<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 September 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.
------------------------------------------------------
(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)
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 -
57,438,829 shares outstanding as of September 30, 2000 and 55,919,230 shares
outstanding as of October 31, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
DQE Condensed Statement of Consolidated Income (Unaudited)
---------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars, Except Per Share Amounts)
-----------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Electricity sales $293,416 $321,967 $ 810,634 $ 842,889
Water sales 30,287 28,582 81,829 72,398
Other 36,825 31,420 117,640 92,570
---------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 360,528 381,969 1,010,103 1,007,857
---------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Fuel and purchased power 120,983 84,341 264,319 180,921
Other operating 98,982 113,336 304,322 311,489
Maintenance 8,204 18,426 44,578 62,197
Depreciation and amortization 99,345 64,943 255,118 175,563
Taxes other than income taxes 19,259 25,280 63,952 71,200
---------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 346,773 306,326 932,289 801,370
---------------------------------------------------------------------------------------------------------------------------------
Operating Income 13,755 75,643 77,814 206,487
---------------------------------------------------------------------------------------------------------------------------------
Other Income 141,120 39,937 211,881 119,119
---------------------------------------------------------------------------------------------------------------------------------
Interest and Other Charges 28,997 40,187 94,233 114,410
---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 125,878 75,393 195,462 211,196
---------------------------------------------------------------------------------------------------------------------------------
Income Taxes 60,886 26,176 70,418 71,908
---------------------------------------------------------------------------------------------------------------------------------
Net Income 64,992 49,217 125,044 139,288
---------------------------------------------------------------------------------------------------------------------------------
Dividends on Preferred Stock 115 425 (427) 1,153
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Earnings Available for Common Stock $ 64,877 $ 48,792 $ 125,471 $ 138,135
=================================================================================================================================
Net Income 64,992 49,217 125,044 139,288
---------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income:
Unrealized holding gains,
net of tax of $19,648, $756, $25,405 and $1,437 27,705 1,066 35,821 2,026
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 92,697 $ 50,283 $ 160,865 $ 141,314
=================================================================================================================================
Average Number of Common Shares
Outstanding (Thousands of Shares) 59,357 75,356 65,770 76,110
=================================================================================================================================
Earnings Per Share of Common Stock:
Basic $ 1.04 $ 0.64 $ 1.91 $ 1.81
Diluted $ 1.02 $ 0.63 $ 1.87 $ 1.77
=================================================================================================================================
Comprehensive Earnings Per Share of Common Stock:
Basic $ 1.45 $ 0.68 $ 2.45 $ 1.86
Diluted $ 1.41 $ 0.67 $ 2.39 $ 1.84
=================================================================================================================================
Dividends Declared Per Share of Common Stock $ 0.40 $ 0.38 $ 1.20 $ 1.14
=================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
DQE Condensed Consolidated Balance Sheet (Unaudited)
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(Thousands of Dollars)
-------------------------------
September 30, December 31,
ASSETS 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 120,002 $ 54,229
Receivables 205,574 184,248
Other current assets 40,335 137,180
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Total Current Assets 365,911 375,657
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Long-Term Investments 756,531 639,284
--------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 2,346,022 4,369,303
Less: Accumulated depreciation (658,021) (2,541,236)
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Total Property, Plant and Equipment - Net 1,688,001 1,828,067
--------------------------------------------------------------------------------------------------------------------
Other Non-Current Assets:
Transition costs 478,301 2,008,171
Regulatory assets 243,843 224,002
Divestiture costs -- 218,653
Other 299,834 315,158
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Total Other Non-Current Assets 1,021,978 2,765,984
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Total Assets $ 3,832,421 $ 5,608,992
====================================================================================================================
CAPITALIZATION AND LIABILITIES
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Current Liabilities:
Notes payable and current debt maturities $ 130,677 $ 812,052
Other current liabilities 102,638 171,591
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Total Current Liabilities 233,315 983,643
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Non-Current Liabilities:
Deferred income taxes - net 831,223 1,020,103
Deferred income 113,229 126,434
Other non-current liabilities 187,885 225,688
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Total Non-Current Liabilities 1,132,337 1,372,225
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Commitments and Contingencies (Note D)
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Capitalization:
Long-Term Debt 1,373,626 1,633,077
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Preferred Stock:
DQE preferred stock 23,596 42,170
Preferred stock of subsidiaries 211,108 215,608
Preference stock of subsidiaries 12,019 14,404
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Total Preferred Stock 246,723 272,182
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Common Shareholders' Equity:
--------------------------------------------------------------------------------------------------------------------
Common stock - no par value (authorized - 187,500,000
shares; issued - 109,679,154 shares) 995,558 994,935
Retained earnings 1,002,316 953,785
Treasury stock (at cost) (52,240,325 and 37,912,995 shares) (1,188,284) (602,689)
Accumulated other comprehensive income 36,830 1,834
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Total Common Shareholders' Equity 846,420 1,347,865
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Total Capitalization 2,466,769 3,253,124
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Total Liabilities and Capitalization $ 3,832,421 $ 5,608,992
====================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
DQE Condensed Statement of Consolidated Cash Flows (Unaudited)
-------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
-----------------------------------
Nine Months Ended September 30,
