ML20112D604

Dqe 1995 Annual Rept to Shareholders

ML20112D604
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1995
From:	Vonschack W DQE
To:
Shared Package
ML20112D597	List: ML20112D593 ML20112D604 ML20112D610 ML20112D620 ML20112D628 ML20112D641
References
NUDOCS 9606040423
Download: ML20112D604 (64)

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P ro Si e og is an cuoicing energy scrcices company una, is strategicaiir positioning N

J itself to meet the expanding energy needs of the marketpiace.

1995 RESULTS ON THE COVER Through a combination of entrepreneurism and teamwork, the people of e DQE earnings per share DQL re helping to transform our company into a dynamic, global energy increased by Ji% frorn 1994.

services provider.'lhey understand the need for change to successfully compete e Duquesne Light's system peak in the increasingly competitive energy marketplace and are working together demand of 2,666 enegawatts to provide exceptional shareholder value.

was its highest ever.

• Duquesne light established DOE FINANCIAL AND OPERATING HIGHLIGHTS a new record for customer energy use in a single anonth CHAlnunN'S MESSAGE

- 1.4 billion kilowatt-hours Wes von Schack discusses some of the recent incremental steps we have taken in August.

to strategically position DQE for a competitive power market and for the gwwing energy smices marketplace.

e Three Duquesne Light erwironmental projects - the ABOui DOE company's youth education programs, enhancernent of a Meet the companies that contribute to our success: Duquesne Light Company, wildlife habitat at linmot Duquesne Enterprises, Montauk and DQE Energy Services.

Island Power Station, and the innovative disposal of THINKING lNDIVIDUALLY, SUCCEEDING COLLECTIVELY fly ash in abandoned mines The customer service focus and cost-control efforts of our principal subsidiary,

- have been selected to Duquesne Light Company, and the earnings growth of our market-driven appear in Renew Arnerica's enterprises provide for a sound Gnancial performance. The photo stories on Erwironmental Success Ire'w.

pages 6-14 show how ti e men and women of DQE are building customer and shareholder value by thinking individually and succeeding collectively, e Duquesne Light established new records for the shortest CONDENSED FINANCIAL STATEMENTS refueling outage at both of the nuclear generating units learn more about our 1995 Onancial performance through this quick, it operates.

accessible overview. Complete Gnancial information can be found beginning on page 21.

• Duquesne Enterprises and Afontauk contauted g SELECTED FINANCIAL DATA 32 cents to earnings per w

share, an increase of 50%

Q h SELECTED OPERATING DATA m'tr 1994, e Duquesne Enterprises unade k, BOARD OF DIRECTORS strategic irnestrnents to W

enhance DQE's capabilities 1995 FINANCIAL INFORMATION as an energy senrices provider.

Management's discussion and analysis of results of operations and Gnancial e Afontauk made irnestments condition, detailed financial statements, and related footnote disclosure are to better diversify its intest.

included in this financial section.

rnent portfolio and position itselfforfuture earnings OFFICERS growtn.

SHAREHOLDER REFERENCE GUIDE

• DQE Energy Serviccs was formed in August 1995, (Inside llack Cover)

Some statements in this report are forward-looking statements that involve risks and uncertainties, including, but not limited to, the effect of economic conditions, the impact of competition, the effect of the company's accounting policies, and other risks detailed in the company's Securities and fshange Commission filings.

Change Change f rom from (tnillions) 1995 1994 1994 1993 1993 1

Electric Customer Sales 12,428 KWil 2.5% 12,122 KWII 2.3% 11,851 KWil Operating Revenues

$ 1,220

-0.3%

$ 1,224 3.5%

$ 1,183 Non. Fuel Operating and Maintenance Expense

$384.7

-5.7%

$408.0

-0.1 %

$408.4 Operating Income

$322.5 1.8 %

$316.9 1.2%

$313.0 i

Interest and Other Charges

$ 107.6

-2.2%

$ 110.0

-8.1%

$ 119.7 I

Net Income

$ 170.6 8.8%

$156.8 8.9%

$144.0 Year End Shares Outstanding 77.6

-1.1%

78.5

- 1.3%

79.5 Net Operating Cash flow (A)

$378.9 1.0 %

$375.2

-3.1 %

$387.4 Capital Expenditures and Other Investments

$281.9 50.1 %

$ 187.8

-4.3%

$ 196.3 Return on Average Common Equity 13.1 %

12.5 %

12.0 %

Average Cost of fuel Per KWIi Generated 1.39 C

-3.5%

1.44(

-4.0%

1.50C Average Cost of Generation Per KWil (B) 2.22C

-0.5%

2.23(

-4.3%

2.33C Peak Demand 2,666 MW 5.2%

2,535 MW l.4% 2,499 MW KWII: Kilowatt-hour. A measure of the quantity of electricity consumed in one hour. equivalent to 1,000 watts consumed in one hour.

MW: Megawatt. A measure of the electric generating capacity of power plants, equal to I.G30 kilowatts.

(A): Excludes uvrking capital and other balance sheet changes.

(B): Excludes capital cost.

COMMON STOCK TRENDS nverar Compound Grsr.vth 1995 1994 1993 1992 1991 D90 R.ue Earnings Per Share

$2.20

$ 1.98

$ 1.81

$ 1.78

$ 1.67

$1.49 8.1%

Dividends Paid Per Share

$ 1.19

$ 1.12

$1.07

$ 1.01

$.96

$.91 5.5%

Book Value at Year End

$ 17.13

$ 16.27

$15.47

$ 14.75

$ 14.00

$13.38 5.1%

Market Price Per Share fligh

$30.75

$23.00

$24.67

$21.58

$20.67

$16.83 12.8 %

1ow

$ 19.63

$18.42

$20.92

$ 17.92

$ 15.75

$13.58 7.7%

Year-End

$30.75

$ 19.75

$23.00

$21.50

$20.42

$16.58 13.2 %

All amounts hat'e lven restated for the 3-for-2 stock split declared in April 1995.

DOE Earnings Year.End Annualized Per Share Dividends Per Share Earn!ngs per share Dividend growth has been in the top have increased nine quartile of the industry, straight years.

1991 1991 DQiL 1993 Annual Rein >n

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ven as the energy services industry continues to evolve, DQE is providing j

exceptional value to you, our shareholders. We are achieving this success through a

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number ofinnovative strategies that build upon the strength of our core business and a

grow our company through new, market-driven business opportunities.This report details the breadth of a company that focuses on energy solutions for customers.

i In the photo stories on the following pages, we share with you some of the motivated and dedicated people who are Onding opportunity in the r

y changes taking place in our industry and at DQE. Summarized in these sto-

- ^

ries are highlights of the year, which include signi6 cant operating improve-i ments at our core utility business as well as the increased importance our

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market-driven investments have had on our earnings performance.

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Following are some of the major breakthroughs for you as a shareholder:

Financial Performance s

• A three-for-two stock split increased the number of shares you own by i

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50 percent and made it easier for individual shareholders to add to their 4F investment in our company.

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• DQE has provided you with one of the best total returns in the industry over the past five years.

4 Environmental Leadership i

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• Development and implementation of new power station burner technology that reduced nitrogen oxide emissions, meeting stringent regulatory

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requirements at a moderate cost.

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• Chester Engineers' volume ofinternational work resulted in receipt of the i

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Wes von schack Customer Service Superiority

• Duquesne Light became the Grst Pennsylvania regulated utility and one of the first utilities in the nation to offer its residential customers comprehen-sive guarantees ofits commitment to courteous, reliable and ef6cient service.

Looking to the future, we have taken steps to distinguish our core business in the energy services industry from that of our competitors.

In late 1945, Dmjuesne Light announced several broad-based customer initiatives that continue its transition to compelstive electric energy markets and target the highest levels of guaranteed customer service in the industry.

Duquesne Light's plan to freeze base rates for five years for all customers would result in a 40 percent inflation-adjusted price reduction in the decade of the 1990s. Also included in the plan is a proposed $5 million annual credit to customers through the utility's fuel clause.

This initiative is predicated on regulatory approval of the sale of Duquesne Light's 50 percent interest in linit 1 of the Fort Martin Power Station.The sale of an asset that we no longer need for baseload capacity underscores Duquesne Light's commitment to pro-vide its customers with the highest level of operational efficiency. The proceeds from the sale will be used to further restructure Duquesne 1.ight's balance sheet.

A Gnal measure in this plan is a recommendation to both the Pennsylvania Public litility Commission and the Federal Energy Regulatory Commission that Duquesne light, Allegheny Power System and Penn Power, along with companies in the existing 1

Pennsylvania-New Jersey-Maryland (PJM) power pool, be admitted to a new regional pool, and that this pool be operated as an independent transmission company through which all wholesale electricity would be sold under common terms at market prices.

nw im anm a u at m

Another important customer service initiative is Duquesne 1.ight's Customer Advanced Reliability System, which is a state-of-the-art communications link through -

the electric meter that will provide customers with superior levels of service reliability, security and convenience. The addition of this capability will raise the standard for customer service to a new threshold because utility personnel will be able to respond to customer needs on the basis ofimmediate, real-time information about the status of power delivery at individual homes and businesses.

This new communications service is another major element in our multi-step plan to make our utility business more competitive and efficient.The Customer Advanced Reliability System's ability to process information about power delivery will provide customers with new choices and greater convenience, and enable Duquesne Light to more effectively manage its electric power load growth pro 61e.

Ily capitalizing on the strengths of our core business - a solid, well balanced sales nar; ionproved operating efficiencies; decreased production costs; and stabilized rates - we are positioning ourselves for growth in a cornpetitive energy services anarket.

Our market-driven businesses have played an increasingly important role in this positioning. Montauk, a Gnancial services company, continues to be the most signi6-cant contributor to earnings. During 1995, Montauk invested in high credit-quality opportunities that enhanced our investment portfolio balance. The returns on these investments are anticipated to enable Montauk to continue its solid earnings growth trend. Our other market-driven businesses Duquesne Enterprises and DQE Energy Services, are providing energy solutions for customers as they seek new opportunities related to the core business.

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These results illustrate how people at DQE The incremental steps we have have thought individually and succeeded col-lectively. The incremental steps we have taken taken Over the past several years have over the past several years have created a more ef6cient, more competitive, more market-driven created a more effic.ient, more and more pro 6 table company. Through these measured steps, we believe DQE is strategically Competitive, more market-driVell positioning itself for a competitive electric and more profitable Company.

pmver m rket and for the growing energy services matketplace. The andustry as facing a

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trCinCndoHs alnoHnt o[Untertainty. Changing, and at this point unknown, state and federal regulations and new technologies will clearly influence thefinure of energy services providers. We Ormly believe that the strategies we have embraced in recent years are the right ones.

We thank you for your continued support.

On behalf of the Board of Directors, O

Wesley W. von Schack Chairman and Chief Executive Of6cer February 26,1996 nur im unual Report

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DUQUESNE LIGHT l

Q DUQUESNE COfAPANY ENTERPRISES j

BUSINESS DESCRIPTION BUSINESS Duquesne Light Company, a

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DESCRIPTION E>

whose origin dates to 1880, Duquesne is engaged in the production, L

,j Enterprises makes transmission, distribution and strategic investments beneficial to DOE's core energy busi-sale of electric energy. Its ness. These investments enhance DOE's capabilities as an service territory is approximately 800 square miles in south-energy provider, increase asset utilization and act as a western Pennsylvania, with a population of 1.5 million, hedge against changing business conditions. Duquesne located within a 500-mile radius of one half of the population Enterprises' investments include:

of both the United States and Canada. In addition to serving

• Allegheny Development Corporation, a subsidiary more than 580,000 direct customers, the company sells which provides all energy services for the Pittsburgh electricity to other utilities.

International Airport

• Property Ventures, Ltd., a subsidiary which owns and 1995 OPERATING HIGHLIGHTS develops real estate in southwestern Pennsylvania

• Both company-operated nuclear generating units achieved

• Exide Electronics Group, Inc., an integrated provider of record refueling outages in terms of number of days non-interruptible power quality products, systems and needed for completion services, both domestically and internationally

• Introduced one of the first comprehensive customer ser.

• Chester Engineers, a subsidiary which is a leading vice guarantee programs in the nation domestic and international water and wastewater

• System peak demand of 2,666 megawatts was the com.

engineering and services company pany's highest ever

• RECRA Environmental, one of the largest environmental

• Received Edison Electric Institute's Diversity-Affirmative testing and measurements companies in the United States Action Award for the second year in a row 1995 OPERATING HIGHLIGHTS outlook

• Exide's acquisition of International Power Machines

• Broad-based customer initiatives proposed to the Corporation resulted in a (post-split) 5 cents per share gain Pennsylvania Public Utility Commission include a five-year

• Chester Engineers won the Pennsylvania Governor's rate freeze and sale of the company's interest in Fort Export Excellence Award Martin Power Station. The rate freeze, to begin in 1996,

• Property Ventures' involvement in Duquesne Light's move would result in a 40-percent, inflation adjusted price to new corporate headquarters, which substantially reduced reduction in the decade of the 1990s the utility's rental costs

• The Customer Advanced Reliability System, a state of the-mt electronic communications link with individual customers OUTLOOK through the electric meter, will provide superior levels of

• Continued developments with existing subsidiaries and service reliability, security and convenience new opportunities related to the core business

• Cost reduction has enabled increased capital recovery in

. Future initiatives are expected to include fuel cells, energy an effort to lower fixed generation costt and better posi-consultant services and telecommunications businesses tion the utility for increasing competition Duquesne Enterprises Assets Customers Served b"

' A "#I"* #b#II'd Per Employee Effeiency improvements during the 1990s have resulted in a 20% increase in the number of Duquesne Ught customers served per employee.

1995 1994 1993 1992 1991 DQL 1993 Mrmal Rmort

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~s MONTAUK 2A e - Q ',

D OE ENERGY

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SERVICES

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Montauk is a 'inancial ser.

1 DESCRIPTION

- g"W.,

. 'g BUSINESS DESCRIPTION BUStNESS g

vices company that makes

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DOE Energy k

long-term investments and Services is a marketing provides financing to market-and development company providing energy solutions for driven business activities-customers in domestic and international markets. Included are energy facility development and operation, independent 1995 OPERATING k

j Power production, gas and electric energy / fuel manage-HIGHLIGHTS ment, utility management services and advanced systems.

AM RGHLIGHTS ncr e.. t portfoio diversity by geographic region and investment type

• Formed in August 1995

• Enha,ced liquidity of market driven enterprises through

• Formed a joint venture with Marathon Oil, ElectroGen financing activities International, which will develop, own and operate power generation projects in selected international markets OUTLOOK OUTLOOK

• Continue to support DOE's initiatives to provide high-qual-ity products, services and solutions to energy customers

• Develop, own and operate domestic energy facilities

• Continue to maintain a diversified portfolio of high credit-

• Develop, own and operate power generating facihties in

.international markets quality investments to minimize risk

• Access new investment opportunities related to areas of a Develop and market selected utility services to domestic expertise, including fee-based and consulting initiatives and international customers

• Continue to be a source of financing for market-driven

• Initiate strategic partnerships to market innovative activities, providing expertise in the project finance area energy / fuel management programs for DOE Energy Services activities Montauk Assets (at Ikc. 31. milliom of <lollars)

EG ElectroGen l N T E ft N A T I O N A L Joint venture formed by DOE Energy Services and Marathon Oil to pursue international power projects.

1995 1994 1993 1992 1991 DQl.1945 Am.ual Report

( As the idea)of electric utility industry restructuring germinated in the late 1980s and gained increasing momentum in the 1990s, we accelerated the transformation of our company to meet increasing competition. Our utility operations featured 100-plus years of quality customer service and technicalinnovation. With the formation of the holding company structure in 1989, we gained the flexibility to pursue new business opportunities related to our core business. Driving this transformation into a dynamic, global energy services company is a combination of entrepreneurism and teemwork. DOE is a company whose people understand the need for change to successfully compete in the increasingly competitive energy marketplace, and who are working together to provide exceptional shareholder value. As the photo stories on the following pages demonstrate, we are hinki g Individuall Suc ollect t

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During the 1990s, DQE has provided i top total returns in the industry. In 1995 we continued our l

i strong performance.

l Shareholders again benefited from per share increases in earnings and dividends. These solid financial results reflect the continued evolution of our company. Managing this transition are individuals with perceptive leadership abilities who have brought decision-making in all of our businesses closer to the customer level.

The customer-service focus and cost-control efforts of Duquesne

( Lydia York)

Light Company have provided the foundation for our strong financial performance. Ilowever, our recent earnings growth has resulted as y,.g,y,,j,,,g much from the growth of market-based enterprises as from our core nis 6,000 ton cross-pit spreader utility business.

Sysicm moirs moinnains of carth '"

DQE's market-driven subsidiaries - Duquesne Enterprises,

'lexas litilities Alunng Company can

,nyy, ccmminicau hantst deep.

Montauk, and DQE Energy Services - provided 32 cents per share to r

scam ugnite caal. tydia wrk (lct,;

earnings in 1995, compared to 21 cents per share in 1994 and 9 cents sifts through mountains of potential per share in 1993. While Duquesne Light continues to be a fully imestment ideas to find flu'sc, like integrated provider of electricity to the greater Pittsburgh region,

'h'"'55-P ' 'P"dd" d'" " in future growth will come from the sale of new products and services i

achicec solid returns for our sharc-related to our core business. These initiatives, being developed and holders. Incestments selected by l

Afontauk are clo3cly refaird to our implemented through our market-driven subsidiaries, will provide core business, are geographically energy solutions to customers both inside and outside of the utility's diverse (47 states, 2 foreign coun-traditional service territory.

tries), are not concentrated in one type of business (4% leasing, 34%

l affordable Imusing, and 2m oil and gas) and are made seith high Dbring 1995, sales of electricity to Duqu sne Light's direct cus-creditymdity cmnpanics. n'hne tydia n.orks long hours,3hc can't tomers increased more than two percent from the 1994 level. Warmer-quite match the cross-pit spreader. It than-normal summer temperatures resulted in a higher level of sales to operatc5 around the clock, JtYi Jay 5 residential customers. Warmer temperatures were a lesser but contribut-a year. And you'll be pleased to ing factor to continuing higher sales to commercial customers.

knoic that 7exas titilitics' land recla-Duquesne Light has a well-balanced sales mix. Commercial sales malion program has won national and state honors. In fact, many of represent almost 38 percent of total 1995 kilowatt hour sales.The rest its pnvedures haec been used as of the utility's sales mix is evenly balanced between residential,22 per-nwacis for fcacral regul, tions.

cent; industrial,21 percent; and sales to other utilities,19 percent.

During the 1990s, the residential customer base has remained stable.

Even with continued customer interest in efforts to promote the l

comfort, convenience, safety and lifestyle improvements afforded by l

electric living, future residential sales fluctuations will continue to be mainly dependent upon weather.

Commercial sales have been a consistent growth sector, increasing in 15 of the past 16 years, even when weather variations are considered.

Diversification of the Pittsburgh region and Duquesne Light's economic development initiatives have driven this growth. Spurred by further i

i l

nor ins Annual neport

Electric Utility Customst Salas (milhons of kulowatt-hours)

?ATQM[

• g marketing efforts and customer satisfaction enhancements, we expect commercial sales to continue to be the utility's main source of future

@Miin;;fAiM$%3,is7 electric sales growth.

Q R 3.m linlike many utilities, Duquesne Light's sales are diverse, with industrials

[.g TO **

being the smallest direct market segment. And despite the trend toward

' ms *** '

- s.su large consumption customers changing their supplier of electricity or 3

l fully generating the?r own power supply, Duquesne Light has not lost sm

,,,,o any existing major customers to other energy providers. In fact, late in sm-

. 137, '

the year, the utility signed five-year energy contracts with a major 3, m retailer and an international food manufacturer.

2.22' As restructuring of the electric utility industry continues, off-system sales to other utilities will become more significant.The biggest 3.m

,,u impediment to a long-term power sale of Duquesne generation has issa been obtaining access to the transmission grid owned by other utilities.

som asm.,,,

Applications have been filed with the Federal Energy Regulatory sum a..i Commission (FERC) for transmission service from other utilities. FERC ans co"'"*"*'

authorized this access for Duquesne Light, but the utility has been unable to receive comparably priced terms for this service. The matter

$ning is pending before FERC. Gaining transmission access would enhance our ability to negotiate long-term sales agreements with other utilities.

Inherently, utility sales are influenced by external factors, such as weather and the economy. With impending deregulation and the result-ing increases in competition, we have been taking steps to ensure that future sales will be influenced to a greater degree by internally control-lable factors, such as service reliability, customer satisfaction initiatives and pricing. Duquesne Light has the programs in place, and the individuals managing and

( Malcom Bynum) l executing them, rieu sen ice Representative.

g to excel in these l>uquesne u he

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s nuquesne ught is one of only a critical areas.

handful of it.5. electsic utilities to g

Duquesne Light offer a comprehensive customer has7educedjgg servise guarantee program. ihe residential prices F

h OlMUSE lb PCI' Y

utility will pnn'ide a $25 credit to a customer's monthly billin the cent since 1991.

event it does not deliver courteous, Relative to the timely and accurate resuhs in the rising prices of areas of sen' ice connections, service l

other goods and visit.s and billing. 'lhanks to the y

' ices in the 4

initiative and professionalism of

- f, J

region during that people like Alaltom flynum (see photo), the error rate has been an period, Duquesne

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impressively low.007% en more Light customers than 17 million transactions.

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have seen a decline in the real w

DQr.1945 Annual Report l

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Throughout our utility operations, t

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we are im reasing cfficiensy by corn-i f

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bining job tlassifications, using

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h new technology and re-engineering y

work processes. Peg Page (below) led a tearn dedicated to strearnlin-ing ouquesne I.ight's prosedures for providing a new or upgraded ser-vice connection for residential and

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comunercial customers. lhe tearn's goal was to unake the procedure a onenall, onestop process. LIsing a Telepad portable romputer, a tesh.

nician, like Andy Vidra (above, right), now cc:n provide customers cost of electricity of approximately 25 percent. Late in 1995, the utility a simple service connection design announced a proposal to freeze prices through the year 2000. If grant-drawing and a cost estimate in the ed by the Pennsylvania Public Utility Commission (PUC), the rate field. Cornputerization of the process freeze would result in a 40 percent in0ation-adjusted price reduction allows new-bu3ine35 managers hke during the decade of the 1990s. Currently, industrial customer prices t

it is t

i e Ile to give custorners inimediate job statu, support of innovative, Ocxible economic devel-updates. The streamlined 3ystem opment pricing by Duquesne Light within its al3o gives customers more options, service territory. The utility offers manufactur-rm].

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because the people who deal with ing customers that locate new business in its j

them directly ham increased author'

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territory a price for power competitive with iry to make decisions on the spot.

any electric utility in Pennsylvania. Current customers considering expansion, for whom

( Peg Page) electricity is a signi0 cant cost factor, receive a simil r gu r ntee. Duquesne Light will com-Director, tuluct integration, ouquesne ugh, mit to a cost of electric service that is competi-tive with alternative expansion anywhere in Pennsylvania.

.fi.icpaa When direct retail competition arrives, cus-portable computer tomers in a free market will continue to seek

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out value. Value comes in many forms: from energy solutions that can improve a company's operation or an mdividual's lifestyle, to guaranteed levels of customer

service, in 1995, Duquesne 1.ight introduced one of the first comprehensive customer service guarantee programs in the nation (see photo page 8).

The utility guarantees that customer bills will be accurate; that service representatives will arrive for appointments on time; that customers will receive prompt, courteous and professional service; and that new resi-dential service will be connected within one day of the date requested by the customer. In the event that Duquesne Light does not meet nqV 1995 Annualluport

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Customer's account. In the Grst

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has been less than one hundredth z

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of one percent in more than 17 million customer transactions.

Duquesne Light traditionally I

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has madc a special effort to

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adapt new technologies to its basic customer service opera-tions. It has one of the most automated distribution systems

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of any utility. Duquesne 1.ight's k

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network enables it to pinpoint g

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service interruptions and auto-J matically switch loads and sec-tionalize circuits. That enables

( Jim Cross) the utility to spot and isolate Senior Vice President ami Chief problem areas so it can minimize the number of customers affected by a Nudcar Officer, Duquesne Light storm and respond promptly to areas that are without service.

lim Cross (sciond frorn right) is a Over the next few years, die utility will be implementing a number nudcar iruhorty irreran, icith ofinitiatives that fundamentally will change the way it does business 25 3rars of extierience at generar-so it can continue to enhance customer satisfaction levels that already are among the best in the industry.

i ard i

r. I J in I Duquesne light in 1994. fly A state-of-the-art communications service of Itron, Inc., to be installed cmouraging tearmcork, trducing the during the next two years, will provide Duquesne Light's residential number of outside contrac tors ami customers with superior levels of service reliability, security and conve-recluiring high performance stan-nience ltron, a leading supplier of energy information and communi-dards, his impact has quithly been cation solutions to the utility industry, will own and operate a two-way I irir is a sir i << l h i wireless communication network that will provide a link through the 3,csr.cecr nfueling ourage times in electric meter to Duquesne Light's 580,000 customers. The Customer 1995. Reducing ourage time not Advanced Reliability System will provide a variety of valuable informa-only saves nwner, it alw increas< s tion. Electric use will be recorded immediately and communicated ou'Pur, meaning the station can electronically to a control center at the utility. As a result, customer produce un>n clnnicu at a nnah r

service personnel will have a real-time picture of the status of power tar is tr j nIl) 5 Dad >ic ncid-fres of Maintenance loses power for any reason, the utility will know about it. The customer and Sam Chakerts and Scott will not have to report the outage, and Duquesne Light's efforts to cencic of operations.

restore power can begin sooner, reducing the time the customer is without power. Customers also will be able to request electric service to start or stop on any hour of any day. And customers who have electric meters inside their homes no longer will have to provide access to have their meters read.

