ML20214V438

Duquesne Light Co Annual Rept 1986

ML20214V438
Person / Time
Site:	Beaver Valley, Perry, 05000000
Issue date:	12/31/1986
From:	Arthur J, Von Schack W DUQUESNE LIGHT CO.
To:
Shared Package
ML20214V285	List: ML20214V283 ML20214V323 ML20214V371 ML20214V405 ML20214V438
References
NUDOCS 8706120101
Download: ML20214V438 (52)

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f Financialand Operating Highlights Mission Statement Duquesne LightCompany Financial Percent 1986 1985 Change Duquesne L1ghtCompanyis engagedin theproducIlon, trans. Revenues from Customers (000) SoQ,744 $872,411 - 2.5 mission, distribut/on andsale of Revenues from Other Utdities(000) $45,519 $46,049 - 1.2 electric energy. Our first responsi-bihtyls to outresident/al, com- Total 0perating Revenues (000) $896,263 $918,460 - 2.4 rnercial, and Industrialcustomers.

Netincome(000) $151,426 $175,957 - 13.9 In meeting theirneeds, we must always mainfaln quahty andprofes- $1,79 $2.26 - 20.8 Earnings Per Share of Common Stock sionalstandards. Oureffortsmust be directedtowardthe satts/ action Dividends Paid Per Share of Common Stock $1.63 $2.06 - 20.9 ofnewandesistingcustomers. As well, wemustconstantly strive to Book Value Per Share of Common Stock at Year End $16,75 $16.36 + 2.4 reduce ourcosts so that we mayo //er reasonable electricrates. The Shares of Common Stock Outstanding success otthe Company /s directly at Year End 73,119,446 71,488,270 + 2.3 dependent upon theproductive contribullons olallemployees. Each Allowance for Funds Used During employee mustbe consideredas an Construction as a Percent of Earnings individual. The dignity of allem- for Common Stock 85 % 64 % + 32.8 playets mustbe respectedandtheir meritrecognized. Compensation Operating mustbe taltandadequate, and 54,312,047 $4,168,993 + 3.4 Electric Plant (000) working conditionsmust be clean, orderly, and sale. Employees should MWH Sales to Customers 10,514,121 11,008,367 - 4.5 be free to make suggestions andin volce their opin/ons. T/'ere must be MWH Sales to 0ther Utilities 2,135,834 1,980,761 + 7.8 equalepportunity oremployment. TotalMWH Sales 12,649,955 12,989,128 - 2.6 development, and!dvancement.

We are responsible to curstock- Pnk Load Megawatts 2,132 2,127 + 0.2

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holders. We mustbelanovallvein aur epproach. entrepreneuriatin cur 3st of FuelPer Msilion 6TU 165.3C 168.56  ;- 1.9 style, and willing to take calcu/Jted- Average BTU Per KWH Output 10,624 10.633 - 0.1 reasonable business risks. Byop- - - - - - - - - - - - - - -

erstingin this manner, we willbe AnnualSystem Generation MWH 13,275,877 13,599,359 - 2.4 dedicated to earning an adequate proht and, in turn, realizing a lair and competillve return for the Compairy's Contents owners for the ose of theircapital.

Wesre responsible to the commun-1 ItiesIn which weIlve and work. We To out stockholders _

mustbe goodcorporate citltens, Perspective on 1366 s to 21 offering assistance anddoing our Cornpan& port on Finanual statements 22 partto helpimprove the general __

quahty of hie in our service territory Opimon of Independent Certified Pubke Accountants 22 We mustmain aln the property we Fsnancua1 \ntormaten 23 to 47 areprivilegedto use, comply with St(*C* Alta MA0 48 environmentalregulations, and protectournaturaltesources. Tax status of Common stock Devedends 48 Daard of oirectors and company Oftcers insde Back Cover

To Our Stockholders he precipitous decline of the local steelindustry over the past several years

. continues to affect Duquesne Light Company and the communities and people of the two southwestern Pennsylvania counties it serves. In late 1985, realizing that the steellosses were permanent...ending a historic rise-and-fall cycle...we undertook an evaluation of our marketplace and of our traditional method of doing business.

In mid-April 1986, the DUQUESNE PLAN, a series of initiatives to revitalize the Company and to help accelerate the economic recovery of the Pittsburgh region, was announced.

The quote on the cover of this report captures the essence of the DUQUESNE PLAN.

It details in one sentence what we need to do as a company to operate successfully in a changing marketplace and a changing utility environment. Duquesne Light Company faces non-traditional challenges-the major loss of steelload, completing and recovering our i investment in new generation plants in a changing political and bus! ness environment, and increasing competition. The DUQUESNE PLAN responds to these problems in non-traditionalways.

Of primary concern to us is legislation passed in Per nsylvania in June 1986 which allows the Public Utility Commission to limit recovery of costs associated with additional capacity if the Commission considers a new baseload generating unit to be " excess capacity." This irresponsible legislation takes a " snapshot" approach in judging capacity levels. It gives no consideration to the fact that utilities must plan for new generation stations 10 to 15 years in the future and that these plants are built to last 40 to 50 ', ears.

At the same time, the new law has the potential of disco Jraging future in\tstment in utility construction projects because it, in effect, breaks the long standing social compact that has existed between regulated utilities and society. As part of that compact, a utility is granted a monopoly franchise and, in turn, accepts an obligation to provide safe, reliable service to every customer at a fair price. The utility is expected to anticipate the demand for electricity far into the future, and to invest millions...even billions...in the generation, transmission and distribution infrastructure needed to meet that demand. Society's share of the compact is to permit those who prudently invest funds...as part of a utility's good faith effort to ensure reliable, long-term service...to recover their investment and to have an opportunity to earn a reasonable return on that investment.

Legislators cannot expect to have it both ways. As part of our obligation to serve, and with the strong encouragement of regulators, we invested in new generation. If regulators now use the new legislation to change the rules in midstream...and attempt to pick and choose those investments on which they will allow a fair return... investors will quit playing the game. And utilities probably will not build the necessary generating stations if they cannot recover their costs. This type of legislation may be politically popular now. but who will pick up the pieces of the broken compact 10 years down the road?

I

The legislation needs to be modified. We will work for its revision to a law that is fair to all participants in the compact. In the meantime, we will do our best to work within the confinesof thelegislation.

Management is keenly aware of the hardships borne by our stockholders as  !

Duquesne Light responds to events in its marketplace and the Pennsylvania regulatory I arena. We especially regret your loss of income as a result of tte reduction in the quarterly  !

dividend last April. This step was necessary as we work to improve our Company's long-term financial stability in this difficult environment.

Duquesne Light is at a crossroads. The electric utility industry as a whole is anticipating change. We are not sure what final form that transformation will take...but we know that change is inevitable, and senior management is preparing for it by directing comprehen-sive corporate planning based on input from every facet of our operation.

l Part of this change willinvolve increasing competitive pressures. In addition to the strong traditional competition we face locally from other energy sources, competition is expected to develop from cogeneration and municipal waste-to-energy plant projects.

There also is increasing competition among electric companies. As new technologies emerge, these customer options willincrease...and we need to be ready to position our Company as a utility which provides a quality product at a fair price.

Tra following pages outline how Duquesne Light is evolving and changing. They detail what the Company is doing to become more efficient, more competitive, more market-driven, more customer oriented and motu profitable during the most challenging years of Duquesne Light's 106-year history.

In the short term, the Company faces some difficult problems... recovering our investment in generating stations. .. rebuilding significant losses of load... protecting our interests as a major customer's bankruptcy proceedings continue... dealing with unfair and punitive legislation. However, we are confident that Duquesne Light is moving in the right direction and are optimistic about the long term future of your Company and of the communities we serve.

Company management is grateful for the dedication and perseverance of the med and women of Duquesne Light in 1986. We also extend our gratitude to the many shareholders who have remained loyal to the Company during these recent difficult years.

j s Wb to NW <$

John M. Arthur WesleyW. von Schack Chairmanof theBoard President and Chief Executive Officer february 25.1987 2

T Joh hurand 55$$hl""

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1 Perspective on1986 When a bi!!before the Fransylvania Duquesne Light's decreased earnings in 1986 reflect the fact that our overall with c ve of gen ta i nc n struction costs (see page one) started retail sales were at a 15-year low, primarily due to a continued loss of industrial to look like had news for both Duquesne L/ght andits employees, manage, sales. Other major factors involved in the 47-cent drop in eamings from $2.26 in 1985 m:ntandunion becameall,esin a to $1.79 in 1986 include a prolonged work stoppage involving our largest customet.

common cause. Atleftin thephoto is Ernie Varhola, Duquesne Light's a bankruptcy filing by our second largest customet..the recording of two refunds to cus-Man:gerofGovernmenta/ Relations. tomers totaling more than $58 million...and rate increases that have averaged only two Atrightis NeilMcGowan of the InternationalBrotherhoodofElec- percentoverthe past fouryears.

Thirty-nine cents of the earnings decrease relates to a pending Public Utility Commis-mana rolfhes f u'e "etight employeelocals. Last summerthey sion (PUC) ordered $43 million refund, still in the appeal process, resulting from th top "

banded oj,e,oet,, a 1981 option rate order, and to a $15.3 million refund involving replacement power costs dwntI Harrisburg. Seeingmanagement accumulated during a 1979 outage at Beaver Valley Power Station Unit 1.

Eighty-five percent of 1986 earnings available for common stock were non-cash earn-legl ato s e an[dsm punled, some glad, some even ings attributable to AFUDC (Allowance for Funds Used During Construction)-an account-terentt t ing credit to the income statement unique to the utility industry which reflects the cost of mat r. one we argumentspresented. Some votes funds invested in new facilities not yet in rate base. In 1985,64 percent of eamings were changed, some didnot. That bill passed, buta newsessionandnew AFUDC-related.

bills are coming up. Having given partnership a try...andlearning theycan work togetheron As projected in last year's annual report, Duquesne Light's 1986 retail sales h" ' were down to 19711evels. Sales to retail customers dropped 4.5 percent in 1986 to t ene i ...compa y d i seem likely to repeat the joinf e/ fort. 10.5 billion kilowatt-hours, primarily because ourindustrial sales decreased 22.4 percent to 2.7 billion kilowatt-hours. A major factor in this decline was a six-month-long work stoppage at USX Corp.,

ourlargest customer.

Revenues from retail customers totaled $851 million in 1986...a 2.5 percent decrease. Industrial revenues were j down 21 percent to $178 million. The USX work stoppage l reduced industrial revenues by approximately $13 million.

Industrial revenues also were affected by LTV Steel Com- ,

pany's bankruptcy filing in July 1986. LTVs refusal to pay monthly minimum charges  !

under a long-term contract lowered industrial revenues by more than $6 million. l The steelindustry's former dominance of the local economy...and Duquesne Light's customer base...is giving way to a more diversified mix of non-manufacturing research 5

r and development, commercial, and advanced technology companies. Sales to commer- Corporate Secretary 0iane cial customers in 1986 rose 4.1 percent to a record 4.7 billion kilowatt-hours. Sales to hfl ff ce" te d / n residential customers also set a new all-time high with a 3.8 percent increase to 3 billion from whatmanycorporationspro-vide. Unlikemostcorporations, kilowatt-hours. Commercial revenues totaled $347 million; residential revenues amounted ouquesnet/ght/sownedmalnly by 134,000 individuals (approximately to $298 million.

40percentofwhomarePennsylvania Duquesne Light's sales to steel producers steadily increased from the 1950s until residents)...most with relatively small h8/dl898 "andsoherdepartment's 1981, when our system peak-2,522 megawatts-was established. During that time, we servicesaretailoredtothem. One did what every electric utility is obligated to do.. contract for the construction of generation exampleIsouttol/4reestockholder senl plants, based on the best projections of customer needs, so that when the power was g, an a a f 8 0367-6400.

needed, it would be there. However, not only did Steel's projections for growth never outsideItansylvanla, 1-800-247-0400.1 materialize, the existing industry collapsed due to factors beyond our control. Conse- '#f[f[,kholde ff ej// ara s e .

quently, our sales to Steel dropped from 30 percent of the record 13.6 billion kilowatt-hours howto transfershares to the grand-of electricity sold to retail customers in 1981 to just 15 percent of the 11 billion kilowatt- [, f$3);f.fach[bouttheDo pany hours sold in 1985. An unorecedented drop of almost 60 percentin just four years. (Department airector Tom Ross, right, offersone caution:"Ourpeople Indicative of the continuing diversification of the region's economy is a five-year workhardtoprovidefactsandassis-comparison of our retail customer sales. In 1981, industrial sales represented approxi. tance, buttheycan'tgiveadvice oninvestments ortaxes.")If you'd mately 49 percent of the 13.6 billion kilowatt-hours sold, ratherta/k face-to-face, you're wel-

• h foNowed by commercial sales at 30 percent and residen- {'"j odmpln '['oquse

,d t tial salesat 21 percent. In 1986, commercial sales Light'smain o///ce, located /n one 0 ntre 30f represented approximately 45 percent of the 10.5 billion pf,, ,om - js[t kilowatt-hours sold, followed by residential sales at down with youanddoeverything 28 percent and industrial sales at 27 percent. While this the p t.

type of diversified load growth is desirable in the long run, it does not offset in the near term the loss of industrialload. KWH Sales To Customers saons uws The Company's wholly owned coal-fired generation units maintained an availability of 86 percent despite major planned maintenance outages at the Cheswick and Elrama power , g 7, , 7 .

stations which were completed on a tight schedule through use of improved project . [-cj e

management programs. Major equipment improvements made at Cheswick during the outage increased the unit's efficiency and further improved control of stack emissions.

On May 16,1986, Beaver Valley Unit I was shut down for its fifth refueling outage,

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'ai a a a a a 10 years after the station began generating power. In its first decade of operation, Unit 1

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where Leo Spaederstands, generated more than 31.2 billion kilowatt-hours. Unit 1's record availability of 91.9 per-cent in 1985 gave it an impressive ranking of ninth among 89 U.S. reactors. Even better i eII / thealt n y u yearsaga Nowthe formerJones & availability,98.4 percent, was achieved in the first four months of 1986. Availability for all Ave uels o e;th ndi eing of 1986 was 70.7 percent, good considering it includes the three-month scheduled developedbya consortium olprivate refueling outage.

andpublic groupsas a high-tech industrialparkknown asthe A recent evaluation by the institute of Nuclear Power Operations (INP0) found Unit 1 httsburgh TechnologyCenter, and to be effectively managed and safely operated, and noted Duquesne Ught's progressive Spaederhasanotherprojecton his tist. Intensi/ying ourmarketing efforts to improve plant operations. INP0 is an independent, non-profit organization andeconom/cdevelopmentettarts established by the utility industry shortly after the Three Mile Island accident to help is the centerpiece ofourDUQUESNE PLANbusiness strategy. As manager nuclear power stations achieve high standards of operating excellence.

Emergency preparedness at Beaver Valley has achieved national recognition. Main-ment Spa e g a st dd/obsan industry to the localscene. This means taining and adding to that respected statusis important because of heightened public interest in emergency planning. In recent years, nuclear power opponents have zerced of fayingo expandn he ndnev companles on theldea olmoving in on emergency planning as part of last-minute efforts to halt generation construction fec /v heh becomeap uc ro projects. The 1986 Beaver Valley drill was held at night, for the first time, to test videotape shows on unlikelytopics, participants' ability to respond to an emergency at any time. From all indications, such as anIdle steellaboratoryand a silentsh/pyard. The shows are it was the best in five years of such drills. Approxi nately 275 Company employees

" fours"of available facllifies that and 1,000 state, county and local emergency management officials took part.

can be viewedconvenientlyin the o//lces old/stantcorporations. In addition to producing power efficiently and safely p oyees o e ashsteningpas s, Spaeder's departmenthas gotten tion for quality service...whatever the conditions.

Their response to a May storm and flood, which deva-thi ng i li gaway pitchedinto changingtheirminds. stated northern sections of our service territory, causing e/o [, eight fatalities and more than $20 million in damages, y op spee a Ic mentrates, artNily designedto illustrates that commitment. Despite difficult working conditions due to the concentration of the damage in edg , andis w rking on of rs.

a small area, service was restored to half of the 25,000 customers affected within several hours of the storm. Most of the rest had service the following day. Many employees helped residents dig out from the flood's aftermath during their off-duty hours.

Construction of Perry Unit 1, of which Duquesne Light owns a 13.74 percent share, was completed in 1986 by The Cleveland Electric illuminating Company. Full-power testing 9

e began in late December after a federal appeals court lifted a stay requested by a Rich Swlderskiwas 10yearsyoun-8'# ## #

consumer group challenging the plant's ability to withstand earthquakes. However, at ,f7,[ffo#"#[,##[7

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,jf f, year end, the State of Ohio continued to question the plant's emergency evacuation plans. December 1986, the profecipassed the 98-percent completemark when the Assuming no major problems develop at the plant and that no additional court appeals .. hot functionaltest"..what Swidersk/

describes as the unit's biggestcon-interrupt its power ascension program, Perry Unit 1 is expected to achieve commercial struction milestone...was completed.