-----------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Operations $ 266,973 $ 308,885
Changes in working capital other than cash 42,753 (6,970)
Other (37,930) (3,883)
--------------------------------------------------------------------------------------------------------------------------
Net Cash Provided from Operating Activities 271,796 298,032
--------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of generation assets, net of federal income tax payment of $157,424 1,547,576 --
Proceeds from sale of investments, net of federal income tax payments of $52,784
and $16,300 208,000 64,860
Capital expenditures (115,474) (102,768)
Divestiture costs (78,752) --
Long-term investments (75,157) (39,557)
Acquisitions (32,000) (159,811)
Other (10,849) (24,871)
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Net Cash (Used in) Provided from Investing Activities 1,443,344 (262,147)
--------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Reductions of long-term obligations - net (764,892) (70,946)
Repurchase of common stock (590,617) (83,415)
Reduction of commercial paper (342,803) --
Dividends on capital stock (76,513) (86,650)
Issuance of debt 149,746 --
Increase in notes payable -- 226,233
Other (24,288) (30,649)
--------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided from Financing Activities (1,649,367) (45,427)
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 65,773 (9,542)
Cash, beginning of period 54,229 108,790
--------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 120,002 $ 99,248
==========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<S> <C> <C>
Non-Cash Investing and Financing Activities:
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Preferred stock issued in conjunction with long-term investments $ -- $ 8,634
==========================================================================================================================
Capital lease obligations recorded $ -- $ 6,470
==========================================================================================================================
Equity funding obligations recorded $ -- $ 812
==========================================================================================================================
</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.; Cherrington Insurance, Ltd.; 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.
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; bottled water sales; and independent
power production. DQE Capital and Cherrington Insurance provide financing and
insurance services 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 nine months ended September 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.
Basis of Accounting
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 Pennsylvania Public Utility
Commission (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
October 31, 2000, approximately 31.4 percent of Duquesne Light's customers had
chosen alternative generation suppliers, representing approximately 35.5 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 Power MidWest, L.P. (discussed below). Customers pay for generation
charges as provided by their electricity generation supplier, and pay Duquesne
Light the CTC and charges for transmission and distribution. Electricity
delivery
5
<PAGE>
(including transmission, distribution and customer service) remains regulated in
substantially the same manner as under historical regulation.
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 (and the rates for the supply of
electricity) beyond the final CTC collection through 2004.
Duquesne Light filed its extension plan on June 30, 2000. Since October 2000,
Duquesne Light has participated in collaborative meetings with the PUC and
various stakeholders concerning provider of last resort issues. We anticipate
the PUC's determination in November.
Transmission and Distribution 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. If
the amended provider of last resort arrangement described above is approved,
this rate cap will be extended through at least 2003. In addition, Duquesne
Light will have the option to further extend this cap through 2004.
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 originally 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 $480 million ($290 million
net of tax) at September 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 have received and responded to comments on this filing, and anticipate a
final determination regarding our filing, the accounting treatment sought and
the balance of transition costs by the end of 2000.
AquaSource Rate Application
AquaSource has filed consolidated, statewide water and sewer rate change
applications with the Texas Natural Resource Conservation Commission (TNRCC) and
17 municipalities. The requested rate increases are to be phased in over twelve
months, with the first increase becoming effective July 17, 2000 and the second
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 systemwide 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 their corporate limits
over water and sewer utility rates. The TNRCC has statewide original
jurisdiction over the rates and services in all other areas, and has appellate
jurisdiction over all municipal rate orders. Either regulatory authority may
hold a hearing regarding AquaSource's applications.
6
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In addition, 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.
The City of Ingram has denied the proposed increase and established 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. In addition, the TNRCC has notified
AquaSource that, since more than 10 percent of the affected customers have
protested the rate increase, a consolidated preliminary hearing has been
scheduled for November 29, 2000. While there is no statutory deadline for
decision, AquaSource 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)
------------------------------------------------
Sept. 30, Sept. 30, Dec. 31,
2000 1999 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric customers $116,581 $ 97,005 $ 82,314
Water customers 26,857 28,364 21,352
Other utility 8,741 27,733 32,582
Other 65,256 54,581 57,280
Less: (Allowance for
uncollectible accounts) (11,861) (9,950) (9,280)
------------------------------------------------------------------------------
Receivables - net 205,574 197,733 184,248
Less: Receivables sold -- (50,000) --
------------------------------------------------------------------------------
Total $205,574 $147,733 $184,248
==============================================================================
</TABLE>
Duquesne Light and an unaffiliated corporation have an agreement that entitles
Duquesne Light to sell, and the corporation to purchase, accounts receivable on
an ongoing basis. Duquesne Light expects to terminate the agreement in the
fourth quarter of 2000.
D. COMMITMENTS AND CONTINGENCIES
Construction
We estimate that in 2000 we will spend, excluding the allowance for funds used
during construction, approximately $90 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.
In connection with DQE Energy Service's sale, through a subsidiary, of its
alternative fuel facilities, DQE agreed to guarantee the subsidiary's obligation
under the sales agreement to indemnify the purchaser against breach of
warranties, representations or covenants. We do not believe this guarantee will
have any material impact on our results of operations, financial position or
cash flows.