In the future, Duquesne Light will be able to pro 61e each customer's consumption of electricity. Coupled with time-of-use and other special rates, this information will help customers realize more value from nur munnual nert l

their use of electricity. As the transition to competition and customer choice begins over the next decade, Itron's technology will enable the utility to implement the needed metering and billing services. The first Duquesne Light customers will be connected to the new system in April 1996, and all customers will be on-line in 1997.

We view our long-standing environmental commitment as another competitive advantage. Surveys show that an increasing number of consumea piace value on a company's environmental performance.

( NOx Reduction Project Team)

Through the years, we have earned a reputation as an environmental

- Du</nesne f.ight leader in our industry. The photo below details one of our recent A true team effort 3olved a poten.

success stories in this important area. Our commitment is driven by tially expensiir environntental our environmental strategic plan, which stresses compliance, training, thallenge, inade one of Duquesne issues management, stewardship and communications.Through our lighd coalfueled plants rnore comprehensive and innovative approach to environmental excellence wmpetnice, put the contpany i" in our operations and our community stewardship programs, we contentwn for the industry 5 high-est honor, and helped the utility continue to expand that commitment.

win another unajor industry award for the senand year in a row. People

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..;.~:. ~. ;. ~ e,.. s. m s.

.. y 7 w.n

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i ; l. L...: \\ d. ? '. L L : ful from fossil generation, environmen-m tal affairs, engineering and pur-As utility competition increases, so does the importance of cost con-chasing joined in a creatiec par

trol. Duquesne 1ight had another successful year in this area in 1995.

ner3 hip with i nergy Systems

\\'

' power Station nuclear generating Assoaates to denvlop new burner technology that is helping tmits both had record refueling outages in terms o(the num9er o(

Duquesne's Lirama power Station rnect stringent Clean Air Act regu-lations for nitrogen oxide (No,)

etnissions at a fraction of the cost of solutions be:ng used by other utilities. In fact, their unique approath has been patented and is NA

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attrat ting interest from other enemy generators. 'the I.Irama project is a

~

jinalist for the prestigious Edison Award, presented by the Edison Liectric Institute (LLI) to recognize

" distinguished leadership, innovation N

and contribution to the advantement of the eles tric industry." *lhe work of the disvrse, unnhi-disciplinary task team that desvloped and perfected the new tenknology also was cited in Duquesne Iight's receipt of LLi's g,,., v-Diversity-Affirrnaliar Action award for the second year in a row.

..;2.-

Project team mernbers incimle (top

&l$

row, from left) llob Orthowski, S Y" htithael skonuT, James lireslin, (middle) Joe Canvllo, Alel Crigler, Rick Sanvr; (bottom) Tony IIallo, liernard IIreen of Energy Systems Associates, Sharon Stubbs and Gerry Gretz.

DQL 1995 Annual Report

FWu:.

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3

_4-As part ofits ongoing con,anitment

";.-l _ _$4 t,f g

f i.

to raluce sosts, Duquesne light was

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lookingfor a new location for its C~

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correrate headaptarters in downtown e

Putsburgh. Ihm Aforine of Fwperty

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% ntures, Ltd. liked the hxation,

_g charuter, soundneu and, unost 4

importantly, price of the fortner Chamber of Cunnenene lluilding (below). It um a good snatch.

Duquesne Light, whhh iornpleted its W

relotation in Decernber i995, has substantially reduced its rental costs while enaintaining a corporate pres-ence in its traditiorud Pittsburgh horne base. Ihnt is shown Iwre (right) with Sueria % nable, an anhitatural N

engineer with Duquesne Light, inspecting a portion of the utility's new offices. S neria was part of the L

/

tearn that designed the interior o)) ice erwironenent, highlighting the hhtor. ( Don Morine)

( Sateria Venable) ical thann of the building, whhh President, Property Ventures, Ltd.

Architectural 1:ngineer, Duquesne Light was built in 19ILL 1he refurbished 411 Sewinh Amine has recciwd a number of awards, unc!uding the days needed for completion. As detailed in the photo caption on page Pitt3 burgh fli3 tory & landmarks 10, the men and women who operate the station plan to improve on foundation Awardfor extraordinary these levels in future outages. Re-engineering of business processes, restoration and adaptive re-use of a multicrafting at powel stations and continued ef6ciency improvements historie building, and the Pittsburgh across the utility during N 1990s have resulted in a 20 percent increase Chapter of the American Institute "I in the number of customers served per employce. Additionally, annual Architects De3ign Awardfor 1995.

11w refurbishing project was a Utility operation and maintenance expenses, excluding energy costs, finalist in the Afaster fluilders have been reduced by more than $10 m,lh,on,n the past two years.

i i

Aeotiation 1995 I!uilding &cclleme linergy costs also have been a major focus of Duquesne Light's cost Awards for renot'alion. The building reduction efforts, since they represent approximately 40 percent of the util-is a fining new twishbor to ity's variable costs. Energy costs were lower in 1995 - the third time in Pin 3 burgh's Cultural Trust Di3rrht.

the last Ove years. The utility's delivered cost of coal is among the lowest in Pennsylvania. Its nuclear fuel cost has been reduced by 36 percent during

' h[

the last Ove years. With these and other cost reductions, Duquesne was able to lower its variable production costs by 12 percent during the 1990s.

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With increasing competition in the energy services industry will come increasing business opportunities. DQE has been positioning itself to take advantage of these opportunities through exceptional ser-

'em, vice reliability, favorable pricing designs, ef6cient operations, available

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cash flow and, ultimately, growth through pursuit of market-driven business opponunities. Our strategy has been to stay focused on the energy services industry and to develop products and services that are complementary to our core busineas. Continued prudent investment in n ot.I9 % u nual uctvre

competition-created opportunities - and their success - will continue to distinguish DQE from our competition in the future.

Our Duquesne Enterprises subsidiary is forming strategic alliances to Chester Engineers ha4 earned a offer a broad range of energy products and related services. During reputation as a firrn that can 1995, it acquired a substantial interest in Exide Electronics Group, an efficiently deliver water and integrated provider of power protection and power management systems, wastewater unanagement senites and is exploring opportunities in fuel cells and telecommunications.

IN I Gesta Ensneas, a leadng nadonal and intanadonal wata and

, Ir. pr Iri o I thief operating officer. Chester's coinplete Wastewater engineering and serv ces Orm, is another DE investment.

range o[ turnkey engineering, Chester designs, builds, owns and operates Water and Wastewater treal-construction and long-tenn plant ment facilities for industrial and operation services help businesse5 municipal clients, including more and conununities worklu*ide realize gyan 399 po7,99g 599 (9 mpg 9;eg y sontinuing value frorn their water S"^ Y' S U" 'O U"'8"'

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supplies. A burgeoning world market and the continuing growth tional markets more aggressively m Q.

of developing nations have openea the early 1990s led to signiGcant D d.~

• up a wealth of opportunities for contracts in Taiwan, Mexico, South

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Chester in countries smh as China, America and China. Since our

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hiexico, 'laiwan, l'oland, Venezuela,

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Columbia and Ilrazil. Thefirm's international sales increased frorn 5Ia'0,000 in I992 to more than

$I2 million in I994, carning Chester l'ennsylvania's I995 Governor's Ikport thcellence Award.

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( John Lucey, Jr.)

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President and Chief Operating Officer, Chester Engineers L. r e z A l:

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ug (Tony usanti )

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Vice Chairman and Chief Executive Officer, Chester Engineers affiliation with Chester in 1993, the company has focused on expanding its core business of domestic and international water treat-ment consulting, while continuing to improve its pro 6tability.

Allegheny Development Corporation has been providing all of the energy services to noe 1995 annual ucert

l.,...g A

W ll the new Pittsburgh International 4

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Airport since it opened in 1992, after winning a competitively bid

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contract.

Property Ventures, Ltd. acquired

• 4 and refurbished a building adia-o cent to Pittsburgh's Cultural

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District, which now is serving as

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Duquesne Light's corporate head-quarters, substantially reducing the utility's rental costs (see photo caption on page 12).

..t Through our Montauk sub-sidiary, we are the lessor in sever-s k~

g al energy-related leasing transac-tions, including a fossil generat-g ing station, a gas processing f acihty and coal mining equip.

ment (see photo on page 6).

g Montauk also is a financial part-( John Welch )

( Lex Tsaggaris )

ner in several oil and gas produc-Executive Vice President, President, DQE Energy Services tion partnerships. The earnings DQE Energy Services growth trend from our market-As the energy services industry driven businesses is expected to continue in the future as these and enters a new era of change, busi' similar investments continue to be profitable, and as our newest sub-

"* "PP""""Id "'IU '"" d""' '"

sidiary, DQE Energy Services (DES), develops.

einerge. Energy entrepn neurs like lex haggaris (ab4ne, nght) and DES was formed in August 1995 to provide innovative energy solu-John IVelch (above, left), president tions for domestic and international customers, including energy / fuel and executive rice pre 3ident, respec-management, energy facility development, co-generation, independent tirely, of DQE f nergy Services, are power production, utility management services, and advanced energy seeking growth opportunities that systems. This new venture is being led by two veterans of the engineer-P""'id"""KY 3'd"'i"3 /"'

ing and energy services fields (see photo). Soon after its inception, DES

'""'""#" ""# " '""'"I"#" '" 'I to our core business. They bring formed a joint venture with Marathon Oil, an experienced energy com-well-enarched experiences to the job.

pany with global reach, to develop independent power production Lex sened as an officer in the facilities abroad.

Navy's nudear submarine program, worhed in the elet tric utility indus-

.y try, and managed engineering and

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u sonstniction businesses. John has an extensiec ba4kground in energy

,,he activities we have descn. bed - the customer service focus and sen i4cs management and in au cost control efforts of our core business, and the performance of our aspects of the naturalgas induary.

market-driven enterprises - will help position DQE to continue to be an industry leader into the 21st century. Already a low variable-cost producer of electricity, we will continue to search out new energy-relat-ed products and services for today's customers and tomorrow's new customer base. Through it all, we will continue to cultivate the entre-preneurial spirit of the men and women of DQE as we work together through continuing change in our indusuy toward our ultimate goal of providing exceptional shareholder value.

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...n v ~.:u...b, w..l.t,.... (.d::..l.s ;& Q.. :,,, s>.d 6,Mn l,;..w,;a; Ay tc' CONDENSED STATEMENT OF CONSOUDATED INCOME (httulON5 UI lhHlAR\\, ll.U.ll'l l*lR SH W AMOUVR)

Year Endal December 31, 1995 1994 egg Revenues from sales of electricity

$ 1,139

$1,134 W/uryggg, l'ucl and purchased power expenses 232 244 7&" Der Net electric revenues 907 890 Other revenues 81 90 Net operating nwnues 988 980 j,

Operating and maintenance expenses 383 408

^{

,/ Depreciation and amortization 192 167 ev,ey Taxes other than income taxes 89 on Non-energy operating expenses 666 663 Operating incorne 322 317 y Equity investment and other income 52 43 4%

oMr Interest and other charges 107 110 N

Incorne before incorne taxes 267 250 income taxes 96 93 Net incorne

$ 171

$ 157 M.w// cOAcEtwrvE. MAWL y Earnings per share

$ 2.20

$ 1.98 g,

g g

Depreciation &

Amortization Expense (millioru of atollars)

Incrs: sed capital recovery will lower fixed generation costs and bette, polition Duquesne Light for increas-ing competition.

1995 1994 1993 1992 1991 DQi'.1995 ArmualIkport

CONDENSED CONSOUDATED BALANCE SHEET (klinums or DouAns) 1Jecem!er 3I Gh*7},#&g 1995 1994

-ppvnt fr6 # #

Current assets

$ 238

$ 335

• long-term investments 441 196 pgggge/Ar70 g Property, plant and equipment 3,060 3,140 gOSN6 Regulatory assets 672 711 gg/MU

_g E

Other non-current assets 48 45 7btal assets

$4,459

$4,427 Current liabilities

$ 286

$ 327

!)eferred income 222 64 Non-current liabilities 1,150 1,286

- long-term debt 1,401 1,378 7btal liabilities 3,059 3,055 g

W'WzArray

~%

D/05 Preferred and preference stock 71 95 N

'N Common shareholders' equity 1,329 1,277 l

Total liabilities ami equity

$4,459

$4,427 i

I i.

Long Term investments b

(millkna of Jollars)

Future earnings growth will come from the sale of new products and services related to our core buziness. These energy solutions tra being developed and impbmented through our market-driven subsidiaries.

1995 1994 l

1993 992 1991 1

DQV.1995 AnnualIbrort

CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Airtuoss or DouAus)

War Ended December 31, 1995 1994 Operating cash flows

$379

$375 Changes in working capital 46 (32)

Other 29 26 Cash providedfrorn operating actitities 454 369 1.ong-term investments (188)

(67)

D GXMNil!W"S Capital expenditures (94)

(121)

Other (4)

(12)

Cash used by investing activities (186)

(200)

O/VUE@s Q4 gym

~% Common stock dividends (94)

(89)

Common stock repurchases (21)

(23) gg Net reduction oflong-term obligations (47)

(74)

(ovr7 geeep Change in notes payable (20) 33 MO p6W Other (11) 2 Cash used byfinancing actitities (l93)

{l51)

Net change in cash

$(25)

$ 18 Net Operating Cash Flow" (millions of dollars)

Positive cash flow allowed DOE to meet all of its operating and construction requirements, improve its capital structure and develop its mirkst-driven operations.

M 1995 1994 1993 1992 1991

• Excludes working capital and other balance sheet changes.

DQl. I995 Annual Report l

l

b J

(httwoNS of DoHAus, Excrrr Ptn Sn. Ant AMouwis) 1995 1994

-1993 1992 1991 1990 1986-Selected Income Statement items:

Revenues from sales of electricity

$1,139

$ 1,134

$1,120

$1,116

$1,139

$1,094

$ 869 Fuel and purchased power expenses 232 244 238 239' 254 229 234 Net electric revenues 907 890 882 877 885 865 635 Other revenues 81 90 63 37 38 31 15 Net operating rewnues 988 980 945 914 923 896 650 Operating and maintenance expenses 385 408 408 357 365 373 234 l

Depreciation and amortization 192 167 153 129 11 9 122 74 Taxes other than income taxes 89 88 71 84 94 80 71 Non-energy operating expenses 666 663 632 570 578 575 379 Operating income 322 317 313 344 345 3 21 271 Equity investment and other income 52 43 28 42 36 46 (17) interest and other charges 107 110 120 132 142 157 148 Income taxes 96 93 80 11 2 105 88 (4)

Changes in accounting principles 3

Net income

$ 171

$ 157

$ 144

$ 142

$ 134

$ 122

$ 110 Earnings per share

$2.20

$ 1.98

$ 1.81

$1.78

$1.67

$1.49

$1.00 i

Ratio of earnings to fixed charges (pre-tax) 2.73 2.57 2.29 2.24 2.10 1.90 1.75 Selected Balance Sheet items:

long-term investments

$ 4jl

$ 196

$ 126

$ 59

$ 44

$ 18 property, plant and equipment

$3,060

$3,140

$3,168

$3,037

$3,053

$3,048

$3,491 Total assets

$4,459

$4,427

$4,550

$3,778

$3,851

$3,834

$3,997 Total capitalization

$ 2,801

$2,750

$2,781

$2,716

$2,669

$2,770

$3,085 Capitalization Ratios:

Common shareholders' equity 47.5 %

46.4 %

44.2 %

43.1%

41,6 %

39.0 %

39.0%

preferred and preference stock 2.5 %

3.5%

4.8%

4.9%

5.2%

6.8%

8.7%

long-term debt 50.0 %

50.1 %

51.0 %

52.0%

53.2 %

54.2 %

52.3%

Selected Common Stock information:

Average shares outstanding (millions) 77.7 79.0 79.5 79.4 80.1 81.6 109.4 Shares outstanding at year-end (millions) 77.6 78.5 79.5 79.4 79.4 80.6 109.7 Market capitalization

$2,386

$ 1,550

$ 1,829

$1,708

$ 1,621

$ 1,337

$896 Dividends declared

$94

$89

$86

$81

$78

$75

$103 Dividends dedared per share

$ 1.21

$ 1.13

. $ 1.08

$1.03

$.97

$.92 5.94 Dividend payout ratio 54.1%

56.4 %

58.8 %

56.9 %

57.6%

60.7 %

107.9 %

Dividend yield at year-end 4.2%

5.7%

4.6%

5.0%

5.0%

5.8%

9.8%

price-earnings ratio at year-end 14.0 9.9 12.7 12.1 12.3 11.1 8.1 Return on average common equity 13.1 %

12.5 %

12.0 %

12.4 %

12.2 %

11.3 %

9.3%

nQt: 1995 AnnualRnvn 1

L d

1995 1994 1993 1992 1991 1990 1986 Sales of Electricity (kilowatt-hours):

Average annual residential use 6,474 6,170 6,201 5,901 6,3 31 5,953 5,8 21 Electric energy sales billed (millions):

Residential 3,378 3,219 3,231 3,069 3,285 3,078 2,957 Commercial 5,729 5,563 5,490 5,358 5,450 5,236 4,724 Industrial 3,237 3,256 3,046 3,059 3,042 3,296 2,734 Aliscellaneous 84 84 84 83 84 84 99 Total sales to cintorners 12,428 12,122 11,851 11,569 11,861 11,694 10,514 Sales to other utilities 2,975 3,212 2,821 4,060 2,979 1,830 2,091 Total sales 15,403 15,334 14,672 15,629 14,840 13,524 12,605 Percentage Change in Energy Sales:

Residential 4.9 (0.4) 5.3 (6.6) 6.7 (1.3) 3.8 Commercial 3.0 1.3 2.5 (1.7) 4.1 1.8 4.1 Industrial (0.6) 6.9 (0.4) 0.6 (7.7) 2.3 (22.4)

Miscellaneous 0.0 0.0 1.2 (1.2) 0.0 0.0 (2.0)

Total sales to crutomers 2.5 2.3 2.4 (2.5) 1.4 1.1 (4.5)

Sales to other utilities (7.4) 13.9 (30.5) 36.3 62.8 (12.9) 7.8 Total Sales 0.4 4.5 (6.1) 5.3 9.7 (1.1)

(2.6)

Energy Supply and Production Data:

Energy supply (millions of kilowatt-hours):

Net generation - system plants 14,201 14,678 14,056 15,074 14,220 13,266 12,456 Purchased and net interchanged power 1,202 656 616 555 620 258 149 Total encryy supply 15,403 15,334 14,672 15,629 14,840 13,524 12,605 -

Generating capability (megawatts) 2,834 2,834 2,834 2,834 2,835 2,835 2,908 Peak demand (megawatts) 2,666 2,535 2,499 2,308 2,402 2,379 2,132 Cost of fuel per million lill!

131.374 137.23C 143.65C 140.15( 153.70C 149.62C 165.34C Average cost of generation per kilowatt-hour 2.22<

2.23(

2.33C 2.19C 2.44 C 2.51 C 2.554 Customer Data:

Telephone access:

% of customers waiting fewer than 30 seconds 87 %

86 %

76 %

41 %

26%

Service interruptions:

Average System Availability Index 99.99 % 99.99 % 99.99 % 99.99 % 99.99 %

99.99 %

99.98 %

Number of customers at year-end (thousands)

Residential 522.9 522.6 522.3 521.2 520.0 518.3 509.1 Commercial 53.8 53.6 52.9 52.8 52.6 52.3 50.3 Industrial 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Other 1.9 1.9 1.9 1.8 1.9 1.9 1.8 Total cantomers 580.6 580.1 579.1

,577.8 576.5 574.5 563.2 Market-Driven Operations:

Office rental property occupancy rate 91 %

91 %

75 %

Airport service availability 100 % 99.99 % 99.97 %

Annual long-term investment activity (millions)

$188

$67

$72

$22

$7 t>qL ivos Armuat Rapt l

l (Att TIms 3 YtAus) l DANIEL BERG THOMAS J. MURRIN

66. Term expires 1997 (1, 6). Institute Professor,

66. Term expires 1997 (3, 6). Dean, A.J.

Rensselaer Polytechnic Institute. Directorships Palumbo School of Business Administration, include fly-Tech Machine, Inc. (specialty parts),

Duquesne University; former Deputy Secretary loachim Machinery Co., Inc. (distributor of of LI.S. Dept. of Commerce; former President, machine tools), and Chester Engineers.

Westinghouse Electric Corporation Energy and Advanced Technology Group. Directorships DOREEN E. BOYCE

!aclude Motorola, Inc. Member of the

61. Term expires 1998 (2, 5). President of the Executive Committee of the ll.S. Council on Buhl Foundation (supports educational and Competitiveness and Chairman of the Distnct community programs). Directorships include Export Council.

Microbac Laboratories, Inc. and Dollar Bank, Federal Savings llank. Trustee of Franklin &

ROBERT B. PEASE Marshall College.

70. Term expires 1996 ( 1, 5). Senior Vice President, National Development Corporation ROBERT P. BOZZONE (real estate); Executive Director, Allegheny

62. Term expires 1997 (1,2). Vice Chairman of Conference on Community Development,1968-Allegheny Ludlum Corporation (specialty metals

91. Directorships mclude Regional Industrial production). Directorships include Allegheny

"' P*Cnt Corporation of Southwestern l udlum Corporation; Chairman, Pittsburgh Pennsylvam.a.

branch of the Federal Reserve Bank of Cleveland.

Trustee of Rensselaer Polytechnic Institute.

ERic W. SPRINGER

66. Term expires 1996 (1,4). Partner of florty, SIGO FALK Springer and Mattern, P.C. (attorneys-at-law).

61. Term expires 1996 (2, 3,4). Management Directorships include Presbyterian liniversity of personal investments. Chairman of Maurice il spital. Past president of the Allegheny Falk Medical Fund and Chatham College Board County Bar Associauon.

of Trustees. Directorships include the IIistorical Society of Western Pennsylvania and the WESLEY W. VON SCHACK Allegheny land Trust.

51. Term expires 1996 (3,4, 6). Chairman, President and Chief Executive Officer of DQE; WILLIAM H. KNOELL Chairman and Chief Executive Officer of

71. Term expires 1997 (3,4, 6). Retired Duquesne Light. Directorships include Mellon Chairman and Chief Executive Officer of Bank Corporation, RMI Titanium Co., the Cyclops industries, Inc. (basic and specialty Pittsburgh branch of the Federal Reserve Bank of steels and fabricated steel products; industrial Cleveland; Chairman, the Regional Industnal and commercial construction). Directorships Dmlopment Corporation of Southwestern include Cabot Oil and Gas Corporation. Life Pennsylvama, and the Pittsburgh Cultural trustee of Carnegie Mellon liniversity.

Frust. Also a life trustee of Carnegie Mellon liniversity.

DAVID D. MARSHALL

43. Term expires 1998 (5, 6). Executive Vice President of DQE; President and Chief Operating />WIhuluesne I.ight Committees:

Officer of Duquesne Light. Directorships l Audi' include Southwestern Pennsylvania industrial

2. Cyfnigensation I h""""

Resource Center (economic development).

Trustee, Vice President and Secretary of Penn's Southwest Association (economic development).

lhutuesne f.ight Committees:

ROBERT MEHRABIAN i Employment and

54. Term expires 1998 (1, 5, 6). President, C""""""i" ##l"N""'

^ #"d'"' #"*

Carnegie Mellon liniversity; Dean, College of Engineering, liniversity of California at Santa Barbara, 1983-90. Directorships include PPC

{,

Industries, Inc. (producer of glass, chemicals, coatings and resins), and Mellon Bank Corporation.

DQF.1995 Annual Report

l

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D 1995 Financial Information Q,,a nmnn,

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2 COMPANY REPORT ON FINANCIAL STATEMENTS l

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hQ The Company is responsible for the fmancial infonnation and repre-fcomums

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sentations contained in the financial statements and other sections of hdinsdryofTermsM $l this annual report to shareholders The Company believes that the Q

consolidated financial statements have been prepared in conformity 22; ^ -

4 p.. 0 : De,

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with generally accepted accounting principles that are appropriate in the Gaesides of Opdrations? y circumstances to reflect, in all material respects, the substance of events p23L l

and transactions that should be included in the statements and that the Eii'...a :,

4 other information in the annual report to shareholders is consistent with fJJquidityjndh,

l those statements. In preparing the fmancial statements, the Company ical Resources;

'h makes informed judgments and estimates based on currently available l

i sj information about the effects of certain events and transactions. The

^

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Company maintains a system ofinternal accounting control designed to

[kand Equipment; j

provide reasonable assurance that the Company's assets are safeguarded pa9j - -

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j and that transactions are executed and recorded in accordance with

,o established procedures. There are limits inherent in any system ofinternal

?s outloop 1a d

control and such limits are based on recognition that the cost of such a F[f35

~7 system should not exceed the benefits derived. The system ofintemal 4

f eport of fndependent i1 accounting control is supported by written policies and guidelines and is Os

.j o

gR supplemented by a staff ofinternal auditors.The Company believes that pSerti ed Publics i3 the intemal accounting control system provides reasonable assurance Pun'a85?

that its assets are safeguarded and the financial information is reliable.