Operation by mid-1987. Theprocessinvcivesbringing the plantupto work /ngtemperatures Lessons learned during the start-up of Beaver Valley Unit 1 are being put to use at andpressures, withoutthe use of Beaver Valley Unit 2, where construction work passed the 98-percent-complete mark at nuclear /uel, ln order to test various sy msan panen s year end. In addition to building the plant, Duquesne Light owns a 13.74 percent share o[ ,

of the unit's capacity. Because of the continued success of the testing program at Unit 2, quietlypleased with thetest. lt was a ^ "'

a fuel-loading schedule set two years ago is being maintained. Fuelloading is scheduled [8*yl##edaheadol

,,fp, edextre to begin at Unit 2 in Apil 1987, followed by low-power testing. Full power generation is weII, andfor30 seconds theplant expected around the end of 1987' electricityto theDuquesnelight system. In Swiderski's words, con-struction, inspection and testing are Eark.er m th.is report and in various stockholder communi- "windmgdown~asIvelloading cations throughout the year, we talked at length about the 8PPmachesIn April 1987. Employees with years of experience operating Unit unfairnessandirresponsibilityof the"excesscapacity" f have been melded /nto the Unit 2 sta#. The emergencypreparedness provisions of recently passed Public Utility Commission program (which has severelydelayed Sunset Legislation, and their potential adverse effect on somenuclearplants) was developed anddemonstrated, wRh Nuclear our Company.

RegulatoryCommission approval, The uncertain impact of this ill-advised legislation on on Unit f. Swiderskihopes to see a Duquesne Light rate increase request filed with the PUC , ","##fheendof t 98 last summer was cited as a primary reason for the Nov.12,1986, lowering of our bond ratings. The lower credit rating will result in higher costs for Duquesne Light to borrow money, which will be reflected in our price to custom-ers. In addition, Deloitte Haskins & Sells, Duquesne Light's independent certified public accountants, cited passage of the legislation as a primary factor in the qualification of their opinion on the Company's financial statements. In the final analysis, we believe that this legislation, which was championed by some as " pro-consumer," may, in the long run, result in higher bills, unreliable electric service, restricted economic develop-ment prospects and fewer jobs for Pennsylvanians.

To this point, we have discussed the major factors affecting our performance...the 10

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Thepipes behind Tim Durlsrepre- decline of the local primary steelindustry...the need to complete our generation construc-tion program and to begin to recover the costs of that investment ...a harsh legislative act y a lotDu e eL/ hl Th ry n:trralgasinto ourCheswickI'ower which creates uncertainty for investors. We've also highlighted Duquesne Light's strong Station- which burns coal. What goodis gasin a coal burningpower operating recordin 1986.

ptnt? Remember..ourDUQUESNE The following pages detail our response to the challenges...The DUQUESNE PLAN, a PLANbusiness strategyiscom-mitted to looking at alloptions to help series uf initiatives announced in April 1986 which build upon a first-rate generation and bo h henon t ad$onaland he

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traditional. The factis, coalalone designed to revitalize the Company and to accelerate the economic recovery of the has a freboxth s ze o a s all apartment house, in which pulverized We believe it is important that our customers be able to plan on reasonable and predict-un t,a support I el sn de tI st:rt and stabl/ize the flame. A lot of able energy prices into the future. This DUQUESNE PLAN initiative is designed to keep future price increases in the five percent to six percent range per year through the com-burneda Ifion llo sof la ar Durls supervised the installation of bined effect of a phase-in of costs associated with the completion of our generation a dual-burner system, which en-abtsusto takeadvantage o/ swings construction program and a continuation of our major cost reduction programs.

In the fuelmarketandburn natural Our rate stabilization proposal was filed with the PUC on June 11,1986. If approved, gas orall. Testsindicate we can expectimprovedcoalcombustion the initial year of the plan would generate a 5.8 percent, or approximately $47.5 million, add 'on o th u Isa ings.

That rate increase request includes one-fifth of the Cosiof Fossiland Nucleat Fuel Company's overall $663 million investment in Perry Unit 1 weem and the recovery of one-tenth of its overall $155 million investment in Perry Unit 2. A final PUC vote on the pro-posalis expectedin March.

Perry Unit 2 is included in the rate increase request

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because, as far as Duquesne Light's participation is concemed, the unit has been L 4 - _ _-. abandoned. Because we believe it requires the unanimous agreement of CAPC0 owners

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x The DUQUESNE PLAN also is attempting to tailor the size of the Company more closely to its lower level of operation and sales. In this regard, we have temporarily closed our older and less efficient power stations, and we have undertaken strong intemal efforts to reduce costs, including a hiring freeze and a program of salary reductions and salary freezes.

13

New major capital spending projects in 1986 were restricted to those associated AtDuquesne L/ght, welike to with safety, govemment regulation, reliability, and those having a financial payback [fo e'[ re d mpa y e of less than two years. Specifically, we reduced the 1986 capital budget (excluding that customer an Internationalcorpor-ation or an unemployed single parent.

nuclear units under construction) from $120 million to $90 million, a 25 percent otherpeople's troubles areRege Bobonis' fob. Asdirectorolcommunity reduction.

Relations, he ls responsible for help-Construction expenditures for Perry Unit 1 and Beaver Valley Unit 2, which totaled /ng linancially troubled customers-whose numbershavemult!pliedin

$131 million in 1985, declined to $105 million in 1986 and are expected ta drop to recentyears.Hisprogramispartly

$48 million in 1987 as our generation construction program moves toward completion. preventive. His department works with localorganizationsin eight low income neighborhoodstopromotelow-cost /

Duquesne Light's future is tied to the economic well-being of the greater Pittsburgh no-cost ways toconserve energyand region. Intensifying the Company's marketing and economic development efforts is the #"[,#IY#fp*;##

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centerpiece of the DUQUESNE PLAN. We are implementing an overall marketing strategy unable todoanything to restore which includes comprehensive economic development measures to aggret,s!vely retain fh y 5 ele sta fra f' and expand existing businesses as well as to bring new companies and jobs into the region. help. Among otherthings, Bobonis arrangeda system ofpersonalvisits The Company has renamed and realigned one of its corporate groups to reflect th.is bySalvationArmyrepresentatives.

increased commitment. The Marketing and Customer inaddition to findingout whatthe problem wasin terms of the cus.

Services Group will combine in one unit our expanded tomer's/nabilitytopayto getthe

//ghts back on, theyalso help these economic development staff and a newly created marketing individualslink up with socialservice force recruited primarily from the existing work force. agenciesthatcan help solve other Through a tripling of our existing economic development jlems eymag be,,deserbas staff and other resources, we plan to broaden our traditional "to get closer,"Is to make sure that behind-the-scenes economic development role and become {b dyha je y,, ,h ov j a more visible catalyst for growth in the area and a more aggressive marketer of our own product... reliable electric power that is available now and for future expansion.

For example, six representatives will concentrate full-time on economic development in Allegheny and Beaver counties. In addition, the Company's comprehensive computer-ized property listing and a growing videotape library of business sites are valuable aids in working with the Pittsburgh region's various economic development agencies.

In January 1987, Duquesne Light began to implement a major marketing thrust targeted at certain key markets This strategic marketing program is based on the findings of an in-depth customer end-use study and extensive analyses of both the internal and external environments affecting the Company.

14

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Redirecting andreshaping A major reorientation of resources and retraining of personnelis taking place 0 esne t more as we fill approximately 20 new marketing positions. This new staff will concen-

,, efo market-driven, more customer. trate on the implementation of the new strategic marketing plan, which is designed 8'##"# d d'" ' pr Ia eisthe 10 obtain an increased share of our very competitive da l n , ,p; ning Council. The Councilmeets energy market. We expect competition in our market to continue to intensify over the next several years.

being i d t ecompIj-ment of the Company'soblectives, Thus, we are committed to providing the resources and the innovations necessary to meet the competition head-8 'fhe P ig bnc n /]de rromlett,GaryR Brandenberger. on. We're not just training our people how to sell electric-vicepresident, PowerSupply Group; John D. Sieber, vice president, Nuclear; ity. We expect our people to get closer to our custamers...

Donald o. Messner, vicepresident, to better understand their needs and to determine how Administrative Setvices Gros,p; Gearge L. Mazanec, vice president, we bestCan satisty those needs.

Finance Group; Roger D. Beck, vice We have successfully worked with the PUC to broaden president, Marketing and Customer Services Group; Walter T. Wardlinski, our existing specialized incentive rates for economic development. The rates have been used alone or as part C m unicata Group a J hn Carey, senior vice president, Nuclear of a community package to attract or retain business, We will continue to design and evaluate special eco-b ess e an fa a eca! w tene ad-ditions to the Planning Councilln t936 n0mic development rates and willinvestigate other inno-vative, market based end-use rates to make the price of our product more competitive.

It's imperative that we find ways to do more with less. As part of the DUQUESNE PLAN, we're taking a fresh look at the way we do things... building on the approaches that still work, in all of these etforts, our goalis not to tear down what we've built so far...but to give it another hardlook, We're looking to improve efficiency la all areas of our business. For example,1986 marked the first full year of computerized meter reading. Hand-held microcomputers, which helped our meter readers significantly reduce errors and the resulting need for re-reads, reduced annual operating costs by more than $112,000. In addition, a program to extend the life of Company cars and trucks through in-house refurbishing saved approxi-mately $500,000 in replacement costs last year.

Management information services, an area which touches most aspects of our operation, is a high priority for 1987, With approximately 563,000 customers,134,000 shareholders, 4,500 employees,1,300 retirees, and numerous facilities, Duquesne Light is responsible for 17

managing and controlling an enormous amount of information. A major task force currently is evaluating and prioritizing the Company's anticipated information needs. Particular 1 attention is being paid to applications involving our nuclear generation plants and our human resources activities.

But it's people who ultimately make change happen. Managing our human resources is an integral part of our entire operation as we attempt to do more with less in our day-to-day business...as we realign our priorities...as we strengthen our managemer.t at aillevels...as we anticipate and adapt to the rapid changes occurring outside the Company which cause change inside the Company. We want an environment which encourages and enables each employee to contribute to the highest possible level. Open communication and a con-tinued and expanded emphasis on training and development form the base on which we are building such an atmosphere. During 1986, approximately 20,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> of corporate-sponsored training were given to more than 900 Company employees. One of the high-lights of last year's training program was a four-day symposium for middle and upper level managers titled: "Our Ability to Change Will Determine Our Future." The symposium stressed the need for managers and employees to understand the ongoing changes in our Company's operating environment.

The DUQUESNE PLAN recognizes that the Company's responsibility as a good corporate citizen goes hand in hand with its responsibility as an energy supplier. We are a " hometown" company... involved in and committed to the communities in our service territory.

We have created innovative credit and collection policies; we have been instrumentalin establishing the Dollar Energy Fund, which serves as a last resort after customers have exhausted all other possible sources of funds; and we have placed even greater emphasis on helping these customers by expanding our relationships with agencies such as the Salvation Army in 1984, we were the first major Pennsylvania utility to have no residential customer previously shut off for non payment enter the winter without electricity We continued that policyin 1985 and 1986.

In its annual review of utility hardship programs, the PUC praised Duquesne Light shareholders. managers and customers for their " sense of unselfishness and willingness to address the needs of the disadvantaged in the Pittsburgh area" through the Dollar 18

Energy Fund. Our employees and customers contributed a quarter million dollars to the Fund in 1986, which, in turn, helped 1,000 customers with their winter utility bills.

Commitment to the community is an employee tradition of which we are very proud.

Duquesne Light people always seem to be there when it counts. We can't say enough about a group of men and women who continually go and give "above and beyond" for important community causes such as the United Way and the Salvation Army food fund for the unemployed. Despite having 200 fewer people in our work force, employees pledged almost a half million dollars to the United Way in 1986, two percent more than our record total set in 1985. That's just one specific example of their caring and commitment to their hometown communities.

In 1986, four vice presidents retired: Charles M. Atkinson, exacutive vice president, 28 years of service; Clifford N. Dunn, vice president, Power Supply Group,37 years' service; William F. Gilfillan Jr., vice president, Marketing and Customer Services Group, 38 years' service; and Earl J. Woolever, vice president, Special Nuclear Projects,34 years' service. Their work ethic and dedication are examples for all of us who continue their work.

We salute them for the significant contributions they have made to the Company.

New Company officers include George L. Mazanec, vice president, Finance Group, and chief financial officer, who joined Duquesne Light with more than 25 years of financial and administrative experience in the gas industry; Donald 0. Messner, vice president, Administrative Services Group, a 26 year Company employee with a background in cus-tomer services, engineering and public relations; Gary R. Brandenberger, vice president, Power Supply Group, who has worked in various engineering and operations positions since joining Duquesne Light in 1960; and John D. Sieber, vice president, Nuclear, a 25-year Company employee with engineering and management experience in both coal and nuclear power generation. In related moves, John J. Carey, vice president of the Nuclear Group since its inception in 1981, was named senior vice president of the Nuclear Group, and Roger D. Beck, former vice president of the Administrative Services Group, was named vice president, Marketing and Customer Services Group.

Other recent upper level management appointments include: George E. Bentz, general manager, General Services Unit; James 0. Crockett, senior manager, Nuclear Operations; Donald H. DeVos, general manager, System 0evelopment Unit; 1homas D. Jones ll, general manager, Fossil Generation Unit; H. Donald Morine, general manager, Marketing 19

and Economic Development Unit; and Joseph F. Zagorski, general manager, Human Resources Unit. A veteran of the U.S Navy's nuclear program, Mr. Crockett joins Duquesne Light after serving as a nuclear unit superintendent and plant manager for an Eastern utshty. Mr. Morine joins the Company with 25 years of marketing and sales experience with a major Pittsburgh based corporation.

Mr. DeVos was general manager, fossil Generation Unit; Mr. Jones was general manager of the Nuclear Operations Unit; and Mr. Zagorski was general manager, General Services Unit.

There are still a number of financial uncertainties confronting the Company as it enters 1987.

We are evaluating our options in implementing new accounting standards approved late in 1986 by the financial Accounting Standards Board. The new provisions, which must be adopted by Jan.1,1988, prescribe how the Company must recognize losses for abandoned plants and disallowances from rates of costs associated with newly completed plants.

At this time, we are unable to predict how and when our appeal of the pending $43 million option order refund will be resolved.

Through the DUQUESNE PLAN, we have taken concrete, responsible, viable steps to attempt to manage the elfects of the dechne of the local steelindustry-both in terms of revitaliang our Company and in terms of dealing with the economic and social difficulties facing the communities in our service territory. But it is crucial that the PUC treat our rate stabilization proposal favorably. We believe the costs incurred in our generation construc-tion program were prudent and that our shareholders should receive a fair rate of return on theirinvestment.

Concur rent with the decline of the local primary steel industry, a new economy has been developing... featuring a more diversified mixture of research and deve!opment, advanced technology services and commercial development. Through our expanded marketing and economic development efforts, we have a rare opportunity to be pro active and to create our market of tomorrow...rather than just adapt to the needs of our existing marketplace.

20

A comprehensive study of the Pittsburgh region's advanced technology sector found that 639 advanced technology firms employed 66,000 people last year. These firms increased their employment by nine percent since 1984, compared with an increase in overall regional employment of only 2.3 percent during the same time frame. Ground was broken in 1986 for the Pittsburgh Technology Center (see Pages 8-9), an advanced technol-ogy industrial park whose initial primary tenants will be research institutes for Carnegie-Mellon University and the University of Pittsburgh...two major catalysts of the continued local growth of these industries of the future. The Center is being constructed on the site of a former major steelmaking complex located nn thn Mnnnngahah River just twn milet frnm rinwntnwn Pittsburgh. A $103 million federal computer research center, expected to encourage spin off enterprises, support services, and additional employment of profes-sional and non professional personnel, is scheduled to open in the fall of 1987.

While we don't expect steel to come back to former levels, that doesn't mean we've given up in terms of working with enterprises interested in steelmaking facilities. As part of the recent settlement of a six month work stoppage, USX Corp. has pledged to invest hundreds of millions of dollars in two local steel plants, inclading building a continuous caster and a hot strip mill. We intend to play a major role in helping to ensure that manufacturing will be part of the foundation of this region's emerging service oriented economy it also ls clear that increasing competition and selective deregulation are irreversible trends. The DUQUESNE PLAN provides a flexible framework for our Company to continue to adapt to these challenges...and those to follow.

Change is behind us. Change is ahead of us. Redirecting and reshaping Duquesne Ught Company to meet the demands of a changing marketplace will be an ongoing challenge.

As we move through this change, we will continue to strive, above all, for individual excel-lence and customer satisfaction-there are no substitutes. We will continue to emphasize doing more with less as we strive to provide the natiun's most livable city and surrounding communities with reliable, safe, electric service at a competitive price. The DUQUESNE PLAN will help us build upon opportunities created by change.

