ML20246A142

Duquesne Light Co 1988 Annual Rept

ML20246A142
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1988
From:	Von Schack W DUQUESNE LIGHT CO.
To:
Shared Package
ML20246A132	List: ML20246A129 ML20246A142 ML20246A153 ML20246A172
References
NUDOCS 8905080182
Download: ML20246A142 (39)

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The mission statement on FINANCIAL AND OPERATING HIGHLIGHTS the front cover and our cor-Perced porate objectives and goals reflect the changes in our 1988 1987 Change marketplace and in the elec-tric utility industry. Every group, unit, and department Earnings Per Share in our company has set spe- of Common Stock. $1.86 $1.85 + 0.5 cific goals to help us meet the following objectives.

Book Value Per Share CUSTOMERS of Common Stock Deliver quality service and at Year End . $18.51 $17.37 + 6.6 provide customer satisfaction in such a way that differen-tiates us within the energy Shares of Common Stock services marketplace. Outstanding at Year End (000) . 57,831 70,096 - 17.5 SHAREllOLDERS Dividends Paid . $1.20 $1.20 Manage our resources to maximize the shareholders' return on investment, and Peak Load (megawatts). 2,372 2,280 + 4.0 insure a relationship with our owners that is character- Annual System Generation d t mely nica (megaw tt-hours). .14,996,332 14,033,842 + 6.9 OPERATIONS Be a low cost producer of electric energy and related services, and be recognized for excellence in our operat-ing performance. COMPANY PROFILE EMPLOYEES Recognize the value of the in- Duquesne Light Company, headquartered in Pittsburgh, Pa.,

dividual, encourage increased provides safe and reliable electric service to some 570,000 i '

[b$ $nhh "i It u"[ customers within an area of approximately 800 square miles in opportunity for personal Allegheny and Beaver counties in Southwestern Pennsylvania, growth and development.

The company also sells electricity to other electric utilities.

COMMUNITY Be a communityleaderin improving the quality oflife in our service territory by being recognized as a pre-mier economic development CONTENTS organization and by enhanc-ing the overall value of the human and natural Letter to Shareholders . 1-3 resourcesof theregion. Perspective on1988. .4-13 The photographs on the fol. Graphs. .14 lowing pages illustrate how Financial Review. .75-35 our employees are working to meet these ambitious Board of Directors ' 36 objectives. Company Officers and Unit Managers . .36 Shareholder Reference Guide . .Inside Back Cover

A.

.y TO OUR S H~A R E H O L D E R S 1988 marked the third year of our DUQUESNE PLAN business strategy.

Introduced in early 1986 in response to the unprecedented collapse of the local steel industry and a 50% loss in industrial sales, the DUQUESNE PLAN was designed to revitalize our compar.y and to help accelerate the economic recovery of the Pittsburgh region. We have made significant progress toward both of those objectives. I am pleased to report that in 1988:

Wesley W von Schack chairman of the Board, = Retail sales increased 5.7% and total operating revenues topped President and

$1 billion, reflecting the strength and diversity of the local economy.

Chief Executice Officer

= Our employees displayed a commitment to excellence in all areas of our business...our power plants operated very efficiently...and our distribution personnel provided excellent service to customers, especially during record hot summer months when peak demand increased 4% and reached its highest level in seven years.

= In particular, Beaver Valley Power Station Unit 2 had an outstanding first year of operation... achieving 91.8% availability, compared to a nationalaverageof 63.2%

= Our wholly owned subsidiary, Allegheny Development Corpo-ration, won the energy services contract for the main terminal at Greater Pittsburgh International Airport, scheduled to be com-pleted in 1992.

= We completed a major portion of our stock buy-back program-the largest in modern day utility industry history. As of Decem-ber 1988, we repurchased about 21% of the shares outstanding at the beginning of the program in October 1987.

= The annual dividend was increased 6.7%, from $1.20 to $1.28, beginning January 1.,1989.

As you recall, the DUQUESNE PLAN comprised six initiatives:

expanded marketing and economic development efforts; reshaping our N&hlDIN h t }

1 A

V company; assistance for financially troubled customers; rate stabiliza-tion; financialimprovement; and shareholder interest initiatives.

As I've noted in previous communications, highlights of the past three years include the following.

