months Ended June 30, 2000 and June 30, 1999. The all
other category contributed $16.9 million to net income in the second quarter of
2000 compared to $15.1 million in the second quarter of 1999, an increase of
$1.8 million or 11.9 percent.
Operating revenues for the all other category primarily include gas sales,
propane sales, rental revenues and alternative fuel sales. Operating revenues
increased in the second quarter of 2000 by $13.1 million or 103.1 percent
compared to the second quarter of 1999. This increase was primarily the result
of increased revenues from our propane delivery business acquisitions during
1999.
Operating expenses for this category consist of costs to operate and
maintain our propane gas processing and alternative energy facilities;
administrative expenses; and non-income taxes, such as property and payroll
taxes. Operating expenses increased $18.5 million or 80.1 percent in the second
quarter of 2000 compared to the second quarter of 1999. This increase was
primarily the result of increased expenses from our propane delivery
acquisitions in 1999.
Depreciation and amortization expense primarily includes the depreciation
of the expanded business lines' plant and equipment and amortization of certain
investments. In the second quarter of 2000, depreciation and amortization
expense increased by $2.3 million, primarily due to the acquisition of propane
delivery companies during the last half of 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 the second quarter of 2000 was $3.8 million or
10.5 percent lower than in the second quarter of 1999. The decrease is related
to the nature of our leasing investments, where income decreases over the lease
life. Also contributing to the decrease from the second quarter of 1999 was a
lower level of gains on dispositions in the second quarter of 2000. Another
factor contributing to the decrease was a charge for terminating a coal-bed
methane investment. Included in 2000 were gains on the sale of affordable
housing investments, as well as gains on warrant exchanges at two of our
electronic commerce investments.
Interest expense was $8.6 million in the second quarter of 2000, an
increase of $3.4 million or 65.4 percent. This increase reflects the fact that
DQE Capital did not begin borrowing until June 1999.
The change in income taxes reflects an adjustment to deferred tax balances.
Comparison of Six Months Ended June 30, 2000 and June 30, 1999. The all
other category contributed $27.6 million to net income in the first six months
of 2000 compared to $33.1 million in the first six months of 1999, a decrease of
$5.5 million or 16.6 percent.
Operating revenues increased in the first six months of 2000 by $28.9
million or 109.1 percent compared to the first six months of 1999.
Operating expenses also increased in the first six months of 2000 by $37.7
million or 89.5 percent. In addition, depreciation and amortization expense
increased by $5.4 million or 84.4 percent. These increases can primarily be
attributed to the larger size of the all other category due to our propane
acquisitions made during 1999.
Other income in the first six months of 2000 was $12.3 million or 17.1
percent lower than in the first six months of 1999. The decrease is related to
the nature of our leasing investments, where income decreases over the lease
life. Also contributing to the decrease from 1999 was a lower level of gains on
dispositions in 2000. Another factor contributing to the decrease was a charge
for terminating a coal-bed methane investment. Included in 2000 were gains on
the sale of affordable housing investments, as well as gains on warrant
exchanges at two of our electronic commerce investments.
Interest expense was $18.0 million in the first six months of 2000, an
increase of $8.7 million or 93.5 percent. The increase reflects the fact that
DQE Capital did not begin borrowing until June 1999.
The change in income taxes reflects an adjustment to deferred tax balances.
LIQUIDITY AND CAPITAL RESOURCES
We estimate that during 2000 we will spend, excluding the allowance for
funds used during construction, approximately $85 million for electric utility
construction, including $5 million for generation, and approximately $45 million
for water utility construction. During the first six months of 2000, we have
spent approximately $76.8 million on capital expenditures, which consist of
approximately $38.2 million at Duquesne Light, $28.9 million at AquaSource and
the remaining $9.7 million on other.
14
<PAGE>
Acquisitions and Dispositions
On March 31, 2000, Duquesne Light purchased from Itron, Inc. the Customer
Advanced Reliability System (CARS), the automated electronic meter reading
system developed by Itron for use with our electricity utility customers. We had
previously leased these assets.
On April 28, 2000, Duquesne Light completed the sale of our generation
assets to Orion for approximately $1.7 billion dollars. (See "Generation Asset
Sale" discussion on page 16.)