21

Company Report on Financial Statements

> ~- - - - . m The Company is responsible for the financial information and system of intemal accounting control and tests of transactions to representations contained in the financial statements and other the extent they considered necessary to provide reasonable assur-sections of this Annual Report. The Company believes that the ance that the financial statements are not misleading and do not financial statements have been prepared in conformity with gen. contain materialerrors.

erally accepted accounting principles appropriate in the circum- The Board of Directors has an Audit Committee composed of stances to reflect, in all material respects, the substance of events four non-employee directors which met four times in 1986. The Audit and transactions that should be included and that the other infor- Committee has the following duties and responsibilites: (1) recom-mation in the Annual Report is consistent with those statements. mending the independent public accountants; (2) reviewing the In preparing the financial statements, the Company makes planned scope and results of the audit and other services to be informed judgments and estimates based on currently available performed by the independent public accountants; (3) reviewing infurmation about the effects of certain events and transactions. the financial statements and the related report of the independent The Company maintains a system of intemal accounting control public accountants; (4) reviewing with the officers, intemal auditors designed to provide reasonable assurance that the Company's and the independent pubhc accountants the adequacy of the assets are safeguarded and that transactions are executed and Company's system of internal accounting control, including their recorded in accordance with established procedures. There are recommendations with respect thereto; and (5) reviewing the kmits inherent in any system of intemal control based on the planned scope and results of the intemal audit function. The recognition that the cost of such a system should not exceed the independent certified public accountants and intemal auditors benefits to be derived. The system of intemal accounting control have full and free access to the Audit Committee and meet with it, is supported by wntten policies and guidelines and is supplemented with and without management being present, to discuss internal by a staff of internal auditors. The Company believes that the inter- accounting control, auditing and financial reporting matters.

nal accounting control system provides reasonable assurance that its assets are safeguarded and the financialinformation is reliable.

The accompanying financial statements have been audited by ja W g% W, Deloitte Haskins & Sells, independent certified public accountants, U whose appointment was approved at the 1986 Annual Meeting of Wesley W. von Schack George L. Mazanec Stockholders. Their examination was made in accordance with President and Vice President, Finance Group generally accepted auditing standards and included a review of the Chief Executive Officer and Chief Financial 0fficer Opinion of Independent Certilled Public Accountants DEL 0 lite HASKINS & SELLS Certified Public Accountants 24000ne PPG Place Pittsburgh, Pennsylvania 15222 TO THE DIRECTORS AND STOCKHOLDERS OF DUQUESNE LIGHT COMPANY.

We have examined the balance sheets of Duquesne Light Company in our opinion, subject to the effects on the financial statements as of December 31,1986 and 1985 and the related statements of of such adjustmentsJf any, as might have been required had the income, retained earnings, capital surplus and changes in finan. outcome of the uncertainties referred to in the preceding paragraph cial position for each of the three years in the period ended been known, such financial statements present fairly the financial December 31,1986 Our examinations were made in accordance position of Duquesne Light Company at December 31,1986 and with generally accepted auditing standards and, accordingly. 1985 and the results of its operations and the changes in its finan-included such tests of the accounting records and such other cial position for each of the three years in the period ended auditing procedures as we considered necessary in the December 31,1986, in conformity with generally accepted circumstances accounting pnnciples applied on a consistent basis As discussed in Note I-Rate Matters, there are severalissues affecting the ultimate recoverabikty of the Company's investment j in two nuclear generating units neanng completion of construction. 8 The Company is unable to predict what effect, if any, the Sunset legislation a1d the results of the construction management audits february 17,1987 will have on ti e Company's financial position or results of operations 22

DuquesnelightCompany Statement ofIncome m1=.auwwwwumuwuwwwwmamm mmrmummuwr.= mum awcum=w:wwas Year Ended December 31, (Thousands of Dollars, Except Per Share Amounts) 1986 1985 1984 OPERATING REVENUES:

Customers $850,744 $872,411 $865,701 Other utilities 45,519 46,049 31,439 Total 0perating Revenues 896,263 918,460 897,140 OPERATING EXPENSES:

Fuel 233,673 249,212 234,910 Purchased power 3,765 4,094 4,802 Other operation 169,555 159,188 153,403 74,719 60,462 73,214 Maintenance (Note _M)

Depreciation and amortization 74,325 81,066 77,532 Taxes other than income taxes (Note M) 70,987 72,614 70,279 Income taxes (Note E) 79,433 100,707 97,266 Total 0perating Expenses 706,457 727,343 711,406 0FERATINGINCOME 189,806 191.117 185,734 UTHERINCOME:

Allowance for equity funds used during construction 81,943 72,782 60,133

_Inco_me taxes-cre_djt(Note E) 61,897 28,267 22,666

_ .R_ ate r_efunds (including interest expense of $12,953) (Note C) (57,278) - -

Otherincome and deductions-net 2,692 10,801 4,594 Total 0therincome 89,254 111,850 87,393 INCOME BEFOREINTEREST CHARGES 279,060 302,967 273,127 INTEREST CHARGES:

_ interest on long-term _de_bt_____ _ _ _ 147,483 146,884 133,431 Otherinterest .

8,792 6,357 3,611 Allowance for borrowed funds used during construction, net of income taxes (28,641) (26,231) (20,709)

Totallnterest Charges 127,634 127,010 116.333

~

~

VI ENDS 0N PREEERREI AliD PREFERENCE STDCK 0 295

$130,879 $154,707 $134,839 E_ARNINGS FOR COMMON STDCK AVERAGE NUM8ER OF COMMON SHARES OUTSTANDING (000) 72,930 68,543 61,054 EARNINGS PER SHARE OF COMMON STOCK $ 1,79 $2.26 $2.21 ggENgS DECu_ RED PER SH ARE OF COMMON STOCK $1.415 $2.06 $2.06 See Notes to FinancialStatements.

23

DuquesneUghtCompany Balance Sheet nw ,m.. ~,n .:,: :cx .x . .~ -:: = =:. = : :-- - == =

As of December 31, (Thousandsof Dollars) 1986 1985 ASSETS PROPERTY, PLANT AND EQUIPMENT:

Electric plantin service $2,607,433 $2,630,883 Construction workin progress 1,324,848 1,305,162 Property held under capitalleases (Note H) 272,721 232,209 Property held for future use(NoteI) 107,045 739 Total 4,312,047 4,168,993 Less accumulated depreciation and amortization 821,448 748,860 l

Property, Plant and Equipment-Nel 3,490,599 3,420,133 l DTHER PROPERTY ANDINVESTMENTS 22,837 37,516 CURRENTASSETS:

Cash and temporary cash investments (at cost which approximates market) 2,821 59,953 Accounts receivable:

Customers (less allowance for uncollectible accounts of $5,181 and $3,686, respectively) 85,751 80,845 Other (including tax claims of $20.025 and $16,841, respectively) 41,749 36,157 Materials and supolies (generally at average cost):

Coal 33,687 40,197 Other operating and construction 42,452 40,031 Othercurrent assets 29,354 13.888 TotalCurrent Assets 235,814 271,071 DEFERRED DE81TS:

Property pending regulatory treatment { Note 1)_ _ _ _ _ _ _ _ _ _ _ .

154,635 _ _ _ _

Extraordinary property losses (Note B) 27,026 28,501 Unamortized loss on reacquired debt (Note L) 40,614 37,869 16,375 14,938

_ Deferred coalcosts(Note 1)

Otherdeferred debits 51,227 44,440 TotalDeferred Debits 289,877 125,748 Total Asseis $4,039,127 $3.854,468 See Notes to financialStatements.

24

a . =n m ., m: .

- .. , x.

1986 1985 CAPITAllZATION AND LIABILITIES CAPITAllZATION (Note L):

Common stock (authorized-90,000,000 shares, outstanding-73,119,446 and 71,488,270 shares, respectively) $ 73,119 $ 71,488 Capitalsurplus 926,131 900,391 Retained earnings 225,733 197,952 TotalCommon Stockholders' Equity 1,224,983 1,169,831 Non-redeemable preferred and preference stock 156,137 156,137 Redeemable preferred and preference stock 110,653 119,653 First mortgage bonds 1,327,051 1,246,222 Otherlongierm debt 296,137 313,986 Unamortized debt discount and premium-net (8,485) (9,209)

TotalCapitalization 3,106,476 2,996,620 08LIGATl0NS UNDER CAPITAL LEASES (Note H) 154,887 142,469 CURRENT LIA81LITIES:

Notes payable-bank (Note D) 15,000 -

_Long:t_erm debt maturing within one year (Note L) 800 20,700 Lease obligations due within one year (Note H) 32,271 22,029 Accounts payable 100,830 110,959 Accruedincome taxes 7,805 7,264 Deferred income taxes and other accrued taxes 10,548 14,646 Accruedinterest 38,792 36,592 Dividends declared 27,017 42,113 Sinking fund and purchase requirements (Note L) 17,254 16,174 Rate refunds (Note C) 3,500 -

TotalCurrent Liabilities 253,817 270,477 OTHER NONCURRENT LIABILITIES:

Investment tax credits unamortized 198,258 185,270 Defetredincome taxes-net 270,565 253,389 Rate refunds (Note C) .

51,770 __

Other deferred credits 3,354 6,243 Total 0ther Noncurrent Llabilities 523,947 444,902 COMMITMENTS AND CONTINGENCIES (Notes B through L)

Total Capitalization and Llabilities $4,039,127 $3,854,468 25

DuquesneUghtCompany Statement of Changes in Financial Position ata m m - w=ar.w am m- - e m u m m m w e mm mu m = m .m . .- osm -w m Year Ended December 31, (Thousands of Dollars) 1986 1985 1984 CASH PROVIDED FROM:

Operations:

Netincome $151,426 $175,957 $156,794 Depreciation and amortization 97,265 109,755 92,810

_ . .Changqsin_ working capital (s_ee below) _ _ _ _ _ _ _ _ _ __ _ _. _ . _ _ _ _ ___

_ _ (44,957)__ (2.933)_

7,172_

Investment tax credits unamortized 12,988 19,468 22,038

_ _ _ inco_me taxes _ deferred-net (noncurrent portio.n) __ .__

_ _ _ _ _. _ _ _17,176_ _3_0,75_6___28,98_4_ .

j

_ Rate refun_d_s_(in_cluding a_c_crue_d interest)__ _____ __ _ __ _

51,770 _ _ _ _ _.

_ Deferred co_a_l costs _ _ ___ _._ _ _ _ _ ____ _

_ (1,437) . _ __7.69_7_. _ 292) (

Allowance for equity and borrowed funds used during construction

_ _ _110,584)

( _ 99,013)

( _ (80,842)

TotalCash Provided From Operations 173,647 241,637 226,664 Financing:

Saleof bonds 100,000 289,000 50,000 issuanceof common stock 27,313 102,910 86.466

_0bligations_undercapitalleases_ ___

_ . _8,954 5,7,24 _ 2,778_

Nuclear fuel obligations (including lease arrangem_ents)_ 20,178 34,494 13,749 Construction _ costs reimbursed _from pollution control financings _ 17,016 _ _ 39,235 _

35,453_

Notes payable 15,000 - -

TotalCash Provided From Financing 188,461 471,363 188,446 TotalCash Provided 362,108 713,050 415,110 CASH USED FOR:

Construction expenditures (net of allowance for equity and borrowed funds used during construction) . __ 178,765 244,859 250,522

. Nuclear fuelexpenditures .__ _ _ _ 20,1_78 34,494 13,749

. Property held under capitalleases 8,954 5,724, 2.778 Dividends on capitalstock 123,645 162,318 148,419 Reductions _ of long term obligations (including current matunties) . 59,360 198,935 29,197 Spent nuclear fuelobligations - 8,357 -

Reduction of preferred and preference stock 9,000 7,078 4,808 Premium on reacquired debt 2,745 35,415 -

Other-net 16,593 6,333 (11,028)

TotalCash Used 419,240 703,513 438,445,

$ (23,335) m_

Jcrgay (Decy_ase)fn Cash and TenJpor,ary Cash investments

$(531J2) $J5_37 CASH PROVIDED FROM (USED FOR) CHANGES IN WORNING CAPITAL:

Accounts receivable $ (10,498) $ (14.441) $(12,942)

Materials and supplies 4,089 13,008 952 Other current assets (15,466) (1,597) 3,858 Accounts payable (10,129) (6,077) 21,232 Accruedincome taxes 541 4,125 (2,639)

Deferred income taxes and other accrued taxes (4,098) (2,717) (2,067)

Accruedinterest 2,200 1,461 (5,259)

Dividends declared (15,096) 3,305 4,037 nate refunds 3,500 - -

m, - mm = Cashfrgided From (Used For) Changes in Working Cap tal g44,957)__$ (2.933) _$ 7,172, See Notes to financialStatements.

26

DuquesneUghtCompany Statement of Retained Earnings

_____.__m - mmmm- _ m __ __ _

Yeat Ended December 31, (Thousands of Dollars) 1986 1985 1984 BALANCE AT BEGINNING OF YEAR _ . _ _ ____ _ _ _ . _ _

__$197,952 __ _$184,313 _ _$175.938 NETINCOME FOR THE YEAR 151,426 175,957 156,794 Total 349,378 360.270 332,732 Cash dividends declared:

Preferred stock:

4% Series 1,100 1,100 1,100

.. _3 75% Series _ __ _ _ _ _. 281_ _ ___281 _ _. 281

. 4.15% Series ._ _ _ _ __ _ _ _ _ _ _ _ _ _291 _ ____291_ _ _ 291 4

. . . _20% Series _ _ _ _ _ _210 __ _ 210___ _ _210

._4.10% Series _ _ _ _ _ __ 246 ___246 _ __246

$2.10 Series 336 336 336

._ $864 Series _ _

_2,064 _ 2.116 _ _ 2,168

__. . $7.20 Series _ _ 2,520_ 2,520 _ _ 2,520

._ C375 Series _

_ 2,236 , 2,337 _ 2,437 Preference stock:

$7.50 Series _

1,683 _1.,769__ _._1,859

$2.75 Series __328 _ _ 488 _ 646

$_2.315 Series _ _

2,778 _2,778 2,778

$2.10 Series 2,520 2,520 2,520 0125 Series _ .

3,954 4,259 __ 4,563 Common stock (pershare: 1986-$1.415; 1985-$2 06; 1984-$2.06) 103,098 141,067 126,464 TotalCash Dlvidends Declared 123,645 162,318 148,419 BALAN CE AT EN 0 0,F Yi AR ,=.= _ _. - . ===.==.=== ==== =======$225,733 $197,952 $184,313

-nn= a ==n = = = - =.= w Statement of CapitalSurplus

. ~ . ... .. , . . ~

Year Ended December 31, (Thousands of Dollars) 1986 1985 1984 BALANCE AT BEGINNING OF YEAR $900,391 $804,377 $724,147 Premiumon common stockissued 25,682 06,197 80,111

.O f .. . _ _ _ _ _ _ _ _

_ __ _8 L ,

n . ~. , w. - - - .. = , = =. ,,

See Notes to financialStatements.

27

DuquesneUghtCompany Notesto FinancialStatements m m mmm mwannum _ n - n _ a _ an . -_,,,_ __ ,_

A.SUIMIARY OF ACC00Niille POLICIES lacemeinnes

' Deferred income taxes are provided principally for differences Property,Plantand Epipment between depreciation for income tax purposes and depreciation Properties are carried at original cost and generally are subi >ct to for accounting purposes, to the extent permitted by the PUC for afirstmortgagelien Costincludesdirectlabor, materials,1 direct costs and an allowance for funds used during construction (A/C) ratemaking purposes. Deferred taxes are also provided for expenses, such as fuel, extraordinary property losses and losses on early of properties. AFC is included in construction work in progress retirement of debt, which are deferred for accounting purposes (CWIP) and credited to other income for Af C attnbutable to equity but deducted currently for income tax purposes. Deferred tax funds and to interest expense for AFC attributable to borrowed credits are recorded for rate refunds, which are recognized cur-funds, net of income taxes. AFC is a non cash item compuleu rently for accounting purposes but deducted over the refund using a composite rate, which is applied to the balance of CWJa and assumes that funds used for construction are provided by period for income tax purposes. In compliance with regulatory accounting, income taxes are allocated between operating borrowings and by preferred, preference and common stock expenses and other income, principally with respect to interest equity The awrage annual rate was 94%. 95% and 9.4% in 1986, charges related to CWIP. Investment tax credits are deferred and 1985, and 1984, respectively. This procedure results in the inclu.

amortized over the lives of the related facihties.

I slon of amounts in property, plant and equipment that are consid.