9 t,

. W,m fStatenient of, 0

Consolidated Iricomel. 4 i

f(395 y hk

', W j

v c

h Consoliddred

-}

Wesley W. von Schack Balance Sheet -

Chairman of the Board, Pres. dent i

5 40'-~

1 and Chief Executive Officer V Sta'tenient: >

Wof Cansolidated [

y Cash Flows!;

p 5

4.

(',

e.

4 B [ Notes to Consolid,.Jd[ j Gary L. Schwass M Tinancial Statementst a Executive Vice President, EL432 Chief Financial Officer and Treasurer p

r:'-

1 5^ m 2

+,f a

r

(

noumuaw g l

Ibliowing are explanations of certain financial and operating terms used in our report and Glossary of Tertns the utility business.

demand of.1 KW and, if burned continuously, Allowance for Funds Used During will consume 1 KWil in ten hours. One Construction (AFC) thousand KWs is a megawatt (MW). One AFC is an amount recorded on the books of thousand KWils is a megawatt hour (MWil).

a utility during the period of construction of utility assets.The amount represents the Nuclear Decountnissioning Costs estimated cost of both debt and equity used to gg gg finance the construcuon.

inch in meion with the entombment, i

f decontamination, dismantlement, removal Baseload and disposal of the structures, systems and The amount of electric power delivered or components of a nuclear power plant that needed at the lowest point of demand during has permanently ceased the production of the day.

electric energy.

Construction Work in Progress (CWIP)

Peak Dernand

,this amount represents assets m the process Peak demand is the amount of electricity of construction but not yet placed in service.

required during periods of highest usage. Peak The amount is shown on the consolidated peri ds fluctuate by season and generally balance sheet as a component of property, occur m the morning hours in winter and m, plant and equipment.

late afternoon during the summer.

Deferred Energy Costs Pennsylvania Public Utility Cotntnission (PUC)

In conjunction with the Energy Cost Rate The Pennsylvania governmental body that Adjustment Clause, the Company records regulates all utilities (electric, gas, telephone, deferred energy costs to offset differences water, etc.), which is made up of five members between actual energy costs and the level of nominated by the governor and confirmed by energy costs currently recovered from electric the senate.

utility customers.

Regulatory Asset Dernand Costs that the Company would otherwise The amount of electricity delivered to have charged to expense which are capitalized consumers at any instant or averaged over a or deferred because thesa costs are cunently period of time.

being recovered or because it is probable that Energy Cost Rate Adjustunent Clause (ECR) the PLIC and the FERC will allow recovery of these costs through the ratemaking process.

The Company recovers through the ECR, to the extent that such amounts are not included Retail or Wimlesale Access m base rates, the cost of nuclear fuel, fossil The ability of customers to contract for fuel and purchased power costs and passes to electncal energy from competing generating its customers the profits from short-term supph,ers.

power sales to other utilities.

Stranded Cost Federal Energy Regalatory Commission (FERC) '

Stranded costs include any prudent utility The FERC is an independent five-member

,mvestment, commitments or expenses not yet commission within the tinited States recovered, made during a period when there Department of Energy. Among its many was an obligation or authorization to provide responsibilities, the FERC sets rates and service at a regulated price, that are no longer charges for the wholesale transportation and necessary or economical due to a change in y

sale of natural gas and electricity, and licenses statute or regulatory policy which allows hydroelectric power projects.

others to compete for the utility's customers.

For example, the Company recently refinanced Interruptible Customer its long-term debt. Refinancing costs will be An interruptible customer receives a discount recovered and amortized for accounting in exchange for allowing temporary interrup-purposes over the term of the debt, unless tions in his service during the Company's peak regulatory changes prevent future recovery, load periods or during emergency conditions.

nd result in " stranded costs."

Kilowatt (IGV)

"N"I A kilowatt is a unit of power or capacity.

An electric operation wherein transmission A kilowatt hour (KWil) is a unit of energy or facilities of one system are used to transmit l

kilowatts times the length of time the kilowatts power of another system.

l are used. For example, a 100-watt bulb has a 000 ms Annual R<twc

DOE 1995 FmANCIAL INFORMANON Corporate Structtire DQE is an energy services holding company formed in 1989. Its subsidiaries ate Duquesne 1.ight Company (Duquesne), Duquesne Enterprises (DE), DQE Energy Services (DES) and Montauk. DQE and its subsidiaries are collectively referred to as the Company.

Duquesne is an electric utility engaged in the production, transmission, distribution and sale of electric energy, and the largest of DQE's subsidiaries. DE makes strategic investments related to DQE's core energy business. These investments enhance DQE's capabilities as an energy provider, increase asset utilization, and act as a hedge against changing business conditions. DES was fonned in August 1995 and is a marketing and development company providing inergy solutions for customers in domestic and international markets. Montauk is a financial services company that makes long term investments and provides financing for the Company's ini:iatives in high quality products, services and energy solutions for its customers.

The Company's Electric Sercice Territory The Company's utility operations provide electric service to customers in Allegheny County, induding the City of Pittsburgh, and Ileaver County. This represents a service territory of approxi-mately 800 square miles in southwestern Pennsylvania. The population of the area served by the Company's electric utility operations, based on 1990 census data, is approximately 1,510,000, of whom 370,000 reside in the City of Pittsburgh. In addition to serving approximately 580,000 customers within this service area, the Company's utility operations also sell electricity to other utilitica beyond the Company's service territory.

Regulation

'lhe Company's electric utility operations are subject to regulation by the Pennsylvania Public litility Conunission (PLIC), as well as to regulation by the lederal Energy llegulatory Commission (ITitC) under the Federal Power Act with respect to rates for interstate sales, transmission of elec-trie power, accounting and other matters.

The Company's electric utility operations are also subject to regulanon by the Nuclear Regulatory Commission (NRC) under the Atomic Energy Act of 1954, as amended, with respect to the operation of its jointly owned / leased nuclear power plants, lleaver Valley L.Init I (IIV linit 1),

Ileaver Valley linit 2 (IIV linit 2) and Perry linit 1. The Company is also subject to the accounting and reporting requirements of the linited States Securities and Exchange Commission.

The Company's consolidated financial statements report regulatory assets and liabilities in accordance with Statement of Financial Accounting Standards No. 71, AccountingJor the Effects of Certain Types of Regulation (SIAS No. 71), and reflect the effects of the ratemaking process. In accordance w th SIMS No. 71, the Company's consolidated financial statements reflect regulatory assets and i

liabilities based on current cost-based ratemaking reguladons. The regulatory assets represent probable future revenue to the Company because provisions for these costs are currently includ.

ed, or are expected to be included, in charges to electric utility customers through the ratemaking process.

The Company's electric utility operations currently satisfy the STAS No. 71 criteria. However, a company's utility operations or a portion of such operations could cease to meet these criteria for various reasons, including a change in the PilC or the i ERC regulations. Should the Company's electric utility operations cease to meet the SFAS No. 71 criteria, the Company would be required to write off any regulatory assets or liabilities for those operations that no longer meet these requirements. Management will continue to evaluate significant changes in the "gulatory and competitive environment in order to assess the Company's overall consistency h the criteria of St AS No. 71.

Results of Operations Seasonality Sales of electricity to customers by the Company's electric utility operations tend to increase during the warmer summer and colder wintet seasons because of greater customer use of electricity for cooling and heating.

In the near term, weather conditions and the overall level of business activity in the Company's electric utility service territory are expected to continue to be the primary factors affecting sales of electricity to customers. In the long-term, the Company's electric sales may also be affected by increased competition in the electric utility industry. (See " Competition" discussion on page 35.)

Sales of Electricity to Customers Operating recennes are derived from the Company's sales of electricity to customers and are based on rates authorized by the PllC. These rate are cost-based and are designed to recover the Company's energy and other operating expenses and investment in electric utility assets and to provide a return on the investment. Sales to the Company's 20 largest customers accounted for 14.2 percent and 14.6 percent of customer revenues in 1995 and 1994, respectively. Sales to llSX Corporation, the Company's largest customer, accounted for 3.7 percent and 3.8 percent of total DQL 1995 Annul Regwt L

1995 and 1994 customer revenues

, in 1995 increased 2.5 percent when compared t, respec 4.9 percent and 3.0 percent, respectiextreme 1995 summer peratures, residential and commercial KW to the prior year because of tem vely. Industrial sales volume in 1995 d li

. n response to Company's large industrial cust porary production facility outages exp i sales increased

higher residential KWil sales volu ec ned when compared omers. The severe weather condition i er enced by some of the

' Components of Change in O me when compared to 1993.s n 1995 also resulted in perating Retenuesfrom the Prior le'ar Revenues from Sales of Electricity:

1995

. Net customer revenues (Amounts in Millions ofDollars) 1994 llltilities i

Other operating revenuesRevenues from total sales of electricity

$ 7.8

$ 6.2 (2.3)

~

~

7. 6

'Ibtal Operating Retenues 5.5 13.8

~

4 (9.2) 26.9 i other energy costs. Customer revenues Ductuate as a re b(3.7)

$40.7 1he change is the net result of higherNet customer r 7

anges in fuel and 2

compared to 1994 increased by

' hour (MWil), the benents of whi h are passed through to the customers isales

rates. The signi0cantly hotter summ c

]9 : to residential customers in particular. Revenu ergy costs per megawatt er temperatures in 1995 resulted in i f in 1995 exceeded 1994 residential revenues by $13 2 n the form oflower also increased $6.2 million, or 0 6 perc es attributable to electric sales to residenti lncreased s

j represented hi

. million or 3

. customer base.gher sales to commercial and industrial customerent

-l a customers l

s, driven in part by an expandedd

' Net customer rerrnnes for 1994 and 1993 i l

'a' nd subsequent recovery of revenues s

resulting from a $232 million rate innclude phas ended in April 1994 During thi1988. The PtlC required the Comp j

j e

s phase-in period, the rate increase wy to phase this t e deferral j

retynnes (See "1987 Rate Case" di page 4&)

year period, which Sales to Otlu r Utilities scussion in Note F to the consolid as recognized in operating ated financial statements on j

Short-term power sales to other utilitiShort-term sales to other 9

l es in 1995,1994 and 1993 were 2 974 7gula

_ IMil and 2,820 920 KWII, respectively Fluct

]

to the Company,'s customer energy J

ar et rates.

were $56.0 million, $58.3 million and $50 7and the avail 0

r 4

s generating stations. Revenues fromet and transmission conditions es are related to'other utilities were less preval. million in resuhed in Customers" greater sales to the Company'995 than in 1994 becaus ent in 1 discussion on page 23.) Increased cu ts electric utility customers. (See "

other utilities. Future levels of short-term e y. Sales conditions of the Company's proposed sale ofits ow sales to other utilities will be affect d bs omer sale t'he outcome of the Company's FERC i e o sell to nership interest in the Ft. Martin Pow it. Martin" and *lransmission Acc e

y the resolution f lings requesting titm transmission i base rates) fuel and other energyCencrally, the Company is p ess" discussions on pages 31 and 36 er Station and by access. (See " Sale of costs from its customers through an Eo recover (to Adjustment Clause ECR credit to the Compa(ny's c)u, stomers for profi subject to the PilC review. This reven ounts are not included

. the Company's customers for profits from short nergy Cost Rate the PtIC, themillion in 1994 and ts from short-term sales to othue adjustment also includes a 1995, $ 16.6 the Company' Company proposes a$ 12.1 million in 1993. Included in a p s electric utility customers for the lostfive-year annual $5 million credit t

sales caused by the sale ofits ownershi i on in on currently before Rate Adiustment Clause (ECR)"and "S l profits from any reduced short-term poo the ECR p nterest in the Lt. Martin Power Statio respectively.)

a e of1t. Martin" discussions on pages 28n. (See " Energy Cost wer and 31, m,w

1 1995 and 1994 customer revenues, respectively. Total kilowatt-hour (KWil) sales to customers in 1995 increased 2.5 percent when compared to KWil sales to customers in 1994. In response to j

extreme 1995 summer and winter temperatures, residential and commercial KWil sales increased 4.9 percent and 3.0 percent, respectively. Industrial sales volume in 1995 declined when compared to the prior year because of temporary production facility outages experienced by some of the Compaay's large industrial customers. The severe weather conditions in 1995 also resulted in higher residential KWil sales volume when compared to 1993.

Cornponents of Change in Operating Revenues from the Prior Year 1995 1994 (Amounts in Millions of Dollars)

Revenues from Sales of Liectricity:

Net customer revenues

$ 7.8

$ 6.2 litilities (2,3) 7.6 Revenues from total sales of electricity 5.5 13.8 Other operating revenues (9.2) 26.9 Total Operating Revenues

$(3.7) 540.7 Customer revenues fluctuate as a result of changes in sales volume and changes in fuel and other energy costs.

Net custorner revenues in 1995 when compared to 1994 increased by $7.8 million, or 0.7 percent.

The change is the net result of higher sales, partially offset by lower energy costs per megawatt hour (MWil), the benefits of which are passed through to the customers in the form oflower rates. The significantly hotter summer temperatures in 1995 resulted in increased sales of electricity to residential customers in particular. Revenues attributable to electric sales to residential customers in 1995 exceeded 1994 residential revenues by $13.2 million, or 3.3 percent. Net customer revenues also increased $6.2 million, or 0.6 percent, in 1994 when compared to 1993. The 1994 variation represented higher sales to commercial and industrial customers, driven in part by an expanded customer base.

Net customer revenues for 1994 and 1993 include phase-in,leferrals that represented the deferral and subsequent recovery of revenues resulting from a $232 million rate increase granted in early 1988. 'lhe PllC required the Company to phase this increase in during a six-year period, which ended in April 1994. During this phase-in period, the rate increase was recognized in operating revenues. (See "1987 Rate Case" discussion in Note F to the consolidated financial statements on page 48.)

Sales to Other Utilities Short term sales to other utilities are regulated by the FERC and are made at market rates.

Short-term power sales to other utilities in 1995,1994 and 1993 were 2,974,797 KWil,3,212,110 KWII and 2,820,920 IGVil, respectively. Fluctuations in electricity sales to other utilities are related to the Company's customer energy requirements, the energy market and transmission conditions and the availability of the Company's generating stations. Revenues from sales to other utilities were $56.0 million, $38.3 million and $50.7 million in 1995,1994 and 1993, respectively. Sales to other utilities were less prevalent in 1995 than in 1994 because severe weather conditions resulted in greater sales to the Company's electric utility customers. (See " Sales of Electricity to Customers" discussion on page 23.) Increased customer sales reduce power available to sell to other utilities. Future levels of short-term sales to other utilities will be affected by the resolution of the Company's proposed sale ofits ownership interest in the I t. Martin Power Station and by the outcome of the Company's 1 ERC filings requesting firm transmission access. (See " Sale of I t. Martin" and "Iransmission Access" discussions on pages 31 and 36, respectively.)

Generally, the Company is permitted to recover (to the extent that such amounts are not included in base rates) fuel and other energy costs from its customers through an Energy Cost Rate Adjustment Clause (ECR), subject to the PilC review. This revenue adjustment also includes a credit to the Company's customers for profits from short-term sales to other utilities. The credit to the Company's customers for profits from short tenn sales to other utilities was $15.5 million in 1995, $ 16.6 million in 1994 and $12.1 million in 1993. Included in a petition currently before the PilC, the Company proposes a five-year annual $5 million credit to the ECR to compensate the Company's electric utility customers for the lost profits from any reduced short-term power sales caused by the sale ofits ownership interest in the Ft. Martin Power Station. (See " Energy Cost Rate Adjustment Clause (ECR)" and " Sale of Ft. Martin" discussions on pages 28 and ',1, respectively.)

tw m Annut twon

Other Operating Revenues The Company's non-KWil revenues comprise other operating revenues in the Company's statement of consolidated income. Other operating revenues decreased $9.2 million in 1995, when compared to the prior year. 'lhis decrease largely reflects the restructuring of Chester Engineers (Chester) (formerly, Chester Environmental, Inc.), a wholly owned subsidiary of DE. Conversely, other operating revenues expanded in 1994 and 1993 when compared to each of the prior years primarily due to growth in environmental service revenues.This growth included the original acquisition of a 70 percent controlling interest in Chester in August 1993. Chever's revenues have been reflected in other operating revenues since that date.

Operating Expenses 7btal operating expenses decreased $9.3 million for 1995 when compared to 1994. Total operating expenses increased from 1993 to 1994 by $36.9 million. Fuel and purchased power expense fluctua-tions generally result from changes in the cost of fuel, the mix between coal and nuclear generation, the total KWils sold and generating station availability. Because of the ECR, changes in fuel and purchased power costs normally do not impact earnings.

Components of Change in Fuel and Purrhased Power Expense from the Prior Year 1995 1994 (Amounts in Millions of Dollars)

Average unit cost of fuel

$ (2.3)

$(3.4)

Generation mix (5.2)

(5.5)

Generation volume (6.4) 7.6 Purchased power 1.7 7.7 Total Energy hpense

$(12.2)

$ 6.4 The average unit cost of fuel is based on fuel costs divided by generation. The average unit cost of fuel decreased in 1995 when compared to 1994 and 1993 largely because oflower nuclear fuel costs.

Generation mix impacts fuel expense as the Company's nuclear fuel cost per IGVII is less than its fossil fuel cost per KWil. During 1993, compared to 1994 and 1995, the Company had more nuclear power station outages, resulting in less nuclear generation and more fossil fuel and purchased power expense.

Cencration vohime during 1995 decreased 2.7 percent when compared to 1994 due to more generating station outages. Overall nmlear generation increased in 1995 due to strong performances at the nuclear units. (See " Beaver W%cy Power Station (BVPS)" and " Perry Unit 1" discussions on page 30.) Major outages at coal stations, including an extended forced outage at the I:t. Martin Power Station, resulted in reduced coal generation which more than offset the increased nuclear generation. During 1994, generation increased 3.4 percent from 1993 due to fewer generating l

station outages.

Purchased power volume increased in 1995 when compared to 1994 primarily due to generating station outages during periods of extreme weather conditions. Purchased power volume increased in 1994 when compared to 1993 primarily due to the performance of Perry Unit 1.

In 1995, other operating expense decreased $25.3 million when compared to 1994. 'lhis 1995 reduction reflects, in large part, the restructuring of Chester. In addition, $7.7 million, or 30 per-cent of this favorable variance, constitutes cost savings attributable to the Company's electric utili-ty operations. Other operating expense increased slightly in 1994 compared to 1993 despite a

$25.0 million increase in operating expenses at Chester, the result of a full year of ownership in 1994. This increase was offset by similar electric utility cost reductions and by the 1993 recording of a $15.2 million long term power sale write-off and a $12.8 million property subleasing charge.

Maintenance expense fluctuations primarily result from the timing of scheduled generating station outages, the timing of scheduled transmission and distribution line maintenance and the effect of storms on overhead lines and transformers. Incremental maintenance expense incurred for scheduled refueling outages at the Company's nuclear units is deferred for amortization over the period between refueling outages (generally 18 months). Influenced by extreme weather conditions and the timing of outages at both fossii end nuclear stations, maintenance costs incurred by the Company in 1995 exceeded the prior yem by $2.0 million. During 1994 and 1993, amortization of deferred nuclear refueling outage expense increased, reflecting the higher costs of refueling outages. Offsetting this increase in 1994 was a decrease in transmission and distribution line maintenance expense.

nur. ms Annual wivn

-)

C.

The Company changed, as of January 1,1993, its method of accounting n>r maintenance costs i

during scheduled major fossil generating station outages. Linder the new accounting policy, the j

Company accrues, over the periods between outages, anticipated expenses for scheduled major fossil generating station outages.

~

The cumulative pffect (approximately $5.4 million, net of income taxes of approximately

$3.9 million) of the change on prior years was included in net income in 1993. The effect of the change in 1993 was to reduce income, before the cumulative effect ofihanges in accounting principles, by approximately $2.4 million, or 5.03 per share, and to reduce net income, after the cumulative effect of changes in accounting principles, by approxinutely $7.8 million, or $.10 per share, based on post-split shares.

Depreciation and amortization expense increased $25.7 million in 1995, primarily due to the change in the Company's electric utility operations composite depreciation rate from 3.0 percent to 3.5 pacent effective January 1,1995. Depreciation and amortization expense increased $13.9 million in 1994 when compared to the prior year due to increases in depreciable property and nuclear decommissioning expense.

As part of the Company's plan to optimize generation capacity, a petition pending before the PUC p(oposes an annual increase in depreciation and amortization expense related to the Company's nuclear power investment of $25 million for three years. Consistent with the 1995 increase in the composite depreciation rate, the Company is not seeking a rate increase to recover these additional costs. (See " Sale of It. Alartin' discussion on page 31.)

Irxes other than iricome taxes were lower in 1993 compared to 1995 and 1994, primarily as a result of a favorable resolution of certain property tax assessments. In 1993, the Company secorded, on the basis of these revised assessments, the expected refunds for overpayments in prior years.

Other income Other income increased $9.4 million in 1995 when compared to 1994 primarily due to additional investing activity, including the merger of International Power Alachines Corporation (IPAt) and Exide flectronics Group, Inc. (Exide). (See " Investing" discussion below.) Other income increased

$15.0 million in 1994 when compared to 1993 as a result of additional leasing activities in 1994 and a full year's income from investments made during 1993.

Income Rixes Income taxes were lower in 1993, when compared to 1995 and 1994, because of a favorable y

settlement with the Internal Revenue Service (related to the Company's 1988 federal income tax return and the Company's 1989 consolidated federal ineme tax return). The remaining Ductuations result from changes in taxable income. During 1994 the statutory Pennsylvania income tax rate was reduced from 12.25 percent to 9.99 percent. This resulted in a net decrease of $80.5 million in deferred tax liabilities and a corresponding reduction in the regulatory receivable.

1 Capital Expenditures The Company spent approximately $78.7 million in 1995, $94.3 million in 1994 and $100.6 i

million in 1993 for electric utility construction. These amounts were expended to improve and/or expand electric utility production, transmission and distribution systems. The Company's capital expenditures for electric utility construction focus on extending service to new customers, providing for the replacement of utility property and modifying facilities consistent with the most current environmental and safety regulations. The Company estimates that it will spend, excluding allowance for funds used during construction (AlC) and nuclear fuel, approximately $90 million,

$90 million and $100 million for electric utility construction during 1996,1997 and 1998, respectively. Approximately $5 million of capital expenditures for reliability enhancements to the simple cycle units located at llrunot Island (111) contemplated in the Company's petition before the PilC are excluded from these estimates. (See " Sale of ft. Atartin" discussion on page 31.) The Company expects that funds generated from operations will continue to be sufficient to finance a large part of its capital needs. The Company's market-driven capital expenditures were for real estate investments at DE.These real estate investments were $16.7 million and $26.8 million in 1995 and 1994, respectively.

Investing The Company's long-tenn investments focus in five principal areas: affordable housing, natural gas reserves limited partnerships, lease and leasehold investments, environmental services, and energy solution investments. Investing activities increased in 1995, after staying relatively constant in 1994 when compared to 1993.The Company invested $41.4 million and $22.1 million in affordable housing funds and $38.7 million and $44.6 million in other leases and investments in 1995 and 1994, respectively. In addition, the Company invested $72.2 million in natural gas reserves limited partnerships and $35.4 million in leveraged leases in 1995.

e

On February 8,1995, IPM was acquired by l>ide. As a result of this merger, the Company acquired 5'26,250 shares of ISide common stock, a 6.8 percent interest. Since the merger, the Company i

has acquired an additional 532,500 shares of Exide for $9.8 million. At December 31,1995, the Cmnpany held an 11.6 percent interest in Exide. Other leng-term inivstmems at December 31,1995,

ncluded a $ 15.6 million investment in Exide connnon stock. Other long-term incestments at December 31,1994, included a $2.8 million inve3tment in IPM convertible preferred stock.

On August 31,1995, Chester repurchased 30 percent ofits own outstanding common stock for

$6 million. As a result of this purchase, DE owns 100 percent of the outstanding common stock of Chester. I ffective iebruary 1,1996, Chester fonnally changed its name to Chester Engineers.

Ligmdity and Financing Capital Resources

'lhe Company expects to meet its current obligations and debt maturities through the year 2000 with funds generated from operations and through new fmancings. At December 31,1995, the Company was in compliance with all ofits debt covenants.

The Cornpany's 1947 first mortgage bond indenture was retired in the third quarter of 1995 following the maturity of the last bond series issued under the indenture. All of the Company's l'irst Collateral Trust llonds have been issued under a new mortgage indenture that was estab-lished in April 1992 (the 1992 Indenture). All Iirst Collateral Trust lionds became first mortgage bonds when the 1947 mortgage indenture was retired. The 1992 Indenture includes more flexible provisions and eliminates conventions such as manda:ory sinking funds and formula-derived maintenance and replacement clauses.

On September 1,1995, the Company redeemed all ofits outstanding shares of $7.20 Preferred Stock for $29.9 million. On August 29,1995, the Company repurchased $7 million ofits 8%%

first Collateral Trust Ilonds maturing in 2024.

In the fourth quarter of 1995, the Company placed $65 million of five-year notes maturing in 2000 bearing an average annual lixed interest rate of 6.49 percent. Interest is payable semi-annually.

In May 1996, $50.0 million of First Collateral Trust Bonds will mature. The Company expects to retire these bonds with internally generated funds or to refinance the bonds.

Short-Term Borroteings At December 31,1995, the Company had two extendible revolving credit agreements, including a $100 million facility expiring in August 1996 and a $150 million facility expiring in October 1996.