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.
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 and interest on a loan
to DQE from Duquesne Light.
7
<PAGE>
<TABLE>
<CAPTION>
Business Segments for the Three Months Ended:
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(Millions of Dollars)
--------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
--------------------------------------------------------------------------------------------
September 30, 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 89.3 $ 126.6 $ 88.9 $ 30.3 $ 31.7 $ (6.3) $ 360.5
Operating expenses 47.4 126.6 3.9 29.0 46.8 (6.3) 247.4
Depreciation and amortization expense 13.4 -- 76.1 4.7 5.1 -- 99.3
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 28.5 -- 8.9 (3.4) (20.2) -- 13.8
Other income 3.3 -- -- 1.3 137.1 (0.6) 141.1
Interest and other charges 19.6 -- 1.3 0.2 8.1 (0.2) 29.0
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 12.2 -- 7.6 (2.3) 108.8 (0.4) 125.9
Income taxes 5.6 -- 3.5 (1.0) 52.1 0.7 60.9
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
intercompany charges 6.6 -- 4.1 (1.3) 56.7 (1.1) 65.0
-----------------------------------------------------------------------------------------------------------------------------------
Intercompany charges - net 0.4 -- -- (3.4) 2.5 0.5 --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7.0 $ -- $ 4.1 $ (4.7) $ 59.2 $ (0.6) $ 65.0
===================================================================================================================================
Assets $2,181.0 $ -- $ 478.3 $ 473.0 $ 700.1 $ -- $3,832.4
===================================================================================================================================
Capital expenditures $ 25.7 $ -- $ -- $ 4.6 $ 8.4 $ -- $ 38.7
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(Millions of Dollars)
--------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
--------------------------------------------------------------------------------------------
September 30, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 95.8 $ 129.7 $ 107.8 $ 28.6 $ 21.1 $ (1.0) $ 382.0
Operating expenses 41.4 138.5 4.7 21.8 36.0 (1.0) 241.4
Depreciation and amortization expense 7.8 2.5 46.1 1.7 6.8 -- 64.9
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 46.6 (11.3) 57.0 5.1 (21.7) -- 75.7
Other income 0.5 1.0 -- 1.0 38.0 (0.6) 39.9
Interest and other charges 9.1 11.8 11.9 0.4 7.1 (0.1) 40.2
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 38.0 (22.1) 45.1 5.7 9.2 (0.5) 75.4
Income taxes 13.8 (11.1) 18.7 2.2 2.9 (0.3) 26.2
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss)before
intercompany charges 24.2 (11.0) 26.4 3.5 6.3 (0.2) 49.2
Intercompany charges - net (0.3) (0.6) -- (1.3) 2.5 (0.3) --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 23.9 $ (11.6) $ 26.4 $ 2.2 $ 8.8 $ (0.5) $ 49.2
===================================================================================================================================
Assets (1) $1,535.4 $ 425.7 $2,226.8 $ 446.1 $ 975.0 $ -- $5,609.0
===================================================================================================================================
Capital expenditures $ 10.4 $ 6.8 $ -- $ 9.8 $ 4.4 $ -- $ 31.4
===================================================================================================================================
</TABLE>
(1) Relates to assets as of December 31, 1999.
8
<PAGE>
<TABLE>
<CAPTION>
Business Segments for the Nine Months Ended:
-----------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
--------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
--------------------------------------------------------------------------------------------
September 30, 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 262.1 $ 307.0 $ 277.1 $ 81.9 $ 97.6 $ (15.6) $1,010.1
Operating expenses 132.7 331.2 12.1 79.8 137.0 (15.6) 677.2
Depreciation and amortization expense 36.6 5.2 183.8 12.6 16.9 -- 255.1
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 92.8 (29.4) 81.2 (10.5) (56.3) -- 77.8
Other income 10.7 4.0 -- 4.0 196.8 (3.6) 211.9
Interest and other charges 49.2 5.5 14.7 0.8 26.1 (2.1) 94.2
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 54.3 (30.9) 66.5 (7.3) 114.4 (1.5) 195.5
Income taxes 16.2 (13.1) 27.8 (3.3) 43.8 (1.0) 70.4
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
intercompany charges 38.1 (17.8) 38.7 (4.0) 70.6 (0.5) 125.1
Intercompany charges - net (0.6) (2.6) -- (12.0) 16.3 (1.1) --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 37.5 $ (20.4) $ 38.7 $ (16.0) $ 86.9 $ (1.6) $ 125.1
===================================================================================================================================
Assets $2,181.0 $ -- $ 478.3 $ 473.0 $ 700.1 $ -- $3,832.4
===================================================================================================================================
Capital expenditures $ 59.2 $ 4.7 $ -- $ 33.5 $ 18.1 $ -- $ 115.5
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(Millions of Dollars)
--------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Other tions dated
--------------------------------------------------------------------------------------------
September 30, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 259.3 $ 339.1 $ 290.3 $ 72.4 $ 56.6 $ (9.8) $1,007.9
Operating expenses 121.8 357.5 12.7 57.3 86.3 (9.8) 625.8
Depreciation and amortization expense 43.1 12.9 101.1 5.5 13.0 -- 175.6
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 94.4 (31.3) 176.5 9.6 (42.7) -- 206.5
Other income 3.1 6.3 -- 3.0 109.6 (2.9) 119.1
Interest and other charges 27.2 35.2 35.6 1.1 16.4 (1.1) 114.4
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 70.3 (60.2) 140.9 11.5 50.5 (1.8) 211.2
Income taxes 25.6 (30.3) 58.5 3.3 17.1 (2.3) 71.9
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
intercompany charges 44.7 (29.9) 82.4 8.2 33.4 0.5 139.3
Intercompany charges - net (0.9) (2.2) -- (3.4) 8.8 (2.3) --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 43.8 $ (32.1) $ 82.4 $ 4.8 $ 42.2 $ (1.8) $ 139.3
===================================================================================================================================
Assets (1) $1,535.4 $ 425.7 $2,226.8 $ 446.1 $ 975.0 $ -- $5,609.0
===================================================================================================================================
Capital expenditures $ 39.1 $ 18.9 $ -- $ 28.1 $ 16.7 $ -- $ 102.8
===================================================================================================================================
</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.; Cherrington Insurance, Ltd.; 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.