At December 31,1986 the cumulative net amount of timing ered by regulatory authorities as appropriate costs in establishing j rates for utdity charges to customers. differences for which deferred income taxes have not been i Maintenance and repairs and replacements of minor units of provided was approximately $174 miflion. These timing differ-ences relate primarily to accelerated depreciation, certain taxes, t property are charged to income and replacements of retirement the debt portion of AFC, pensions and certain other employee units of property and betterments are capitalized. The costs of depreciable property units retired, plus removal costs, less salvage, benehts.

are charged to accumulated depreciation. Deferred FuelCests The Company defers the difference between actual fuel costs and Movenees fuel costs included in its base rates until the period in which such l Customer meters are read monthly of bimonthly and bills are ren, costs are billed to its customers through its energy cost rate. The dered on a monthly basis. flevenues are recorded when billod.

energy cost rate is based on projected costs with proWsions for OWh subsequentadjustmentstoactualcosts. Anyovercollectionsof The Company provides for depreciation of electric plant, exclusive revenues are refunded to customers with lnterest. See Note 1.

of coal properties, on a straight line basis determined in a manner consistent with applicable Pennsytvania law and with methods ap. Nuclear FuelCosts I

The Company finances its acquisition of nuclear fuel through capi-plied by the Pennsylvania Public Utikty Commission (PUC)in the

' tallease and other arrangements The Company's share of nuclear determination of depreciation in rate proceedmos. Provisions for fuel costs under the lease agreements is charged to fuel expense depreciation, amortization and depletion of other Company prop.

based on the quantity of electric energy generated.

erty are made on various bases, such as amount of nuclear fuel I

Under the Nuclear Waste Policy Act of 1982 (the Act), the United burnedand tonsof coalmined.

States Department of Energy (00E)is responsible for the ultimate The Company provides for decontamination and dismanthng costs for Deaver Valley Unit No t in accordance with the provi, storage and disposal of spent nuclear fuel temoved from reactors.

Under the Act the Companyis required to pay a quarterly fee to slons of the orders of the PUC. The Company currently estimates 00E of one mill per kilowatt hour on nuclear generation occurring its share of the total cost of dismantling the Unit to be $68 milhon.

after Apnl 6,1983 and a one time fee for nuclear generation which The Company is allowed to recover through current rates annual occurred through Apnl6.1983 The one time fee of $80 million decommissioning annuity payments to provide forits share of the was paid in June 1985. The Company began recovering the one-decommissioning of the Unit's radioactive components only, the tims fee in rates over ten years beginning in February 1983. The cost of whichis currently estimated to be $50 mdlion. The Com.

Company also is recovering the fees for generation after April 6, pany espects to recover the remaining decommissioning costs 1983 and is making payments t000E on a quarterly basis.

through rates in affect subsequent to the dismanthng of the Unit.

The Company deposits apphcable revenues in segregated accounts Other which have been established to pay for such costs. At December 31, Other property and investments are stated principally at cost, less l accumulated depreciation where applicable. 0ther operating and

! 1986 $3 milkon was included in such accounts.

in its 1986 rate case the Company requested similar rate treat. construction inventories are stated at average cost and lnclude ment of decontamination and dismantkng costs for Perry Unit No. certain general and administrative costs related to operating the

1. Such Costs are estimated to be $37 million of which $27 milhon Company's storerooms. General and administrative costs remaln-are related to radioactive components only ing in inventory at December 31,1986 and 1985 were $2 2 million and $39 mdlion, respectively Ocbt discount or premium and related expenses are amortiled over the lives of the issues to l which they portJin.

28

amm e w - m anmumam m maw am m m m m m mmam a m mam ma RosiesetNesliens The Company subsequently requested the PUC to stay the order The 1985 and 1984 financial statements have been reclassified to and to extend the time for filing the refund plan. On November 28, [

conform with accounting presentations adopted during 1986. The 1986 the PUC entered an order denying the Company's request to principal change relates to the reclassification in the Statement of stay the refund order. The Company filed the refund plan on January income of transmission line and microway ? rental revenues from 8,1987, and expects to file an appeal of the PUC's refund order and  ;

" Operating Expenses-0ther operation" to " Operating Revenues- a petition for stay with the Pennsylvania Commonwealth Court Customers", after the PUC takes action on the refund plan, The Company's management present'y is unable to predict the

8. EXTRA 0RDINARY PROPERTY LOSSE8 final outcome of this matter. However, because of the PUC's denial in 1980 the CAPC0 companies cancelled the construction of four of the stay and other relevant considerations, the Company recorded nuclear generating units, and in 1982 the Shippingport Atomic the $32.8 million principal amount of the refunds in November 1986.

Power Station was removed from commercial operation. The Interest accrued from July 15,1981 through December 31,1986 Company received approval from the Federal Energy Regulatory and recorded in 1986 amounted to $10.3 million. The effect of Commission and the PUC to amortize and recover from its cus- these transactions was to reduce eamings, net of an income tomers its share of the accumulated construction costs of the can- tax effect of $22 million, by $21.1 million, or approximately celled units, which amounted to $34 5 million, and a portion of the $.30 per share, for 1986.

undepreciated cost of the Shippingport station over a ten year period which began January 29,1983. The unrecovered costs of O. SHORTTERM BORROWING AND REVOLVING CRE0li  ;

! the cancellnd units and the Shippingport station as of December ARRANGEMENTS l 31,1986 were $209 million and $61 million, respectively The The Company has two revolving credit agreements with two PUC's order approving the amortization and recovery of the groups of banks totaling $225 million, available to May 15,1988 accumulated construction costs of the four CAPC0 units, which and December 15,1988 in the amounts of $125 million and $100 was appealed by the Consumer Advocate to the Pennsylvania million, respectively. At December 31,1986 $15 million was out.

Commonwealth Court, was affirmed by the Court in 1985, On standing under the $100 million agreement. Under certain con-May 2,1986 the Pennsylvania Supreme Court agreed to hear a ditions, borrowings outstanding under the two agreements may further appeal filed by the Consumer Advocate and certain other be converted to term notes. Interest rates fluctuate during the intervenors. The Company is not eaming any retum on the un. revolving and term periods, depending on the period of borrowings, j amortized costs of either of the extraordinary propertylosses. at the prime rate and at percentages in excess of prime, Euro-rate ,

The Company beheves that the resolution of this matter will not and certificate of deposit rates. Interest rates under the $100 million  !

have a material adverse effect on its financial position or results agreement also include a component cost of funds rate. There is of operations, However, new accounting standards will require the a commitment fee of %% per annum on the average daily unbor.

Company to wnte-off a portion of its investment in the four can- rowed amount of each commitment. The commitment fee on the  ;

celled units. See Note K. $125 million agreement increases to %% per annum on the aver- .

i age daily unborrowed amount upon the first borrowing against this  !

, C. RATE REFUNOS commitment. l l g,,,, g g,,g ,,,,g p,,,, At December 31,1986 the Company had a $5 milkon line of credit with a bank, all of which was unused. The range of interest rates in 1981 the PUC found that the Company had not proven that its under this kne of credit is from the primo rate less one half of one j

cost of replacement power purchased dunng the 1979 outage of percent to a special rate as may be offered by the bank from time l Beaver Valley Unit No. I was not prudentry incurred. On June 26, .

l to time. There is no commitment fee or compensating balance  !

1986 the PUC approved an agreement entered into by the Com, requirement associated with this line of credit.

pany, the PUC staff, the Consumer Advocate and two commercial Dunno 1986,1985 and 1984, the maximum amount of short.

customers. The settlement terminated the PUC's investigatnn of term borrowings outstanding, consisting of bank and commercial l certain outages at the Unit and provided for refunds to the Company's paper borrowings. was $120 million, $23 milkon and $255 million.

customers of $15 3 milhon, including interest, over four years [

the average amount of daily short term borrowings outstanding beginning July 1,1986. Accor$ngly,in June 1986 the Company was $594 milhon, $36 milhon and $4.6 milhon, and the weighted l recorded the $11.5 milhon pnncipal amount of the refunds, Inter, average daily interest rate apphcable to such short term borrow-est accrued through December 31,1986 amounted to $2.7 mil-ings was 66%,8 2% and 11.5%, respectively.

kon. Additionalinterest expense on the unamortiled balance of the

refunds will be incurred over the remaining refund penod. The I effect of the settlement was to reduce 1986 eamings, net of an income tax effect of $7.2 milhon, by $6 9 milhon, or $ 09 per share, i 19010puen 0rder

! The Company was permitted in 1981 to increase its rates by $64 2 million annually in accordance with an option order of the PUC. In 1984 the Pennsylvania Supreme Court ruled that the option order ,

was invahd and remanded the case to the PUC. On Apnl 9,1986  :

the PUC ordered refunds to the Company a customers of all I

, revenues collected under the option rate order from July 15,1981 through January 28,1982 ($32.8 milkon).

l 29 j

DuquesneLIghtCompany Notes (continued) ,w = .= =~

wan-~ m~n~, w - m , , ,. m m x E.lNCOME TAXES Totalincome taxes in 1986,1985 and 1984 were comprised of the following components:

1986 1985 1984 Mcludedin operating expenses: (Thousands of Dollars)

Currentlypayable:

Federal $ 15,913 $ 37,765 5 38,004 State 7,939 13,230 16,042 Deferred-net:

federal 40,871 29.034 16,577 State (34) 743 4,893 Investment tax credit deferred-net 14,744 19,935 21,750 Total 79,433 100,707 97,266 Includedin otherincome:

Currently payable:

federal (28,073) (23,015) (18,060)

State _ (6,406) _ (5,252) (4,606)

Deferred:

federal (22,324) - -

State (5,094) - -

Total (61,897) (28,267) (22,666)

Totalincome tax expenso $ 17,536 $ 72,440 $ 7{6g Currently payable-federal and state $ (10,627) $ 22,728 $ 31,380 Deferred-net 13,419 29,777 21,470 investment tax credit deferred-net 14,744 19,935 21,750 Totalincome tax expense $ 17,53,6 $ 72,440 $ 74,600 Totalincome taxes were less than the amount computed applying the statutory federalincome tax rate of 46% to income before income taxes. The reasons for this difference in each year were as follows:

Computed federalincome tax at statutory rate $ 77,722 $114.262 $106.441 I Increase (decraase)in taxes resulting from:

Allowance for funds used dunng construction (50,869) (45,546) (37,187) i Excess of book over tax depreciation (594) 6.215 4,979 l State income taxes, net of federalincome tax benefit (1,941) 4,709 8.828 Amortization of deferred investment tax credits (6,120) (4,818) (5,750)

Other-net ,

(662) (2,382) (2,711)

Totalincome tax expense $ 17,536 5 72,440 $ 74.600 m .m Sources of income taxes deferred and the related tax effects were:

Excessof acceleratedoverstraight linedepreciation 3 34,769 5 20,388 $ 22 931 lxpensed on tax return and deferred on books:

Loss on early retirement of bonds 1,403 19,362 -

Beaver Valley maintenance outage costs 3,509 - -

Wnte off of uncollectible accounts receivable 5,818 - -

Expensed on books but not deducted for f ax purposes:

Ocaver Valley replacement power refund (5,378) - -

1981 option order refund (22,040) - -

f uelcasts (1,630) (6,572) (2,333)

Amortilation of entraardinary property losses (1,738) (1,703) (1,703)

Other-net _, ., _ _

_ (1,294) _(1,698[__

_ . 2.575_ .

forahncome taics deferred net $ 13,419 _$ 29.777 $ 21.470 ,

30

The Company's income tax returns are settled through 1970. F EIAPLOYEE BE10EFITS Income tax retums for 1971 through 1983 have been examined, The Company has trusteed retirement plans to provide pensions ,

and the returns for 1984 and 1985 are being examined. The Com. for all employees, except coal mine employees who are covered pany's management believes that the settlement of federal and under a plan administered by the United Mine Workers of America state taxes will not have a material ad erse effect on the Company's (UMW). Since it is a multi-employer plan, information concerning fmancial position or results of operations. the UMW plan is not determinable by the Company and is not in.

The Tax Reform Act of 1986 (Tax Act) will have a mixed effect cluded in the table below. Pension costs, excluding the UMW plan, on the Company's income tax expense for 1987 and later years, are funded as accrued and inclirde amortization of most prior ser.

Although the Tax Act will reduce the federal tax rate to a blended vice costs over 30 years and prior service costs related to the rate of 40% in 196/ and to 34% in 1988 and thereafter, the Tax Act Company's early retirement program over 15 years. Pension costs also will accelerate the inclusion of certain transactions in taxable charged to expense or construction for 1986,1985 and 1984 were income and postpone or eiiminate certain credits and deductions. $13.5 million, $13.4 million and $14.2 million, respectively.

The Tax Act exempted certain large projects under construction, Accumulated plan benefits and net assets available for benefits such as Perry Unit No. I and Beaver Valley Unit No. 2, from th9 for the trusteed plans are presented as of the December 31 benefit repeal of the investment tax credit and less favorable depreciation information dates. The assumed rate of retum used in determining rates. Howeve', the retroactive repeal of the investment tax credit the actuarial present value of accumulated plan benefits was 8%

for other asst ts increased the Company's 1986 tax liability by for1985 and 1964, approximateiy S3 million. The repeal had no effect on 1986's net December 31' income because of tM requirement to defer investment tax credits. --

The Company's future 1ax liabitities and cash flow will be adversely 1986 1984 affected by the repeal of the investment tax credit as well as the (ThousandsofDollars)

Tax Act's provisions regarding longer depreciation lives for new Actuarialpresentvalue of r assets, the capitalization of construction period overhead and accumulated plan benefits interest costs, the inclusion of unbilled revenues in taxable income $166,176 $156,564

-Vested ar.d the repealof the reserve method of accounting for bad debts. Nor5ested 8,000 ~7,55 The Company will also be affected by the PUC's treatment of '

Total $174,066 $164,159 ta s in current and future rate proceedings. The PUC currently is considering the effects of the Tax Act in the Company's 1986 rate Net assetsavailable for benefits case (see Note I) and also is considering allowing ratepayers to (atfairvalue) 8100,906 $145.817 -

rectve immediately the benefits of any reduction in utilitics' future taxes Action by the PUC to inappropriately benefit ratepayers with The Company is liable under federal and state laws for the pay- l the effect of the lower tax rates or to exclude the added costs of ment of benefits to coal mine employees disabled by " black lung" the Tax Act from revenues would reduce the Company's net disease and to their survivors and dependents. The estimated income andcashflow costs of providing such benefits, including amortizat.on of prior service costs over the remaining estimated life of the Warwick i mine, are actuarially determined and accrued on the basis of mine payroll costs and are deposited with a trustee. Such costs were

$ 8 million, $1.5 million and $1.7 million for 1986,1985 and 1984, respectively At July 31,1986 (the date of the latest actuarial valua.

l tion), the unfunded prior service cost for these disability benefits

! was approximately $2.5 million. The fair value of the related trust

! fund assets was $154 million at July 31,1986.

1 l

3t .

DuquesneUghtCompany Notes (continued) - au m .a wa < - , - , . = ,, ,

G. JOINTLY 0WNED GENERATING UNITS The Company, together with other electric utilities, primarily the CAPC0 companies, has an ownership interest in certain jointly-owned units.

Information regarding the Company's share of such jointly-owned units as of December 31,1986 is as follows (thousands of dollars):

Company'sInterest Percentage Utility Plant Accumulated Construction Unit Ownership Megawatts in Service Depreciation Workin Progress fort Martin No.1 __ . ._ _ _ _

50.0 _276_ _ _ $ 50,974_ __ _ $__18,618_ $__ 2,2_79 CAPCO Units:

Eastlake No. 5 31.2 202 51,674 15,379 7,200 Sammis No. 7 31.2 187 73,539 15,505 471 Bruce Mansfield No.1 29.3 228 73,713 21,516 15 Bruce Mansfield No. 2 8.0 ____62 _. _._ 20,559 _ _ 5,150 _ _ __ _ _ _ _ _5 4_ j Bruce Mansfield No. 3 13.74 110 ~ 71,783~ 13,796

~ ~~ ~ ~ ~

57 I

' ~ ~ ~~ ~

l Bruce Mansfield Common and Shared facilities _

_ 64,126 _ .__18, .

_ 638_ ___ _ __ 556 _

Deaver Valley No.1 47.5 385 380,668 83,614_ _ _ . _ _ _ 4,316__

8eaver Valley No. 2 __

13.74 114 .

_497,7_0_5_

DeaverValley Common Facihties 76,113 _ _ 10,739 _____

103,051 _

Perry No.1 13.74 165 - - 663,304 Total 1,729 $863.149 $202,955 $1,279,008 Under the terms of the arrangements with the other owners of these jointly-owned units, the Company is required to provide its share of financing the costs of such units. The Company's share of the direct expenses (fuel, maintenance and other operation expenses) of the jointly owned units is included in the corresponding operating expenses in the Statement of Income.

H, LEASES Lease payments in 1986,1985 and 1984 amounted to $38.6 mil-Leased property consists of the following: lion, $43.6 million and $262 million, respectively, and $35.5 million, 541.2 million and $35 million (including deferred nuclear fuellease December 31, payments), respectively, were charged to operating expenses.