= Our successful economic development efforts helped add or retain more than 8,100 jobs to an increasingly diverse regional economy.

Interestingly, commercial sales,30% of our customer sales in 1981, now represent 44%.

= We reshaped the company through internal organizational restruc-turing, and cost effectiveness programs initiated in 1985 whereby costs were reduced by approximately $175 million.

= We helped more than 5,000 of our financially troubled customers through a variety of innovative, need specific programs, including the Dollar Energy Fund, the Salvation Army Outreach Program, i and our new weatherization program.

= Rate stabilization became a reality in March 1983 when the Pennsyl-  ;

vania Public Utility Commission approved a six-year, $232 million i rate phase-in. f

= We saved $8 million in 1986 interest costs through the early redemp-tion of high-coupon first-mortgage bonds. In 1987, we completed j the cornerstone of our financial restructuring program-the sale j and leaseback of our interest in Beaver Valley Unit 2. We used pro- j ceeds from that sale for the stock buy-back program and to redeem l

l an additional $206 million of high-coupon bonds, which further  ;

reduced annualinterest expenses by $26 million.

i

= When we announced the DUQUESNE PLAN, we stated that we  ;

would analyze a variety of traditional and non-traditionaloppor- l tunities to increase shareholder value-including the possibility of forming a holding company. After careful consideration, we believe ,

this is an appropriate course of action. A holding company structure j will provide enhanced organizational, managerial, and financial flexibility-each important to our success in a changing industry -

and a diversified energy services market. We would appreciate your support for this proposal when you vote your proxy.

I 3? 1 Duquesn, Light Comuny

A

% r5 We are grateful for what the men and women of Duquesne Light .

have accomplished through the first three years of the DUQUESNE 1

l PLAN. Yet we know we cannot rest on those accomplishments.

We must continue to get closer to our customers and to meet their individual needs. We also must continue to be innovative and adaptable in today's changing business and regulatory environments. And finally.

we m ust continue to work for balanced public policy.

We enter 1989 with a clear vision of the role we want to play in a changing utility industry and a changing energy services market. Our mission statement and corporate objectives, detailed on the cover of this 1

report, capture our vision of the future. At the heart of our vision is a commitment to operate Duquesne Light as efficiently and effectively as we can. That means satisfying the needs and requirements of our cus-l tomers as a low cost producer of safe and reliable electric energy. This will continue to be our primary focus. We also will consider undertaking activities in the diversified energy services market that relate to our core business, satisfy customers' needs, and represent a good investment for shareholders.

l Icommend my fellow employees for their perseverance, innovation, and creativity in dealing with the formidable challenges of the past several years. We look forward to the future.

On behalf of the Board of Directors, thank you for your continuing support.

.fok N % becM_

February 21,1939 iGs2 GGG E - - - --

sM.

p fs.

P New krk Stock Exchange SilAREllOLDERS Gary Sclavass, vice pres- e ident, Einance, and Etill ..

Stein, treasurer, manag:d -;

the largest stock buy-back 6 prograrn in modern day  %

utility history, irnproving  %

the value ofyour invest-  ?

ment. lonproving share-holder services is the ains ofI)iane Eismont, corporate secretary, and her staff, icho are using informationfrorn the recent shareholder survey to develop ? cays 10 better serve our individual investors.

vu.4,AT, Nr~c.,mewiu

dv.s af PERSPECTIVE ON 1988 Sales, Revenues, farniirgs. Sales to retail customers in 1988 totaled 11.6 billion kilowatt-hours, an increase of 5.7% over the previous year. Industrial sales increased 13.2%, primarily due to increased demand trom USX Corporation's .c9el production facilities. Record hot summer temperatures helped commer-cial sales increase 3.2%, and residential sales increase 3.0%.

For the fifth consecutive year, we set a new record in sales to other utilities. These 1988 sales of 2.8 billion kilowatt-hours represent a 12.5%

increase above 1987 sales to other utilities. Total 1988 sales increased l

6.9%, to 14.4 billion kilowatt-hours.

We are actively promoting economic development throughout our service territory, and are encouraged by the growth and diversification l

of the regional economy. No longer easily defined as "the Steel City" today's Pittsburgh and its environs is an economic quilt of high-tech industi;es.. . medical research facilities... corporate headquarters...and major financial institutions, in addition to the traditional heavy indus-tries that are our heritage.