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; bottled water sales; and independent
power production. DQE Capital and Cherrington Insurance provide financing and
insurance services 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 more than 400,000 water and
wastewater customer connections in 20 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 Public Utility Commission (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. In a filing made October 16, 2000, we informed the FERC that we plan to
join a regional transmission organization at the earliest practicable date, and
are currently exploring our options. We anticipate making a final decision by
the end of 2001.
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 16.)
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 September 30, 2000 and September 30, 1999.
Basic earnings per share were $1.04 in the third quarter of 2000 compared to
$0.64 in the third quarter of 1999, an increase of 62.5 percent. The average
shares of outstanding common stock declined by approximately 16 million, or 21.2
percent. The lower average shares outstanding reflect the $591 million of common
stock we repurchased during 2000. Net income increased from $49.2 million in the
third quarter of 1999 to $65.0 million in the third quarter of 2000, an increase
of 32.1 percent. The increased earnings level for the third quarter is due to
the gain on the sale of alternative fuel facilities, partially offset by
increased transition cost amortization.
10
<PAGE>
Comprehensive income consists of net income plus unrealized holding gains in
marketable securities. Comprehensive earnings per share were $1.45 for the third
quarter of 2000 and $0.68 for the third quarter of 1999. In addition to
increased basic earnings per share, we recognized value creation from
investments in technology companies during the quarter as a result of public
market valuations of those companies.
Comparison of Nine Months Ended September 30, 2000 and September 30, 1999.
Basic earnings per share were $1.91 in the first nine months of 2000 compared to
$1.81 in the first nine months of 1999, an increase of 5.5 percent. The average
shares of outstanding common stock declined by 10.3 million, or 13.6 percent.
Net income decreased from $139.3 million in the first nine months of 1999 to
$125.1 million in the first nine months of 2000, a decrease of 10.2 percent. The
lower earnings level can be attributed to the following items: (1) an increase
in the amortization of transition costs, (2) a onetime charge in the second
quarter of 2000 related to the termination of a coal-bed methane project, and
(3) a charge to income in the second quarter of 2000 related to an AquaSource
purchase accounting adjustment regarding 1999 acquisitions. Partially offsetting
these decreases was the third quarter gain on the sale of alternative fuel
facilities.
Comprehensive earnings per share were $2.45 for the first nine months of 2000
and $1.86 for the first nine months of 1999, a 31.7 percent increase.
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 this category are comprised of energy facility operations, landfill
gas operations, bottled water sales and propane and other operating investments.
Income from financial investments and gains on asset dispositions are included
in other income. Assets in this category are comprised of financial investments,
energy facility assets, landfill gas recovery and processing assets, bottled
water delivery 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 and
interest on a loan to DQE from Duquesne Light.
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 September 30, 2000 and September 30, 1999.
The electricity delivery business segment contributed $7.0 million to net income
in the third quarter of 2000 compared to $23.9 million in the third quarter of
1999, a decrease of $16.9 million or 70.7 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 decreased by $6.5 million or 6.8 percent compared to the
third quarter of 1999. This decrease is due to lower sales to electric utility
customers of 3.6 percent in the third quarter of 2000. The lower overall sales
can be attributed to lower sales to residential customers due to milder weather
in 2000. The following table sets forth kilowatt-hours (KWH) delivered to
electric utility customers.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
KWH Delivered
----------------------------------
(In Millions)
----------------------------------
Third Quarter 2000 1999 Change
--------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 988.4 1,104.5 (10.5)%
Commercial 1,697.8 1,720.8 (1.3)%
Industrial 898.8 893.3 0.6%
--------------------------------------------------------------------------
Sales to Electric Utility Customers 3,585.0 3,718.6 (3.6)%
==========================================================================
</TABLE>
Operating expenses for the electricity delivery business segment primarily are
made up of costs to operate and maintain the transmission and distribution
system; meter reading and billing costs; customer service; collection;
administrative expenses; and non-income taxes, such as gross receipts, property
and payroll taxes. Operating expenses increased by $6.0 million or 14.5 percent
from the third quarter of 1999. This increase is due to the allocation in
11
<PAGE>
1999 of overhead expenses to the energy supply business segment. Because of the
sale of our generation assets, all overhead costs are charged to the electricity
delivery business segment in 2000.