We also sold various non-strategic investments, including affordable
housing investments during the first six months of 2000 for $49.4 million,
resulting in an after-tax gain of $4.0 million.
On July 28, 2000, DQE Energy Services entered into a definitive agreement
to sell its synthetic fuel facilities, which includes a multi-year operating and
maintenance agreement. Provided the transaction closes as scheduled, we expect
to reflect a gain from the sale of approximately $0.85 per share in our third
quarter earnings. This sale is subject to certain closing conditions, including
antitrust approval by the Department of Justice and the Federal Trade
Commission.
In the first six months of 1999 we issued approximately 35,000 shares of
DQE Preferred Stock, as part of a total investment of approximately $117 million
in water companies.
Investments
In the first six months of 2000 we spent approximately $62 million on new
investments. These investments include investments in gas reserves as well as
technology and electronic commerce companies.
Financing
In the first six months of 2000 we repurchased 8.4 million shares of DQE
common stock on the open market for approximately $345 million. We have also
repurchased 164,000 shares of DQE Preferred Stock for approximately $13.8
million.
With the issuance of $150 million of floating rate two-year notes in
January 2000 and the proceeds of the generation sale in April 2000, in addition
to repurchasing common and preferred stock we retired $350 million of long-term
bonds, $399 million of current maturities and $343 million of commercial paper.
At June 30, 2000, we had $81.6 million of current debt maturities. During
the quarter, the maximum amount of bank loans and commercial paper borrowings
outstanding was $323 million, the amount of average daily borrowings was $51.6
million, and the weighted average daily interest rate was 6.16 percent.
Future Capital Requirements and Availability
We are continuing to use the proceeds of our generation asset sale to
recapitalize. As previously reported, we have retired short-term debt, redeemed
long-term debt, and are continuing to aggressively repurchase outstanding common
stock. Through July 31, 2000 we have repurchased 12.7 million shares of DQE
common stock for approximately $515.7 million and 186,000 shares of DQE
Preferred Stock for approximately $15.6 million. Additionally, $65 million of
term loans will mature in the fourth quarter of 2000.
We maintain two separate revolving credit agreements, one for $300 million
expiring in June 2001 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
June 30, 2000, 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 June 30, 2000, 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 $40 million of accounts receivable. At various times during the
second quarter, Duquesne Light had sold receivables under the facility. No
amounts were outstanding at June 30, 2000. At June 30, 1999 we had sold $50
million of receivables. The accounts receivable sales agreement expires in
February 2001, and was recently amended to reduce the sale and purchase
entitlement from $50 million. The agreement 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.
With customer choice fully in effect, and our generation asset divestiture
complete, all our electric utility customers are now buying their generation
directly from alternative suppliers or indirectly from Orion (who supplies
generation to Duquesne Light pursuant to our provider of last resort service
agreement). Customer revenues from Duquesne Light's operations have been reduced
by an amount equal to the generation rate previously applicable to those
customers using alternative generation suppliers. A further impact on customer
revenues is expected to occur when the CTC has been fully collected, which is
currently expected to occur in 2002 for most major rate classes; elimination of
the CTC will reduce customer rates.
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,
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<PAGE>
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 Pennsylvania Electricity Generation Customer Choice and Competition Act
(Customer Choice Act) enables Pennsylvania's electric utility customers to
purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). All customers now have customer choice. As of
July 31, 2000, approximately 26.9 percent of Duquesne Light's customers had
chosen alternative generation suppliers, representing approximately 12.5 percent
of Duquesne Light's non-coincident peak load. The remaining customers are
provided with electricity through our provider of last resort service agreement
with Orion (discussed below). Customers pay their electricity generation
supplier for generation charges, and pay Duquesne Light the CTC and charges for
transmission and distribution. 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, we previously agreed to
extend this rate cap for an additional six months through the end of 2001.
However, if Duquesne Light's amended provider of last resort arrangement is
approved, this rate cap will be extended through 2003, with a possible further
extension through 2004. (See "Provider of Last Resort" discussion below.)
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.
Although no longer a generation supplier, 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 generation asset sale, Orion 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. 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. In April 2000, Duquesne Light and
Orion entered into an agreement that, as amended in June 2000 and subject to PUC
and other approvals, would extend this provider of last resort arrangement
beyond the final CTC collection through 2004. We anticipate a determination by
the PUC later this year.