Higher retail sales and the March rate increase helped increase 1988 current revenues to $884 million, a 5.7% gain over 1987. Total 1988 oper-ating revenues, which reflect increased sales to other utilities and l

deferred revenues from the rate case phase-in, increased 19.7%,

to $1.06 billion.

1988 earnings per share were $1.86, compared to $1.85 in 1987. In 1988, net income was lower than the previous year because we received less n,- o c6

s%

4 ws,

, than full recovery of our Beaver Valley Unit 2 and Perry Unit 1 costs in the rate case decision. Financial

~-

t restructuring and cost effectiveness _

1 helped offset some of the disap- r

.. 3 dbi, pointing and adverse aspects of the -

, , a .. , .. --

rate case decision. Lc.oking ahead, L i -

p,

- % we expect that our continued em-3 phasisin these areas will have a positive effect on shareholder value. ,

y+ r , ,.

1 ji- Operations Results. Our fuel mix is well balanced: 71%

ct.al-fired and 29% nuclear in 1988.

Our power stations operated with a high degree of excellence, L) especially during the summer yh j months when a record heat wave l

p.h[ g pushed customer demand to 2,372 megawatts-the highest levelin seven

<h years. On July 18, we set an all-time generation record- 2,623 megawatts

-enabling us to meet customer needs and to sell 451 megawatts to other utilities. It is interesting that, in 1981, we hr.d to purchase 333 megawatts 9

.y to meet our all-time system peak of 2,522 megawatts. If that peak had j6 occurred last year, we could have met the customer demand with elec-

\'

j* tricity generated solely by our own power plants.

The availability oi our company-operated, coal-fired Cheswick and

. Elrama power stations was 84.9% and 85.3% respectively, compared to

' }[ .

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55

- or t_ ;.

Efranta Power Station the industry average of 79.2% As discussed earlier, the nuclear Beaver Valley Unit 2 had an outstanding first year of operation. Even with a scheduled two month refueling outage, fleaver Valley Unit 1 exceeded the industry average with a 77.4% availability.

OPERATIONS Our power station employees worked safely as well as efficiently.

Opcratingcfficiency and reliability are Acy to our ability Io be a low cost During the past five years, the company's overall safety record has con-energy supplier. Gary Brandt nbega, vice press-sistently been better than the industry average. For the second consecu-dent, IUwer Supply; Linda tive year, nuclear station employees compiled one milh.on work hours Tor, enginecr; and RalpJr Cocingron, boiler oper-ator, [trepart of a tran, without a lost-time accident, and earned an award from the Edison ,

working tofind newaper-ating econonties and ta Electriclnstitute, extendIhelife of our older generatingstations. l ow maw,,c6

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Individualinnovation and the creative work of employee involve-p i fj .

ll ment teams helped improve operating efficiencies. For example: two y il y ,

f/ ,

' employees received national recognition for their innovative work at

, 3 Beaver Valley Power Station -work that will result in significant cost EMPLOYEES The success of our busi- savings for our company and the industry. And at Cheswick Power ii

/j :? ness depends on the corn-

initinent of our einployees

': .\--) and Ihe quality of their Station, an employee involvement team's new computerized job

' contribution. Kent Park-tracking system means shorter maintenance outages and improved

., i hil1, director, inanagentent

$,h,'"r'r',$or i i t s< <in Productivity and safety all year long.

.i training; and Dianna

\, Green, rice president,

y llutnan Resources, are n.f helping ensplayces develop the skills needed to achieve excellence. 8 Duquww Lught com;wny

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Controlroorn trainingsianulator Dnployee Training. We continued to place more emphasis on training and development in 1988. Employees took part in more than a quarter million work hours of skills training, personal development, and managerial and supervisory education. In May, our nuclear training center was fully accredited by the National Academy for Nuclear Training.

Management Changes. Dianna L. Green was elected vice president, Human Resources in September 1988. Prior to joining Duquesne Light as general manager, Human Resources, she was vice president of personnel for the Informa-l tion Products Division of Xerox Corporation.  !

l 9

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Service crew responding to call CUSIDMERS \

The surntner of1988 was j%q the hottest in tnore than

.W 100 years, placing heavy L 3 demands on ourpeople p  :

and our system. Our cus-torner service employees-

& Jf ?i including Joanne Mi: gor- y ski, customer service 4

representative; Jim Griffin, manager, construction

• lg and engineering; and e Sam Shemaka, service crew leader-gave the extra effort to keep the powerflowing, despite two fierce storrns and 38 days when the inercury hit 90 degrees or better.