Other income was $3.3 million for the third quarter of 2000 compared to $0.5
million for the third quarter of 1999, an increase of $2.8 million. This
increase is due to higher interest income, which in turn is the result of more
cash at Duquesne Light from the generation sale proceeds.
Interest and other charges include interest on debt, other interest and
preferred stock dividends of Duquesne Light. In the third quarter of 2000, there
was $10.5 million more interest and other charges allocated to the electricity
delivery business segment compared to the third quarter of 1999. Although
Duquesne Light utilized auction proceeds to retire debt, thus reducing its
overall level of interest expense, all remaining financing costs after
recapitalization are now borne by the electricity delivery business segment.
Comparison of Nine Months Ended September 30, 2000 and September 30, 1999. The
electricity delivery business segment contributed $37.5 million to net income in
the first nine months of 2000 compared to $43.8 million in the first nine months
of 1999, a decrease of $6.3 million or 14.4 percent.
Operating revenues increased by $2.8 million or 1.1 percent compared to the
first nine months of 1999 due to an increase of 0.6 percent in sales to electric
utility customers. The increase is primarily attributable to increased
consumption by steel manufacturers, offset by lower residential sales due to
milder weather conditions in 2000. The following table sets forth KWH delivered
to electric utility customers.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
KWH Delivered
----------------------------------
(In Millions)
----------------------------------
First Nine Months 2000 1999 Change
--------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 2,664.9 2,772.9 (3.9)%
Commercial 4,675.0 4,618.5 1.2%
Industrial 2,733.1 2,617.1 4.4%
--------------------------------------------------------------
Sales to Electric Utility Customers 10,073.0 10,008.5 0.6%
=========================================================================
</TABLE>
Operating expenses were $10.9 million or 8.9 percent higher compared to the
first nine months of 1999, primarily due to the allocation of more overhead
expenses as a result of the generation asset sale.
Other income was $7.6 million higher than in the first nine months of 1999.
This increase was the result of increased interest income due to more cash at
Duquesne Light from the generation sale proceeds.
In the first nine months of 2000, there was $22.0 million or 80.9 percent more
interest and other charges allocated to the electricity delivery business
segment compared to the first nine months of 1999. Although Duquesne Light
utilized auction proceeds to retire debt, thus reducing its overall level of
interest expense, all remaining financing costs after recapitalization are now
borne by the electricity delivery business segment.
Electricity Supply and CTC Business Segments.
Comparison of Three Months Ended September 30, 2000 and September 30, 1999. In
the third quarter of 2000, the electricity supply and CTC business segments
reported net income of $4.1 million compared to $14.8 million in the third
quarter of 1999, a decrease of $10.7 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 decreased by $22.0 million or 9.3 percent from the third
quarter of 1999. The decrease is due to two factors: (1) 18.4 percent lower KWH
supplied primarily due to lower sales to other utilities following Duquesne
Light's generation asset sale; and (2) a lower CTC revenue rate per KWH compared
to 1999. In accordance with the PUC restructuring order, Duquesne Light's annual
transition cost recovery rate decreases proportionally with the increasing
customer shopping credit. The following table sets forth KWH supplied for
customers who have not chosen an alternative generation supplier.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
KWH Supplied
----------------------------------
(In Millions)
----------------------------------
Third Quarter 2000 1999 Change
--------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 639.2 911.9 (29.9)%
Commercial 1,604.6 1,241.7 29.2%
Industrial 881.0 866.9 1.6%
---------------------------------------------------------------------------
Sales to Electric Utility Customers 3,124.8 3,020.5 3.5%
---------------------------------------------------------------
Sales to Other Utilities 88.5 919.1 (90.4)%
---------------------------------------------------------------
Total Sales 3,213.3 3,939.6 (18.4)%
===========================================================================
</TABLE>
Operating expenses for the electricity supply business segment are primarily
made up of energy costs; costs to operate and maintain the power stations; and
non-income taxes, such as gross receipts, property and payroll taxes.
Fluctuations in energy costs generally result from changes in the cost of
fuel; total KWH supplied; and generating station availability.
12
<PAGE>
Operating expenses decreased $12.7 million or 8.9 percent from the third
quarter of 1999, as a result of the generation asset sale. The decrease was
partially offset by the higher cost of purchased power related to the provider
of last resort supply agreement with Orion Power MidWest, L.P. (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 third quarter of 1999, depreciation of generation assets.
There was an increase of $27.5 million or 56.6 percent compared to the third
quarter of 1999. This increase was due to a higher level of transition cost
amortization in the third quarter of 2000.