1986 1985 Rental payments are made monthly during the terms of the leases (Thousands of Dollars) based on the amount of nuclear fuel! cased and the amount of Nuclear fuel $243,230 $206,377 nuclear fuelburned.

Electric plant (principally buildings The nuclear fuelleases may be terminated by the lessees or and data processing equipment) 29,491 25,832 lessors with notice as defined in the agreements or by casualty 272,721 232,209 or certain other contingencies, including default by the lessees.

Total 85,563 67,711 In certain situations involving a termination, the lessees may be Less accumulated amortization required to purchase the leased nuclear fuel at the higher of fair Property held under capital market va!ue or unamortized cost. At December 31,1986 the Icases-net _ __

_$187,158 . $164,498 Company's share of the lessors' unamortized cost of the leased nuclear fuel was $160.1 milhon, and the Company expects to Leased property is amortized in conjunction with the amortization finance an additional $38.3 mdlion of such costs under current of the related lease obhgation. Leased nuclear fuelis amortized as the fuelis burned The amortization of electric plant is bJsed on

'03 "

T e Cornpany has certain buddings or portions thereof under the rental payments made. Amortization of leased property lease, including its corporate headquarters, subject to renewal options and in certain cases purchase options.

9861985 nd 98 , sp'ec y Future minimum lease payments for capital leases are related pnncipally to building leases and the estimated usage of nuclear 32

maw-me.a.mu-ammmmmmem-marwrmamem-mmammmmm fuel, including a trust arrangement. Minimum tease payments for 1986 Rate Case-Perry Unit 14o.1 operating leases are related principally to the corporate headquar- On June II,1986 the Company fileJ a new rate schedule with the ters lease. Future minimum lease payments at December 31,1986 PUC estimated to increase arr'ual revenues by $58 millica which, wereasfollows: when netted against estimated fuel cost reductions, was reduced to $47.5 million, or a 5.8% increase. The recommended decision YearEnding Capital Operating of the administrative law judge who presided over the rate request December 31 Leases Leases wasissuedinlate January 1987.

(ThousandsofDollars) The judge's recommended decision concluded that if Perry Unit

$ 35,413 $ 10,982 No.1 achieves commercial operation prior to the effective date 1987 1988 38,222 10,226 of the new rate schedule, which may be extended to July 8,1987, 31,153 9,996 the Company should be authorized to increase its annual operating 1989 revenues by approximately $44 million, before any fuel savings. If 1990 32,116 8,517 the Unit does not achieve commercial operation prior to the effec.

101 22,682 7,710 tive date of the new rate schedule, tho judge determined that the 1992andthereafter 103,745 81,749 Company should be authorized to increase annual operating 263,331 $129,180 revenues by approximately $28 million.

Totalminimumlease payments The ludge also concluded that the Unit currently constitutes Lessamount representinginterest 66,120 excess capacity because, under the Sunset Legislation (see Presentvalueofnetminimum "New Legislation" above), it does not provide an annual economic lease payments $197,211 benefit in the early years of operation, and therefore the Company should be denied an equity retum on its investment in the Unit until the Unit satisfies the economic benefit test. The judge spe-

1. RATE MATTER 8 cifically recommended that the PUC make no adjustment to the New Legislation Company's claims for costs associated with the Unit for impru-On July 10,1986 the Pennsylvania Public Utility Commission dence in pfanning, management or construction.

Sunset Legislation (Sunset Legislation) became effective. One pro- The judge further recommended that the Company recover its vision of the law establishes a rebuttable presumption that a newly investment in Perry Unit No. 2 over ten years on the basis that the constructed base load generating unit is excess capacity for pur- Unit was abandoned for ratemaking purposes (see " Property poses of excluding from rates all or part of the unit's operating and Pending Regulatory Treatment below).

construction costs. Such costs could be recovered from ratepayers The recommended decision is not binding on the PUC and, if (t) the unit is found to be necessary to meet customer demand, along with any exceptions filed by the parties to the rate proceed-including a reasonable reserve margin, in a test year or the year ing, will be considered by the PUC prior to issuing its final order, following a test year and (2) the unit produces an annual economic which is expected by March 10,1987. The Company is unable to beneht which exceeds the total annual cost of the plant during predict the outcome of the PUC's review.

a test year or within a reasonable period thereafter. Of criticalimportance to the inclusion of the costs associated

! In July 1986 the Office of Consumer Advocate filed a complaint with Perry Unit No. l in rates is the date when the Unit is deemed with respect to the Company's pending 1986 rate proceeding. The to be in commercial operation. The State of Ohio and an Ohio complaint alleges that under the Sunset Legislation all or a part of citizens group have initiated litigation in an attempt to delay f ull-Perry Unit No. I constitutes or may constitute excess capacity power operation of the Unit pending court review of decisions of I which must be excluded from rates because capacity from the the Nuclear Regulatory Commission not to reopen hearings to j Unit is not needed to provide reliable service to the Company's review the adequacy of the Unit's seismic design and the adequacy

ratepayers and because the economic benefits of the Unit will not of the Ohio emergency response plan. While appeals on the merits l exceed the costs of that Unit in the test year or within a reasonable before the U.S. Court of Appeals for the Sixth Circuit are still pend-period thereafter. Similar complaints have been filed by other inter

• ing, court imposed stays prohibiting full-power operation have l

venors m the rate proceeding. been lifted, and the full power license has been issued by the

! Because it is uncertain how the PUC and the courts willinterpret Nuclear Regulatory Commission. The Unit is undergoing its power-and apply the statute, the Company is unable to predict what effect, ascension program under which it achieved 10% net positive j if any, the Sunset Legislation or the complaints will have on the generation as of February 23,1987, and currentlyis scheduled Company's rates, financial position or results of operations. How- to achieve 100% net generation by mid 1987.

ever, depending on how the PUC and the courts interpret and apply l; this legislation, the new law could have a material adverse effect l upon the Company's rate proceedings requesting inclusion in rate base of new generating units.

l i

I 1

j 33

DuquesneUghtCompany Notes (continued) a.m.mma:amsam.ww=mwz.mmmenwmm = x a- mww=w Any additionalin-service delay of the Unit which might result cost of Quarto coal through its energy cost rate to approximately from court and regulatory proceedings involving the issuance the prevailing market price of similar coal rather than the actual of a full-power Scense for the Unit or other circumstances would cost of Quarto coal. As required by the Interim 0rder and by the increase the cosi of the Unit and could delay or otherwise affect PUC's Final 0rder the Company is deferring the excess of the efforts to fully recover the Unit's construction and operating costs actual cost of Quarto coal over the cost allowed to be recovered through rates. The Company estimates that the cost of its 13.74% throughits energy cost rate.

interest in the Unit (1663.3 million at December 31,1986) will The Company believes that the methodology provided in the increase by approximately S7 million per month (of which PUC's Final 0rder may not, under certain circumstances, permit

$5 million is AFC) until the Unit achieves commercial operation. full recovery of the deferred coal costs by the scheduled expiration Property Pending Regulatory Treatment of the Quarto coal sales agreements in 1999. Fluctuations in the in March 1984 the CAPC0 companies agreed to minimize con. deferred coal costs may result during this period depending on struction work and cash expenditures on Perry Unit No. 2 pending actual 0uarto costs, market price of other coal, amount of Quarto consideration of severalaltematives, including resumption of con. coal burned and other factors. The unrecovered cost of Quarto struction or cancellation of the Unit. The Company believes that coal paid by the Company at December 31,1986 was $8.6 million.

any decision as to the resumption of construction of the Unit must Further, the PUC staff has indicated that the market price of coal used by the Company in calculating the costs included in its  ;

be approved by all of the CAPC0 companies. Based on present conditions, the Company will not approve the resumption of such energy cost rate since January 1,1986 is too high and should be i construction. The Company does not know what the positions of reduced. Such an adjustment would have increased the amount the other CAPC0 companies will be with respect to the future of of unrecovered Quarto coal costs at December 31,1986 by up to

$3.8 million. In addition, the Federal Energy Regulatory Commis-the Unit.

In its 1986 rate request, the Company requested recovery of its sion has indicated that it may direct the Company to write-off the present investment in the Unit over a ten-year period, on the basis deferred costs as being unrecoverable.

that the Company has abandoned its interest in the Unit for rate. The Company is attempting to resolve this matter with the PUC; making purposes. Such investment, including AFC recorded however, it is uncertain whether the deferred costs ultimately will through June 30,1985 but excluding common facilities required be recovered by the Company and whether it will have to refund for the operation of Perry Unit No.1, was approximately $155 mil. any of the $3.8 million adjustment discussed above which was lion at December 31,1986. This amount is included in the Balance previously recovered through the energy cost rate.

Sheet as " Property pending regulatory treatment". The Company Deferred CoalCosts(Warwick) does not expect to incur significant amounts of additional costs In accordance with a 1981 PUC rate order, the cost of coal mined relative to the Unit. Although the Company believes that the ulti- at the Company's wholly-owned Warwick mine in excess of the mate resolution of this matter will not have a material effect on its average market price of similar quality coal purchased by Pennsyl-finntial position, new accounting rules will require the Company vania utilities may not be recovered through the energy cost rate, to reduce its investment in the Unit. Sec Note K. but may be deferred and recovered to the extent that the cost of Beaver Valley Unit No. 2 Construction Management Audit Warwick coal falls below such market price. Such deferred costs The PUC has directed an outside consultant to perform a con. amounted to $7.8 million at December 31,1986, compared to $3.6 struction management audit of Beaver Valley Unit No. 2 to million at December 31,1985. The PUC staff has indicated that it will recommend that the PUC expand this limit on recovery of fuel (1) determine whether project costs are reasonable and proper, costs to include all coal delivered to the Company's power stations.

(2) review and evaluate the project management process for the remainder of the project, and (3) identify opportunities to improve Such an action by the PUC could result in additional deferrals of the overall project management. The Company has a 13.74 percent coal costs. The Company is studying various proposals to deter-ownership interest in the Unit, and is the constructing CAPCO mine the potential for recovery of existing and future deferrals.

company with respect to the Unit. The final audit report is expected Additionally, the PUC eliminated the Warwick mine from the Com-to be issued in 1987. The Company is unable to predict the results pany's rate base for retemaking purposes in 1981. This exclusion of theauditorwhatactionthe PUCwilltakeaftercompletionof the from rate base was $49.1 million at December 31,1986.

audit. However, new accounting rules could require the Company 1984 Rate Case to reduce its investment in the Unit as a result of the audit findings. In connection with a January 1985 order of the PUC approving a See Note K. $31.4 million rate increase for the Company, the Consumer Advo-cate filed an appeal with the Pennsylvania Commonwealth Court Deferred CoalCosts(Quarto) in December 1980 the PUC instituted an investigation into the with regard to the recovery of the accumulated construction costs reasonableness of the cost of coal supplied by Quarto Mining of four cancelled generating units (see Note B) and certain other issues involving approximately $10 million of operating expenses Company (Quarto), an unaffiliated company. In a 1981 Interim Order the PUC directed that the Company limit its recovery of the allowed by the PUC. The Company also has filed an appeal and believes that it is reasonably possible that the PUC's order will be upheld by the Court.

34

,-gp g

-z-, ggfW'WWhW"p5 si.PM:D----'

y.-- -._m._f 4.C.- -- . w g. ype'imm neggm f PropertyHeld ForFuture Use LTVCorporation The PUC has approved the Company's requests to place in " cold The Company is involved in various regulatory and court proceed-reserve" 575 megawatts of a total generating capacity of 641 ings with LTV Steel Company, Inc. (LTV Steel). 0n July 17,1986 megawatts at the Brunot Island and Phillips Power Stations. The LTV Steel filed for reon?.nization under Chapter 11 of the federal Company's investment in the cold-reserved units was $107 million - bankruptcy laws As of July 17,1986, LTV Steel owed the Company C December 31,1986 and is included in the Balance Sheet as $11.6 million for past service, subsequently reduced to $9.7 mil-

" Property held for futun use". The PUC's orders granting the Com- tion, and is ot;!igated to pay minimum charges of $1.1 million per pany's requests provide that the approvals are not to be considered month for the duration of a long-term contract, which expires in precedent for excess capacity issues in the Company's 1986 rate 1989. The Company has filed objections to LTV Steel's petition case (discussed above) or in subsequent rate proceedings. The with the bankruptcy court to reject the long-term contract. LTV Company believes that its investment in the cold-reserved units Steel's refusal to pay the monthly minimum charges under the eventuallywillbe recovered. long-term contract lowered the Company's operating revenues fcr 1986 by$6 million.

J. COMMITMENTS AND CONTINGENCIES The Company and LTV Steel are discussing a settlement of all

' Construction penoind litigation between the parties. Any settlement agreement

> The Company currently estimates that it will spend approximately will be subject to final approval of the parties and of the bankruptcy

$555 million on construction, exclusive of nuclear fuel and AFC, court..The final outcome of this matter is not expected to have a during the period 1987 through 1991. material adverse effect on the Company's financial position or results of operations.

Quarte Mining Company (Quarto)

The CAPC0 companies have long-term coal supply arrangements SecuritiesLitigation with Quarto to supply coal for the Bruce Mansfield Plant. As part Commencing with the dividend declared on April 18 and paid July of thesearrangementstheindividualCAPC0companiesseverally, 1,1986, the Company has paid quarterly dividend s on its common not jointly, guarantee their proportionate shares of Quarto's debt stock in the amount of $.30 per share. This amount represents a and lease obligations incurred in connection with the development reduction of 5.215 per share from the previous level of the quarterly and equipping of Quarto's coal properties. At December 31,1986 dividend. Subsequent to the reduction in the dividend rate, three the Company had guaranteed the obligations of Quarto with respect ccmplaints were filed against the Company and two additional to $49.9 million of indebtedness and had also guaranteed lease complaints were filed against the Company and its Directors by obligations relating to $17.6 million of capital equipment for the holders of common stock seeking certification as class actions.

mines. In general, it is contemplated that the purchase prices to Two of the comp?aints have been dismissed without prejudice.

be paid for the coal to be received under the foregoing arrange- While the remaining three complaints are not identical, they col-ments willinclude amounts sufficient to service the guaranteed lectively seek compensatory and punitive damages for alleged

[

obligations. violations of secudties laws, as well as common law fraud and The Company's estimated future minimum payments ur du tr,e . negligent misrepresentation. ,

i coal supply contract attributable to payment of Quarto's long-term i No class Ms been certified m any of the actions, and the three debt and lease obligations as discussed above are: complaints have been conselidated for pre-trial purposes. The l

l Company is continumg to contest the three complaints. Although l Year Ending December 31, (Thousands of Dollars) the Company is unab!e to predict the ultimate outcome of these 1987 . $ 9,007 matters, it believes the complaints are without merit and that reso-

~

1988 8,672 lution of this matter will not have a material adverse Effect on the Company's results of operations.

1989 8,337 NuclearInsurance l 1990 8,002 The CAPC0 companies maintain a nuclear insurance program to 1991 7,668 the maximum extent available. This program currently provides After1991 5D.561 $620 million of primary and excess property insurance and $610

$92,247 million of decontamination liability and excess property insurance l Total

- coverage for the companies' investment of $4.9 billion (at December Under the terms of the coal supply contract, which continues 31,1986)in Beaver Valley Units Nos.1 and 2. The companies also until December 31,1999 with an option to extend for ten additional have similar property insurance for their investment of $6.3 billion years, the CAPC0 companies must reimburse Quarto for their (at December 31,1986)in Perry Units Nos.1 and 2. Under the cut-proportionate shares of the costs of operating the Quarto mines, rent program, the companies are subject to various retrospective including those costs associated with mine construction, whether premium adjustments in the event of accidents at these units or at or not they receive coal from 0uarto. The Company's total pay. certain other utilities' nuclear plants. Based on its current interest ments under this contract amounted to $28.9 million, $29.4 million in one operating nuclear reactor and two new reactors expected and $30.7 million for 1986,1985 and 1984, respectively. The current to be fully operationalin 1987, the Company's share of any such price of Quarto coal to the CAPC0 companies is based principally assessment wodd be approximately $5 million per year.

on actual current production costs plus amortization of deferred production expenses incurred during the development period.

\

35

DuquesneUghtCompany Notes (continued) um emzmmmmmm' n ==-  ; .= m we v = m . ,

The Company is also a member of an insurance program which AFC. The Company must adopt the provisions of the Statement, provides coverage for the expense of purchasing replacement which are to be applied retroactively, by January 1,1988. The power during prolonged accidental outages of Beaver Valley Unit Statement pe rmits, but does not require, companies to record the No.1. The current policy would provide the Company with weekly effect of the r.ew standards on prior years' transactions by restating payments of up to $550,000 for one year after a deductible period previously-issued financial statements when first adopting the of 26 weeks, and up to $275,000 for an additional year. The Com- Statement. The Company has not yet determined when it will pany would be subject to a retrospective premium of approximately adopt the Statement or if it will restate previously-issued financial

$987,000 per year if the insurer's losses exceeded its reserves. The statements.