Generation Asset Sale
On April 28, 2000, Duquesne Light completed the sale of our generation
assets to Orion. Orion purchased the wholly owned Cheswick, Elrama, Phillips and
Brunot Island power stations, as well as the stations received from FirstEnergy
Corp. in the December 3, 1999 power station exchange, for approximately $1.7
billion.
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. Originally, transition costs were to be
recovered over a seven-year period ending in 2005. As we have regularly stated
in our reports, however, by applying the net proceeds of the generation asset
sale to reduce transition costs, we anticipated early termination of the CTC
collection period in 2001. On August 4, 2000, Duquesne Light submitted its final
sale-related filing to the PUC, seeking approval for the accounting treatment
of the asset sale proceeds. Pursuant to this filing, we now anticipate early
termination of the CTC collection period in the first quarter of 2002 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. The unrecovered balance of transition costs
that remain following the generation asset sale, previously anticipated to be
approximately $2.1 billion ($1.5 billion net of tax), was approximately $550
million ($330 million net of tax) at June 30, 2000. Duquesne Light is allowed to
earn an 11 percent pre-tax return on this net amount, which remains subject to
PUC review. We cannot predict the ultimate outcome of the PUC's determinations
regarding our filing, the accounting treatment sought, or the balance of
transition costs.
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. On May 17, 2000, the Third
Circuit unanimously affirmed the District Court's ruling. In early June 2000,
AYE announced it would not pursue further appeals in this matter.
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<PAGE>
AquaSource Rate Application
AquaSource filed consolidated, statewide water and sewer rate change
applications with the Texas Natural Resource Conservation Commission (TNRCC) and
17 municipalities on June 15, 2000. The requested rate increases are to be
phased in over twelve months, with the first increase becoming effective July
17, 2000 and the second phase becoming effective on July 17, 2001. AquaSource
proposes to replace the more than 100 separate tariffs of its acquired companies
with single water and sewer tariffs using uniform system-wide rates. AquaSource
is also requesting substantial changes to the customer service rules, extension
policies, water rationing plans and customer service applications to create
uniformity and to achieve conformity with recent regulatory changes. If this
request is approved, annual water and sewer revenues will increase approximately
$7 million after the phase-in period is completed.
Subject to possible suspension by a later interim or final rate order,
AquaSource's proposed rates were implemented on the July 17, 2000 effective date
and are being charged (subject to refund with interest) pending the final order
on each application by the regulatory authority having jurisdiction. In Texas,
certain municipalities have original jurisdiction within its corporate limits
over the rates and services of investor-owned water and sewer utilities. The
TNRCC has statewide original jurisdiction over the rates and services in all
other areas, and has appellate jurisdiction over all municipal rate orders.
The regulatory authority (TNRCC or municipality) must call a hearing on the
rate change application upon receipt of protests by 1,000 (or 10 percent, if
less) of the affected customers subject to its original jurisdiction within 60
days of the July 17, 2000 effective date. In addition, the regulatory authority
may call a hearing upon its own motion within 120 days of this effective date.
If a hearing is not called before the expiration of the 120-day period, the
rates are deemed approved by operation of law. The regulatory authority may set
interim rates or order an escrow of increased revenues at any time during the
rate case. If an interim rate or escrow is ordered, the regulatory authority
must render its final decision within 335 days after the effective date of the
interim rates or escrow; otherwise, the proposed rates are approved as a matter
of law.
On July 11, the City of Ingram became the first municipality to act on the
rate application, by denying the proposed increase and establishing rates lower
than requested. AquaSource has appealed that municipal rate order to the TNRCC.
AquaSource anticipates similar ratemaking action by other municipalities, after
which it will file appeals. It is customary for the TNRCC to consolidate all
municipal appeals with the general rate case and to issue one uniform rate order
affecting all service areas. While there is no statutory deadline for decision,
the Company expects the TNRCC's final order to be issued within 12 to 18 months
of the July 17, 2000 effective date.