Interest and other charges include interest on debt, other interest and
preferred stock dividends of Duquesne Light. In the third quarter of 2000 there
was a $22.4 million decrease in interest and other charges compared to the third
quarter of 1999. The decrease reflects a lower level of interest expense at
Duquesne Light from the retirement of debt with auction proceeds, and less
interest expense allocated to these segments due to the generation asset sale.
Comparison of Nine Months Ended September 30, 2000 and September 30, 1999. In
the first nine months of 2000, the electricity supply and CTC business segments
reported net income of $18.3 million compared to $50.3 million in the first nine
months of 1999, a decrease of $32.0 million or 63.6 percent.
Operating revenues decreased by $45.3 million or 7.2 percent compared to the
first nine months of 1999. The decrease in revenues resulted from a 62.7 percent
decrease in energy supplied to other utilities in the first nine months of 2000
compared to the first nine months of 1999, as well as a decrease in the
transition cost recovery rate set forth by the PUC. The following table sets
forth KWH supplied for customers who have not chosen an alternative generation
supplier.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
KWH Supplied
----------------------------------
(In Millions)
----------------------------------
First Nine Months 2000 1999 Change
--------------------------------------------------------------------------
<S> <C> <C> <C>
Residential 1,861.3 2,368.6 (21.4)%
Commercial 3,485.9 3,381.1 3.1%
Industrial 2,552.1 2,527.0 1.0%
--------------------------------------------------------------
Sales to Electric Utility Customers 7,899.3 8,276.7 (4.6)%
--------------------------------------------------------------
Sales to Other Utilities 883.9 2,369.6 (62.7)%
--------------------------------------------------------------
Total Sales 8,783.2 10,646.3 (17.5)%
==========================================================================
</TABLE>
Operating expenses decreased $26.9 million or 7.3 percent from the first nine
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, following the generation asset sale, from the
higher rate per KWH due to the customer shopping credit.
There was an increase of $75.0 million or 65.8 percent in depreciation and
amortization expense compared to the first nine months of 1999. This increase
was due to a higher level of transition cost amortization in the first nine
months of 2000.
In the first nine months of 2000 there was a $50.6 million or 71.5 percent
decrease in interest and other charges compared to the first nine months of
1999. The decrease reflects a lower level of interest expense at Duquesne Light
from the retirement of debt with auction proceeds, and 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 September 30, 2000 and September 30, 1999.
The water distribution business segment had a $1.3 million net loss before
intercompany charges in the third quarter of 2000, compared to $3.5 million of
net income in the third quarter of 1999, a decrease of $4.8 million.
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; and water-related
construction and engineering projects. Operating revenues increased by $1.7
million during the third quarter of 2000. The increase can be attributed to the
rate increase for water and sewer charges related to AquaSource's rate change
applications with the Texas Natural Resource Conservation Commission and 17
municipalities. The rate increase became effective on July 17, 2000. (See
"AquaSource Rate Application" on page 16.)
Operating expenses for the water distribution business segment are primarily
made up of costs to operate and maintain the water distribution systems;
administrative expenses; and non-income taxes, such as property and payroll
taxes. Operating expenses increased by $7.2 million as a result of 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 $3.0 million was due to the larger size of the business from acquisitions in
1999.
Comparison of Nine Months Ended September 30, 2000 and September 30, 1999. The
water distribution business segment had a $4.0 million net loss before
intercompany charges in the first nine months of 2000, compared to $8.2 million
of net income in the first nine months of 1999, a decrease of $12.2 million.
Operating revenues were $9.5 million higher in the first nine months of
2000. This increase is primarily the result of
13
<PAGE>
acquisitions during the second half of 1999 and the Texas rate increase
discussed previously.
Operating expenses increased by $22.5 million due to a $6.0 million purchase
accounting adjustment in the second quarter of 2000 related to 1999
acquisitions, higher repairs and maintenance costs, higher contractor costs
related to the Texas rate applications and various systems implementations and
acquisitions during 1999.
Depreciation and amortization expense includes depreciation of utility
delivery systems and the amortization of goodwill on acquisitions. The $7.1
million increase can be attributed to increases in both depreciation and
amortization related to the larger size of the business from acquisitions during
1999.
All Other.
Comparison of Three Months Ended September 30, 2000 and September 30, 1999.
The all other category contributed $59.2 million to net income in the third
quarter of 2000 compared to $8.8 million in the third quarter of 1999, an
increase of $50.4 million.
Operating revenues for the all other category primarily include gas sales,
propane sales, rental revenues, alternative fuel sales and bottled water sales.
Operating revenues increased in the third quarter of 2000 by $10.6 million or
50.2 percent compared to the third quarter of 1999. This increase was primarily
the result of increased revenues from our propane delivery business acquisitions
during 1999 and landfill gas prices.
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 $10.8 million or 30.0 percent in the third quarter of 2000
compared to the third quarter of 1999. This increase was primarily the result of
increased expenses from our propane delivery acquisitions in 1999, and our
landfill gas sites.
Depreciation and amortization expense primarily includes the depreciation of
the expanded business lines' plant and equipment and amortization of certain
investments. In the third quarter of 2000, depreciation and amortization expense
decreased by $1.7 million, primarily due to the sale of certain investments and
the alternative fuel facilities.