Interest rates cn these credit agreements vary. Commitment fees are based on the unborrowed amount of the commitments. Iloth credit facilities contain two-year repayment periods for any amounts outstanding at the expiration of the revolving credit periods. At December 31,1995 and 1994, short-tenn borrowings were $35 million and $60 million, respectively. The weighted average interest rates applied to such borrowings were 6.5 percent and 6.7 percent at December 31,1995 and 1994, respectively.

Interest and Other Charges The Company achieved a $2.4 million reduction in interest and other charges in 1995, primarily due to the retirement oflong-term debt and preferred stock of subsidiaries. The Company's interest on long-term debt and dividends on preferred and preference stock declined to $101.3 million in 1995 from $107.0 million in 1994 and $117.4 million in 1993. ;nterest expense in 1996 will be influenced by fluctuations in short-term rates and any new financing.

Sale of Accounts Receicable The Company and an unaffiliated corporation have an agreement that entitles the Company to sell, and the corporation to purchase, on an ongoing basis, up to $50 million of accounts receiv-able. At December 31,1995, the Company had sold $7 million of receivables to the unaffiliated corporation. The Company had no receivables sold at December 31,1994. 'Ihe accounts receivable sales agreement, which expires in June 1996, is one of many sources of funds available to the Company. The Company may attempt to extend the agreement, or to replace the facility with a similar one or to eliminate it upon expiration.

Nuclear Fuel Leasing The Company fmances its acquisitions of nuclear fuel through a leasing arrangement under which it may fmance up to $75 million of nuclear fuel. As of December 31,1995, the amount of nuclear fuel financed by the Company under this arrangement totaled approximately $40.8 million.

The Company plans to continue leasing nuclear fuel to fulfill its requirements at least through September 1998, the remaining tenn of the leasing arrangement.

DQL 1995 Annual Rmon 1

i

(

Stock Split and Dividends On April 19,1995, the Company's board of di shareholders of record on May 1,1995 One ddi i rectors declared a three-for-two stock split fcr two shares outstanding as of the record d a

t onal share of common stock was iss share on the post-split shares on each ofJul ate. The Company paid a quarterly dividend f $ued the fourth quarter of 1995 on the p y 1 and October 1. The quarterly dividend d payable beginning January 1,1996.

o

.30 per ost split shares was increased from $ 30 to $ 32 continuously paid dividends on common stThe following in eclared in per share to reDect the stock split. The Comp dividend for each of the last eight years to th i

ock since 1953. The Company has increased it

{

on the post-split shares. The Company's stock any has e current annualized dividend rate of $128 increase in book value since December 31 1994value s annual price was $30.75 at the end of 1995. The book per share aserage compounded rate of 5.5 percent over th

. The annual di represents a 5.2 percent c

maintained a lower payout ratio than the electric utilie past Ove years,vid i

'that funds generated from eperations ty industry in general. The Companyev opportunitie, ' y the economic activity withineed for and th will continue to be suf0cient to pay dividends 'th expects n the Company's utility service territo

. competitive and environmental legislation and by regul utility industry generally.

ment declared by the board of directorsDividends may be paid on the C atory matters experienced by the electric may be restricted by Duquesne's o. Ilowever, payments of dividend t

to Duquesne's Restated Articles ofincorporation N d bligations to holders of preferred and pref sne's common n as l,

Duquesne's common stock if Duquesne has not paid dividends oi sinking fund oblig

. o preferred or preference stock. Further, the aggregate 4

p yments or distributions may not exceed certain p on amount of Duquesne's common stock dividend common sh ns on its Duquesne'areholders' equity to total capitalization is less than sp ercentages of net income if the ratio of total common dividends, the Company may not be abls common stock j

ercentages. As all of No part of the retained earnings of the Com e to pay dividends to its common sha

'}

Changes in the Number of Shares of DQE C pany was restricted at December 31,1995 e

ers.

i

.k ommon Stock Outstanding l

1995 Outstanding as of January 1 1994 1993 l

' Reissuance from treasury stock (Amounts in Thousands ofSha es)

{

78,459

Repurchase of common stock 79,518 79,425

)

83 j

- f Outstanding as of December 31 11 6 93 i

(986)

(1,175) 77,556 lj

. Electric rates charged by the Company to its 79,518 78,459 1

the FERC. These rates are designed tocharged to the Borough

>d customers aie regulated by the PUC Electric 1

recover the Company's electric utility operatinor investment in electric utility assets and to rates j

no immediate plans to Gle a base rate case in the Cutilit e

provide a return on those investments Sales tog expenses j

the; sale ofits ownership interest in the ft M ompany's petition currently before the P other j

-its base rates for a Ove year period (S artin Power Station, the Company proposes to f k

' Ehergy Cost Rate Adjustment Clause (ECR) ee " Sale ofIt. Martin" discussion on page 31 )

or reeze base rates) nuclear fuel, fossil fuel and purchas dThrough e extent that such amounts are not included passes to its customers the pronts from short term e

power expenses and, also through the LCR

energy costs). Nuclear fuel expense is recorded on the basis of th n

(DOE for future disposal and uhimate storagegenerated a

expens)e includes the costs of coal, natural gas and fuel sed by the United States Department of Ene quant and disposition ofspent nuclear fuel Fossil f l

. On the Company's statement ergy oil used in the generation of electricity.

. component ofoperating revenues.of consolidated income, these LC ue expenses for recovery, or refunding, in subsequFor ECR purposes, the Company defe ent years. The deferrals renect the differencee and other ener

,y-

Stock Split and Dieidends On April 19,1995, the Company's board of directors declared a three-for two stock split for shareholders of record on May 1,1995. One additional share of common stock was issued for every two shares outstanding as of the record date. The Company paid a quarterly dividend of 5.30 per share on the post-split shares on each of July I and October 1.The quarterly dividend declared in the fourth quarter of 1995 on the post-split shares was increased from $.30 to $.32 per share payable beginning January 1,1996 The following information has been restated to reflect the stock split.The Company has continuously paid dividends on cominon stock since 1953. The Company has increased its annual dividend for each of the last eight years to the current annualized dividend rate of $1.28 per share on the post-split shares. The Company's stock price was $30.75 at the end of 1995.The book value per share of common stock was $17.13 at December 31,1993, which represents a 5.2 percent increase in book value since December 31,1994. The annual dividends paid have increased by an average compounded rate of 5.5 percent over the past five vears, even though the Company has maintained a lower payout ratio than the electric utility industry in general. The Company expects that funds generated from operations will continue to be sufficient to pay dividends. The Company's need for and the availability of funds will be influenced, among other things, by new investmsnt opportunities, by the economic activity within the Company's utility service territory, by competitive and environmental legislation and by regulatory matters experienced by the electric utility industry generally.

Dividends may be paid on the Company's common stock to the extent permitted by law and as declared by the board of directors. liowever, payments of dividends on Duquesne's common stock may be restricted by Duquesne's obligations to holders of preferred and preference stock pursuant to Duquesne's Restated Articles ofincorporation. No dividends or distributions may be made on Duquesne's common stock if Duquesne has not paid dividends or sinking fund obligations on its preferred or preference stock. Further, the aggregate amount of Duquesne's common stock dividend payments or distributions may not exceed certain percentages of net income if the ratio of total common shareholders' equity to total capitalization is less than specitied percentages. As all of Duquesne's common stock is owned by the Company, to the extent that Duquesne cannot pay common dividends, the Company may not be able to pay dividends to its common shareholders.

No part of the retained earnings of the Company was restricted at December 31,1995.

Changes in the Number of Shares of DQE Common Stock Outstanding 1995 1994 1993 (Amounts in Thousands ofShares)

Outstanding as of January 1 78,459 79,518 79,425 Reissuance from treasury stock 83 11 6 93 Repurchase of common stock (986)

(1,175)

Outstanding as of December 31 77,556 78,459 79,518 Rate Matters Electric rates charged by the Company to its customers are regulated by the PilC. Electric rates charged to the Borough of Pitcairn and charged for sales to other electric utilities are regulated by the i ERC. These rates are designed to recover the Company's electric utility operating expenses, investment in electric utility assets, and to provide a return on those investments. Sales to other utilities are made at market rates. At this time, the Company has no pending base rate case and has no immediate plans to file a base rate case, in the Company's petition currently before the PLIC for the sale ofits ownership interest in the Ft. Martin Power Station, the Company proposes to freeze its base rates for a five-year period. (See " Sale of Ft. Martin" discussion on pay 31.)

Energy Cost Rate Adjustment Clause (ECR)

Through the ECR, the Company recovers (to the extent that such amounts are not included in base rates) nuclear fuel, fossil fuel and purchased power expenses and, also through the ECR, passes to its customers the profits from short-term power sales to other utilities (collectively, ECR energy costs). Nuclear fuel expense is recorded on the basis of the quantity of electric energy generated and includes such costs as he fee imposed by the linited States Department of Energy (DOE) for future disposal and ultiman storage and disposition of spent nuclear fuel. Fossil fuel expense includes the costs of coal, natural gas and fuel oil used in the generation of electricity.

On the Company's statement of consolidated income, these ECR revenues are included as a component of operating retynnes. For ECR purposes, the Company defers fuel and other energy expenses for recovery, or refunding, in subsequent years. The deferrals reflect the difference L)QC 1495 Annual RelvM t

l

between the amount that the Company is currently collecting from customers and its actual ECR energy costs.'lhe PllC annually reviews the Company's I:CR energy costs for the Oscal year April through March, compares them to previously projected i CR energy costs and adjusts the ECR for over or under recoveries and for two PUC-established coal cost standards. (See " Deferred Coa Costs" and "Warwick hiine Costs" discussions in Note F to the consolidated Anancial statement on page 49.)

Over or under-recoveries from customers are recorded on the consolidated balance sheet as payable to, or receivable from, customers. At December 31,1995, $5.8 million was payable to customers and shown as other current liabilities. At December 31,1994, $5.9 million was receivable from customers and shown as other current a3 sets.

Deferred Rate Synchronization Costs in 1987, the PUC approved the Company's petition to defer initial operating and other coste of Peny Unit 1 and IW Unit 2.The Company deferred the costs incurred from November 17,1987, when the units went into commercial opetation, until March 25,1988, when a rate order was issued. In its order, the PUC postponed ruling on whether these costs would be recoverable from the Company's electric utility customers. At December 31,1995, these costs totaled $51.1 million.

net of deferred fuel savings related to the two units. 'lhe Company is not earning a return on the deferred costs. The Company believes that these costs are recoverable. In 1990 and 1995, the PUC permitted other Pennsylvania electric utilities rate recovery of such costs.

Property, Plant and int estment in Pl%E and Accumulated Depreciation Equipment (Pl%E)

TI,e Company's total investment in property, plant and equipment and ne related accumulated depreciation balances for major classes of property at December 31,1995 and 1994, are as follows:

PP&E and Related Accumulated Depreciation at December 31 (Amounts in husanils of Dollars) 1995 1994 Accumulated Net Accumulated Net Investment Denreciation investment Investment Denreciation Investnient Electric Production

$2,501.974 5 885,389 $ 1,616,585 12,474,032 5 796,338 $1,677,694 Electric Transmission 296,953 110,242 186,711 295,512

05,217 190,295 Electric Distribution 1,143,111 347,399 795,712 1,119,247 323,922 795,325 Electric General 314,8 4 141,133 173,711 305,335 123,766 181,569 Property licld for Future lisc 216,633 94,283 122,350 216,206 94,283 121,923 Property lleld Linder Capital leases 133,381 74,874 58,507 162,732 91,376 71,356 Other 139,217 32,557 106,660 136.460 35,081 101,379 Total

$4,746,113 $1,685,877 $3,060,236 54,709,524 $ 1,569,983 53,139,541 Joint interests in Generating Units The Company has various contracts with The Potomac Edison Company, Monongahela Power Company, Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric illuminating Company (CEI) and The Toledo Edison Company that include provisions for coordinated maintenance responsibilities, limited and qualified mutual back-up in the event of outages and certain capacity and energy transactions.

linder the agreements governing the operation of these jointly owned generating units, the day to-day operating authority is assigned to a specinc company. CEI has such authority for Perry Unit 1 and Eastlake linit 5; Ohio Edison Company has authority for Sammis Unit 7; Pennsylvania Power Company has authority for Bruce Mans 6 eld linits 1,2 and 3; and Monongahela power Company operates Ft. Martin Unit 1.

I in September 1995, the Company served a demand for arbitration on CEI seeking, among other things, a partition of Eastlake Unit 5 through a sale of the Company 's interest therein and a i

i termination ofits operating agreement with CEI for that unit. The demand alleges, among other things, the improper allocation by CEl of fuel and related costs between itself and the Company; the mismanagement by CEI of the closing of the Saginaw Mine, which historically supplied coal to the unit; and the concealment by CEI ofinformation. In October 1995, CEI filed its own arbitration demand and asserted counterclaims seeking the Company's alleged share of costs relating to the unit. A panel of arbitrators has been appointed.

DQC 1995 Annual Report o

the Company has a joint interest in the following nuclear power stations with the following companies:

Ileaver Vallev Perry Unit I linu Umt 1 l

Duquesne

• 47.50%

• 13.74% (c) 13.74 %

Ohio Edison Company 35.00 %

41.88 %

30.00%

Pennsylvania Power Company (a) 17.50 %

CEI (b) 5.24 %

Toledo Edison Company (b) 24.47 %

• 31.11 %

19.91 %

19.91 %

• Denotes Operator (a) Subsidiary of Ohio Edison Company (b) Subsidiary of Centerior Energy Corporation (c) in 1987, the Company sold and leased back its 13.74 percent interest in llV linit 2; the sale was exdusive of transmission and common facilities.1he total sales price of $537.9 million was the appraised value of the Company's interest in the property.1he Company subsequently leased back its imerest in the unit for a term of 29.5 years.1he lease provides for semiannual payments and is accounted for as an operating lease.'1he Company is responsible under the terms of the lease for all costs ofits imerest in the unit.

(Sce " Property, Plant and Equipment," Note l', to the consolidated financial statements on page 47.)

The Company has a joint interest in the following fossil plants with the following companies:

Sammis Bruce Mansfield Eastlake Ft. Martin ifnit 7 linit 1 Umt 2 Unitl LiniL5 linh1 Duquesne 31.20 %

29.30 %

8.00 %

13.74 %

31.20 %

50.00 %

Ohio I:dison Company

• 48.00 %

60.00 %

39.30 %

35.60 %

Pennsylvania Power Company (a) 20.80%

• 4.20%

• 6.80%

• 6.28%

CEI(b) 6.50 %

28.60 %

24.47 %

• 68.80 %

l Toledo Edison Company (b) 17.30 %

19.91 %

Potomac Edison Company (c) 25.00 %

Monongahela Power Company (c)

• 25.00 %

' Denotes Operator I

(a) Subsidiary of Ohio Edison Company (b) Subsidiary of Centerior Energy Corporation (c) Subsidiary of, and currently known as, Allegheny Power System Beaver Valley Power Station (BVPS) l BVPS continues to demonstrate excellence in operating performance. During 1995, BV Unit I and BV Unit 2 both underwent scheduled refueling outages, which were completed in the shortest duration in both the units' history. Further exemplifying IIVPS' accomplishments, both refueling outages were completed under budgeted cost. In spite of these scheduled refueling outages, the combined capacity factor for the units averaged 80 percent during 1995. Capacity factor is a key l

production measure and indicates how well the plant operated based on its design capacity. It is the ratio of the power actually generated by a facility to the facility's rated capacity during a given period of time. Also, IIV Unit 2 achieved en unplanned capability loss factor of 0.7 percent, which is significantly better than the industry standard of 4.0 percent.This factor measures how much power production was lost due to unplanned outages.

In addition to optimizing generation and cost efficiency, BVPS management continues to emphasize safety in operations. During 1995, BVPS employees achieved the milestone of more

(

than three million hours worked without incurring a single lost time accident.

Perry Unit 1 The Company has a 13.74 percent ownership interest in Perry Unit 1, a nuclear generating unit l

located in Ohio and operated by CEl.

Perry Unit 1 experienced improved performance during 1995, a year without a refueling outage, and achieved a capacity factor of 87.5 percent.

CEI has submitted to the NRC an action plan, called the Perry Course of Action (PCA). CEI man-agement continues to represent to the Company that the PCA is on schedule and will be an effective program to ensure that Perry Unit 1 is in conformance with applicable industry standards. The PCA is scheduled to he completed by the end of Perry Unit l's fifth refueling outage, presently scheduled for the spring of 1996. The Company cannot predict the effectiveness of the PCA. The Company will continue to monitor closely this situation.

l DQE 1995 Annual Rmon l

l

Sale of Ft. Martin On November 29,1995, the Company and AYP Capital, Inc., an unregulated subsidiary of the Allegheny Power System (APS), entered into an agreement for the sale of the Company's 50 percent ownership interest in linit 1 of the l't. Martin Power Station, for the sum of $169 million. 'lhe agreement is subject to all necessary regulatory approvals. On December 20,1995, the Company Gled a Petition for Declaratory Order with the PilC requesting approval for the sale in conjunction with a six point plan to be Gnanced in part by the proceeds of the It. Martin transaction.

Linder the plan, the Company offers to freeze its base rates for a period of Ove years. If approved, the rate freeze is expected to produce a 14 percent reduction in the real price of elec.

i tricity based on an average annual in0ation rate of 2.7 percent. In addition, the Company propos-es to record a one time reduction of approximately $130 million in the value of the Company's nuclear plant investment.'lhe Company also proposes to use the proceeds from the sale to finance reliability enhancements to the simple cycle units located at lil, to retire debt and to reduce equity '1he BI simple cycle units will provide 168 megawatts (MW) of peaking capacity and permit the Company to achieve greater operational Ocxibility in meeting peak system demands, The plan also proposes an annual increase of $25 million for three years in depreciation and amor-ti:ation expense to the Company's nuclear investment, as well as additional annual contributions to its nuclear plant decommissioning funds of $5 million for Ove years, without any increase in cxisting electric rates. l.astly, the Company proposes a Ove-year annual $5 million credit to the i

ECR to compensate the Company's electric utility customers for the lost pronts from any reduced short-term power sales foregone by the sale ofits ownership interest in the 17. Martin Power t

Station. (See " Energy Cost Rate Adjustment Clause (ECR)" discussion on page 28.)

The PilC is currently reviewing the Company's petition.

Property Heldfor Future Use in 1986, the PilC approved the Company's request to remove the 300 MW Phillips Power i

Station (Phillips) and 240 MW of BI from service and from rate base.The Company expects to j

recover its net investment in these plants through future electricity sales. 'Ihc Company believes its investment in these plants will be necessary in order to meet future business needs outlined in the Company's plans for optimizing generation resources. (Sec "Ceneration Resource Optimization" discussion on page 37.) If business opportunities do not develop as expected, the Company will consider the sale of these assets. In the event that market demand, transmission access or rate recovery do not support the utilization or sale of the plants, the Company may have i

to write off part or all of their costs. At December 31,1995, the Company's net investment in Phillips and BI held for future use was $77.4 million and $44.9 million, respectively.

Employces At December 31,1995, DQE and its subsidiaries had 3,839 employees, including 1,178 cmployces at the Company-operated IWPS.The International Brotherhood of Electrical Workers (IBEW) union represents 2,086 of the Company's employees.The current collective bargaining agreement with the IBEW expires on September 30,1998.

Electric Utility Approximately 69 percent of the electric energy generated by the Company's system during 1995 Operations was produced by its coal fired generating capacity and approximately 31 percent was produced by

)

its nuclear generating capacity. The Company normally experiences its peak loads in the summer.

l The 1995 customer system peak of 2,666 MW, the highest system peak in the Company's history, i

occurred on August 16,1995.

The Company's fossil plants operated at 76 percent availability in 1995 and 85 percent availability 1

in 1994.The Company's nuclear plants operated at 83 percent availability in 1995 and 75 percent in 1994.The timing and duration of scheduled maintenance and refueling outages, as well as the i

duration of forced outages, affect the availability of power stations.

The Company determines the need for and timing of generation resource additions based on maintaining an adequate level of resources in reserve above the projected weather normalized annual p,.ak demand. In adCtion, capacity resources throughout the region can supplement the Company's in-service generation resources, if required, through the Company's substantial transmis-sion import capability, currently in excess of 4,000 MW.The North American Electric Reliability Council, of which the Company is a member, uses " capacity margin" to report generating capability when compared to customer demand. Capacity margin is one of the criteria used by the Company in assessing the need for future resources. 'lhe Company's capacity margin in 1995 was 11.7 percent.

The capacity portfolio reflected in the Company's capacity margin includes in-service generating capacity, plus 21 MW capacity provided by non-utility generation contracts, plus a portion of the capacity from property held for future use available to meet customer needs during peaking or emergency conditions. The customer peak demand redected in the Company's capacity margin is l

based on the actual peak demand experienced during the extraordinarily hot 1995 summer weather conditions, less 97 MW of interruptible load resources available from the Company's interruptible customers, but not actually interrupted during the peak period.

DQL 1995 Amwal Repon

I

'the successful resolution of the Company's proposed sale of its ownership interest in i t. Martin will reduce in service capacity by 276 MW. The Company expects to replace ft. Martin capacity by (1) utilizing the 168 MW oil Gred combustion turbines at the ill combined cycle facility, which is property held for future use, and (2) acquiring seasonal peaking capacity from power marketplace resources, as required.1hese additional resources ensure that adequate capacity will be available to enable the Company to continue to maintain the expected level of power generation reliability.

Tessil Tuct lhe Company believes that sufficient coal for its coal-fired generating units will be available from various sources to satisfy its requirements for the foreseeable future. During 1995, approximately 2.6 million tons of coal were consumed at the Company's two wholly owned coal Gred stations, Cheswick Power Station (Cheswick) and Einma Power Station (Elrama).

The Company owns Warwick Mine, an underground mine located on the Monongahela River approximately 83 river miles from Pittsburgh. Warwick Mine has been excluded from rate base since 1981.1hc Company temporarily idled the mine in June 1988 due to excess coal inventories. In 1990, the Company restarted the mine and entered into an agrecir. nt under which an unaffiliated company will operate the mine until March 2000 and sell the coal produced. Production began in late 1990.'lhe mine produced 1.1 million tons of coal in 1995.1he Warwick Mine coal reserves include both high and low sulfur coal; the sulfur content averages in the mid range at 1.7 percent to 1.9 percent. More than 60 percent of the coal mined at Warwick Mine currently is used by the Company.1hc Company receives a royalty on any sales of Warwick coal in the open market.1hese royalties are credited to the Company's ECR.1he Warwick Mine currently supplies less than one-Ofth of the coal used in the production of electricity at the plants owned or jointly owned by the Company. 'lhe Company estimates that, at December 31,1995, its economically recoverable coal reserves at Warwick Mine were 9.0 million tons. Costs at Warwick Mine and the Company's investment in the mine are expected to be recovered through the cost of coal in the ECR. Recovery is subject to the system wide coal cost standard.1he Company also has an opportunity to carn a retum on its investment in the mine through the cost of coal during the period of the system-wide coal cost standard. At December 31,1995, the Company's net investment in the mine was $14.9 million.The current estimated liability, including Anal site reclamation, mine water treatment and certain labor liabilitics, for mine closing is $34.1 million, and the Company has recorded a liability on the consolidated balance sheet of approximately $15.9 million toward these costs. (See "Wanvick Mine Costs" discussion in Note F to the consolidated financial statements on page 49.)

During 1995,56 percent of the Company's coal supplies were provided by contracts including Warwick Mine, with the remainder satisfied through purchases on the spot market. The Company had four long term contracts in effect at December 31,1995, which, in combination with spot market purchases, are expected to furnish an adequate future coal supply.1he Company does not anticipate any difficulty in replacing or renewing these contracts as they expire from 1996 through 2002. At December 31,1995, the Company's wholly owned and jointly owned generating units had on hand an average coal supply of 45 days.

1he PllC has established two market price coal cost standards. One applies only to coal delivered at the Bruce Mans 0 eld Power Station (Bruce Mans 0 eld).1he other, the system-wide coal cost standard, applies to coal delivered to the remainder of the Company's system. Both standards am updated monthly to rc0cct prevailing market prices of similar coal.The PilC has directed the Company to defer recovery of the delivered cost of coal to the extent that such cost exceeds general y prevailing market prices for similar coal, as determined by the PUC. The PilC allows deferred amounts to be recovered from customers when the delivered costs of coal fall below such PUC-determined prevailing market prices.

The system wide coal cost standard extends through March 2000. The unrecovered cost cf Bruce Mans 0 eld coal was $8.4 million and the unrecovered cost of the remainder of the system. wide coal was $4.4 million at December 31,1995.The Company estimates that all deferred coal costs will be recovered.The Company's average cost per ton of coal consumed, including the cost of delivery, during the past three years at generating units which it operates or in which it has an ownership interest was $38.86,539.12 and $40.08 in 1995,1994 and 1993, respectively.The cost of coal, which falls within the market price limitations, is recovered from the Company's customers through the ECR. (See " Rate Matters" discussion on page 28, and also see " Deferred Coal Costs" discussion in Note F to the consolidated financial statements on page 49.)

Nuclear fuel The cycle of production and utilization of nuclear fuel consists of(1) mining and milling of uranium ore and processing the ore into uranium concentrates, (2) converting uranium concentrates to uranium hexafluoride, (3) enriching the uranium hexaGuoride, (4) fabricating fuel assemblics, (5) utilizing the nuclear fuel in the generating station reactor and (6) storing and -

disposing of spent fuel.