10 Duqunne Ught Cam;wny

A V

Edwyna G. Anderson joined us in September 1988 as general counsel.

She is nationally prominent in the field of utility regulation, and has 33 years of public service experience. Other recent upper level manage-ment appointments include: Julian A. Chandler, from manager, Central Shops, to general manager, General Services; Robert A. Irvin, from manager, System Operations, to general manager, System Operations and Telecommunications; and A. William Stein, from assistant treas-urer, to treasurer.

Getting Closer to Customers. We are striving to become the preferred energy resource in our service territory by continuing our DUQUESNE PLAN efforts to get closer to our customers and to take a lead role in local economic development initiatives.

We have developed specialized electric rates tailored to specific cus-l tomer end-uses of electricity, including add-on heat pumps and other electric space heating. In addition, our economic development incentive rates have helped commercial and industrial customers expand oper-ations and increase jobs. In 1988, the $1.5 million Duquesne Light Economic Development Fund was established to provide loans for promising business start-ups and expansions in areas particularly hard-hit by the decline of the local steelindustry. The fund is held and managed by The Pittsburgh Foundation.

Working closely with three consumer advisory groups, we devel-oped a weatherization and energy education program for low-income customers. These advisory groups also helped us develop a completely iG 5%

d%

'A f%

COAfAft/NITY Expansion at Greater Pittsburgh International Airport is expected to cre-ate snore than 17,000 jobs over the next decade as adjacent land becornes pritne realestatefor business developonent.

linn Woodske and other rnembers of our econornic developrnent tearn are working tvith local, county andstate leaders, such as Ray Christinan, Pennsylvania's Secretary of Corntnerce, to help attract and retain busi-nesses throughout our service territory.

T a f

o -

i s i i

Comrnercialgrowth near airport

, e 12 Duquesne Lught Compuny

A 31r5 new plain-language bill format which has been very well received by our residential customers and the Pennsylvania Public Utility l

Commission. '

We completed the segmentation of our markets, begun in 1987, and now have an experienced major account sales force in place to service 1

l them. Our internal technical support has been augmented to provide  !

I faster response to customer inquiries. Our Consumer Services  !

Department was reorganized and merged with our Credit and Collection Department so we can serve our customers more effectively 1

and efficiently. l l

Customer surveys and focus groups last year helped us better under-stand and then fulfill customers' needs. In 1989, we plan to implement j 1

an ongoing program to measure opinion in four areas: new customers, l trouble calls, general inquiries, and service reliability. Two other cus-tomer service improvements planned for this year include a switch to monthly meter reading and the opening of two full-service field offices.

All of our employees are part of the marketing team.This was epitomized by the outstanding response to an employee involvement program to compose a customer focus slogan. The contest attracted more than 2,600 entries from employees in all sections of our company.

The winning entry, "Duquesne Light Company: Focusing Our Energy on Your Needs," capsulizes our marketing thrust in 1989.

13 Duqueme Lu,gM Comtwny

di

'A 15 DQU COMMON STOCK PRIG vs S& P UTILITY INDEX Duquesne L.ight Price- Dollars 5&P Utility index

0 m 15 19) 10 .

l(X)

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10 _ _ _ _ _

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_.ss 83 84 86 87 83 GENERATION AVAILAlllLITY* 1988 FUEL MIX fvnent IVn ent

[Juquesne 1.ight -198M inJustry Aserage 1983-1987 Coal ( Nuclear llM1 84 6 M. I 84 9

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A.