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 third quarter of 2000 was $99.1 million or
260.8 percent higher than in the third quarter of 1999. The increase is
primarily related to the sale of alternative fuel facilities and income
generated by alternative energy investments. Included in 1999 are gains on the
sale of certain assets and higher income from lease investments. Due to the
nature of our leasing investments, income decreases over the lease life.
Interest expense was $8.1 million in the third quarter of 2000, an increase of
$1.0 million or 14.1 percent. This increase reflects additional borrowings at
DQE Capital.
The change in income taxes reflects the taxes associated with the alternative
fuel facilities sale.
Comparison of Nine Months Ended September 30, 2000 and September 30, 1999. The
all other category contributed $86.9 million to net income in the first nine
months of 2000 compared to $42.2 million in the first nine months of 1999, an
increase of $44.7 million or 105.9 percent.
Operating revenues increased in the first nine months of 2000 by $41.0 million
or 72.4 percent compared to the first nine months of 1999.
Operating expenses also increased in the first nine months of 2000 by $50.7
million or 58.7 percent. In addition, depreciation and amortization expense
increased by $3.9 million or 30.0 percent. These increases can primarily be
attributed to the larger size of the all other category due to propane
acquisitions made during 1999.
Other income in the first nine months of 2000 was $87.2 million or 79.6
percent higher than in the first nine months of 1999. Included in 2000 gains
were the sale of alternative fuel facilities, the sale of affordable housing
investments and gains on warrant exchanges at two of our electronic commerce
investments.
Interest expense was $26.1 million in the first nine months of 2000, an
increase of $9.7 million or 59.1 percent. The increase reflects additional
borrowings at DQE Capital.
The change in income taxes reflects the taxes associated with the alternative
fuel facilities sale.
LIQUIDITY AND CAPITAL RESOURCES
We estimate that during 2000 we will spend, excluding the allowance for funds
used during construction, approximately $90 million for electric utility
construction, including $5 million for generation, and approximately $45 million
for water utility construction. During the first nine months of 2000, we have
spent approximately $115.5 million on capital expenditures, which consist of
approximately $63.9 million at Duquesne Light, $33.5 million at AquaSource and
the remaining $18.1 million on other.
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 nine months of 2000
for $260.8 million.
14
<PAGE>
On September 14, 2000, DQE Energy Services completed the sale of its
alternative fuel facilities. This transaction includes a seven year contract for
DQE Energy Services to reassemble and operate several of the facilities.
In the first nine months of 1999 we issued approximately 86,000 shares of DQE
Preferred Stock, as part of a total investment of approximately $151 million in
water companies.
During the first nine months of 1999 we sold various non-strategic
investments, including affordable housing and certain properties, for
approximately $81.2 million.
Investments
In the first nine months of 2000 we spent approximately $75.2 million on new
investments. These investments included investments in gas reserves as well as
technology and electronic commerce companies.
During the first nine months of 1999 we spent approximately $39.6 million on
new investments. These investments included investments in natural gas reserves,
propane companies, and technology and electronic commerce companies.
Financing
In the first nine months of 2000 we repurchased 14.6 million shares of DQE
common stock on the open market for approximately $591 million. We have also
repurchased 186,000 shares of DQE Preferred Stock for approximately $15.6
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 September 30, 2000, we had $130.7 million of current debt maturities. There
were no bank loans or commercial paper borrowings during the quarter.
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 have aggressively repurchased outstanding stock. Through
October 31, 2000 we have repurchased 16.1 million shares of DQE common stock for
approximately $645.2 million and 195,000 shares of DQE Preferred Stock for
approximately $16.3 million, substantially meeting our repurchase target for
2000. Additionally, $25 million of term loans matured in October and $40 million
of term loans will mature in November 2000. Through the debt reduction and stock
repurchases, our capital structure is now approximately 60 percent debt and 40
percent equity.
We maintain two separate revolving credit agreements, one for $300 million
expiring in June 2001 and one for $225 million expiring in September 2001. 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
September 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 September 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, accounts receivable on
an ongoing basis. At various times during the first nine months of 2000,
Duquesne Light had sold receivables under the facility. No amounts were
outstanding at September 30, 2000. At September 30, 1999 we had sold $50 million
of receivables. Duquesne Light expects to terminate the agreement in the fourth
quarter of 2000.
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), which has affected our cash flows. Customer revenues include
revenues from provider of last resort customers. Although we collect these
revenues, we pass them on (net of gross receipts tax) to Orion. In addition, 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 bills.
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
October 31, 2000, approximately 31.4 percent of Duquesne Light's customers had
chosen alternative generation suppliers, representing approximately 35.5 percent
of Duquesne Light's non-coincident peak load.
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The remaining customers are provided with electricity through our provider of
last resort service agreement with Orion (discussed below). Customers pay for
generation charges as provided by their electricity generation supplier, 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.
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 (and the rates for the supply of
electricity) beyond the final CTC collection through 2004. Duquesne Light filed
its extension plan on June 30, 2000. Since October 2000, Duquesne Light has
participated in collaborative meetings with the PUC and various stakeholders
concerning provider of last resort issues. We anticipate the PUC's determination
in November.