Adequate supplies of uranium and conversion services are under contract for the Company's requirements for its jointly owned / leased nuclear units through 1996. Enrichment services are supplied under a 1984 United States Enrichment Corporation Utility Services Contract entered into DQE 1995 Annual thport

t l

for a period of 30 years by the Company for joint interests in Perry linit 1, ilV linit I and BV Unit 2. Under the terms and conditions of this contract, the Company is committed to 100 percent ofits enrichment needs through 1998 and 70 percent in 1999; the Company has terminated, at zero cost, all ofits enrichment services requirements for Oscal years 2000 through 2003 and continues to review the need for further services on an annual basis. Fuel fabrication contracts are in place to l

supply reload requirements for the next two cycles for llV linit 1, the next two cycles for ilV linit 2 i

and the next sixteen cycles for Peny linit 1. lhe Company will be required to make arrangements l

for uranium supply and related services as existing commitments expire.

Each utility company is responsible for financing its proportionate share of the costs of nuclear fuel for each nuclear unit in which it has an ownership or leasehold interest. (See " Nuclear fuel

1. casing

• discussion on page 27.) The Company's nuclear fuel costs, which are amortized to re0cct fuel consumed, are charged to fuel expense and are recovered through rates.The Company estimates that, over the next three years, the amertization of nuclear fuel consumed will exceed the expenditures for new fuel by approximately $1.7 million.'lhe actual nuclear fuel costs to be Gnanced and amortized during the period 1996 through 1998 will be innuenced by such factors as changes in interest rates; lengths of the respective fuel cycles; reload cycle design; and changes

)

in nuclear material costs and services, the prices and availability of which are not known at this I

time. Such costs may also be innuenced by other events not presently foreseen.

The Company's nuclear fuel costs related to ilV linit 1, llV linit 2 and Perry linit I under the fuel lease arrangement are charged to fuel expense based on the quantity of energy generated.

Nuclear fuel costs for these units averaged.750,.903 and.918 cents per KWI1, inclusive of charges l

associated with spent fuel, in 1995,1994 and 1993, respectively.1he Company is recovering from l

its customers the costs associated with the ultimate disposal of spent fuel.

l Nuclear lhe PilC ruled that recovery of the decommissioning costs for BV linit I could begin in 1977, Decommissioning and that recovery for llV linit 2 and Perry linit I could begin in 1988.1hc Company expects to l

decommission BV linit 1, ilV linit 2 and Perry linit I no earlier than the expiration of each plant's operating license, 2016,2026 and 2025, respectively. BV linit I is expected to be placed in safe storage until the expiration of the llV linit 2 operating license, at which time the units may be decommissioned together.

liased on site-specinc studies Gnalized in 1992 for BV linit 2, and in 1994 for IIV linit I and i

Perry linit 1, the Company's share of the total estimated decommissioning costs, including removal and decontamination costs, currenity being used to determine the Company's cost of semce, are l

$122 million for BV Unit 1, $35 million for BV linit 2 and $67 million for Perry linit 1.

In conjunction with an August 18,1994, PilC Accounting Order, the Company has increased the annual contribution to its decommissioning trusts by approximately $2 million to bring the total annual funding to approximately $4 million per year. In collaboration with the Company and several other Pennsylvania utilities, the PllC Of0ce of Special Assistants is evaluating various decommis.

sioning issues, including funding methods.1he Company expects that any action relating to any forthcoming PUC report will result in further increases in annual contributions to its decommis-sioning trusts. Consistent with these anticipated future PllC actions, the Company's petition before the PilC for the sale ofits ownership interest in the Ft. Martin Power Station provides for additional annual contributions to its nuclear decommissioning funds of $5 million for Ove years without any increase in existing electric rates. (Sec " Sale of Ft. Martin" discussion on page 31.)

1hc Company records decommissioning costs under the category of depreciation and amortinnion expense and accrues a liability, equal to that amount, for nuclear decommissioning expense. Such l

nuclear decommissioning funds are deposited in external, segregated trust accounts. The funds arc invested in a portfolio of municipal bonds, certi0 cates of deposit and United States government securities having a weighted average duration of four to seven years. Trust fund earnings increase the fund balance and the recorded liability.The market value of the aggregate trust fund balances at IAccmber 31,1995, totaled approximately $28.5 million. On the Company's consolidated bal-anc c sect, the decommissioning trusts have been renected in other long-term investments, and the related liability has been recorded as other non cunent liabilitics.

i Nuclear insurance All of the companies with an interest in BV Unit 1, llV Unit 2 and Perry Unit 1 maintain nudcar property insurance, which provides coverage for property damage, decommissioning and decontamination liabilities.1he Company's share of this program provides for $1.2 billion of insurance coverage for its net investment of $407.8 million in the llVPS and $565.5 million in Perry linit 1, plus its interest in BV linit 2 with lease commitments of $405.2 million, at December 31,1995. The Icase commitments of $405.2 million represent the net present value of future lease paymems discounted at 10.94 percent, the return currently authorized the Company's electric utility operations by the PUC.The Company would be responsible for its shaie of any damages in excess of insurance coverage. In addition, if the property damage reserves of Nuclear Electric Insurance Limited (NEIL), an industry mutual insurance company, are inadequate to cover claims arising from an incident at any United States nuclear site covered by that insurer, the Company could be assessed retrospective premiums totaling a maximum of $10.9 million.

opt: 1995 Annual Rmm

i l

The Price Andenen Amendmems to the Atomic Energy Act of 1954 limit public liability from a single 1

l incident at a nuclear plant to $5.9 billion.'ihe Company has purchased $200 million of insurance, the maximum amount available, which providee.he Grst level of Onancial pmtection.

Additional protection of $8.3 hillion would be provided by an assessment of up to $75.5 million per incident on each nuclear unit in the linited States.*lhe Company's maximum total assessment,

$56.6 million, which is based on its ownership or leaschold interests in three nuclear generating i

i units, would he limited to a maximum of $7.5 million per incident per year. A further sercharge of 5 percent could be levied if the total amount of public claims exceeded the funds provided I

under the assessment program. Additionally, a state premium tax (typically 3 percent)(ould be charged on the assessment and surcharge. Finally, the linited States Congress could impese other revenue-raising measures on the nuclear industry if funds prove insuf0cient to pay claims.

'lhe Company carries extra expense insurance which would pay the incremental cost of any replacement power purchased (in addition to costs that would have been incurred had the units been operating) and other incidental expense after the occurrence of certain types of accidents at its nuclear units in a limited amount for a limited period of time.'lhe coverage provides for 100 percent of the estimated extra expense per week during the 52-week period starting 21 wecks after an accident and 80 percent of such estimate per week for the following 104 wecks, with no coverage thereafter. The amount and duration of actual cxtra expense could substantially exceed insurance coverage. NEIL also provides this insurance if NEIL's reserves are inadequate to cover claims at any tinited States nuclear site covered by that insurer, the Company could be assessed retrospective premiums totaling a maximum of $3.5 million.

Spent Nucic r The Nuclear Waste Policy Act of 1982 established a policy for handling and disposing of spent i

Fuel Disposal nuclear fuel and a policy requiring the established Gnal repository to accept spent fuel. Electric utility companies have entered into contracts with the DOE for the permanent disposal of spent nuclear fuel and high& vel radioactive waste in compliance with this legislation. 'the DOE has indicated that its repository under these contracts will not be available for acceptance of spent fuel before 2010 at the earliest. Existing on-site spent fuel storage capacitics at IW linit 1, BV linit l

l 2 and Perry linit 1 are expected to be sufficient until 2016,2010 and 2011, respectively.

Uranium Enrichment Nuclear reactor licensees in the tinited States are assessed annually for the decontamination Decontaminaden and and decommissioning of DOE enrichment facilities. Assessments are based on the amount of Decommissioning Fund uranium a utility had processed for enrichment prior to enactment of the National Energy Policy Act of1992 (NEpA) and are to be paid by such utilities over a 15-year period. At December 31,1995, the Company's liability for contributions is approximately $9.9 million (subject to an in0ation adjust-ment). Contributions, when made, are recovered from electric utility customers through the ECR.

Environmental Matters

%c Comprehensive Em ironmental Response, Compensation and Liability Act of 1980 and the Superfund Amendments and Reauthori:ation Act of 1986 (Superfund) established a variety of informational and environmental action programs.The linited States Environmental Protection Agency (EPA) has informed the Company ofits involvement or potential involvement in threc hazardous waste sites. The Company has reached agreements to make de minimis financial pay-ments related to two of the three sites in order to resolve any associated liability. If the Company is ultimately determined to be a responsible pany with respect to the remaining site, it could be liable for all or a ponion of the cleanup costs. However, other solvent, potentially responsible parties that may bear all or part of any liability are also involved. In addition, the Company believes that available defenses, along with other factors (including overall limited involvement and low estimated remediation costs) will limit any potential liability that the Company may have for cleanup costs. The Company believes that it is adequately reserved for all known liabilitics and costs and, accordingly, that this matter will not have a materially adverse effect on its Gnancial i

position or results of operations.

l in 1990, Congress approved amendments to the Clean Air Act, which established the Emission Allowance Trading System. Allowances are issued by the EPA to fossil.6ted stations with generating capability of more than 25 MW that were in existence as of the passage of the 1990 amendments Allowances are part of an innovative market based approach to sulfur dioxide (SO ) reduction.

Emission allowances can also be obtained through purchases on the open market or directly from i

other sources. Excess allowances may be banked for future use or sold on the open market to other parties to offset their emissions.

Although the Company has satisfied all of the Phase I requirements of the Clean Air Act, phase 11 requires signiGcant additional reductions of SO, and oxides of nitrogen (NO ) by the year 2000.

The Company currently has 662 MW of nuclear capacity,1,187 MW of coal capacity equipped with SO, emission reducing equipment (including 300 MW of propertr heldfhrfuture use at Phillips) as well as 757 MW of capacity that meets the 1995 standards of the Clean Air Act Amendments through the use of low sulfur coal. Through the year 2000, the Company is considering a combination of compliance methods that include fuel switching; increased use of, and improvements in, S0, emission reducing equipment; low NOs burner technology; and the purchase of emission j

aqc ms smal1<en

i allowances. Ilue gas conditioning and post combustion NO, reduction technologies may also bc employed if economically justified. In addition, the Company is examining and developing innov-ative emissions technologies designed to reduce costs. 'ihe Company continues to work with the operators ofits jointly owned stations to implement cost-effective compliance strategies to meet t

these requirements. NO, reductions under Title IV of the Clean Air Act were required at Cheswick, and the work to achieve the reductions was completed in 1993.'ihe ozone attainment provisions of Title I of the Clean Air Act Arnendments also required NO, reductions by mid 1995 at Cheswick, Elrama and llruce Mansfield. The Company achieved such reductions using innovative combustion i

system modifications and low NO, burner technology.The Company currently estimates that additional capital costs to comply with Clean Air Act requirements through the year 2000 will be approximately $20 million. 'lhis estimate is subject to the finalization of federal and state regulations and the PllC approval of the sale of the Company's interest in the Ft. Martin Power Station. (See " Sale of 12. Martin" discussion on page 31.)

t 3

'Ihe Company has developed, patented and installed low NO, burner technology for the Elrama boilers. These cost-effective NO, reduction systems installed on the I lrama roof fired boilers will likely be specified as the benchmark for the industry for this class of boilers in the EPA's pending Group !! rulemaking. 'lhe Company is also currently evaluating additional low cost, developmental NO, reduction technologies at Cheswick and Elrama. An Artificial Neural Network control system enhancement, co-sponsored by the Electric Power Research institute and the Company, will bc demonstrated at Cheswick.The Gas Research Institute and the Company are sponsoring a targeted natural gas reburn demonstration at Elrama. Iloth demonstrations will be completed in 1996.

As required by Title V of the Clean Air Act Amendments, the Company has filed comprehensive air operating permit applications for Cheswick, Elrama,111 and Phillips during the last half of 1995.The Company also filed its Title IV Phase 11 Clean Air Act compliance plan with the PllC on December 27,1995.

The Company is closely monitoring other potential future air quality programs and air emission control requirements, including additional NO, control requirements that were recommended for fossil fuel plants by the OzoneTransport Commission and the potential for more stringent ambient air quality and emission standards for SO, particulates, and other by-products of coal combustion.

As these potential programs are in various stages of discussion and consideration, it is impossible to make reasonable estimates of the potential costs and impacts, if any.

In 1992, the Pennsylvania Department of Environmental Protection (DEP) issued Residual Waste Management Regulations governing the generation and management of non hazardous residual waste, such as coal ash. The Company is assessing the sites which it utilizes and has developed compliance strategies under review by the DEP. Capital compliance costs of $3.0 million were incurred by the Company in 1995 to comply with these DEP regulations; on the basis ofinformation currently available, an additional $2.5 million will be incurred in 1996. The expected additional capital cost of compliance through the year 2000 is estimated, based on current information, to be approximately $25 million.This estimate is subject to the results of ground water assessments and DEP Gnal approval of compliance plans.

The Company is involved in various other environmental matters. The Company believes that such matters, in total, will not have a materially adverse effect on its financial position or results of operations.

Outlook Competition

'lhe electric utility industry is undergoing fundamental change in response to the open trans-mission access and increased availability of energy alternatives fostered by NEPA which has served to increase competition in the industry. Previously captive customers are secking freedom to choose alternative suppliers of energy 'lhese competitive pressures require utilities to offer competitive pricing and terms to retain customers and to develop new markets for the optimal utilization of their generation capacity.

At the national level, NEPA was designed to encourage competition among electric utility companics, improve energy resource planning and to encourage the development of alternative sources of energy. NEPA authorizes the FERC to require electric utilities to provide wholesale suppliers of electric energy with nondiscriminatory access to the utility's wholesale transmission l

system. In response to this mandate, the FERC has issued a Notice of Proposed Rulemaking (NOPR) on Open Access Nondiscriminatory Transmission Services and a supplemental NOPR on the Recovery of Stranded Costs.The NOPR on open access transmission would define the terms under which independent power producers, neighboring utilities and others could gain access to a utility's transmission grid to deliver power to customers. The supplemental NOPR on stranded costs would address the issue of recovery of a utility's unrecovered costs that were incurred to provide service to customers that subsequently leave a utility's system in favor of another supplier.

A final order is expected in mid 1996 on both NOPRs. Also, in January 1996, the FERC announced its plans to reconsider its public utility merger guidelines.The FERC actions are expected to have a significant impact on competition in the electric utility industry.

DQE 1995 AnnualReport

l l

In Peansylvania, the PUC currently is conducting an investigation concerning regulatmy reform and has indicated an intention to issue a report to the governor and the Pennsylvania General Assembly by April 1996.The PllC staffissued an interim repon in August 1995 that recommended l

that retail wheeling not be implemented at that time because of concerns that retail whccling would benc0t large industrial customers at the expense of smaller customers and utility share-i holders, who would absorb the costs of stranded investments, and that service reliability could bc impaired.The report concludes that performance-based ratemaking, wholesale competition and l

utility cost cutting could provide the benc0ts of retail wheeling without the attendant disruptions.

'lhe Company is aware of the foregoing federal and sw regulatory and business uncertaintics, and is attempting to position itself to operate in a more comptt tive environment. Its current rate i

structure allows some Dexibility in setting rates to retain its customcc base and attract new business.

Furthermore, as discussed below, open access transmission offers the Company the opponunity to sell power on a market basis to customers outside ofits service tenitory.

'ihe Company has pmposals before both the FERC and the PllC that address specinc issues relating to its competitive position. llecause of the Company's current dectric generating configu.

ration, some ofits baseload capacity is used less than optimally.Two options the Company is currently considering to align its generating capabilities more closely with customer demand are discussed in " Transmission Access" below and "Cencration Resource Optimization" on page 37.

First, through open transmission access, the Company is seeking to increase its level of 0xed demand through the negotiation oflong-term power sale contracts to customers outside its service tenitory. Second, the Company proposes to change its generdon pronic through the sale ofits interest in the Ft. Martin Power Station.

As pan ofits petition currently before the PUC with respect to the sale ofits interest in Ft. Martin, the Company has proposed, among other concessions, a Ove-year freeze on base rates and a Ove-year annual $5 million credit to the ECR (which would otherwise remain unaffected by the freeze) to compensate the Company's electric utility customers for short-term power sales foregone by the sale of its interest in the plant. (See " Sale of Ft. Martin" discussion on page 31.) Ahhough the Company believes a rate freeze will enable it to maintain and expand its existing customer base, if the rate freeze is implemented, the Company could face the risk of reduced rates of return if unfocescen costs arise and if revenues from sales prove inadequate to fund those costs.

Finally, as noted above, open ac;ess transmission requirements implicitly create the potential for stranded costs. To address these issues, the Company has implemented, and will continue to evaluate, the accelerated depreciation ofits generating assets as one method to guard against the competitive risks of stranded investments. (See " Operating Expenses" discussion on page 25.) At present, the FERC and the PUC appear supportive of stranded cost recovery; however, implemen.

tation details for recovery of stranded costs are extremely vague and far from decided. The petition for the sale of the Company's ownership interest in the Ft. Manin Power Station currently before the PUC proposes to further increase depreciation and amortization expense related to the Company's nuclear power investment by $75 million over a three-year period.This petition also proposes to record a one time write-down in the value of the Company's nuclear plant investment of approxi-mately $130 million and to increase by $5 million the annual contribution to the Company's nuclear plant decommissioning funds, for a total of $25 inillion in contributions over the next five years. (See " Sale of Ft. Martin" discussion on page 31.) These current and proposed accelerated investment cost recovery measures will be absorbed by the Company without an increase in base rates.

The Company believes that these and similar initiatives will strengthen its position to succeed in a more competitive environment by climinating the need to charge its electric utility customers in the future for these currently rec 3nized expenses. At this time, however, there is no assurance as to the extent to which Company initiatives can or will ultimately eliminate regulatory and other uncertaintics associated with increased competition.

Transmission Access in March 1994, the Company submitted, pursuant to the rederal Power Act, two separate " good faith" requests for transmission service with APS and the Pennsylvania-New Jersey 41aryland Interconnection Association (PJM Companics), respectively. Each request is based on 20 year firm service with Ocxible delivery points for 300 MW of transfer capability over the APS and PjM Companics transmission networks, which together extend from western Pennsylvania to the East Coast. Piccause of a lack of progress on pricing and other issues, on August 5 and September 16, 1994, the Company filed with the FERC applications for transmission service from the PJM Companies and APS, respectively. The applications are authorized under Section 211 of the rederal Power Act, which requires electric utilities to provide Orm wholesale transmission service. In l

May 1995, the FERC issued proposed orders instructing APS and the PJM Companies to provide transmission service to the Company and directing the parties to negotiate specific rates, terms and DQ[ 1993 Annual Refvn

i conditions.The Company was unable to agree to terms for transmission service with either ApS or the 1 JM Companies. liriefs were Oled with the i t:RC outlining the areas of disagreement among the companies. The matter is now pending before the FERC.Tbc Company cannot predict the Onal outcome of these proceedings.

Generation Resource Optimization The Company's plans for optimizing generation resources are designed to reduce underutilized generating capacity, promote competition in the wholesale marketplace, maintain stable prices and meet customer-specined levels of service reliability. We Company is committed to explore firm energy sales to wholesale customers, system power sales, system power sales with specine unit back up, unit power sales, generating asset sales and any other approach to ef0ciently managing capacity and energy.

The proposed sale of the Company's ownership interest in the Ft. Martin power Station demonstrates the Company's ongoing efforts to optimize the utilization of generation resources.

(See " Sale of Ft. Martin" discussion on page 31.) The sale is expected to reduce power production costs by employing a cost-effective source of peaking capacity through enhanced reliability of the simpic cycle units at 111. Implementation of the proposed plan will better align the Company's generating capabilities with its native load requirements.

Customer Service Guarantees

%e Company's commitment to provide reliable, quality service to its electric utility customers

.is characterized by its customer service guarantees. On March 6,1995, Duquesne became the first pennsylvania regulated utility, and the third in the linited States, to offer its residential customers guarantees of its commitment to courteous, reliable and cf0cient service. %c Company offers a 525 credit to a customer's account if it fails to provide accurate billings; to meet punctual service appointments; to extend prompt, courteous and professional service; or to connect new services within one day of the date requested by the customer.

Customer Advanced Reliability Sys.'em in January 1996, the Company announced its Customer Advanced Reliability System, a new communications service that will provide its electric utility customers with superior levels of service reliability, security and convenience. The Company has signed a long-term, full service contract with Itron, Inc. (ltron), a leading supplier of energy information and communication solutions to the electric utility industry. Over the next two years, Itron will install, operate and maintain a commu-nications network that will provide the Company with an electronic link to its 580,000 customers.

The Customer Advanced Reliability System is designed to respond to customer needs on the basis ofimmediate information about the status of power delivery at individual homes and businesses. This electronic communications service is another major element in the Company's mult!. step plan to make the Company's electric utility operations more competitive and ef0cient.

Other Financial Accoimting Pronouncement The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of

~ (SFAS No.121) in March 1995. This statement is effective for years beginning after December 15, 1995.The Company anticipates adopting this standard on January 1,1996, and does not expect that it will have a material impact on its Anancial position or resalts of operations, based on the current regulatory structure in which it operates. As competitive factors in0uence pricing in the utility industry, this opinion may change in the future.The general requirements of SFAS No.121 apply to non current assets and require impairment to be considered whenever evidence suggests that it is no longer probable that future cash Cows in an amount at least equal to the asset will result.

Retirement Plan Measurement Assumptions The Company decreased the discount rate used to determine the projected benefit obligation on the Company's retirement plans at December 31,1995, to 7.0 percent. The assumed change in future compensation levels was also decreased to renect current market and economic conditions.

The effects of these changes on the Company's retirement plan obligations are reDected in the amounts shown in " Employee Benefits," Note N, to the consolidated financial statements on page 57.The resulting change in related expenses for subsequent years is not expected to be material.

CEicSI~f5EElitItiMiEfdr'rE~atiSEIciniidEd lifriiri,'tlie"nia~tths~disctide'ci iEthisEritEl 5557tTri fErward-160kiEg??

~

l

- statements which involve risks and uncertainties including, but not limited to, economic, competitive, governmental and

[ technological factors affecting the' Conipariy's op'erations, rnarkets, products, services and prices and other factors discussed-

~

MILthe. Company's,. filings with_the Securities and Exchanget ommission.3

.d-C one 1995 Annual nmon

Ikpon of lo the Directors and Shareholders of DQE:

Independent Cenified Public We have audited the accompanying consolidated balance sheet of DQl: and its subsidiaries as Accountants of December 31,1995 and 1994,'and the related consolidated statements ofincome, retained earnings, and cash flows for each of the three years in the period ended December 31,1995.

%csc fmancial statements are the responsibility of the Company's management. Our responsib is to express an opinion on these fmancial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. %ose standards require that we plan and perform the audit to obtain reasonab!c assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fmancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated fmancial statements present fairly, in all material respects, the fmancial position of DQE and its subsidiaries as of December 31,1995 and 1994, and the results of their operations and their cash Gows for each of the three years in the period ended December 31,1995 in conformity with generally accepted accounting principles.

As discussed in Note A to the consolidated financial statements, effective January 1,1993, the Company changed its method of accounting for income taxes to conform with Statement of 1inancial Accounting Standards No.109, and the Company changed its method of accounting for maintenance costs during scheduled major fossil station outages.

Ni Deloitte & Touche LLP Pittsburgh, Pennsylvania January 30,1996 Report of the The Audit Committee, composed entirely of non-employee directors, meets regularly with the Audit Committee independent certified public accountants and the internal auditors to discuss results of their audit of the Board of work, their evaluation of the adequacy of the internal accounting controls and the quality of Directors of DQE financial reporting.

i in fulfilling its responsibilities in 1995, the Audit Committee recommended to the Board of Directors, subject to shareholder approval, the selection of the Company's independent certified public accountants. The Audit Committee reviewed the overall scope and details of the indepen-dent certi0ed public accountants' and internal auditors' respective audit plans and reviewed and approved the independent certified public accountants' general audit fees and non audit services.

Audit Committee meetings are designed to facilitate open communications with internal auditors and independent certified public accountants. To ensure auditor independence, both the independent certified public accountants and the internal auditors have full and free access to the Audit Committee.

The Audit Committee of the Board of Directors of DQE DQE 1995 Annual Report

I StarturwT or Consouoatto income (7housands of Dollan, Except l'er Share Amounts)

Year Ended December 31, 1995 1994 1993 Operating Rewnues Sales of Electricity-Customers net

$1,083,339

$1,104,327

$1,169,685 Phase-in deferrals (28,810)

(100,315)

Net customer revenues 1,083,339 1,075,517 1,069,370 litilities 55,963 58,295 50,669 Total Sales of Electricity 1,139,302 1,133,812 1,120,039 Other 80,860 90,098 63,141 Total Operating Rewnues 1,220,162 1,223,910 1,183,180 Operating Expenses Fuel and purchased power 231,968 244,135 237,731 Other operating 303,216 328,479 328,108 Maintenance 81,51 6 79,488 80,292 Depreciation and amortization

'192,339 166,610 152,673 Taxes other than income taxes 88,658 88,331 71,371 Total Operating Expenses 897,697 907,043 870,175 Operating income Operating income 322,465 316,867 313,005 Other income Other income 52,314 42,924 27,879 Interest and Other Interest and Other Charges 107,555 110,002 119,655 Charges income Before income Taxes 267,224 249,789 221,229 income Taxes income Taxes 96,661 92,973 79,822 Income Before Cumulative Effect on Prior Years of Changes in Accounting Principles 170,563 156,816 141,407 Adoption of SFAS No.109 - income taxes 8,000 Accounting for maintenance costs - net (5,425)

Net income Net income

$ 170,563

$ 156,816

$ 143,982 Average Number of Common Shares Outstanding (Thousands of Shares) 77,674 79,046 79,469 Earnings Per Sharc Earnings Per Share of Common Stock:

Income Before Cumulative Effect on Prior Years of Changes in Accounting Principles

$2.20

$1.98

$1.78 Adoption of SFAS No.109 - income taxes

.10 Accounting for maintenance costs - net

(.07)

Earnings Per Share of Common Stock

$2.20

$ 1.98

$1.81 l

Ditidends Declared

,p Dividends Declared Per Share of Common Stock

$1.21

$1.13

$1.08

~

~ See notes to consolidatedfinancial statemenu.