Company expects to obtain similar insurance coverage for Perry As discussed in Notes B and I, the Company is seeking to Unit No.1 and Beaver Valley Unit No. 2 when they achieve com- recover its remaining investment in four cancelled nuclear gener-mercialoperation. ating units and in Perry Unit No. 2 over ten-year periods. If the The Price-Anderson Amendments ta the Atomic Energy Act limit Company had adopted Statement No. 90 during 1986, it would liability to third parties to $700 million for each nuclear incident. have reduced its investments in the four units and in Perry Unit Coverage for such liability is provided by $160 million of insurance No. 2 by approximately $6 million and $55 million, respectively.

and $540 million of retroactive assessments against each oper- If the Company had also restated previously-issued financial state- l ating nuclear reactor. Based on its present ownership interest in ments, net income for 1986 would have decreased by approximately l one operating reactor and two new reactors expected to be fully $26 million as a result of these adjustments. If the Company had 1 operationalin 1987, the Company's maximum potential assess- not restated previously-issued financial statements, the adjust-ment under the Amendments would be $7.5 million per year. The ments would have decreased 1986's net income by approximately current Amendments expire on August 1,1987, and any renewal $30 million.

legislation enacted by Congress could impose significantly higher Statement No. 90 also applies to disallowances of costs of liability limits against each operating nuclear reactor. The Company newly-completed plants. The recommended decision discussed is unable to predict what the new limits might be. under "1986 Rate Case-Perry Unit No.1" in Note I did not specify any " prudence" disallowances. However, the PUC could impose Fuel Purchase Commitments such a disallowance of Perry Unit No.1 or Beaver Valley Unit No. 2 The Company is obligated to purcoase minimum quantities of coal costs. Such action would require the Company to record a loss and nuclear fuel under various fuel supply arrangements. Prior and reduce its mvestment in the affected unit.

years' purchases from an unaffiliated coal supplier were less than The Statement also specifies that wh:n recovery of AFC related the minimum quantities specified in the contract and resulted in a total shortfall of 934,000 tons at December 31,1986. The Company to a plant under construction is no longer probable, the recording of AFC must be discontinued. The Company could be required to is currently making up this shortfall at the rate of approximately stop recording AFC on a portion of Beaver Valley Unit No. 2 or to 40,000 tons per month.

record a loss when the results of a construction management CAPC0 Construction Program audit are known (see discussion under " Beaver Valley Unit No. 2 Continuation of the CAPC0 construction program depends on the

, Construction Management Audit" in Note 1). The Company is continued ability of each CAPC0 company to provide its share of unable to predict the results of the audit or what adjustments, the funds required for construction. If any of the companies fails if any, might be required as a result of the audit.

to pay its share, the program could be interrupted in whole or in Depending on when the Company adopts the Statement, whether part unless the share is raised from among the remaining com- the Company restates previously-issued financial statements and panies orfrom another source. the PUC's actions regarding me Company's current and future rate Other cases, the Statement could hcVe a material adverse effect on the The Company is involved in various other legal proceedings. In the Jompany's financial position and results of operations.

Opinionof managementof theCompanysuchlegalproceedings The FASB has also decided that it will reconsider proposed will not have a material adverse effect on the financial position changes in the accounting for phase-in plans, such as the plan orresultsof operationsof theCompany. related to Perry Unit No.1 contained in the Company's 1986 rate See Note I for a description of various other contingencies case. The Company is unable to predict what the new proposals related to rate matters. will be or how they would affect the Company's current or future rate cases.

K.NEW ACCOUNTING STANDARDS In December 1985 the FASB issued Statement No. 87, which in December 1986 the Financial Accounting Standards Board provides for changes in the way companies recognize and meas-(FASB) issued Statement No. 90, " Regulated Enterprises- ure retirement costs, requires some employers to record liabilities Accounting for Abandonments and Disallowances of Plant Costs". for benefit obligations and specifies additional pension-related dis-The Statement prescribes how the Company must account for closures to be included in companies' annual reports. The Com-abandoned plants, disallowances of costs associated with newly- pany has determined that it will adopt the Statement in 1987.

completed plants and, in certain circumstances, the recording of This new accounting rule is not expected to have a material effect on the Company's financial position or results of operations.

36 1

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m w M T W O Mas, K Bh-M.)"AlH E fy M,u Le.m n fuu; r., su jun, gi . us ris1.uu n m'iu.;_unga g gs ;; fuyh u ag - - . nm--a-w .e.rrm unaw _

,.o.u--- -uer .

L CAPITALIZATION December 31,1986 December 31,1985 CallPrice Shares Shares PerShare Outstanding Amount Outstanding Amount Common Stock-$1 par value(1) 73,119,446 $ 73,119,446 71,488,270 $ 71,488,270 CapitalSurplus:

Premiumon common stock $933,325,825 $907,643,839 Capitalstockexpense (7,612,032) (7,695,109)

Other 416,748 441,857 TotalCapitalSurplus $926,130,541 $900,390,587 Non-redeemable Preferred and Preference Stock:

Preferred stock-$50 par value (cumulative) (1):

4% Series (2) $ 51.50 549,969 $ 27,498,450 549,969 $ 27,498,450 3./5% Series (2) 51.00 150,000 7,500,000 150,000 7,500,000 4.15% Series (2) 51.73 140,000 7,000,000 140,000 7,000,000 4.20% Series (2) 51.71 100,000 5,000,000 100,000 5,000.000 4.10% Series (2) 51.75 120,000 6,000,000 120,000 6,000,000

$2.10 Series (2) 51.84 160,000 8,000,000 160,000 8,000,000

$7.20 Series (3) 102.50 350,000 17,500,069 350,000 17,500,000 Preference stock-$1 par value (cumulative) (1):

$2.315 Series (4) 25.90 1,200,000 1,200,000 1,200,000 1,200,000

$2.10 Series (4) 26.40 1,200,000 1,200,000 1,200,000 1,200,000 Total 80,898,450 80,898,450 Premium on non-redeemable preferred and preference stock 75,238,760 75,238,760 Total Non-redeemable Preferred and Preference Stock $156,137,210 $156,137,210 involuntary LiquidationValue $155,998,450 $155,998,450 Redeemable Preferred and Preference Stock:

Preferred stock-SSO par value (cumulative) (1):

$8.64 Series (p $104.00 238,872 $ 11,943,600 244,872 $ 12,243,600

$8.375 Se-iec(t 112.00 264,000 13,200,000 276,000 13,800,000 Preference stock-$1 par value (cumulative) (1):

$7.50 Series (3) 103.00 221,560 221,560 232,760 232,760

$2.75 Series (4) 26.50 55,000 55,000 165,000 165,000

$9.125 Series (3) 105.76 433,400 433,400 466,700 466,700 Total 25,853,560 26,908,060 Premium on redeemable preferred and preference stock 91,304,640 99,250,140 Purchase and sinking fund requirements (6,505,000) (6,505,000)

Total Redeemable Preferred and Preference Stock $110,653,200 $119,653,200 Involuntary Liquidation Value $110,653,200 $119,653,200 (1) Authorizedshares:commonstock-90,000,000; preferred stock-4.000,000; preference stock-8,000,000.

(2) $50 per share involuntary liquidation value.

(3) $100 per share involuntary liquidation value.

(4) $25 per share involuntary liquidation value.

37

DuquesneUghtCompany Notes (continued) em ._ +-mmmmm:amame.:meram.r uu n--r.wmesmmemmunmum=a Common Stock Furthermore, the aggregate amount of junior stock payments The numbers of shares of common stock reserved at December which may be made in any 12-month period are in generallimited 31,1986 for issuance under the former provisions of the Dividend to (1) 50% of net income for any period of 12 consecutive calendar Reinvestment Plan and the Employee Stock Ownership Plans were months within the 15 preceding months if the effect of such pay-2,282,189 and 680,263, respectively. The Company modified the ments would be to reduce the ratio of common stockholders' equity plans in 1986 whereby shares are purchased on the open market. to total capitalization to less than 20% or (2) 75% of net income if The Company has paid a regular quarterly common stock divi- the effect would be to reduce such ratio to 20% or more but less dend on January 1, April 1, July 1 and October 1 in each year than 25%. No portion of retained eamings at December 31,1986 beginning in 1953 after becoming publicly owned. The quarterly was restricted by virtue of this provision.

dividends related to each quarter of 1985 and the first two quarters HigMow stock prices for 1986 and 1985 were as follows:

of 1986 were paid at the rate of 51% cents per share. Quarterly 1986 1985 dividends related to the last two quarters in 1986 were paid at the Quarter High Low High Low rateof 30centspershare.

Dividends may be paid on the common stock to the extent per- 1st $19% $16 $16% $14%

mitted by law and as declared by the Board of Directors, subject to 2nd 18 % 13 17 15 %

the provisions of the Company's Restated Articles which restrict 3rd 15 % 12% 17 % 14 %

the payment of cash dividends or other distributions on, or the purchase of, its capital stock ranking junior to its preferred stock. 4th 13 % 12 % 17 % 14 %

Pennsylvania law provides that dividends on common stock may The principal trading market for the Company's Common Stock only be paid out of positive retained eamings. is the New York Stock Exchange. The stock also is listed on the No dividends or distributions may be made on the common Philadelphia Stock Exchange.

stock if dividends or sinking or purchase fund obligations on the preferred stock or preference stock are accumulated and unpaid.

The following summaryindicates the changes in the number of shares of common stock outstanding during 1986,1985 and 1984:

Year Ended December 31, 1986 1985 1984 Common Stock:

Shares outstanding at beginning of year 71,488,270 64,774,591 58,419,659 issuances:

Common stock sales - 3,000,000 2,500,000 Dividend reinvestment plan 1,631,176 3,656,923 3,793,836 Employee stock ownership plans - 56,756 61,096 Shares outstanding at end of year 73,119,446 71,488,270 64,774,591 38

_ _ _ . _ _ _ _ __- _ _ _= __

Preferred and Preference Stock Company expects to retire the remaining 55,000 shares outstanding The preference stock is entitled to quarterly cumulative dividends by August 1,1987. The 59.125 preference stock is subject to a cumu-except that no dividends may be paid if dividends on any series of lative sinking fund which will retire 33,300 shares on January l in the preferred stock are accumulated and unpaid. If six quarterly each year through 1997 at $100 per share. The Company may on dividends on any series of preference stock are in default, the a non-cumulative basis retire an additional 33,300 shares in each holders of the preference stock are entitled to elect two directors such year, provided that the Company may not retire through the until all dividends in arrears on such stock have been paid. exercise of this option more than an aggregate of 150,000 shares.

The preferred stock is entitled to quarterly cumulative dividends. The $8.64 preferred stock is cubject to a non-cumulative pur-If four quarterly dividends on any series of preferred stock are in chase fund under which the Company offers to purchase annually default, the holders of the preferred stock are entitled to elect a up to 6,000 shares at not more than $100 per share. The $8.375 majority of the Board of Directors until all dividends in arrears and preferred stock is subject to a cumulative sinking fund which will current dividends on such stock have been paid. retire 12,000 shares on April l in each year at $100 per share. The The outstanding preference stock and preferred stock gener- Company may on a non-cumulative basis retire an additional ally are callable on not less than thirty days' notice at the prices 12,000 sharesin each such year.

stated in the above table plus accrued dividends. Certain call The maximum combined aggregate sinking fund and mandatory prices decline in future years. The $9.125 preference series is not purchase requirements for preferred and preference stock for the redeemable prior to January 1,1989 through certain refunding next five years as of December 31,1986 were as follows:

operations; however, it is otherwise redeemable at $100 plus a YearEnding Sinking Fund and Mandatory redemption premium which decreases from $5.28 in 1987 to December 31, Purchase Requirements zero m 1998.

The $7.50 preference stock is subject to a non-cumulative pur. 1987 $7,805,000 chase fund under which the holders of the stock may tender, and 1988 6,430,000 the Company is required to purchase, annually at $100 per share 1989 6,430,000 up to 4% of the number of shares originally issued. The $2.75 preference stock is subject to a cumulative sinking fund which will 1990 6'430'000 retire 55,000 shares tr/ August 1 in each year at $25 per share. The 1991 6,430,000 The following summary indicates the changes in the number of shares of redeemable and non-redeemable preferred and preference stock outstanding during 1986,1985 and 1984:

Year Ended December 31, 1986 1985 1984 Preference Stock:

Shares outstanding at beginning of year 3,264,460 3,337,985 3,426,490 Purchases and redemptions-$2.75 Series (110,000) (27,665) (77,905)

-$7.50 Series (11,200) (12,560) (10,600)

-$9.125 Series (33,300) (33,300) -

Shares outstanding at end of year 3,109,960 3,264,460 3,337,985 l Preferred Stock:

! Shares outstanding at beginning of year 2,090,841 2,108,841 2,126,841 Purchases-$8.375 Series (12,000) (12,000) (12,000)

-$8.64 Series (6,000) (6,000) (6,000)

Shares outstanding at end of year 2,072,841 2,090,841 2,108,841 Gains on the redemption of capital stock are recorded in capital surplus; losses, to the extent they exceed cumulative gains, are charged to retained eamings.

39

DuquesneUghtCompany Notes (continued) -- - -

__---_.__--__ m-Principal Amount Outstanding at First Mortgage Bends (amount authorized is unlimited by indenture): December 31, 1986 1985 Seriesdue April 1,1986(3%%) $ - $ 20,000,000 Series due April 1,1988(3%%) 15,000,000 15,000,000 Series due March 1,1989(4%%) 10,000,000 10,000,000 Series due March 1,1991 (13%%) 50,000,000 50,000,000 Series due December 1,1992(10%%) 75,000,000 75,000,000 Series due June 1,1995(10%%) 50,000,000 50,000,000 Series due February 1,1996(5%%) 22,800,000 22,800,000 Series due February 1,1997(5%%) 24,600,000 24,600,000 34,700,000 34,700,000 l

_ Series due February 1,1998(6%%)

Series due January 1,1999(7%) 30,000,000 30,000,000 l Series due July 1,1999(7%%) 28,947,000 28,947,000 Series due March 1,2000(8%%) 30,000,000 30,000,000 Seriesdue March 1,2001(7]/s%) 35,000,000 35,000,000 Series due December 1,2001(7%%) 26,461,000 26,461,000 Series due June 1,2002(7%%) 28,470,000 28,470,000 32,670,000 32,670,000

-Series due January 1,2003(7%%)

Series due July 1,2003(7%%) 35,000,000 35,000,000 Series due April 1,2004(8%%) 44,100,000 44,100,000 Series due March 1,2005(9%%) 50,000,000 50,000,000 Series due June 1,2006(9%) 80,000,000 80,000,000 Series due April 1,2007(8%%) 97,400,000 97,400,000 Series due February 1,2009(10%%) 100,000,000 100,000,000 Seriesdue January 1,2010(12%%) 60,000,000 60,000,000 Series due June 1,2011(16%) - 17,966,000 Seriesdue May1,2012(16%%) 3,277,000 3,777,000 Series due Aprill,2013(12%%) 60,000,000 60,000,000 Series due December 1,2013(13%) 50,000,000 50,000,000 39,000,000 39,000,000

~ Series due February 1,2015(11%%)

Series due December 1,2015(11%%) 125,000,000 125,000,000 Series due December 1,2016(9%%) 100,000,000 -

Total 1,337,425,000 1,275,891,000 Less: Current maturities-Series due April 1,1986 (3%%) - 20,000,000 Current sinking fund requirements 10,374,250 9,668.910 TotalFirst Mertgage Bonds $1,327,050,750 $1,246,222.090 On February 11,1987 the Company issued $100 million of 9% first mortgage bonds, series due February 1,2017.

In December 1985 the Company redeemed $50 million principal amount of 14%% first mortgage bonds, series due September 1,2010, and reacquired through tender offers $62 million principal amount of 16% first mortgage bonds, series due June 1,2011, and $61,2 minion principal amount of 16%% first mortgage bonds, series due May 1,2012. Funds used to reacquire the bonds were obtained primarily from the proceeds of the issuance and sale of $75 million principal amount of 10%% first mortgage bonds, series due December 1,1992, and

$125 million principal amount of 11%% first mortgage bonds, series due December 1,2015. In June 1986 the Company redeemed the 40

=nwmmma mu =w a=m=mww w=a ma= = == ~ = == ==.m remaining $17,966,000 of 16% first mortgage bonds and in July 1986 reacquired an additional $500,000 of 16%% first mortgage bonds.

The difference between the purchase prices and the net carrying amounts of the bonds in the total amount of $40.6 million has been included in the Balance Sheet as " Unamortized loss on reacquired debt". The Company believes it will receive approval from the PUC to amortize and recover the loss from its customers. The Company expects to reduce its annualinterest expense as a result of these refinancings.