OUTLOOK
As previously reported, with the electricity business now a much smaller
part of DQE than historically, we are changing the role of our administrative
infrastructure. We have implemented a corporate center excellence project
designed to consolidate our administrative resources and have targeted a cost
reduction in excess of $40 million (on an annual basis) to take effect in the
fourth quarter of 2000. In addition, Duquesne Light anticipates up to $30
million of annual cost savings through its Best-in-Class initiative related to
operations and maintenance expenses starting in 2001. We have also been changing
Duquesne Light's capital structure, using proceeds from the generation asset
sale to retire higher-cost debt and reduce the level of equity. Through July
31, 2000, we have repurchased approximately $515.7 million of DQE common stock,
and expect to continue aggressively repurchasing DQE shares throughout the
remainder of the year.
We also continue to focus on realizing operating efficiencies in our other
delivery businesses. AquaSource is implementing new customer and financial
systems aimed at improving cost efficiencies. In addition, AquaSource has filed
its consolidated rate applications in Texas (the state with the largest level of
investment), and expects to make a similar filing in Indiana, another state with
a substantial level of investment, in late 2000 or early 2001.
DQE Systems is working toward achieving cost reductions, making efforts to
mitigate both the weather risk and the commodity price risk inherent in the
propane business operated by its ProAm subsidiary.
DQE Enterprises continues to add to its portfolio of electronic commerce
and energy technology businesses. DQE Enterprises has also been making
additional investments in companies currently in the portfolio, strengthening
its role in incubating those entities. On August 9, 2000 one of its portfolio
companies, H Power, consummated its initial public offering. DQE Enterprises
anticipates public market valuation of other investments in the near future.
As previously discussed, DQE Energy Services has entered into an agreement
to sell its synthetic fuel facilities. In addition, continuing its strategy of
single customer energy facility solutions, in May 2000 DQE Energy Services was
awarded a multi-year energy services contract to design, build, operate and
maintain a central utilities complex for the Ohio plant of a big three auto
maker.
We believe that, through such activities as the above-described
administrative resource reductions, selective asset sales and market valuations
of our investments, as well as sustainable earnings from our delivery
businesses, we will achieve our targeted comprehensive earnings growth of 5 to 8
percent this year.
The foregoing paragraphs of this "Outlook" section contain forward-looking
statements regarding the following: DQE's projected cost reductions through our
Corporate Center Excellence initiative, our plans to continue repurchasing our
common stock; Duquesne Light's projected annual cost reductions through its
Best-in-Class initiative;
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<PAGE>
AquaSource's anticipated improvements in operating and cost efficiency, and its
rate filings; DQE Enterprises' plans to invest in additional electronic commerce
and energy technology companies, and the possibilities of initial public
offerings or other market valuations of the companies in which we invest; and
DQE's targeted earnings growth. Actual results may materially differ from those
implied by such statements due to known and unknown risks and uncertainties,
including but not limited to those set forth below. Our ability to centralize
and streamline administrative functions to eliminate redundancies, as well as to
retrain and redeploy administrative employees, will affect the ultimate amount
of cost reductions at both DQE and Duquesne Light. Fluctuations in our common
stock price could affect our repurchasing plans. The ultimate outcome of
Duquesne Light's final cost assessment, CTC collection estimate and remaining
costs requested in the final auction filing will depend on the PUC's
determinations. AquaSource's projected returns and revenues will also be
affected by the outcome of its rate filings, which will depend on the
determinations made by the appropriate public utility commissions, as well as
the effective use of its new customer and financial systems. The availability of
appropriate investment opportunities could affect DQE Enterprises' plans for
additional electronic commerce and energy technology investments. The volatility
of the stock markets, as well as general business and economic conditions, could
affect the potential for initial public offerings or other market valuations
being made at any time with respect to the companies in which we invest. DQE's
earnings could be affected by the effectiveness of our administrative resource
reduction, our ability to complete selective asset sales and market valuations
of our investments, and the performance of our subsidiaries. Overall performance
by DQE and its affiliates could be affected by changing weather conditions,
demand for utility delivery services, economic, competitive, regulatory,
governmental and technological factors affecting operations, markets, products,
services and prices, as well as the factors discussed in our SEC filings.
Item 3. Quantitative and
Qualitative Disclosures
About Market Risk.