I DQE 1995 Annual Repon I'

L-

ConsouoArto CALANCE SHEET (1housands of Dollars)

As of December 31, 1995 1994 l

Assets Current Assets:

Cash and temporary cash investments 5 24,767

$ 50,058 Receivables:

Electric customer accounts receivable 103,821 96,157 l

Other utility receivables 22,441 26,008 Other receivables 25,164 53,766 l

less: Allowance for uncollectible accounts (18,658)

(15,822)

Receivables less allowance for uncollectible accounts 132,768 160,109 l

less: Receivables sold (7,000) l Total Rccci:> ables 125,768 160,109 Materials and supplies (at average cost):

Coal 25,454 30,484 Operating and construction 53,298 58,262 Total Alaterials and Supplies 78,752 88,746 Other cunent assets 8,099 36,156 Total Current Assets 237,386 335,069 long-Term Investments:

Affordable housing 116,784 57,497 Natural gas reserves 69,435 leveraged leases 87,834 50,322 Other leases 106,916 53,256 Other 59,947 35,143 Total Long-Tenn itwestruents 440,916 196.218 property, Plant and Equipment:

Electric plant in service 4,265,161 4,196,690 Construction work in progress 38,134

'52,199 property held under capital leases 133,381 162,732 property held for future use 216,633 216,206 Other 92,804 81,697 Total 4,746,113 4,709,524 1.ess accumulated depreciation and amortization (1,685,877) (1,569,983)

Property Plant and Equipment - Net 3,060,236 3,139,541 1-Other Non-Current Assets:

Regulatory assets 671,928 710,763 Other 48,377 45,414 Total Other Non-Current Assets 720,305 756,177 Total Assets

$4,458,843 54,427,005 See notes to consolidatedfinancial statements

?

DQE 1995 Annual Rqvrt

(*lhousands of Dollars)

As of December 31, 1995 1994 f.iabilities and' Current Liabilities:

Capitalization Notes payable

$ 35,098

$ 60,115 Current maturities and sinking fund requirements 71,379 85,986 Accounts payable 90,941 83,854 Accrued liabilities 52,063 64,894 Dividends declared 27,825 26,484 Other 9,191 5,722 Total Current Liabilities 286,497 327,055 l

Non-Current Liabilities:

Deferred income taxes - net 801,631 969,948 Deferred investment tax credits 115,760 123,591 Capital lease obligations 34,546 41.106 Deferred income 221,740 64,113 Other 197,973 151,526 Total Non-Current Liabilities 1,371,650 1,350,284 Commitments and Contingencies (Notes B through N)

Capitalization:

Long-Term Debt 1,400,993 1,377,611 Preferred and Preference Stock of Subsidiaries:

Non-redeemable preferred stock 63,608 90,340 Non redeemable preference stock 29,615 29,857 Total preferred and preference stock before deferred ESOP benefit (involuntary liquidation values of $93,086 and $120,060 exceed par by $28,781 and $43,882, respectively) 93,223 120,197 Deferred employee stock ownership plan (ESOP) benefit (22,257)

(24,852)

Total Preferred and Preference Stock of Subsidiaries 70,966 95,345 Common Shareholders' Equity:

Common stock - no par value (authorized - 187,500,000 shares; issued - 109,679,154 shares) 997,461 1,001,973 Retained earnings 698,986 622,072 Treasury stock (at cost) (32,123.601 and 31,220,547 shares)

(367,710)

(347,335)

Total Comonon Shareholders' Equity 1,328,737 1,276,710 Total Capitalinstion 2,800,696 2,719,666 Total Liabilities and Capitalinnion

$4,458,843

$4,427,005 i

f

~

i DQE 1995 Annual Report

t i

STATEMENT OF CONSOUDATED CASH Ftows (Thousanh of Dollars)

War Ended December 31, 1995 1994 1993 Cash flores from Net income

$ 170,563

$156,816

$143,982 Operating Activities Principal non-cash charges (credits) to net income:

Depreciation and amortization 192,339 166,610 152,673 Capital lease, nuclear fuel and other amortization 38,847.

36,320 32,019 Deferred income taxes and investment tax credits - net (22,122)

(11,842)

(39,736)

Allowance for equity funds used during construction (721)

(1,295)

(869) l Phase in revenues and carrying charges recovered 28,621 99,375 l

Changes in working capital other than cash 46,527 (31,8 91)

(111,677) l Other - net 28,618 26,288 23,582 l

Net Cash Protidedfrom Operating Activities 454,05l 369,627 299,349 l

Cash Flores Used by investments:

Imesting Activities Capital expenditures (94,164)

(121,085)

(124,376)

Long term investments (187,719)

(66,698)

(71,956)

Total Capital Expenditures and lxng-Term Imestments (281,883)

(}87,783)

(196,332) l Other - net (3,854)

(12,321)

(5,178)

Net Cash Used by im esting Activities (285,737)

(200,104)

(201,510)

Cash Flows Used in issu.ince oflong-term debt 65,000 114,110 740,500 l

Financing Activitic5 (Decrease) increase in notes payable (20,236) 32,530 36,267 l

Dividends on common stock (93,649)

(89,348)

(86,089) l Repurchase of common stock (21,271)

(23,307)

Reductions oflong-term obligations:

l Preferred and preference stock (29,732)

(39,958)

(187)

Long-term debt (56,114)

(114,835)

(735,048) l Other obligations (26,373)

(33,522)

(27,751)

Premium on reacquired debt (1,731)

(5,033)

(31,702) l Other - net (9,499) 7,664 623 Net Cash Used in Financing Actitities (193,605)

(151,699)

(103,387)

Net (decrease) increase in cash and temporary cash l

investments (25,291) 17,824 (5,548)

Cash and temporary cast. <estments at beginning of year 50,058 32,234 37,782 Cash and temporary cash in estments at end of year

$ 24,767

$ 50,058 5 32,234 SUPPLEMENTAL CASH Ftow INFoRMATioN Cash Paid During interest (net of amount capitalized)

$ 99,954

$105,900

$125,304 -

the War income taxes

$ 115,504 5 111,614

$133,303 Non-Cash lmesting Capital lease obligations recorded

$ 14,961

$ 16,909

$ 11,811 and Financing Activities Equity funding obligations recorded 5 21,827 Preferred stock issued in conjunction with long term investments

$ 3,000 See notes to consolidatedfinancial statemena DQE 1995 Annual Repon

j STAttuENT OF CONSOUDAfra RETAmto EARNINGS (Thousands of Dollars) 1995 1994 1993 Italance at beginning of year

$622,072

$554,604

$496,711 Net income 170,563 156,816 143,982 Dividends declared (93,649)

(89,348)

(86,089)

Italance at end of year

$698,986

$622,072

$554,604 See notes to consolidated financial sta ements.

NOTES To CoNSOUDATED FINANCIAL STATEMENTS A. Summary of Consolidation SI "'/ icd"I S

DQE is an energy services holding company. Its subsidiaries are Duquesne Light Company

^#""!"'I"X (Duquesne), Duquesne Enterprises (DE), DQE Energy Services (DES) and Montauk. DQE anc' its Pohms subsidiaries are collectively referred to as the Company.

Duquesne is an electric utility engaged in the production, transmission, distribution and sale of electric energy, and the largest of DQE's subsidiaries. DE makes strategic investments related to DQE's core energy business. These investments enhance DQE's capabilities as an energy provider, increase asset utilization, and act as a hedge against changing business conditions. DES was formed in August 1995 and is a marketing and development company providing energy solutions for customers in domestic and international markets. Montauk is a Anancial services company that makes long-term investments and provides Anancing for the Company's initiatives in high quality products, services and energy solutions for its customers.

All material intercompany balances and transactions have been eliminated in the preparation of the consolidated fmancial statements of DQE.

Basis of Accounting The Company is subject to the accounting and reporting requirements of the Securities and Exchange Commission (SEC). In addition, the Company's electric utility operations are subject to the regulation of the Pennsylvania Public Utility Commission (PUC) and the rederal Energy Regulatory Commission (FERC). As a result, the consolidated financial statements contain regula-tory assets and liabilities in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71) and renect the effects of the ratemaking process. Such effects concern mainly the time at which various items enter into the determination of net income in accordance with the principle of matching costs and revenues.

(See " Rate Matters," Note E on page 48.)

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.

Revenues Meters are read monthly and customers are billed on the same basis. Revenues are recorded in the accounting periods for which they are billed, with the exception of energy cost recovery revenues. Deferred revenues are associated with the Company's 1987 rate case. (See " Energy Cost Rate Adjustment Clause (ECR)" discussion on page 44 and "1987 Rate Case" discussion, Note E on page 48).

The Cmnpany's Electric Sen ice Territory The Company's utility operations provide electric service to customers in Allegheny County including the City of Pittsburgh, and Beaver County. This represents a service territory cf approxi-mately 800 square miles in southwestern Pennsylvania.The population of the area served by the Company's electric utility operations, based on 1990 census data, is approximately 1,510,000, of whom 370,000 reside in the City of Pittsburgh. In addition to serving approximately 580,000 customers within this service area, the Company's utility operations also sell electricity to other utilities beyond the Company's service territory.

DQE 1995 Annual Report

Net Customer Retrnues for the year ended December 31 1995 1994 1993 (Amounts in Thousands of Dollars)

Sales of Electricity-Customers

$ 1,096,769

$1,116,217

$ 1,186,779 provision for doubtful accounts (13,430)

(11,890)

(17,094)

Customers net 1,083,339 1,104,327 1,169,685 Phase-in deferrals (28,810)

(100,315)

Net Customer Revenues

$ 1,083,339

$ 1,075,517

$ 1,069,370 Energy Cost Rate Adjustment Clause (ECR)

Through the ECR, the Company recovers (to the extent that such amounts are not included in base rates) nuclear fuel, fossil fuel and purchased power expenses and, also through the ECR, passes to its customers the profits from short term power sales to other utilitics (collectively, ECR energy costs). Nuclear fuel expense is recorded on the basis of the quantity of electric energy generated and includes such costs as the fee imposed by the linited States Department of Energy (DOE) for future disposal and ultimate storage and disposition of spent nuclear fuel. Fossil fuel expense includes the costs of coal, natural gas and fuel oil used in the generation of electricity.

On the Company's statement of consolidated income, these energy cost recovery revenues are included as a component of operating revenues. For ECR purposes, the Company defers fuel and other energy expenses for recovery, or refunding, in subsequent years. The deferrals reflect the dif-ference between the amount that the Company is currently collecting from customers and its actual ECR energy costs. The PUC annually reviews the Company's ECR energy costs for the fiscal year April through March, comparcs them to previously projected ECR cncrgy costs and adjusts the ECR for over-or under recoveries and for two PllC-established coal cost standards. (See " Deferred Coal Costs" and "Warwick Mine Costs" discussions, Note F, on page 49.)

Over-or under-recoveries from customers are recorded in the consolidated balance sheet as payable to, or receivable from, customers. At December 31,1995, $5.8 million was payable to customers and shown as other current liabilities. At December 31,1994, $5.9 million was receivabic from customers and shown as other current assets.

Maintenance incremental maintenance expense incurred for refueling outages at the Company's nuclear units is deferred for amortization over the period between refueling outages (generally 18 months). The Company changed, as of January 1,1993, its method of accounting for maintenance costs during scheduled major fossil generating station outages. Prior to that time, maintenance costs incurred for scheduled major outages at fossil generating stations were charged to expense as these costs were incurred. Linder the new accounting policy, the Company accrues, over the periods between outages, anticipated expenses for scheduled major fossil generating station outages. Maintenance costs incurred for non-major scheduled outages and for forced outages are charged to expense as such costs are incurred.This method was adopted to match more accurately the maintenance costs and the revenue produced during the periods between scheduled major fossil generating station outages.

The cumulative effect (approximately $5.4 million, net ofincome taxes of approximately

$3.9 million) of the change on prior years was included in net income in 1993. 'Ihe effect of the change in 1993 was to reduce income, before the cumulative effect of changes in accounting principles, by approximately $2.4 million, or $.03 per share, and to reduce net income, after the cumulative effect of changes in accounting principles, by approximately $7.8 million, or 5.10 per share, based on post-split sharcs.

Depreciation and Amortization Depreciation of property, plant and equipment, including plant.related intangibles, is recorded on a straight line basis over the estimated remaining useful lives of propertics. Amortization of 3

other intangibles is recorded on a straight-line basis over a five-year period. Depreciation and amortization of other properties are calculated on various bases.

'lhe Company records decommissioning costs under the category of depreciation and amornzation

{

expense and accrues a liability, equal to that amount, for nuclear decommissioning expense. Such 1

nuclear decommissioning funds are deposited in external, segregated trust accounts 'ihe funds are invested in a portfolio of municipal bonds, certificates of deposit and linited St.tes government securities. Trust fund earnings increase the fund balance and the recorded liabuity. The market value of the aggregate trust fund balances at December 31,1995, totaled appr 3ximately

}

lo<mswnn

-.-~= ~ -

l STOTEMENT oF CoNSoupATED RETAmeo EARNINGS l

(Thousands of Dollars) 1995 1994 1993 Italance at beginning of year

$622,072

$554,604

$496,711 Net income 170,563 156,816 143,982 Dividends declared (93,649)

(89,348)

(86,089)

Balance at end of year

$698,986

$622,072

$554,604 See notes to consolidated financial statement.t l

notes To CoNSOUDATED FmANCIAL STATEMENTS i

A. Surnntary of Consolidation

(

Significant DQE is an energy services holding company. Its subsidiaries are Duquesne Ught Company AccountinS (Duquesne), Duquesne Enterprises (DE), DQE Energy Services (DES) and Montauk. DQE and its P"I'C'#3 subsidiaries are collectively referred to as the Company.

Duquesne is an electric utility engaged in the production, transmission, distribution and sale of electric energy, and the largest of DQE's subsidiaries. DE makes strategic investments related to DQE's core energy business. These investments enhance DQE's capabilities as an energy provider, increase asset utilization, and act as a hedge against changing business conditions. DES was formed in August 1995 and is a marketing and development company providing energy solutions for customers in domestic and international markets. Montauk is a financial services company that makes long term investments and provides financing for the Company's initiatives in high quality products, services and energy solutions for its customers.

All material intercompany balances and transactions have been eliminated in the preparation of the consolidated financial statements of DQE.

Basis of Accounting

' Die Company is subject to the accounting and reporting requirements of the Securities and Exchange Commission (SEC). In addition, the Company's electric utility operations are subject to the regulation of the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FERC). As a result, the consolidated financial statements contain regula-tory assets and liabilities in accordance with Statement of Financial Accounting Standards No. 71, Accountingfor the Effects of Certain Types of Regulation (SFAS No. 71) and reflect the effects of the ratemaking process. Such effects concern mainly the time at which various items enter into the determination of net income in accordance with the principle of matching costs and revenues.

(See " Rate Matters," Note E on page 48.)

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.

Retenues Meters are read monthly and customers are billed on the same basis. Revenues are recorded in the accounting periods for which they are billed, with the exception of energy cost recovery revenues. Deferred revenues are associated with the Company's 1987 rate case. (See " Energy Cost Rate Adjustment Clause (ECR)" discussion on page 44 and "1987 Rate Case" discussion, Note E on page 48).

The Company's Electric Sert ice Territory The Company's utility operations provide electric service to customers in Allegheny County, including the City of Pittsburgh, and Beaver County. This represents a service territory of approxi-mately 800 square miles in southwestern Pennsylvania.'The population of the area sewed by the Company's electric utility operations, based on 1990 census data, is approximately 1,510,000, of whom 370,000 reside in the City of Pittsburgh. In addition to serving approximately 580,000 customers within this service area, the Company's utility operations also sell electricity to other utilities beyond the Company's service territory.

I

i I

$28.5 million. On the Company's consolidated balance sheet, the decommissioning trusts have been renected in other long term investments, and the related liability has been recorded as other l

aon current liabilities. (See " Nuclear Decommissioning" discussion, Note 1, on page 52.)

Depreciation and amortisuion expense increased $25.7 million primarily due to the change in Duqucsne's composite depreciation rate from 3.0 percent to 3.5 percent effective lanuary 1,1995.

Income ' lines On lanuary 1,1993, the Company adopted Statement ofIinancial Accounting Standards No.109, Accountingfor income lines (SFAS No.109). Implementation of SFAS No.109 involved a change in accounting principle.1hc cumulative $8 million effect on prior years was reported in 1993 as an increase in net income.

SFAS No.109 requires that the liability method be used in computing deferred taxes on all differences between book and tax bases of assets. These book / tax differences occur when events and transactic,ns recognized for financial reporting purposes are not recognized in the same period for tax purposes. SFAS No.109 also requires that a deferred tax liability or asset be adjusted in the period of enactment for the effect of changes in tax laws or rates. During 1994, the statutory Pennsylvania income tax rate was reduced from 12.25 percent to 9.99 percent.This resulted in a net decrease of $80.5 million in deferred tax liabilities and a corresponding reduction in the regulatory receivable.

For its electric utility operations, the Company recognizes a regulatory asset for the deferred tax liabilities that are expected to be recovered from customers through rates. (See " Rate Matters,"

Note F, and " income Taxes," Note 11, on pages 48 and 50, respectively.)

With respect to the Anancial statement presentation of SFAS No.109, the Company reflects the amortization of the regulatory tax receivable resulting from reversals of deferred taxes as depreciation and amortinnion expense. Reversals of accumulated deferred income taxes are included in income tax expense.

When applied to reduce the Company's income tax liability, investment tax credits related to electric utility property generally were deferred. Such credits are subsequently renected, over the lives of the related assets, as reductions to tax expense.

Property, Plant and Equipment The asset values of the Company's electric utility propenies are stated at original construction cost, which includes related payroll taxes, pensions and other fringe benefits, as well as adminis-trative and general costs. Also included in original construction cost is an allowance for funds used during construction (AFC), which represents the estimated cost of debt and equity funds used to finance construction. The amount of AFC that is capitalized will vary according to changes in the cost of capital and in the level of construction work in progress (CWIP). On a current basis, tne Company does not realize cash from the AFC 'lhe Company does realize cash, during the service life of the plant, through increased revenues reflecting a higher rate base (upon which a return is earned) and increased depreciation.The AFC rates applied to CWlP were 8.7 penent in 1995, 9.0 percent in 1994 and 9.6 percent in 1993.

Additions to, and replacements of, property units are charged to plant accounts. Maintenance, repairs and replacement of minor items of property are recorded as expenses when they arc incurred.The costs of electric utility properties that are retired (plus r'emoval costs and less any salvage value) are charged to accmnulated depreciation and amortionion.

Substantially all of the Company's electric utility properties are subject to a first mortgage lien.

Other Current Assets and Long-Term Investments The Company's other current assets and long-term investments include certain investments in marketable securities. In accordance with Statement of Financial Accounting Standards No.115, Accomning for Certain Investments in Debt and Equity Securitics (SFAS No.115), these investments are classified as available for sale and are stated at market value.

Financial Accounting Pronouncement The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. I21, Accotmting for the impairment of Long Lived Assets andfor Long-Lived Assets to be Disposed Of (SFAS No.121) in March 1995.This statement is effective for years beginning after December 15, 1995.The Company anticipates adopting this standard on January 1,1996, and does not expect that it will have a material impact on its financial position or results of operations, based on the current regulatory structure in which it operates. As competitive factors innucnce pricing in the utility industry, this opinion may change in the future.The general requirements of SFAS No.121 apply to non current assets and require impairment to be considered whenever evidence suggests that it is no longer probable that future cash Hows in an amount at least equal to the asset will result.

o qeI m u nualnepon

Ternparary Cash Investmeras Temporary cash investments are shon term, highly liquid investments with original maturities of three or fewer months. %ey are stated at market, which approximates cost.%e Compa considers temporary cash investments to be cash equivalents.

Restassifications The 1994 and 1993 consolidated Gnancial statements have been reclassified to accounting presentations adopted during 1995.

B. Receivables

%c Company and an unaf0liated corporation have an agreement that entitles the Company sell, and the corporation to purchase, on an ongoing basis, up to $50 million of accounts receivah At December 31,1995, the Company had sold $7 million of receivables to the unaf0liated corp tion.The Company had no receivables sold at December 31,1994. %c accounts receivable sales i

agreement, which expires in June 1996, is one of many sources of funds available to the Com The Company may attempt to extend the agreement, or to replace the facility with a similar one or to climinate it upon cxpiration.

C. Changes in Changes in Working Capital Other than Cash Working Capital Other than Cash 1995 1994 1993 (a)

(Arnounts in husands of Dollars)

Reccimbles

$34,341

$ 9,928

$(103,188)

Afaterials and supplies 9,994 2,932 13,635 Other current assets 3,126 (25,701) 4,631 Accounts payable 7,087 (4,455)

(7.961)

Other current liabilities (8,021)

(l4,595)

(l8,794) 7btal

$46,527

$(31,891)

$(ill,677)

(a) Net of the effects from the purchase of Chester Engineers (Chester) l D. Long-Term

%c Company makes equity investments in affordable housing and natural gas reserve Im>cstments partnerships as a limited partner. At December 31,1995, the Company had investments in twenty one affordable housing funds, eight of which were made during 1995, and two natural gas reserve partnerships, each of which were made during the year.

Deferred income primarily relates to the Company's leasehold investments. Deferred amounts will be recognized as income over the lives of the underlying leaschold investments over periods generally not exceeding Ove years.

The Company is the lessor in six leveraged lease arrangements involving manufacturing equipment, mining equipment, rail equipment, a fossil generating station and natural gas processing equipment. These leases expire in various years beginning in 2001 through 2033. The residual value of the equipment at the end of the lease terms is estimated to approximate 6 percen of the original cost.The Company's aggregate investment represents 18 percent of the aggregate original cost of the property and is secured by guarantees of cach lessee's parent or affiliate.The remaining 82 percent was Snanced by non-recourse debt provided by lenders who have been

. granted, as their sole remedy in the event of default by the lessees, an assignment of rentals due under the leases and a security interest in the leased property. %is debt amounted to $364 million and $139 million at December 31,1995 and 1994, respectively.

Net Leveraged Lease Investments at December 31 1995 1994 (Amounts in husands of Dollars)

Rentals receivable (nct of principal and interest on the non. recourse debt)

$ 113,641

$ 50,010 Estimated residual value ofleased assets 26,470 26,470 less: Unearned income (52,277)

(26,158)

Leveraged lease investments 87,834 50,322 less: Deferred taxes arising from leveraged leases (42,392)

(34,174)

Net Irteraged Irase imestments

$ 45,442

$ 16,148 The Company's other leases include investments in fossil generating stations, a waste-to-energy facility, computers, vehicics and equipment. The Company's other investments are primarily in assets of nuclear decommissioning trusts and marketable securitics, primarily of Exide Electronics DQE 1995 Annual Peport

Group. Inc. In accordance with SlAS No.115, thetc investments are classi6cd as available.for sale and are stated at market value.'the amount of unrealized holding losses related to marketable securitics at December 31,1995, is $4.4 million ($2.6 million net of tax).'lhere were no material 3

unrealized gains or losses on investments at December 31,1994.

1:. Property, Plant and in addition to its wholly owned generating units, the Company, together with other electric

(

Equipment utilities, has an ownership or leaschold interest in certain jointly owned units.The Company is required to pay its share of the construction and operating costs of the units. 'lhe Company's share of the operating expenses of the units is included in the statement of consolidated income.

Generating Units at December 31,1995 Net litility fuel Un..

Megawatts (h)

Ilant Source (Millions of Dollan)

Cheswick 570

$ 11 8.7 Coal Elrama (a) 487 98.1 Coal 1

Ft. Martin linit 1 (b) 276 36.4 Coal Eastlake Unit 5 186 42.7 Coal Sammis tinit 7 187 53.1 Coal liruce Mansfield linit 1 (a) 228 66.2 Coal llruce Mansfield linit 2 (a) 62 19.1 Coal liruce Mansfield linit 3 (a) 110 52.1 Coal

!! caver Valley linit I (c) 385 234.0 Nuclear Ileaver Valley linit 2 (d)(c) 11 3 14.4 Nuclear Beaver Valley Common Facilities 159.4 Perry linit I (f) 164 565.5 Nuclear llrunot Island 66 7.1 Fuel Oil Total 2,834 1,466.8 Property held for future use:

limnot Island (g) 240 44.9 Fuel Oil Phillips (a) 300 77.4 Coal ibtal Genemting Units 3,374

$ 1,589.1 i

(a) The unit is equipped with flue gas desulfurization equipment.

(b) See " Sale of I t. Martin" discussion below.