Transmission and Distribution 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. If
the amended provider of last resort arrangement described above is approved,
this rate cap will be extended through at least 2003. In addition, Duquesne
Light will have the option to further extend this cap through 2004.
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 originally 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 $480 million ($290 million
net of tax) at September 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 have received and responded to comments on this filing, and
anticipate a final determination regarding our filing, the accounting treatment
sought and the balance of transition costs by the end of 2000.
AquaSource Rate Application
AquaSource has filed consolidated, statewide water and sewer rate change
applications with the Texas Natural Resource Conservation Commission (TNRCC) and
17 municipalities. The requested rate increases are to be phased in over twelve
months, with the first increase becoming effective July 17, 2000 and the second
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 systemwide 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.
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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
corporate limits over water and sewer utility rates. The TNRCC has statewide
original jurisdiction over the rates and services in all other areas, and has
appellate jurisdiction over all municipal rate orders. Either regulatory
authority may hold a hearing regarding AquaSource's application.
In addition, 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.
The City of Ingram has denied the proposed increase and established 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. In addition, the TNRCC has notified
AquaSource that, since more than 10 percent of the affected customers have
protested the rate increase, a consolidated preliminary hearing has been
scheduled for November 29, 2000. While there is no statutory deadline for
decision, AquaSource expects the TNRCC's final order to be issued within 12 to
18 months of the July 17, 2000 effective date.
OUTLOOK
With the electricity business now a much smaller part of DQE than
historically, we have changed the role of our administrative infrastructure. By
implementing the previously reported corporate center excellence project we have
consolidated our administrative resources and, in the fourth quarter of 2000,
expect to realize the initial related cost reductions. We continue to anticipate
annual savings of $40 million. Duquesne Light has implemented its previously
reported Best-in-Class initiative, through which it anticipates approximately
$30 million in annual savings beginning in 2001, and continues to restructure
its operations following the generation asset sale. In connection with this, we
changed Duquesne Light's capital structure, by retiring and redeeming debt and
repurchasing stock. In addition, on November 2, 2000, Duquesne Light made a
preliminary filing with the SEC regarding a potential tender offer for its
preferred stock.
We also continue to focus on realizing operating efficiencies at
AquaSource. Although AquaSource will not achieve its previously reported
financial objectives for 2000, its new management team has formulated strategies
to improve profitability. By implementing new financial, human resources and
customer information systems, AquaSource expects to be able to fully integrate
its operating subsidiaries. Once appropriate efficiencies have been obtained, we
expect AquaSource to resume its acquisition strategy.
DQE Enterprises is continuing its investment strategy, both adding new
portfolio businesses and strengthening existing investments. On August 9, 2000,
one of these investments, Beacon Power, filed its registration statement with
the SEC for an initial public offering; in late October Beacon Power began its
roadshow meetings with potential investors. DQE Enterprises anticipates further
opportunities for market valuation of its investments in the near future.
Through the corporate activities and changes we have reported on throughout
this year, we expect to achieve our targeted annual comprehensive earnings
growth of 5 to 8 percent.
This "Outlook" section contains forward-looking statements regarding the
following: projected cost savings through the corporate center excellence
project and the Best-in-Class initiative; our stock repurchasing program;
AquaSource's proposed resumption of acquisition activities; possible market
valuations of DQE Enterprises' investments; and our targeted earnings
growth. Actual results may differ materially from those implied by such
statements due to known and unknown risks such as the following: our ability to
centralize and streamline administrative and operating functions at DQE and its
subsidiaries; the effect fluctuations in our common stock price could have on
our repurchase program; rate determinations to be made with respect to
AquaSource's rate filings in Texas and Indiana; the ultimate outcome of Duquesne
Light's final CTC collection filing and the resulting final cost assessment, CTC
collection estimate and remaining costs; the availability of appropriate
acquisition targets for AquaSource; the effect of potentially volatile stock
markets, as well as business conditions for electronic commerce and energy
technology related companies, on the valuation of DQE Enterprises' portfolio
investments; and the performance of our subsidiaries.
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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 40 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 $2.6 million for the
nine months ended September 30, 2000 and $1.0 million for the nine months ended
September 30, 1999. A 10 percent reduction in interest rates would have
increased the market value of our fixed rate debt by approximately $56.7 million
and $86.0 million as of September 30, 2000 and December 31, 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: changing weather conditions; demand for utility
delivery services; economic, competitive, regulatory, governmental and
technological factors affecting operations, markets, products, services and
prices; and other risks discussed in "Outlook" above.
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: EXHIBIT 3.1 - By-Laws of DQE, Inc.
EXHIBIT 10.1 - Amended and Restated Stock Plan for Non-Employee Directors
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. On November 9, 2000, we furnished a Report on Form 8-K to provide disclosure
under Regulation FD regarding a presentation to the investment community.
No financial statements were included.
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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 November 14, 2000 /s/ Morgan K. O'Brien
---------------------- --------------------------------
(Signature)
Morgan K. O'Brien
Chief Operating Officer
Date November 14, 2000 /s/ James E. Wilson
---------------------- --------------------------------
(Signature)
James E. Wilson
Vice President and Controller
(Principal Accounting Officer)
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