The trust indenture securing the Company's first mortgage bonds provides that no additional bonds may be issued unless the " earnings applicable to bond interest", as defined by the indenture, are at least twice the annual interest requirements on the additional bonds and on all bonds outstanding under the indenture. At December 31,1986 this restriction precluded the Company from issuing additional bonds after February 28,1987. However, a separate provision of the indenture permits issuance of additional bonds on the basis of previously-issued bonds which have been retired. At December 31,1986 the Company could issue approximately $198 million of additional bonds under this provision.

Other Long-Term Debt:

Pollution Control 0bligations: SerialMaturity Principal Amount Average or Mandatory Outstanding at December 31, Date of Interest Redemption Final issuance Rate Beginning Maturity 1986 1985 September 21,1972 5.49 % 1983 2002 $ 22,000,000 $ 22,500,000 June 21,1973 5.685 % 1984 2003 11,400,000 11,600,000 October 25,1973 5.755 % 1984 2003 15,000,000 15,000,000 August 13,1974 7.97 % 1989 2004 14,000,000 14,000,000

_ April 2,1975 7.50 % 1993 2005 17,000,000 17,000,000 October 29,1975 8.40% 1991 2005 18,000,000 18,000,000 September 29,1976 6.90% 1994 2011 15,000,000 15,000,000 March 24,1981 12.00 % 2002 2011 50,000,000 50,000,000 November 1,1983 10.50% -

2013 20,500,000 20,500,000 December 19,1984 11.625 % -

2014 51,000,000 51,000,000 October 24,1985 7.75 % -

2015 44,250,000 44,250,000 Total 278,150,000 278,850,000 Less current maturities and sinking fund requirement 1,175,000 700,000 Total Pollution Control Obligations 276,975,000 278,150,000

_ Nuclear fuelobligations 10,058,070 26,732.384 5% sinking fund debentures (authorized-$20,000,000) due March 1,2010 9,104,000 9,104,000 TotalOther Long-Term Debt $296,137,070 $313,986,384 The pollution control obligations arise from arrangements the right of the holders to tender for mandatory purchase under between the Company and governmental authorities whereby certain conditions.

i the construction of certain pollution control facilities is financed The Company's share of the cost of certain pollution control l through the sale of bonds by those authorities. The Company is facilities at Perry Unit No.1 was financed through the issuance of $39 million of State of Ohio 11%% tax-exempt pollution control obligated to pay to the authorities amounts equal to the principal of andinterest on such bonds. revenue bonds, series due February 1,2015, which are secured The interest rate on the $44.25 million of pollution control obli- by an equal amount of first mortgage bands which mature on that gations issued on October 24,1985 is fixed at 7%% for the five date.

year period ending October 1,1990. After that date, the interest The nuclear fuel obligations result f rom a trust arrangement for rate on the bonds will be adjusted annually, unless the rate is fixed the procurement of a portion of the Company's requirements for by the Company for the remaining term of the bonds. There is a nuclear fuel. Interest applicable to the trust is capitalized and commitment fee of %% per annum in connection with an irre- included in CWIP at rates ranging from 1%% to 1%% over the

! vocable letter of credit which expires on October 15,1990 which is available for the payment of certain interest on or redemption of the bonds under certain circumstances. The bonds are subject to 41

DuquesneLightCompany Notes (continued) ummm=wma=mwamaa=m =amam=me=wm=~===xm===m=x=x=m trustee's commercial paper rate. Trust obligations will be paid by The sinking fund requirements in each year relate primarily to the Company as the related nuclear fuelis withdrawn from the the first mortgage bonds, which requirements may be satisfied by trust. the certification of property additions equal to 166%% of the bonds Sinking fund requirements and maturities for the next five years required to be redeemed, and the pollution control obligations. The of long-term debt outstanding, exclusive of nuclear fuel obligations, remaining sinking fund requirement relates to the 5% sinking fund as of December 31,1986 were as follows: debentures. At December 31,1986 sinking fund requirements for the 5% debentures had been satisified for 1987 and the 1988 sink-YearEnding Sinking Fund ing fund requirement had been partially satisified.

December 31, Requirements Maturities Totalinterest costs incurred during 1986,1985 an61984 were 1987 $12,749,250 $ 800,000 $182.1 million, $169 million and $152.3 million, respectively, of 1988 13,903,250 15,800,000 which $124.4 million, $115.6 million and $96.7 million were 14,224,250 10,900,000 capitalized ordeferred, including AFC. Approximately $13 million 1989 86 costs were related to provisions for rate refunds.

14,224,250 900,000 1990 feeote0 1991 13,674,250 51,550,000 M. SUPPLEMENTARY INCOME STATEMENT INFORMATION Year Ended December 31, 1986 1985 198A (Thousands of Dollars)

Maintenance $84,774 $70,839 $83,914 Amortization of extraordinary propertylosses 4,059 4,025 4,033 Taxes other than payroll and income taxes:

Gross receipts 37,870 38,788 38,349 Property 16,179 18,491 16,604 Capitalstock 10,001 8,901 8,901 Insurance and other recoveries - 5,304 -

Under the system of accounting followed by the Company, a portion of maintenance expenses and of taxes other than payroll and income taxes represents amounts charged to coalinventories. The inventory accounts are relieved and operation expense charged as the coalis used.

N. QUARTERLY FINANCIAL INFORMATION (Unaudited)

The following is a summary of selected quarterly financial data (Thousands of Dollars, Except Per Share Amounts):

Operating Operating Net Earn;ngs Per Quarter Ended Revenues Income income Share March 31,1985 $231,695 $50,102 $45,378 S.61 June 30,1985 221,436 48,451 44,493 .59 September 30,1985 239,534 50,168 44,088 .55 December 31,1985 225,795 42,396 41,998 .51 March 31,1986 232,006 47,288 42,875 .52 June 30,1986 214,379 45,534 37,543 .44 September 30,1986 227,345 48,388 45,993 .56 December 31,1986 222,533 48,596 25,015 .27 in the fourth quarter of 1986, the Company recorded refunds to customers related to a 19810ption Order. The principal amount of the refunds was $32.8 million, and interest accrued through December 31,1986 was $10.3 million. The effect of these transactions was to reduce fourth quarter eamings, net of an income tax effect, by $21.1 million, or approximately $.30 per share. See Note C.

During the fourth quarter of 1985, the Company made a one-time transfer of the excess of insurance and other reimbursements over property losses from " accumulated depreciation" to "other income", which increased fourth quarter earnings by $5.3 million, or $.075 per share.

42

DuquesneUghtCompany Selected Financial Data and Statistical Summary mamwmmmmmmummexwn=wn=mm wac.m=:a aw =m,. mm=xn (Thousands of Dollars, Except Per Share Amounts) 1986 1985 1984 1983 1982 1981

SUMMARY

RESULTS OF OPERATIONS:

Residentialrevenues $297,520 $286,260 $280,647 $267,110 $238,496 $223,146 Commercialrevenues 347,364 335,012 314,129 290,370 263,374 243,501 Industrialrevenues 178,425 225,692 244,970 221,107 225,292 300,066 Other revenues 27,435 25,447 25,955 25,663 22,418 22,765 Totairevenuesfromcustomers 850,744 872,411 865,701 804,250 749,580 789,478 Revenues from other utilities 45,519 46,049 31,439 10,471 28,686 6,250 Totaloperating revenues 896,263 918,460 897,140 814,721 778,266 795,728 Operation and maintenance expenses 481,712 472,956 466,329 400,762 431,331 445,088 Depreciation and amortization 74,325 81,066 77,532 73,682 62,939 60,854 Taxes otherthanincome taxes 70,987 72,614 70,279 60,651 57,476 57,694 incometaxes 17,536 72,440 74,600 76,194 53,307 57,801 Interest charges, net of allowance for borrowed funds used during construction 127,634 127,010 116,333 109,161 100,344 92,968 Other income, principally allowance for equity funds used dt. ring construction 84,635 r, 583 64,727 50,955 44,328 28,086 Rate refunds (includinginterest expense of $12,953) 57,278 - - - - -

Income from continuing operations before extraordinary gain 151,426 175,957 156,794 145,226 117,197 109,409 loss from discontinued steam heating operations - - - -

9,924(1) 538(1)

Income before extraordinarygain 151,426 175,957 156,794 145,226 107,273 108,871 Extraordinary gain - - - -

9,609(2) -

Netincome 151,426 175,957 156,794 145,226 116,882 108,871 Dividends on preferred and preference stock 20,547 21,250 21,955 22,411 22,701 22,976 Earnings forcommon stock $130,879 $154,707 $134,839 $122,815 $ 94,181 $ 85,895 Average numberof common shares outstanding (000) 72,930 68,543 61,054 55,883 48,236 41,764 Earnings pershare of common stock:

Income from continuing operations $1.79 $2.26 $2.21 $2.20 $1.96 $2.07 Earningsforcommon stock 1.79 2.26 2.21 2.20 1.95 2.06 Dividends declared on common stock 1.415 2.06 2.06 2.00 1.90 1.85 Property, plant and equipment $4,312,047 $4,168,993 $3,799,499 $3,293,481 $3,024,554 $2,809,753 Accumulated depreciation and amortization 821,448 748,860 659,745 555,641 504,680 477,009 Property, plant and equipment-net $3,490,599 $3,420,133 $3,139,754 $2,737,840 $2,519,874 $2,332,744 Totalassets $4,039,127 $3,854,468 $3,530,310 $3,145,811 $2,883,424 $2,668,577 Bookvalue per share $16,75 $16.36 $16.26 $16.41 $16.29 $16.76 (1) Loss from Company's steam heating subsidiary which discontinued steam service effective May 31,1983.

(2) Extraordinary gain of $9,609,000, or $.20 per common share, resulting from the exchange of 1,406,898 shares of common stock for approximately $29,852,000 principal amount of first mortgage bonds.

43

DuquesneUghtCompany Selected Financial Data and Statistical Summary (continued) l (Thousands of Dollars, Except Per Share Amounts) f 1986 1985 1984 1983 1982 1981 CAPITALIZATION:

Common stock $ 73,119 $ 71,488 $ 64,775 $ 58,420 $ 53,277 $ 45,303 Capitalsurplus 926,131 900,391 804,377 724,147 649,376 550,244 Retained eamings 225,733 197,952 184,313 175,938 165,340 163,705 Non-redeemable preferred and preference stock 156,137 156,137 156,137 156,137 156,137 156,137 Redeemable preferred and preference stock 110,653 119,653 127,414 134,979 140,829 143,924 First mortgage bonds 1,327,051 1,246.222 1,149,547 1,100,147 1,006,637 983,870 Otherlong-term debt 296,137 313,986 278,384 234,019 199,934 176,682 Unamortized debt discount and premium-net (8,485) (9,209) (10,896) (10,967) (9,488) (9,453)

TotalCapitalization $3,106,476 $2,996,620 $2.754,051 $2,572,820 $2,362,042 $2,210,412 AVERAGE REVENUE PER KILOWATT-HOUR-ALLCUSTOMERS 8.032c 7.832c 7.389c 7.215c 6.708c 5.715c SALES OF ELECTRICITY:

Average annuai residential kilowatt-hour use 5,821 5,621 5,768 5,752 5,668 5,698 Electric energy sales billed (millions of kilowatt-hours):

Residential 2,957 2,848 2,918 2,905 2,853 2,858 Commercial 4,724 4.537 4,393 4,257 4,163 4,069 Industrial 2,734 3,522 4,148 3,717 3,902 6,582 Other 99 101 104 111 120 125 Totalsalesto customers 10,514 11,008 11,563 10,990 11,038 13,634 Salesto other utilities 2,136 1,981 1,019 327 917 206 TotalSales 12,650 12,989 12,582 11,317 11,955 13,840 ENERGY SUPPLY AND PRODUCTION DATA:

Energy supply (millions of kilowatt-hours):

Net generation-system plants 13,264 13,590 12,983 11,900 12,352 13,914 Purchased and netinadvertent power 194 184 216 163 228 616 Totalenergysupply 13,458 13,774 13,199 12.063 12,580 14,530 Losses and Companyuse (808) (785) (617) (746) (625) (690)

Net energy supply 12,650 12,989 12,582 11,317 11,955 13,840 Generating capability (thousands of kilowatts) 2,707 3,148 3,148 3,148 3,144 3,177 2,132 2,127 2,172 2,184 2,158 2,522 Peakload(thousands of kilowatts)

Costof fuelper million BTU 165.340c 168.450c 165.868C 167.140c 167.865c 159.660C BTU perkilowatt-hour generated 10,624 10,633 10,682 10,635 10,853 10,931 Average production cost per kilowatt-hour 2.545C 2.462C 2.559c 2.541c 2.575c 2.354C NUMBER OF CUS11)MERS-END OF YEAR:

Residential 509,054 507,824 506,883 505,781 503,987 503,044 50,346 49,927 49,837 49,493 49,320 48,859 C_ornmercial Industrial 1,970 1,981 1,990 1,984 1,999 2,016 Other 1,826 1,817 1,588 1,633 1,647 1,713 TotalCustomers 563,196 561,549 560,298 558,891 556,953 555,632 44

DuquesneUghtCompany Management's Discussion and Analysis of Financial Condition and Results of Operations ammenwmumw.wmmemmnwwwmn=mwwwwa= cama. m=amra CAPITAL RESOURCES AND LIQUIDITY The Company finances its nuclear fuel requirements primarily by leasing and other arrangements whereby it may finance up to Common Stock Dividends

$208 million of nuclear fuel. As of December 31,1986 the Com-On April 18,1986 the Company's Board of Directors reduced the quarterly dividend from $.515 to $.30 per share, effective with the pany's share of the cost of nuclear fuel financed under these dividend paid July 1,1986. The reduction in the dividend rate will arrangements was $170 million, including interest, storage and improv:, cash flow by $63 million on an annual basis, thereby othercosts.

reducing the Company's need for extemal financing and strength, in addition to the funds require eningitsfinancialposition.

program, $29.7 milhon was iredin requ,d 1986for for the maturities Company's const oflong-Effective May 10,1986, the Company suspended its Dividend term debt and sinking fund and stock purchase require,ments. it is Reinvestment Plan under which newly-issued shares of common anticipated that $9 milhon will be required in 1987 for simdar stock were purchased for stockholders' accounts. The Company purposes.

instituted a market purchase dividend reinvestment plan effective interim financing has been and will continue to be provided with the dividend paid January 1,1987. This change eliminated through bank borrowings and sales of commercial paper. See Note future dilution of eamings which would have resulted from con. D for a description of short-term borrowing and revolving credit tinued issuance of new shares under the plan, arrangements.

Variable market and general economic conditions may affect the Construction Company's selection of financing alternatives and its ability to Construction expenditures during 1986, exclusive of allowance for raise capital. On November 12,1986 Standard & Poor's Corpora-funds used during construction (AFC) and nuclear fuel, were $179 tion lowered its ratings of the Company's securities, primarily due million. These expenditures were primarily for the construction of to the uncertain effect of the Public Utility Commission Sunset two CAPC0 generating units, Perry Unit No.1 and Beaver Valley Legislation (see Note I), as well as the Company's depressed Unit No. 2, which are expected to be in service by mid 1987 and results of operations. The lower ratings had the effect of increasing around the end of 1987, respectively. Expenditures were also made interest rates on the first mortgage bonds issued in December 1986 to improve and expand production, transmission and distribution and February 1987 and will result in higher interest expense to the systems and for pollution control equipment. Company. In addition, the Company's lower eamings will limit its The Company currently estimates that its construction expen- ability to issue first mortgage bonds. See Note L This situation ditures, exclusive of AFC and nuclear fuel, will be $140, $100, may be worsened by the effects of new accounting standards.

$100, $105, and $110 million for each of the years 1987 through See Note K' 1991, respectively. These estimates assume that construction of The Restated Articles of the Company require that as a condition Perry Unit No 2 will not resume during this period and that there for the issuance of preferred stock, eamings (after income taxes) will be no environmental matters, such as " acid rain' legislation, available for interest charges be at least 1.5 times the sum of which require large capital expenditures.

interest charges on allindebtedness plus preferred stock dividend Financing requirements. This restriction currently precludes the Company The Company anticipates that funds for planned construction from issuing preferred stock. There is no similar restriction upon expenditures in the next several years will be provided from cash the issuance of the Company's preference or common stock.

becoming available from operations and, to a minimal extent, In order to maintain earnings i dequate to finance construction theissuanceof additionalsecurities. expenditures and funding requirements, the Company requires On December 18,1986 the Company issued $100 million of rate increases sufficient to offset increased costs and provide a 9%% first mortgage bonds, series due December 1,2016, and fair rate of return to its stockholders.

on February 11,1987 issued $100 million of 9% first mortgage l Tax Refctm Actof1986 bonds, series due February 1 2017. There were no issuances of As discussed in Note E, the Company's future tax liabilities and the Company,s equity securiues during 1986 except through the cash flow will be adversely affected by the Tax Reform Act of 1986, Dividend Reinvestment Plan pn,or to its suspension. Funds pro-

, which accelerates the inclusica of certain transactions in taxable vided to the Company under this plan amounted to $27.3 million income and postpones or eliminates certain credits and deductions.

ons of the net proceeds from these transactions were used ing neraumpsnMexpedeMaveamaMal e n o panysanue,nedncomeacash J

to pay short-term indebtedness incurred principally for construc-tion purposes. The balance is being used for general corporate .AaM Refunds purposes. The Company currently estimates that funds required On June 26,1986 the PUC approved a settlement which term,- i for its 1987 construction program will be provided principally from nated its investigation of certa,ni outages at Beaver Valley Unit

, operations and. to a minimal extent, from short-term borrowings. No.1 and provided for refunds to the Company's customers.