(c) 'lhe Nudcar Regulatory Commission (NRC) has granted a license to operate through January 2016.

(d) On October 2,1987, the Company sold its 13.74 percent interest in Beaver Valley linit 2 (BV Unit 2) and leased it back; the sale was exclusive of transmission and common facilities. Amounts shown represent facilitics not sold and subsequent leaschold improvements.

(c) 'lhe NRC has granted a license to operate through May 2027.

(I) The NRC has granted a license to operate through March 2026.

(g) idle combustion turbinc capacity representing 168 megawatts may be returned to service pending outcome of the sale of ft. Martin. (See " Sale of ft. Manin" discussion below.)

)

(h) Cencrating capability during the winter season.

Sale of Ft. Martin in December 1995, the Company Gled a Petition for Declaratory Order with the PilC requesting approval for the sale ofits ownership interest in the l't. Martin Power Station and for a six-point plan to be Gnanced in part by the proceeds of the Ft. Martin transaction. Linder the plan, the Company offers to freeze its base rates for a period of Ove years, in addition, the Company proposes to record a one time reduction of approximately $130 million in the value of the Company's nuclear plant investment.The Company also proposes to use the proceeds from the sale to Gnance reliability enhancements to the simpic cycle units located at Brunot Island (BI), to retire debt and to reduce equity. The plan also proposes an annual increase of $25 rnillion for three years in depreciation and amortimion expense to the Company's nuclear investment, as well as additional annual contributions to its nuclear plant decommissioning funds of $5 million for Ove years, without any increase in existing electric rates. Lastly, the Company proposes a five-year annual

$5 million credit to the ECR to compensate the Company's electric utility customers for the lost profits from any reduced short term power sales foregone by the sale ofits ownership interest in the Ft. Martin Power Station. (See " Energy Cost Rate Adjustment Clause (ECR)" discussion, Note A, on page 44.) The PllC is currently reviewing the Company's petition.

DQC 1995 Annual Repon

C Rate Atatters 1987 Rate Case In hiarch 1988, the Pl!C adopted a rate order that increased the Company's electric utility revenues J

l l

by $232 million annually.This rate increase was phased-in from April 1988 through April 1994.

t Deficiencies in current revenues which resulted from the phase in plan were included in the consolidated statement ofincome as phase in deferrals. phase in deferrals were recorded on the consolidated balance sheet as a regulatory asset. As customers were billed for deficiencies related to l

prior periods, this regulatory asset was reduced.-

l At this time, the Company has no pending base rate case and has no immediate plans to file a l

base rate case. In the Company's petition cinmntly before the PllC for the sale ofits ownership interest in the Ft. Martin Power Station, the Company proposes to freeze its base rates for a five.

year period. (See " Sale of I t. Martin" discussion, Note E, on page 47.) -

Regulatory Assets i

l As a result of the application of SFAS No. 71, the Company records regulatory assets on its -

consolidated balance sheet. The regulatory assets represent probable future revenue to the Company because provisions for these costs are currently included, or are expected to be included, in charges to electric utility customers through the ratemaking process.

'lhe Company's electric utility operations currently satisfy the SFAS No. 71 criteria. Ilowever, a company's electric utility operations or a portion of such operations could cease to meet these criteria for various reasons, including a change in the PilC on the FERC regulations. Shonld the Company's electric utility operations cease to meet the SFAS No. 71 criteria, the Company would I

be required to write off any regulatory assets or liabilities for those operations that no longer meet these requirements. Management will contin'ue to evaluate significant changes in the regulatory and competitive environment in order to assess the Company's overall consistency with the criteria of SFAS No. 71.

Regulatory Assets at Decernber 31 1995 1994 (Amounts in 7housands of Dollars) l-Regulatory tax receivable (Note H)

$414,543

$428,043 linamortized debt costs (Note K)(a) 98,776.

103,454 Deferred rate synchronization costs (see below) 51,149 51,149 Beaver Valley linit 2 (BV Unit 2) sale / leaseback premium (Note I)(b) 31,564

?.414 Deferred employee costs (c) 31,218 012 Extraordinary property loss (see below) 8,300 194 Deferred nuclear maintenance outage costs (Note A) 6,776 10 6 DOE decontamination and decommissioning receivable (Note j) 10,687 lb, 32 Deferred coal costs (see page 49) 12,753 10,677 Other 6,162 8,282 Total Regulatory Assets

$671,928

$710,763 (a) 'the premiums paid to reacquire debt prior to schedukd maturity dates are deferred for amortization over the life of the debt issued to finance the reacquisitions.

(b) 'ihe premium paid to refinance the llV linit 2 lease was deferred for amonization over the life of the lease.

(c) includes amounts for recovery of accrued compensated absences and accrued claims for workers' compensation.

Deferred Rate Synchronization' Costs in 1987, the PLIC approved the Company's petition to defer initial operating and other costs of Perry Unit 1 and BV linit 2. The Company deferred the costs incurred from November 17,1987, when the units went into commercial operation, until March 25,1988, when a rate order was issued. In its order, the PUC postponed ruling on whether these costs would be recoverable from the Company's electric utility customers. The Company is not earning a return on the deferred costs.

The Company believes that these deferred costs are recoverable. In 1990 and 1995, the PilC permitted other Pennsylvania electric utilities rate recovery of such costs.

l Extraordinary Property loss l

The Company abandoned its interest in the partially constructed Perry linit 2 in 1986 and subsequently disposed ofits interest in 1992. In the 1987 rate case, the PilC approved recovery, I

over a 10-year period, of the Company's original $155 million investment in Perry Unit 2.The Company is not earning a return on the as-yet unrecovered portion ofits investment in the unit, s-l DQE i995 Amhml Report

Deferred Coal Costs The PUC has established two market price coal cost standards. One applies only to coal delivered 1

at the firuce Mans 0cid Power Station (llruce Mansfield). The other, the system wide coal cost i

standard, applies to coal delivered to the remainder of the Company's system, lloth standards are updated monthly to renect prevailing market prices for similar coal.The PilC has directed the Company to defer recovery of the delivered cost of coal to the extent that such cost exceeds generally prevailing market prices for similar coal, as determined by the PUC. The PllC allows deferred amounts to be recovered from customers when the delivered costs of coal fall below such PllC.

determined prevailing market prices.

.in 1990, the PUC approved a joint petition for settlement that clarined certain aspects of the system wide coal cost standard and gave the Company options to extend the standard through March 2000. In December 1991, the Company exercised the Orst of two options that extended the standard through March 1996. In December 1995, the Company exercised the second option to extend the standard through March 2000.The unrecovered cost of coal used at Ilruce Mans 0cid amounted to $8.4 million and $7.3 million and the unrecovered cost of coal used throughout the 3

system amounted to $4.4 million and $3.4 million at December 31,1995 and 1994, respectively.

1

'lhe Company believes that all deferred coal costs will be recovered.

Warwich Mine Costs i

The 1990 joint petition for settlement (See preceding discussion on " Deferred Coal Costs.")

also recognized costs at the Company's Warwick Mine, which had been on standby since 1988, and allowed for recovery of such costs, including the costs of ultimately closing the mine. In 1990, the Company entered into an agreement under which an unafuliated company will operate the mine until March 2000 and sell the coal produced. Production began in late 1990.The mine reached a full production rate in early 1991.The Warwick Mine coal reserves include both high and low sulfur coal; the Company's contract is for medium to high sulfur (1.3 percent to 2.5 percent) coal. More than 60 percent of the coal mined at Warwick Mine currently is used by the Company.

The Company receives a royalty on sales of Warwick coal in the open market.These royalties are credited to the Company's ECR. In the past year, the Warwick Mine supplied slightly less than one-fifth of the coal used in the production of electricity at the Company's wholly owned and jointly owned plants.

Costs at the Warwick Mine and the Company's investment in the mine are expected to be recovered through the cost of coal in the ECR. Recovery is subject to the system-wide coal cost i

standard.The Company also has an opportunity to earn a return on its investment in the mine through the cost of coal during the period of the system wide coal cost standard including

{

extensions. At December 31,1995, the Company's net investment in the mine was $14.9 million.

The current estimated liability, including final site reclamation, mine water treatment and certain labor liabilities, for mine closing is $34.1 million and the Company has recorded a liability on the consolidated balance sheet of approximately $15.9 million toward these costs.

Property Heldfor Future Use 11.1986, the PUC approved the Company's request to remove the 300 MW Phillips Power Station (Phillips) and 240 MW of B1 from service and from rate base. The Company expects to recover its net investment in these plants through future electricity sales.The Company believes its invest-ment in these plants will be necessary in order to meet future business needs outlined in the Company's plans for optimizing generation resources. If business opportunities do not develop as expected, the Company will consider the sale of these assets. In the event that market demand, transmission access or rate recovery do not support the utiihation or sale of the plants, the Company may have to write off part or all of their costs. At December 31,1995, the Company's net investment in Phillips and 111 held for future use was $77.4 million and $44.9 million, respectively.

C. Short krm At December 31,1995, the Company had two extendible revolving credit agreements, including Borrowing and a $100 million facility expiring in August 1996 and a $150 million facility expiring in October 1996.

Revolcing Credit Interest rates on these credit agreements vary. Commitment fees are based on the unborrowed Arrangements amount of the commitments. Iloth credit facilities contain two-year repayment periods for any amounts outstanding at the expiration of the revolving credit periods. At December 31,1995 and 1994, short.tcrm borrowings were 535 million and $60 million, respectively.The weighted average interest rates applied to such borrowings were 6.5 percent and 6.7 percent at December 31,1995 and 1994, respectively.

pqe ms Annual Report

I

11. Income 7 axes -

'lhe annual federal corporate income tax returna have been audited by the Internal Revenue 1

Service (1115) for the tax years through 1989.1hc tax years 1990 through 1995 remain subject to IRS review.The Company does not believe that final settlement of the federal income tax returns for these years will have a materially adverse effect on its financial position or results of operations.

'the effects of the 1993 adoption of SIMS No.109 are discussed in " Income Taxes," Note A, on page 45. Implementation of the standard involved a change in accounting principic.'lhe cumula-tive effect of $8 million on prior years was reported in 1993 as an increase in net income. 'lhe SIMS No.109 impact on 1993 income bepre cmnulatiw effirt of changes in accounting principles is immaterial.

Deferred Tia Liabilities 1995 1994 (Amounts in Thousmds of Dollars)

At December 31, deferred tax assets (liabilities) were:

Investment tax creclits unamortized 48,033 $

51,282' Cain on sale / leaseback ofIIV Unit 2 64,124 67,120 Tax benefi' - long term investments 214,089 61,667 Other 41,509 52,037 j

}

Deferred tax assets 367,755 232,106 l'roperty depreciation (871,539)

(880,342) llegulatory asset (172,008)

(183,175)

Loss on reacquired debt unamortized (35,340)

(38,066)

Other (90,499)

(100,471)

Deferred tax liabilities (1,169,386) (1,202,054)

Net Deferred Tinx Liabilities 5 (801,631) $ (969,948) income Taxes 1995 1994 1993 (Amounts in Thousands of Dollars)

Currently payable:

Federal

$88,866

$ 70,908 5 82,803 State 29,915 33,407 36,755 Deferred - net:

Federal (8,649)

(13,198)

(25,388)

State (5,640)

(72,662)

(8,342)

Investment tax credits deferred - net (7,831)

(5,982)

(6,006)

Tax rate adjustment regulatory tax receivable 80,500 (a)

Income Taxes

$96,661

$ 92,973

$ 79,822 (a) During 1994 the statutory Pennsylvania income tax rate was reduced from 12.25 percent to 9.99 percent.

This resuhed in a net decrease of $80.5 million in deferred tax liabilities and a corresponding reduction in the regulatory receivable.

Income Tiu Expense Reconciliation 1995 1994 1993 (Amounts in Thousands of Dollars)

Compuwt federal income tax at statutory rate

$95,591

$ 89,524 5 80,558 Increase (decrease) in taxes resulting from:

Tax audit settlement (15,000)

State income taxes, net of federal income tax benefits 15,779 (25,516) 18,468 Amortization of deferred investment tax credits (7,831)

(5,982)

(6,006)

Adjustment to regulatory receivable, net of federal tax 52,325 Revenue requirement adjustment to regulatory taxes (12,178)

Other (6,878)

(5,200) 1,802 Totalincome 71x upense

$96,661

$ 92,973

$ 79,822 DQC 1995 Annual Repon

Total income taxes differ from the amount computed by applying the statutory federal income l

tax rate to income before income taxes, before preferred and preference dividends of subsidiaries

{

and before the cumulative effect of changes in accounting principles.

l

1. leases

'lhe Company leases nuclear fuel, a portion of a nuclear generating plant, certain office buildings, computer equipment and other property and equipment.

Capital trases at Decernber 31 1995 1994 (Amoimts in Thousands of Dollars)

Nuclear fuel 5112,573

$ 139,763 Electric plant 20,808 22,969 7btal 133,381 162,732 l

less accumulated amortization (74,874)

(91,376)

Property lleld Under Capital Itases - Net (a) 5 58,507 5 71,356

'a) Includes $2,910 in 1995 and $3,201 in 1994 of capital leases with' associated obligations retired.

j in 1987, the Company sold and leased back its 13.74 percent interest in llV linit 2; the sale was exclusive of transmission and common facilities.'Ihc total sales price of $537.9 million was the appraised value of the Company's interest in the property. The Company leased back its interest in the unit for a term of 29.5 years.The lease provides for semiannual payments and is accounted for as an operating lease. 'lhe Company is responsible under the terms of the lease for all costs ofits interest in the unit. In December 1992, the Company participated in the refinancing of collateralized lease bonds to take advantage oflowcr interest rates and reduce the annual lease payments. 'lhe bonds were originally issued in 1987 for the purpose of partially iinancing the lease of IIV linit 2.

in accordance with the llV linit 2 lease agreement, the Company paid the premiums of approxi-l mately $36.4 million as a supplemental rent payment to the lessors.'lhis amount was deferred and is being amortized over the remaining lease term. At December 31,1995, the deferred balance was approximately $31.6 million.

leased nuclear fuel is amortized as the fuel is burned. The amortization of all other leased property is based on rental payments made. Payments for capital and operating leases are charged to operating expenses on the statement of consolidated income.

Suminary of Rental Payonents 1995 1994 1993 (Arnounts in Thousands of Dol lan)

Operating leases

$57,617 556,437

$57,398 Amortization of capital leases 26,705 33,596 28,758 Interest on capital leases 4,332 4,996 5,382 Total Rental Payrnents

$88,654

$95,029

$91,538 Future Minirnum Lease Payments Operating leases Capital Leases Year Ended December 31, (Amounts in Thousands of Dollars) 1996 5 58,095 5 24,392 1997 57,870 13,862 1998 57,621 8,8 01 1999 57,206 5,130 2000 57,164 3,705 2001 and thereafter 902.097 20,946 Total l,sinimum Itase Payments

$ 1,190,053 76,836 less amount representing interest (21,239)

Present value of minimum lease payments for capital leases

$ 55,597 (a)

(a)Indudes cunent obligations of $21.1 million at December 31,1995.

DQE 1995 Annual Report l

l

Future minimum lease payments for capital leases are related principally to the estimated use of nuclear fuel fmanced through leasing arrangements and building leases. Minimum payments for operating leases are related principally to BV linit 2 and certain of the corporate of6ces.

Future payments due to the Company, as of December 31,1995, under subleases of certain corporate office space are approximately $4.4 million in 1996, $4.5 million in 1997 and

$23.1 million thereafter.

I. Commitments and Construction Contingencies The Company estimates that it will spend, excluding the AFC and nuclear fuel, approximately

$90 million, $90 million and $100 million on electric utility construction during 1996,1997 and 1998, respectively. Approximately $5 million of capital expenditures for the reliability enhancements to the simpic cycle units located at Bl contemplated in the Company's petition before the PilC are excluded from these estimates. (See " Sale of Ft. Martin" discussion, Note E, on page 47.)

Nnclear-Related Matters The Company operates two nuclear units and has an ownership interest in a thirdflhe operation of a nuclear facility involves special risks, potential liabilities and specific regulatory and safety requiie-ments. Specific information about risk management and potential liabilities is discussed below.

NucIcar Decommissioning. The PilC ruled that recovery of the decommissioning costs for Beaver Valley linit 1 (BV linit 1) could begin in 1977, and that recovery for ilV linit 2 and Perry linit 1 could begin in 1988.The Company expects to decommission BV linit 1, BV ll# 2 and Perry linit 1 no earlier than the expliation of each plant's operating license, 2016,2026 and 2025, respectively. BV linit I will be placed in safe storage until the expiration of the BV linit 2 operating license, at which time the units may be decommissioned together.

Based on site-specific studies Gnalized in 1992 for BV linit 2, and in 1994 for BV linit I and Perry linit 1, the Company's share of the total estimated decommissioning costs, including removal and decontamination costs, currently being used to determine the Company's cost of service, arc

$122 million for BV linit 1, $35 million for BV LJnit 2, and $67 million for Perry linit 1.

In conjunction with an August 18,1994, PilC Accounting Order, the Company has increased the annual contribution to its decommissioning trusts by approximately $2 million to bring the total annual funding to approximately $4 million per year. In collaboration with the Company and several other Pennsylvania utilitics, the PllC Office of Special Assistants is evaluating various decommissioning issues, including funding methods. The Company expects that any action relating to any forthcoming PllC report will result in further increases in annual contributions to its decommissioning trusts. Consistent with these anticipated future PllC actions, the Company's petition before the PllC for the sale ofits ownership interest in the Ft. Martin Power Station provides for additional annual contributions to its nuclear decommissioning funds of $5 million for Ove years without any increase in existing electric utility rates. (See " Sale of rt. Martin" discussion, Note E, on page 47.)

The Company records decommissioning costs under the category of depreciation and amortir.ation expense and accrues a liability, equal to that amount for nuclear decommissioning expense. Such nuclear decommissioning funds are deposited in external, segregated trust accounts. The funds are invested in a portfolio of municipal bonds, certificates of deposit and linited States government securitics having a weighted average duration of four to seven years. Trust fund carnings increase the fund balance and the recorded liability.The market value of the aggregate trust fund balances at December 31,1995, totaled approximately $28.5 million. On the Company's consolidated balance sheet, the decommissioning trusts have been reflected in other long term imrestments, and the related liability has been recorded as other non current liabilities.

Nuclear Insurance. All of the companics with an interest in BV linit 1, llV linit 2 and Perry linit 1 maintain nuclear property insurance, which provides coverage for property damage, decommissioning, and decontamination liabilitics.The Company's share of this program provides for $1.2 billion ofinsurance coverage for its net investment of $407.8 million in the Beaver Valley Power Station (BVPS) and $565.5 million in Perry linit 1, plus its interest in BV linit 2 with lease commitments of $405.2 million, at December 31,1995. The Icase commitments of $405.2 million represent the net present value of future lease payments discounted at 10.94 percent, the return currently authorized the Company by the PLIC. The Company would be responsible for its share of any damages in excess ofinsurance coverage. In addition, if the property damage reserves of I

Nuclear Electric insurance Limited (NI:lL), an industry mutual insurance company, are inadequate to cover claims arising from an incident at any linited States nuclear site covered by that insurer, the Company could be assessed retrospective premiums totaling a maximum of $10.9 million.

The Price-Anderson Amendments to the Atomic Energy Act of1954 limit public liability from a singic incident at a nuclear plant to 58.9 billion.The Company has purchased $200 million ofinsurance, the maximum amount available, which provides the first level of financial protection.

DQE 199.5 Annual Rmon l

l Additional protection of $8.3 billion would be provided by an assessment of up to $75.5 million l

per incident on each nuclear unit in the linited States.'Ihc Company's maximum total assessment,

$56.6 million, which is based on its ownership or leaschold interests in three nuclear generating l

units, would be limited to a maximum of $7.5 million per incident per year. A further surcharge of 5 percent could be levied if the total amount of public claims exceeded the funds provided under the assessment program. AddWonally, a state premium tax (typically 3 percent) could be charged on the assessment and surcharge. Finally, the linited States Congress could impose other revenue-raising measures on the nuclear industry if funds prove insufGcient to pay claims.

l The Company carries extra expense insurance which would pay the incremental cost of any replacement power purchased (in addition to costs that would have been incurred had the units been operating) and other incidental expense after the occurrence of certain types of accidents at its nuclear units in a limited amount for a limited period of time.The coverage provides for 100 percent of the estimated extra expense per week during the 52-week period starting 21 wecks after an accident and 80 percent of such estimate per week for the following 104 weeks with no coverage thereafter.The amount and duration of actual extra expense could substantially exceed insurance coverage. NEIL also provides this insurance. If NEllls reserves are inadequate to cover claims at any linited States nuclear site covered by that insurer, the Company could be assessed retrospective premiums totaling a maximum of $3.5 million.

Heacer Valley Power Station Steam Generators. BVPS' units are equipped with steam generators designed and built by Westinghouse Electric Corporation (Westinghouse). Similar to other Westinghouse nuclear plants, stress corrosion cracking (SCC) has occurred in the steam generator tubes of BV linit 1. BV'llnit 2, which was placed in service cleven years after ilV linit 1, has not yet exhibited the degree of steam generator tube SCC experienced at BV linit 1. It is, however, too carly in the life of BV linit 2 to determine the extent to which steam generator tube SCC may become a problem.

The Company has undertaken certain measures, such as increased inspections and tube plugging to minimize the operational impact and to reduce susceptibility to steam generator tube SCC.

Although the Company has taken these steps to allay the effects of steam generator tube SCC, the inherent potential for future SCC in steam generator tubes of the Westinghouse design still exists.

Material acceleration in SCC could lead to loss of plant efficiency, signincant repairs or possible replacement of BV linit l's steam generators. Total replacement cost of BV Unit 1 steam generators is currently estimated at approximately $125 million.The Company would bc responsible for $59 million of this total, which includes the cost of equipment removal and replacement, but excludes replacement power costs. The earliest that BV Unit l's steam generators could be replaced is 1999.

The Company continues to explore all viable means of mitigating steam generator tube SCC, including new repair technologies. Both units will undergo 100 percent tube inspection during scheduled refueling outages in 1996.The Company will continue to monitor and evaluate the condition of the BVPS steam generators.

Spent Nuclear Fuel Disposal. The Nuclear Waste Policy Act of 1982 cstablished a policy for handling and disposing of spent nuclear fuel and a policy requiring the established Gnal repository to accept spent fuel. Electric utility companies have entered into contracts with the DOE for the permanent disposal of spent nuclear fuel and high. level radioactive waste in compliance with this legislation. The DOE has indicatcd that its repository under these contracts will not be available for acceptance of spent fuel before 2010 at the earliest. Existing on-site spent fuel storage capacitics at BV linit 1, BV linit 2 and Perry linit I are expected to be suf0cient until 2016,2010 and 2011, respectively.

Uranium Enriclunent Decontamination aml Decommissioning Fuml. Nuclear reactor licensecs in the linited States are assessed annually for the decontamination and decommissioning of DOE enrichment facilities. Assessments are based on the amount of uranium a utility had processed for enrichment prior to enactment of the National Energy Policy Act of 1992 (NEPA) and are to be paid by such utilities over a 15-year period. At December 31,1995, the Company's liability for contri-butions is approximately 59.9 million (subject to an inflation adjustment). Contributions, when made, are recovered from electric utility customers through the ECR.

Guarantees The Company and the owners of Bruce Mansfield have guaranteed certain debt and Icase obligations related to a coal supply contract for the Bruce Mansneld plant. At December 31,1995, the Company's share of these guarantees was $25.4 million. The prices paid for the coal by the l

companics under this contract are expected to be suf0cient to meet debt and lease obligations to be satis 0ed in the year 2000. (See " Deferred Coal Costs" discussion, Note F, on page 49.) The minimum future payments to be made by the Company solely in relation to these obligations are 56.2 million in 1996,55.9 million in 1997, 55.6 million in 1998, 55.3 million in 1999 and DQC 1995 Annual Repon

$4.2 million in 2000.'the Company's total payments for coal purchased under the contract were

$28.9 million in 1995, $23.3 million in 1994 and $26.5 million in 1993.

'lhe Company has entered into various partnerships to enhance the credit associated with affordable housing investments made by third party investors. As part of the transactions, the Company has guaranteed a minimum dc6ned yield and the funding of certain defined ope de6cits in return for a fee. A portion of the fees received has been deferred to absorb any re payments with respect to these transactions. Itased on an evaluation of the underlying housing projects, it is management's belief that such deferrals are ample for this purpose.

Residual Waste Management Regulations in 1992, the Pennsylvania Department of Environmental Protection (DEp) issued Residual Waste Management Regulations governing the generation and management of non-hazardous residual waste, such as coal ash. The Company is assessing the sites which it utilizes and has developed compliance strategies under review by the DEP. Capital compliance costs of $3.0 million were incurred by the Company in 1995 to comply with these DEP regulations; on the basis of information currently available, an additional $2.5 million will be incurred in 1996. The expect additional capitz' cost of compliance through the year 2000 is estimated, based on current information, to be approximately $25 million. This estimate is subiect to the results of ground water assessments and DEP 6nal approval of compliance plans.

Other

'Ihe Company is involved in various other legal proceedings and environmental matters. The Company believes that such proceedings and matters, in total, will not have a materially adverse effect on its financial position or resuhs of operations.