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 30 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 $1.3 million for the
six months ended June 30, 2000 and $0.8 million for the six months ended June
30, 1999. A 10 percent reduction in interest rates would have increased the
market value of our fixed rate debt by approximately $25.7 million and $27.2
million as of June 30, 2000 and June 30, 1999. 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: economic and business conditions
with respect to Internet and energy technology companies; economic, competitive,
regulatory, governmental and technological factors affecting operations,
markets, products, services and prices; and other risks discussed in "Outlook"
above and our filings with the SEC.
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<PAGE>
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
On October 5, 1998, we announced our unilateral termination of our 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 Third Circuit, who, on May
17, 2000, unanimously affirmed the District Court's ruling. In early June 2000,
AYE announced it would not pursue further appeals in this matter.
Effective July 24, 2000, AquaSource entered into a consent order with the
Florida Department of Environmental Protection (FLDEP) regarding five wastewater
facilities. The FLDEP alleged certain compliance issues related to historical
operating practices at the facilities and the effluent disposal capacity
associated with certain of the facilities, all of which existed prior to
AquaSource's acquiring the facilities. In connection with the acquisition,
AquaSource planned certain capital improvements to the facilities, the
completion of which will resolve the compliance issues. The FLDEP, in the
consent order, has agreed to accept the completion of those improvements plus
the payment of up to $206,750 in penalties as a full resolution of these
matters. In addition, AquaSource expects the costs of the improvements to be
recoverable from its ratepayers. The consent order is subject to a one-time
public notice requirement which allows persons whose substantial interests are
affected to petition for an administrative hearing on the consent order if, in
this case, such a petition is filed before August 20, 2000. Unless a timely
petition is filed, the FLDEP will be required to maintain the consent order's
effectiveness as of July 24, 2000.
Item 4. Submission of Matters to a
Vote of Security Holders.
On May 25, 2000, DQE held its 2000 Annual Meeting of Stockholders. Proxies
for the Annual Meeting were solicited pursuant to Regulation 14 under the
Securities and Exchange Act of 1934, as amended. There was no solicitation in
opposition to management's nominees for directors as listed in the proxy
statement dated March 10, 1999, and all nominees were elected. Two proposals
were submitted to stockholders for a vote at the Annual Meeting.
Proposal 1 was the election of three directors to the Board of Directors, one to
serve until the 2002 Annual Meeting and two to serve until the 2003 Annual
Meeting, and until their respective successors have been chosen and qualified.
The vote on this proposal was as follows:
<TABLE>
<CAPTION>
Type of Stock For Abstain
------------- --- -------
<S> <C> <C> <C>
Daniel Berg Common 59,925,082 881,241
Preferred 566,619 0
Robert T. Bozzone Common 60,089,289 881,241
Preferred 566,619 0
Steven S. Rogers Common 60,141,468 881,241
Preferred 566,619 0
</TABLE>
The following Directors terms continue after the
Annual Meeting of Stockholders:
until 2001 - Doreen E. Boyce and David D. Marshall;
until 2002 - Sigo Falk and Eric Springer.
Proposal 2 was the ratification of the appointment, by the Board of Directors,
of Deloitte & Touche LLP as independent public accountants to audit the books of
the Company for the year ending December 31, 2000. The vote on this proposal was
as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Common Stock 60,179,101 371,599 382,487
Preferred Stock 562,869 3,750 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
EXHIBIT 12.1 - Calculation of Ratio of Earnings to
Fixed Charges and Preferred and
Preference Stock Dividend
Requirements.
EXHIBIT 27.1 - Financial Data Schedule
b. A report on Form 8-K was filed May 23, 2000, to report
the Third Circuit's decision on the AYE merger litigation.
No financial statements were filed with this report.
A report on Form 8-K was filed June 14, 2000, to
discuss a presentation made by DQE officers to the
Wall Street Utility Group on that date. No financial
statements were filed with this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant identified below has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DQE, Inc.
-----------------------------
(Registrant)
Date August 14, 2000 /s/ Morgan K. O'Brien
------------------------- -----------------------------
(Signature)
Morgan K. O'Brien
Executive Vice President,
Corporate Development
(Principal Financial Officer)
Date August 14, 2000 /s/ James E. Wilson
------------------------- -----------------------------
(Signature)
James E. Wilson
Vice President and Controller
(Principal Accounting Officer)
20