On June 1,1986 the Company redeemed the remaining out. See Note C. The effect of the settlement was to reduce earnings, standing $17,966,000 of its 16% first mortgage bonds, series due net of an income tax effect of $7.2 million, by $6.9 million, or June 1,2011, at a redemption price of 112.63% of the principal $.09 per share, for 1986. Additionalinterest expense will be amount of the bonds. Since December 1985 the Company has incurred over the remaining refund period on the unamortized reacquired approximately $191.7 million principal amount of its balance of the refunds.

Outstanding high-interest first mortgage bonds issued in the early 1980's. The Company expects to reduce its annualinterest r expense as a result of these refinancings.

1 45

DuquesneLightCompany Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) wwmmummmwummw wmumwnwurum==.mmwammwzmmmmm During 1986 the PUC ordered the Company to file a refund plan New Accounting Standards relating to amounts collected under a 1981 option order. See Note As discussed in Note K, the Company will be required to comply C. The Company expects to appeal the order and is presently unable with the provisions of Statement of Accounting Standards No. 90 to predict the final outcome of this matter. However, because of which prescribes how utilities must account for abandoned plants the PUC's denial of the stay and other relevant considerations, in and disallowances of the construction costs of new generating November 1986 the Company recorded a provision for rate refunds, units and, in certain circumstances, the recording of AFC. The new including interest through December 31,1986, which reduced 1986 accounting standards could have a material adverse effect on the eamings, net of an income tax effect of $22 million, by $21.1 million, Company's financial position and results of operations.

or approximately $ 30 per share. Because of the Company's expected Effects ofInflation appeal, it is uncertain whether its cash flow in 1987 will be adversely The process of setting electric rates limits the Company to the affected by the refunds. recovery of the cost of service in its rates. Therefore, any increases Rate Matters in the cost of service wili not be included in rates charged to cus-As discussed in Note I, the manner in which the PUC and the tomers until the Company can implement new rates through a rate courts interpret the Sunset Legislation as well as the outcome of proceeding filed with the PUC.

the construction management audits related to Perry Unit No.1 The Company, by holding assets such as receivables, prepay-and Beaver Valley Unit No. 2 have created uncertainties as to ments and inventory, suffers a loss of purchasing power during whether the Company will recover and earn a return on its invest- periods of inflation because the amount of cash received in the ments in those units. Additionally, the PUC's final decision in the future for these items will purchase less. Conversely, by owing 1986 rate case and in future rate cases will determine whether the monetary liabilities, primarily long-term debt, the Company Company fully recovers its investments in the new generating units benefits because the payments in the future will be made with and in Perry Unit No. 2. nominal dollars having less purchasing power.

An adverse outcome of these and other rate matters discussed The regulatory process limits the amount of depreciation in Note I could have a material adverse effect on the Company's expense included in the Company's revenue allowance and limits financial position and results of operations. utility plant in rate base to original cost. Such amounts produce cash flows which are inadequate to replace such property or pre-LTV Corporation As discussed in Note J, the Company and LTV Steel Corporation serve the purchasing power of equity capital previouslyinvested.

(LTV Steel) are discussing a settlement agreement which would While this effect is partially mitigated by the benefit derived from end various legal proceedings between the two companies. One owing long-term debt, the Company has a net purchasing power loss which is experienced by the common stockholders and can of the proceedings relates to LTV Steel's refusal to make payments under a long-term contract which has adversely affected the Com. only be overcome by adequate rate relief. The Company will con-tinue to seek rates which ultimately will recover increased costs.

pany's cash flow by $1.1 million per month. The Company is un.

able to predict how much of its claim for amounts due under the Outlook long-term contract ultimately will be collected. The extent to which funds from operations will continue to be available to pay dividends and finance the Company's capital Securities Litigation needs depends upon its financial condition, earnings, business Subsequent to the reduction in the Company's dividend rate (see prospects, the regulatory climate and other relevant factors. The

" Common Stock Dividends" above), three complaints were filed Company is concerned about possible unfavorable decisions in against the Company and two additional complaints were filed rate-related proceedings and recent changes in accounting princi-against the Company and its Directors by holders of common ples, the erosion of its industrialload, the demand for electricity stock. Two of the complaints have been dismissed without prej.

as compared to the Company's available generating capacity, and udice. Although the Company is unable to predict the ultimate outcome of these matters, it believes the complaints are without other problems which the electric utility industry is experiencing in bringing new generating capacity on line and fully into rate base.

merit and the resolution of these matters will not have a material The Company is also concerned about recent legislation enacted adverse effect on the Company's results of operations. See Note J.

in Pennsylvan,a i (see discussion under "New Legislation" in Note I) and the increased uncertainty associated with the regulation of electric rates. These uncertainties could have a material adverse effect on the Company's revenues, net income and cash 1.aw and its ability to obtain financing and pay dividends.

46

m a m w =xm=m = =x=m mmwwa m u = mm==:n=wwu RESULTS OF OPERATIONS Depreciation and Taxes Operating Revenues Depreciation expense decreased in 1986 compared to 1985.

Operating revenues increased (decreased)in the years 1984 including a $9 million decrease related to a service life study which through 1986 over the respective preceding years, for the follow. increased the expected service lives of certain of the Company's assets. Additionally, the Company ceased charging depreciation ing reasons:

on the portion of the Brunot Island Power Station which was 1986 1985 1984 placed in cold reserve, resulting in a $3.5 million decrease in Millions of Dollars depreciation expense in 1986. See Note 1. Both of these adjust-Generalrateincreases $ 10.9 $27.3 $26.9 ments were effective January 1,1986 and increased eamings Electricalconsumption 12.8 by $.17 per share.

(23.3) (19.4)

Fluctuations in income taxes were primarily due to changes ,ni Energycost rate revenues (9.9) 6 18.3 taxable income. Perry Unit No.1 was placed into service for tax State tax adjustment and other .6 (1.8) 3.4 purposes during December 1986. The related tax depreciation Revenuesfrom other utilities (.5) 14.6 21.0 deduction reduced income tax expense by $6 million and increased earnings by $.08 per share. The effective income Total $(22.2) $21.3 $82.4 tax rates for 1986,1985 and 1984 were 10%,29% and 32%,

The operating revenues of the Company are based on rates authorized by the PUC. These rates are designed to recover the e{ creases in allowance for equity and borrowed funds used Company's operating expenses, plus a rate of retum on the invest-during construction were due to the increased costs of construc-ment in utility rate base. The Company also has an energy cost tion. These increases were partially offset by the Company's deci-rate which generally allows it to recover the difference between sian to stop recording AFC on Perry Unit No. 2 as of July 1,1985.

actual fuel costs and fuel costs included in base rates. Any over-See Note 1. Interest income decreased in 1986 compared to 1985 collections of revenues are refunded, with interest, to customers.

due to a decrease in cash available for temporary investments.

There were no rate increases which became effective in 1984 in 1985 the Company made a one-time transfer of the excess of or 1986. In 1985 the Company was permitted rate increases in Insurance and other reimbursements over property losses f rom January and November which were estimated to increase annual

,' accumulated depreciation to "other ineme". This non-recurring revenues by $31.4 million and $10.8 million, respectively. In 1983 transfer increased 1985 eamings by $5.3 million.

rate increases were permitted in January and September which were estimated to increase annual reverues by $106 million and . Interest expense for 1986,1985 and 1984 was higher due to increased borrowings to finance the Company's capital expen-

$21 million, respectively. The decreases in electrical consumption ditures. Additionally,in 1986 the Company recorded rate refunds in 1986 and 1985 were primarily due to decreases of 22% and of $44 million and interest expense of $13 milhon relative to the 15%, respectively, in kilowatt hour sales to industrial customers.

Beaver Valley Replacement Power and the 19810ption Order The fluctuations in energy cost rate revenues were primarily due refunds. The adverse effect, approximately $.39 per share, of to increases or decreases in kilowatt-hour sales and in the energy the two refunds is reflected in the Statement of Income for 1986.

cost rate. In November 1985 a portion of the energy cost rate was See Note C.

rolled into base rates. Favorable capacity situations and the requirements of neighboring utilities resulted in increased sales Earnings Per Share to otherutilitiesin 1985 and 1984. The fluctuations in earnings for common stock for 1986,1985 and 1984 were due to the factors discussed above; however, earnings Operation and Maintenance Expenses per share of common stock were adversely affected by increases Total operation expenses (fuel, purchased power and other oper-ation) decreased slightly in 1986 compared to 1985, primarily due !n the average number of shares outstanding, which reduced earn-ings per common share by $.12, $.27 and $.20, respectively.

to decreases in deferred energy costs. These decreases were sub-stantially offset by increases in other operation expenses, specif-ically general and administrctive expenses and transmission expenses. Total operation expenses increased in 1985 compared to 1984, primarily due to increased generation of electricity which resulted from substantialincreases in sales to other utilities. Main-tenance expenses increased in 1986 compared to 1985, primarily due to the scheduled outages of the Cheswick Power Station from January 31,1986 to April 25,1986 and Beaver Valley Unit No.1 from May 16,1986 to August 25,1986. Maintenance expenses decreased in 1985 compared to 1984 because of the scheduled maintenance and refueling outage of Beaver Valley Unit No.1 which occurred during 1984. There were no similar outages in 1985.

47

z__mmm m _--mammm.m, mmm_--uw--wn.3-Business of the Company Federallocome TaxStatus CAPCO Duquesne Light Comi,any is engaged in the of Common Stock Dividends In 1967, Duquesne Light joined four other production, transmission, distribution and sale Duquesne Light expects all dividends paid on electric utilities to form the Central Area Power of electric energy. The Company serves an area Company stock during 1986 will be fully taxable. Coordination (CAPCO) group.

of approximately 800 square miles in Allegheny Prior to 1980,10 generating units were com-and Beaver counties. This area, which includes Form 10-K Offer mitted under the CAPC0 arrangements, which the City of Pittsburgh,is located in Southwest. If youareaholderorbeneficialownerof any provided for joint ownership interests based on ern Pennsylvania and has a population of classof theCompany'sstockasof Feb.25,1987, individual requirements. To date, seven units are about 1,500,000. the record date for the 1987 Annual Meeting, in service and two units are under construction.

The executive offices of Duquesne Light the Company will send you, upon request and Duquesne Light shares in the ownership of arelocated at: at no charge, a copy of the Company's Annual nine of the CAPC0 units.

OneOxford Centre Report on Form 10-K filed with the Securities Since1980,each CAPC0companyhas 301 Grant St. and Exchange Commission for the year 1986 been responsible for establishing its own level of Pittsburgh, PA 15279 (including a list of exhibits). All requests must reserves and generating capacity needs beyond be madein writing to: the jointly-owned units still under construction.

DuquesneLightCompany Corporate Secretary (17-6) Duquesne Light has a share in the CAPC0 isanEqua/OpportunityEmployer.

Duquesne Light Company unitslisted below:

Service Area Map One0xford Centre

• Duquesne Ught Company 301 Grant St.

Pittsburgh, PA 15279 $,$j' fu#c ens 7*

capacity: 810,000 kW Capacity: 833.000 kW U==m Dansfer Agentand Registrar nL ownersnip: 475% o L ownersnio 1174%

snart sa5mm sammmm

- Common, Preference and Preferred Stock:

• , Pennsylvania Power Company

~[' The FirstJerseyNationalBank uansriceer uanseev#2 u Jersey City. New Jersey gosp g ggg , cos,g9gg p

hh7 i34 AnnualMeeting of Stockholders The Annual Meeting of Stockholders will be 3"

0[sCrl"$$0Kw OiNa"/eT2'0007w uanew#J 8

Mrd p[ '

held at 10 a.m., Pittsburgh time, on Tuesday, 0$p'$ityN00.000Kw

. April 21,1987, in the David L. Lawrence Con- @pg,n;rs g7g

, , , , , . vention Center, Pittsburgh, Pa.

.ohie Edison company The approximate number of holders of sammis #7 Common Stock as of the Feb. 25,1987, record coal-1971

. ,m date for the 1987 Annual Meeting was 125,000. $*Tn,$pS aume D Lsnare:187.000 KW

• The Cleveland Electric laisminating Company Mry st Mry e2 Nuclear-1987'* Nuclear ***

capacity: 1.205.000 Kw Capacity:1.205.000 Kw D L ownersnip 1174% o L ownership:13 74 %

otsnare:165.000 Kw o L share:165.000 Kw 19761986 DIMENSIONS Magazine c,3m ,5 In mid-year 1987, Duquesne Light plans [j,*'c,$ogo

, gw to publish DIMENSIONS, anin-depth, o L ownersnip: at 2%

11-yearstatisticalreviewof theCompany. O L stam.202mm Fora copyof DIMENSIONS write: . gaga 9,8ag,8f,ng , company Duquesne Light Company * **see Troperty Pending Regulatory Treatrnent.* page 34 l Corporate Communications (30-5)

One Oxford Centre 301 Grant St.

Pittsburgh, PA 15279 48

John M. Arthur t# George E.Bentz Thomas E. Nist Chairman of tire Board John M. Arthur GeneralSenices CustomerServices-WesleyW. von Schack t$e Richard S.Christner Presidentand Chief Executwe Wesley W. von Schack GeneralCounsel Steve L.PemickJr.

EnvironmentalAtfairs Offmer President and Chief Executive Ottmer Thomas H. Cook Management RobertC.Schopper CharlesM. Atkinson 88' John J. Carey*

• Int anatenSenices MaterialsManagement Executive Vice President Senior Vice President-Nuclear Group Henry G Allyn Jr. *$ James 0.Crockett PaulL.Schroeder Roger D. Beck *

• RetiredPresidentand Chief ExecutweOfficerof ThePittsburgh Vwe President ~

Markeung and Customer Services Group fe ftrons DonaldH DeVos andtakeErieRadroadCompany SystemDevelopment Don Gary R. Brandenberger*

• 7,33,ald 7y,f3 A. Shirer Jr.

DanielBerg *1# Vice President-FbwerSupplyGroup C. Eugene Ewing President, Retnselaerfblytechne NuclearQualityAssurance Nelson R. Tonet Institute George L Mazanec*

• NuclearEngineering& Records Vice President-Finance Group ThomasHunter Doreen E. Bayce tt andCluelfinanciaI0fficer CustomerServmes- Emest M.Varhola Donald 0. Messner*

• John H. Demmler *t Vice President-Adninistratne Thomas D. Jones,11 Joseph F.Zagorski Partner, PeedSmith Shaw & McClay Services Group Foss#Generaten HumanResources Attomeys-at-law John D. Sieber" John E.Laudenslager Armand G.Zitelli Sigo Falk t$ Vice President-Nuclear Corporttecommunmabons CustomerServices-Healtxareconsultantto three GroupSupportSenices Pittsburgharea hospitals Walter T.Wardzinski David D. Marshall Vice President-legaland Planning, Budgeting & Rates WiIham H. Knoell *# CorporateCommunicationsGroup President and Chief Executne ottmer, H. Donald Morine CglopsCorporaten Diane S. Eismont Marketing & Econwic G. Christian Lantzsch fl#

Vre Chairman of Mellon Bank, N A. James 0. Ellenberger William J. Neidlinger and VceChairmanand Treasurerof Corporate Performance Analysis ControHetandPrincipal Mellon Bank Corporation Accounting Officer Eric W. Springer il Gary L. Schwass Partnes Horty, Springer Treasurer andMattem Attomeys-at Law Lawrence P.Galie Assistant Treasurer

!

• Memberof AuditCommittee l

t Memberof Compensaten Joan S. Senchyshyn l Commuttee AssistantSecretary j t Memberof Employmentand l

Community Relations Committee A. William Stein * *

• l $ Memberof Nominating Assistant Treasurer l Committee andAssistantSecretary l # Member of Nuclear Review l Committee

• Charles M. Atkinson. executive vice presi-

. e Retired Nov.1,1986 dent, retired Nov.1.1986. Chfford N. Dunn, vice president, Power Supply Group; William F. Gdfdlan Jr, vee president, Market.

ing and Customer Servces Group; and Earl J. Wbolever, vice president Special Nuclear Projects; all retired Dec. 31,1986.

For moreinformation see Tanagement Changes," page 19

• Elected by the Company's Board of Directors on Aug.19,1986. For more information, see " Management Changes." page 19.

• *

• Elected assistant treasurer the Company's Board of Otrectors on July ,1986

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