K. Lons@rm Debt

'ihe Company's 1947 Grst mortgage bond indenture was retired in the third quarter of 1995 fol-lowing the maturity of the last bond series issued under the indenture. All of the Company's First Collateral Trust llonds have been issued under a new mortgage indenture that was established in April 1992 (the 1992 Indenture). All First Collateral Trust Ilonds became first mortgage bonds when the 1947 mortgage indenture was retired. The 1992 Indenture includes more flexible provisions and climinates conventions such as mandatory sinking funds and formula-derived maintenance and replacement clauses.

'lhe pollution control notes arise from the sale of bonds by public authorities for the purposes of Gnancing construction of pollution control facilities at the Company's plants or refunding previously issued bonds. The Company is obligated to pay the principal and interest on these bonds. For certain of the pollution control notes, there is an annual commitment fee for an irrevocable letter of credit. Under certain circumstances, the letter of credit is available for the payment of interest on, or redemption of, all or a portion of the notes. In late 1994, pollution control notes totaling $114.1 million with an average interest rate of 10.34 percent were refinanced at lower adjustable interest rates.

hmg-Term Debt at December 31 Principal Outstanding interest (Amounts in Thousands of Dollars)

Rate Maturity 1995 1994 First Collateral Trust Bonds /

first mortgage bonds 4.75 %-8.75 %

1996-2025 $ 903,000 (a) $ 950,400 (b)

Pollution control notes (c)

(d) 2003-2030 417,985 417,051 Sinking fund debentures 5%

2010 5,703 5,817 Term loans 6.49%

2000 65,000 Miscellaneous 13,462 8,833 less unamortized debt discount and premium - net (4,157)

(4,490)

Total Long Term Debt

$1,400,993

$1,377,611 (a) Excludes $50.0 million in 1995 related to a current maturity on May 15.1996.

(b) Excludes $9.6 million in t994 related to sinking fund requirements on the underlying first mortgage bonds and

$49.0 million related to the maturity on June 1,1995, of the last first mongage bonds issued under the 1947 indenture.

(c) Excludes $0.9 million in 1994 related to sinking fund requirements on the underlying first mortgage bonds.

(d) The pollution control notes have adjustable interest rates. 'Ihe interest rates at year-end averaged 3.9 percent in 1995 and 4.3 percent in 1994.

DGE 1995 Annual Report

~ -. -.

At December 31,1995, sinking fund requirements (related solely to the sinking fund debentures) l and maturities oflong-term debt outstanding for the next five years were: $50.4 million in 1996;

$50.7 million in 1997, $75.7 million in 1998, $75.8 million in 1999 and $165.8 million in 2000.

~

Total interest costs incurred were $107.7 million in 1995, $110.7 million in 1994 and $118.1 million in 1993. Interest costs attributable to long term debt and other interest were $102.4 million, $105.1 million and $112.0 million in 1995,1994 and 1993, respectively. Interest costs incurred also include $5.3 million, $5.6 million and $6.1 million attributable to capital leases in 1995,1994 and 1993, respectively. Of these amounts, $1.8 million in 1995, $2.0 million in 1994 and $2.0 million in 1993 were capitalized as AFC. Debt discount or premium and related issuance expenses are amortized over the lives of the applicable isseas.

During 1994, the Company's BV linit 2 lease arrangement was amended to reflect an increase in federal income tax rates. At the same time, the associated letter of credit securing the lessor's equity interest in the unit was increased from $188 million to $194 million and the term of the letter of credit was extended to 1999. If certain specified events occur, the letter of credit could be drawn down by the owners, the leases could terminate and collateralized lease bonds ($409 million at December 31,1995) would become direct obligations of the Company.

At December 31,1995 and 1994, the Company was in compliance with all ofits debt covenants.

l-At December 31,1995, the fair value of the Company's long-term debt, including current matu.

l rities and sinking fund requirements, estimated on the basis of quoted market prices for the same or similar issues or current rates offered to the Company for debt of the same remaining maturities, was $1,466.4 million.The principal amount included in the Company's consolidated balance sheet is $1,441.7 million.

I Preferred and Preferred and Preference Stoch of Subsidiaries at December 31 I'y,';[f #5 (Shares and Amounts in Thousands) 1995 1994 1993

~

Call Price Per Share Shares Amount Share.< Amount Shares Amount i

Preferred Stock Series:

l 3.75% (a) (b) (c)

$51.00 148 5 7,407 148 $ 7,407 148 $ 7,407

[

4.00% (a) (b) (c) 51.50 550 27,486 550 27,486 550 27,486

(

4.10% (a) (b) (c) 51.75 120 6,012 120 6,012 120 6,012 4.15% (a) (b) (c) 51.73 132 6,643 132 6,643 132 6,643 -

4.20% (a) (b) (c) 51.71 100 5,021 100 5,021 100 5,021

$2.10 (a) (b) (c) 51.84 159 8,039 159 8,039 159 8,039

$7.20 (a) (c) (d) 298 29,732 319 31,915 9.00% (c) 3,000 l

Total Preferred Stock 1,209 63,608 1,507 90,340 1,528 92,523 l-Preference Stock Series: (f) l

$2.10 (c) (g) 1,175 29,383 l

$7.50 (d) (h) 84 8,392 Plan Series A (c) (i) 37.18 834 29,615 841 29,857 844 29,956 i

Total Preference Stoch 834 29,615 841 29,857 2,103 67,731 Deferred ESOP benefit (22,257)

(24,852)

(27,126)

Total Preferred and Preference Stock

$70,966

$95,345

$133,128 (a) Preferred stock: 4,000,000 authorized shares; (f) Preference stock: 8,000,000 authorized shares;

$50 par value; cumulative 51 par value; cumulative (b) 550 per share imoluntary liquidation value (g) 525 per share involuntary liquidation value (c) Non-redeemable (h) Redeemable (d) 5100 per share imuluntary liquidation value (i) 535.50 per share invuluntary liquidation value (e) 500 authorized shares: 10 issued $300,000 par value; involuntary liquidation value $300,000 per share: redeemable beginning August 2000 Holders of Duquesne's preferred stock are entitled to cumulative quarterly dividends. If four i

quarterly dividends on any series of preferred stock are in arrears, holders of the preferred stock are entitled to elect a majority of Duquesne's board of directors until all dividends have been paid. At December 31,1995, Duquesne had made all preferred stock dividend payments.

DQC 1995 Annual Report l

r lloiders of Duquesne's preference stock are entitled to receive cumulative quarterly dividends l

if dividends on all series of preferred stock are paid. If six quarterly dividends on any series of preference stock are in arrears, holders of the preference stock are entitled to elect two of Duquesne's l

directors until all dividends have been paid. At December 31,1995, the Company had made all dividend payments. Preferred and preference dividends of subsidiaries included in interest and Other Charges were $5.9 million, $6.0 million and $8.9 million in 1995,1994 and 1993, respectively.

In December 1991, the Company established an Employee Stock Ownership Plan (130P) to provide matching contributions for a 401(k) Retirement Savings Plan for Management Employees. (See " Employee lienefits," Note N, on page 57.)'ihe Company issued and sold 845,070 shares of preference stock, plan serics A to the trustee of the ESOP. As consideration for the stock, the Company received a note valued at $30 million from the trustee. The preference stock has an annual dividend rate of $2.80 per share, and each share of the preference stock is exchangeable for one and one half shares of DQE common stock. At December 31,1995, $22.3 million of preference stock issued in connection with the establishment of the ESOP had been offset, for Snancial statement purposes, by the recognition of a deferred ESOP benefit. Dividends I

on the preference stock and cash contributions from the Company are used to repay the ESOP note. The Company made cash contributions of approximately $2.1 million for 1995, $2.3 million for 1994 and $2.1 million for 1993. These cash contributions were the difference between the ESOP debt service and the amount of dividends on ESOP shares (approximately $2.3 million in 1995, $2.4 million in 1994 and $2.3 million in 1993). As shares of preference stock are allocated j

to the accounts of participants in the ESOP, the Company recognizes compensation expense.

and the amount of the deferred compensation benent is amortized.1hc Company recognized compensation expense related to the 401(k) plans of $2.3 million in 1995, $1.8 million in 1994 and $1.7 million in 1993.

Outstanding preferred and preference stock is generally callabic, on notice of not less than thirty days, at stated prices plus accrued dividends. On September 1,1995, Duquesne called for redemption of all ofits outstanding shares of $7.20 preferred stock. On January 14,1994, Duquesne called for redemption all ofits outstanding shares of $2.10 and $7.50 preference stock. None of the remaining Duquesne picferred or preference stock issues has mandatory purchase requirements.

M. Common Stock Changes in the Number of Shares of DQE Common Stock Outstanding 1995 1994 1993 (Amounts in Thousands of Shares)

Outstanding as of January 1 78,459 79,518 79,425 Reissuance from treasury stock 83 11 6 93 Repurchase of common stock (986)

(1,175)

Outstanding as of December 31 77,556 78,459 79,518 On April 19,1995, the Company's board of directors declared a three-for-two stock split for shareholders of record on May 1,1995. One additional share of common stock was issued for every two shares outstanding as of the record date. All references in the consolidated financial statements as to issued and outstanding shares and per share amounts have been restated to reflect the stock split.

The Company has continuously paid dividends on common stock since 1953. The quarterly dividend declared in the fourth quarter of 1995 on the post-split shares was increased from 5.30 to $.32 per share. The Company has increased its annual dividend for cach of the last eight years.

The Company's annualized dividend per share was $1.28, $1.17 and $1.12 in 1995,1994 and 1993, respectively.

An amendment co the Restated Articles of DQE changing the Company's common stock from stock with a par value of $1.00 per share to stock having no par value, was approved by shareholders at the Company's Annual Meeting of Shareholders on April 20,1994.

Dividends may be paid on the Company's common stock to the extent permitted by law and as declared by the board of directors. However, payments of dividends on Duquesne's common stock may be restricted by Duquesne's obligations to holders of preferred and preference stock pursuant to Duquesne's Restated Articles ofincorporation. No dividends or distributions may be made on l

Duquesne's common stock if Duquesne has not paid dividends or sinking fund obligations on its I

preferred or preference stock. Further, the aggregate amount of Duquesne's common stock dividend payments or distributions may not exceed certain percentages of net income if the ratio of common shareholders' equity to total capitali:.arion is less than specified percentages. As all of Duquesne's 1

common stock is owned by the Company, to the extent that Duquesne cannot pay common dividends, the Company may not be able to pay dividends to its common shareholders. No part of the retained camings of the Company was restricted at December 31,1995.

DQC 1995 Annual Report

N. Employee Benefits Retirement Plans The Company maintains retirement plans to provide pensions for all full-time employees.

Upon retirement, an employee receives a monthly pension based on his or her length of service and compensation. The cost of funding the pension plan is determined by the unit credit actuarial cost method. The Company's policy is to record this cost as an expense and to fund the pension plans by an amount that is at least equal to the minimum funding requirements of the Emple e Retirement Income Security Act of1974 (ERISA) but not to exceed the maximum tax dedur -ble amount for the year. Pension costs charged to expense or construction were $6.1 mil-lion for 1995, $8.9 million for 1994 and $9.8 million for 1993.

Fnnded Status of the Retirement Plans and Amonnts Recognized on the Consolidated Balance Sheet at December 31 1995 1994 tAmounts in Thousands of Dollars)

Actuarial present value of benefits rendered to date:

j Vested benefits

$378,344

$314,933 Non-vested benc0ts 19,110 17,282 Accumulated benefits obligations based on compensation to date 397,454 332,215 Additional benefits based on estimated future salary levels 53,757 59,318 Projected benefits obligation 451,211 391,533 Fair market value of plan assets 490,870 412,724 Projected benefits obligation under plan assets 5 39,659

$ 21,191 Unrecognized net gain

$ 124,794

$ 95,691 Unrecognized prior service cost (37,535)

(30,365)

Unrecognized net transition liability (15,665)

(17,477)

Net pension liability per consolidated balance sheet (31,935)

(26,658)

Total

$ 39,659

$ 21,191 Assumed rate of return on plan assets 8.00 %

8.00 %

Discount rate used to determine projected benefits obligation 7.00 %

8.00 %

Assumed change in compensation levels 5.00 %

5.50 %

Pension assets consist primarily of common stocks, United States obligations and corporate debt securities.

Components of Net Pension Cost 1995 1994 1993 (Amounts in Thousands of Dollan)

Service cost (benefits carned during the year)

$ 9,953

$ 12,482 5 11,657 Interest on projected benefits obligation 30,063 28,221 27,423 Return on plan assets (99,246) 1,967 (41,725)

Net amonization and deferrals 65,316 (33,783) 12,454 Net Pension Cost

$ 6,086 5 8,887

$ 9.809

=

Retirement Savings Plan and Other Benefit Options The Company sponsors separate 401(k) retirement plans for its management and bargaining i

unit employees.

The 401(k) Retirement Savings Plan for Management Employees provides that the Company I

will match employee contributions to a 401(k) account up to a maximum of six percent of an employee's eligible salary.The Company match consists of a 5.25 base match per cligible contribution dollar and an additional 5.25 incentive match per eligible contribution dollar, if Iloard approved targets ?.re achieved.The 1995 incentive target for management was accomplished.

The Company is funding its matching contributions to the 401(k) Retirement Savings Plan for Management Employees with payments to an ESOP established in December 1991. (See " Preferred and Preference Stock of Subsidiarics," Note L on page 55.)

l DQC 1995 Annual Repon

i

%c 401(k) Retirement Savings Man for IHl:W Represented Employees provides that beginni in 1995, the Company will match employee contributions to a 401(k) account up to a maximum of four percent of an employce's eligible salary. %e Company match consists of a 5.25 base match per cligible contribution dollar and an additional $.25 incentive match per cligible contribution dollar, if certain non-occupational illness and injury targets are met. In 1995, these incentive targets were not met by the Company's union represented employees.

%c Company's shareholders have approved a long-term incentive plan through which the Company may grant management employees options to purchase, during the years 1987 throug 2003, up to a total of 6.9 million shares of the Company's common stock at prices equal to the fair market value of such stock on the dates the options were granted. At December 31,1995, approx imately 2.6 million of these shares were available for futurc grants.

%e following information is restated to re0cet the 1995 stock split. As of December 31,1995, 1994 and 1993, respectively, active grants totaled 2,159,000; 2,118,000; and 1,763,000 shares.

Exercise prices of these options ranged from $8.2084 to $27.625 at December 31,1995, and from l

$8.2084 to $23.0833 at December 31,1994 and December 31,1993. Expiration dates of these grants ranged from 1997 to 2005 at December 31,1995; from 1997 to 2004 at December 31, 1994; and from 1997 to 2003 at December 31,1993. As of December 31,1995,1994 and 1993, i

respectively, stock appreciation rights (SARs) had been granted in connection with 1,202,000; 1,190,000 and 1,193,000 of the options outstanding. During 1995, 367,000 SARs were exerched; i

133,000 options were exercised at prices ranging from $8.2084 to $21.6667 and 28,000 options j

were cancelled. During 1994,1,254,000 SARs were exercised; 339,000 options were exercised at j

. prices ranging from $8.2084 to $18.9167; and 80,000 options were cancelled. During 1993, i

1,122,000 SARs were exercised; 227,000 options were exercised at prices ranging from $8.2084 to l

$18.9167; and 78,000 options were cancelled. Of the active grants at December 31,1995,1994 and 1993, respectively, 929,000; 918,000; and 867,000 were not exercisable.

Other Postretirement Benefits in addition to pension benefits, the Company provides certain health care benc0ts and life insurance for some retired employees. Substantially all of the Company's full time employees may, upon attaining the age of 55 and meeting certain service requirements, become eligible for

)

i the same benefits available to retired employees. Participating retirees make contributions, which 0

are adjusted annually, to the health care plan. The life insurance plan is non-contributory.

Company-provided health care benents terminate when covered individuals become cligible for Medicare benents or reach age 65, whichever comes first.%e Company funds actual expenditures for obligations under the plans on a " pay-as-you-go" basis. The Company has the right to modify 3

or terminate the plans.

As oflanuary 1,1993, the Company adopted Statement of Financial Accounting Standards l

No.106, Employers' Accounting for Postictirement Benefits Other Than Pensions, which requires the i

actuarially determined costs of the aforementioned postretirement benents to be accrued over the l

period from the date of hire until the date the employee becomes fully eligible for benents. Le Company has adopted this standard prospectively and has elected to amortize the transition i

liability over 20 years.

Components of Postretirement Cost 1995 1994 (Amounts in Thousands o_f Dollars) h Service cost (benefits earned during the period)

$1,315

$1,631 Interest cost on accumulated benc0t obligation 2,340 2,294 Amortization of the transition obligation over twenty years 1,700 1,700 Other (582)

Total Postretirement Cost

$4,773

$ 5,625 The accumulated postretirement benefit obligation comprises the present value of the estimated future benefits payable to current retirecs and a pro rata portion of estimated benefits payable to active employces after retirement.

l DQE 1995 Annuat Ryort l

i

I'unded Status ofI'ostretirement I'lan and Amounts Recognized on the Conwlidated Italance Sheet at December 31 1995 1994 (Amounu in *lhousands of Dollars)

Actuarial present value of benefits:

Retirees

$ 7,359

$ 6,292 Fully eligible active plan participants-3,187 3,074 Other active plan participants 21,935 20.543 Accumulated postretirement benclit obligation 32,481 29,909 l

Fair market value of plan assets j

- Accumulated benefit obligation in excess of plan assets

$(32,481)

$(29,909) linrecognized net actuarial gains

$ 8,427

$ 9,481 linrecognized net transition liability (28,898)

(30,598)

Postrctirement liability per consolidated balance sheet (12,010)

(8,792)

Total

$(32,481)

$(29,909)

Discount rate used to determine projected benefit obligation 7.00 %

8.00 %

i 8 h care cost trend rates:

j lit t

ror year beginning January 1 8.80%

8.60 %

llltimate rate 5.50 %

6.50 %

i Year ultimate rate is reached 2000 1999 j

Effect of a one percent increase in health care cost trend rates:

On accumulated projected benefit obligation 5 3,228

$ 3,137 On aggregate of annual service and interest costs 435 465 O. Quarterly Financial Summary of Selected Quarterly Financial Data (Thousands of Dollars, Except Per Share Amounts)

\\

Infonnation IE"I""""I 'I '" '"U""' """"""I *""d"""""'i""4 in the Conipany'. service terriinry.1 f

(Unaudited) 1995 First Quarter Second Quarter Third Quarter Fourth Quarter j

Operating Revenues (a) 5298,277

$283,372

$347,265

$291,248 Operating income (a) 80,607 66,870 105,528 69,460 Net income 40,901 35,685 55,269 38,708 Earnings Per Share (b)

.52

.46

.72

.50 Stock Price:(b) liigh 22 %

25 26%

30%

low 19 %

215/s 23 %

26%

l 4

1994 Operating Revenues (a)

$307,270

$295,409

$333,256

$287,975 Operating Income (a) 84,045 65,667 101,945 65,210 Net income 37,296 33,029 48,592 37,899 Lamings Per Share (b)

.47

.42

.61

.48 Stock Price:(b)

Iligh 23 21 %

20%

20%

low 20%

19%

18 %

18 %

(ai itesiaint to confunn with prearniation* a.lupint during IW1 di) Faniing per share und ni.wk prices har been restaied to relleri the at,rk

• phi.

l -

i a

i J

l DQE 1995 Annual Report l

. WESLEY W. VON SCHACK,51. Chairman of the floard, President and Chief Executiec Officer. Joined the company in 1984, Previously held senior executive positions in Anance and administration with other utility and communications companies.

Directorsiiips included in listing on page 20.

l GARY L. SCHWAss, 50. Executiec Vice President, Chief Financial Officer and Treasurer. Previously served in a variety of senior executive positions in finance and management with Consumers Power Company. Joined the company in 1985.

Directorships include Chairman, Western Pennsylvania Development Credit Corporation (promotes small business through lending activities), and Vice President and Treasurer, Holy Family Foundation (supports families in crisis).

l DAVID D. MARSHALL,'43. Executive Vice President. Previously held senior executive positions in finance at Central Vermont Public Service. Joined the company in 1985. Directorships included on page 20.

JAMES D. MITCHELL,44. Vice President. PicViously held senior Gnancial positions with Duquesne Light and U.S. West, Inc.

Joined the company in 1988. Directorships include Three Rivers Youth (helps troubled teenagers).

VICTOR A. ROQUE,49. Vice President and General Counsel. Formerly Vice President, General Counsel and Secretary for Orange and Rockland litilities. Joined the company in 1994. Directorships include the Pennsylvania Chamber of Business and industry (economic development) and the United Way Good Neighbors Advisory Committee. Also a member of the Salvation Army Greater Pittsburgh Advisory Board.

DIANE S. ElsMONT,51 DONALD j. CLAYTON,41 JACK SAXER, JR.,52 JOAN S. SENCHYsHYN,57 Secretary Assistant Treasurer Assistant Treasurer Assistant Secretary MORGAN K. O'BRIEN,35 Controller DUQUESNE llGHT COMPANY WESLEY W. VON SCHACK,51 DIANNA L. GREEN,49 WILUAM J. DELEO,45 JACK SAXER, JR.,52 Chaironan of the floard and Senior Vice President, Vice President, Marketing Assistant Vice President, Chief Executiec Officer Customer Operations and Corporate Performance Adtninistration DAVID D. MARSHALL,43 ROGER D. BECK,59 VICTOR A. ROQUE,49 SALLY K. WADE,42

{

j President and Vice President, Vice President Assistant Vice President, 1

l Chief Openning Officer Customer Services and General Counsel Iluntan Resources GAR 7 L. SCHWAss,50 GARY R.

DONALD j. CLAYTON,41 WILUAM F. FIELDS,45 Senior Vice President and BRANDENBERGER, 58 Treasurer Assistant Treasurer Chief Financial Oficer Vice President, DIANE S. ElsuCNT,51 JOAN S. SENCHYsHYN,57 JAMCs E. cross,49

^" Y" "UE Y Secretary Assistant SCcrClary Senior Vice President, Nuclear yoga,n g, o.gg,gn,35 Controller DUQUESNE ENTERPRISES THOMAS A. HURKMANs,30 ANTHONY J. VILLIOTTI,49 President Vice President, Treasurer and Controller I

MONTAUK JAMES D. MITCHELL,44 DONALD J. CLAYTON,41 WILUAM F. FIELDS,45 President Vice President

'litasurer l

LYDIA E. YORK,36 JAMES E. WILSON,30 Vice President Controller DQE ENERGY SERVICES ALEXis TsAGGARIS,47 JOHN W. WELCH,44 JOHN J. DROZDOWsKI,40 President Executive Vice President Treasurer and Controller DQL t9% An,wal Rawl

a x

"4 o

Common Stock Shareholder Services / Assistance Trading Symbol: DQE By telephone, representatives are available Stock Exchanges Listed and Traded:

from 7:30 a.m. to 4:30 p.m. (Eastern time)

New York, Philadelphia, Chicago to assist you with the following services:

Number of Common Shareholders of Record Direct purchase ofinitial shares at hear-End: 79,048.

Direct deposit of dividends Annual Meeting Automatic cash contributions Shareholders are cordially invited to attend Dividend reinvestment our Annual Meeting of Shareholders at Stock transfer 10 a.m., April 23, at the Smith Barney Plaza, Unreceived dividend payment 388 Greenwich St., New York, NY 10013.

Change of address st stock cenWcate DOE Internet Home Page A variety of shareholder and customer Stock Certificate Transfers information is available on DQE's home Shareholders with only stock certificates to page on the World Wide Web. Our address is transfer should send their certificates and the http://www.dge.com. The site is best viewed related documents to our transfer agent:

using the latest version of Netscape software.

Boston Equi-Serve Transfer Processing 150 Royall Street 45-01-05 Canton, MA 02021 ELECTRI-STOCK Direct Deposit The following investor services are available Y ur DQL quarterly dividends can be depos,it-through DQE's dividend reinvestment and ed automatically into a personal checking or stock purchase plan, savings account. Call Shareholder Relations toll-free for more information.

Direct Purchase of DOE Stock Financial Community Inquiries DQE offers non-shareholders the ability

^"^I SIS' '""5"".ent managers and brokers Y

to purchase stock directly through the should direct their mquines to 1-412-393-company. Call or write for a prospectus on this popugar program, 4133; FAX 1-412-393-6571. Written inquines should be sent to the Investor Relations Automatic Cash Contributions Department at the address below.

Through this program, current reinvest-Dividend Tax Status ment plan participants can make The company estimates that all of the com-regular cash contributions to purchase additional shares of DQE common mon stock dividends paid in 1995 are tax,ble as dividend income. This estimate is subject to stock by having funds automatically withdrawn from their bank accounts.

audit by the Internal Revenue Service.

Form 10 K Other Features and Services

• Purchase and sale of plan shares at if y u hold or are a beneficial holder of DQL nominal commissions.

c mm n stock as of February 21,1996, the record date for the 1996 Annual Meeting, we

• Acceptance of certificates for safe-w 11 send you, free upon request, a copy of keeping

• Reregistration of some or all of a DQE's Annual Report or Form 10-K as filed, shareholder's holdings, with the Secunties and Exchange Commission

• Creation of new accounts as gifts f r 1995. Requests must be made in writing to the Secretary, DQE, at the address listed below.

for family and friends.

DQE l

Shareholder Relations Box 68 Pittsburgh, PA 15230-0068 Q Reg. lI.S. Pat, & Tm. Of f.

Toll-free: 1-800-247-0400 DQE and its affiliated companies are in Pittsburgh: 393-6167 l

Equal Opportunity Employers.

FAX: 1-412-393-6087

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