W COMPANY REPORT ON FINANCIAL STATEMENTS The Company is responsible for the financial infor- and that transactions are executed and recorded in mation and representations contained in the finan- accordance with established procedures. There are cial statements and other sections of this Annual limits inherent in any system of internal control Report. The Company believes that the consolidated based on the recognition that the cost of such a sys-financial statements have been prepared in confor- tem should not exceed the benefits to be derived. The mity with generally accepted accounting principles system of internal accounting controlis supported by appropriate in the circumstances to reflect, in all written policies and guidelines and is supplemented material respects, the substance of events and trans- by a staff of internal auditors. The Company believes actions that should be included in the statements that the internal accounting control system provides and that the other information in the Annual Report reasonable assurance that its assets are safeguarded is consistent with those statements. In preparing the and the financial information is reliable, financial statements, the Company raakes informed judgments and estimates based on eurrently avail- [d% b.) Lan hcd._, I# -

able information about the effects of certain events and transactions. Wesley W. von Schack Gary L. Schwass The Company maintains a synem of internal Chairman of the Board, Vice President-accounting control designed to provide reasonable President and Chief Finance assurance that the Company's assets are safeguarded Executive Officer AUDIT COMMITTEE LETTER The Audit Committee, composed entirely of tors, discussed the independent public accountants' non-employee directors, meets regularly with the management letter recommendations and reviewed independent public accountants and the internal and approved the independent public accountants'

/ auditors to discuss the results of their audit work, general audit fees and non-audit services.

theirevaluationof theadequacyof theinternal The committee meetings are designed to facilitate accounting controls nnd the quality of financial open communications with the internal auditors and reporting. the independent public accountants. To ensure audi-In fulfilling its responsibilitiesin 1988, the Audit tor independence, both the independent public Committee recommended to the Board of Directors, accountants and internal auditors have full and free subject to shareholder approval, the selection of access to the Audit Committee.

the Company's independent public accountants, reviewed the overall scope and specific plans of the independent public accountants and internal audi- The Audit Committee of the Board of Directors REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS l

DELOITTE HASKINS & SELLS the financial statements. An audit also includes l

. Certified Public Accountants assessing the accounting principles used and signifi- l 2400 Ore PPG Place cant estimates made by management, as well as 'j Pittsburgh, Pennsylvania 15222 evaluating the overall financial statement presenta-tion. We believe that our audits provide a reasonable TO THE DIRECTORS AND STOCKHOLDERS basis for our opinion.

OF DUQUESNE LIGHT COMPANY: In our opinion, such consolidated financial state-We have audited the consolidated balance sheet of ments present fairly, in all material respects, the Duquesne Light Company as of December 31,1988 financial position of Duquesne Light Company as rnd 1987 and the related consolidated statements of of December 31,1988 and 1987 and the results of its income, retained earnings and cash flows for each of operations and its cash flows for each of the three the three years in the period ended December 31, years in the period ended December 31,1988 in 1988. These financial statements are the responsibil- conformity with generally accepted accounting ity of the Company's management. Our responsibil- principles.

ity is to express an opinion on these financial As discussed in Note B to the consolidated finan.

statements based on our audits. cial statements, the Company adopted Statement of We conducted our audits in accordance with Financial AccountingStandardsNo.90, Accounting generally accepted auditing standards. Those stan- for Abandonments and Disallowances of Plant Costs, dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate-fg 4

ment. An audit includes examining, on a test basis, Deloitte Haskins & Sells evidence supporting the amounts and disclosures in January 30,1989 16 l oe,w up cm,,,

A.

%r5 MANAGEMENT'S DISCUSSION &

ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS RESULTS OF OPERATIONS Depreciation and Taxes Operating Revenues Depreciation and amortization increased in 1988 l Operating revenues increased (decreased)in the Primarily due to depreciation of Perry 1 beginning i years 1986 through 1988 over the respective preced. in April 1988. Additionally, these costs increased in ing years, for the following reasons: both 1988 and 1987 due to the amortization of Perry 2 costs which began in July 1987. See Note B.

79S8 1987 1986 The increase in taxes other than income taxes in 1988 was primarily due to increased Pennsylvania (Millions ofDollars)

I General rate increases. . $ 63.3 $ - $ 10.9 Sr SS receipts taxes, which vary in direct relation-i Deferred customer revenues . 117.5 - -

ship to revenues. The increase in income taxes m I Electrical consumption. 22.0 1988 was primarily due to increased taxable income.

10.8 (23.3)

! Generalrate decrease (7.7)

Income taxes decreased in 1987 compared to 1986 (7.6) -

Energy cost rate revenues. due to decreased taxableincome and theamortira-(34.9) (10.9) (9.9) ti n f deferred investment tax credits m 1987.

l Other . 5.1 (7.1) .6 Revenues from other Inc me t ws also wue affected by decreases m, utilities. 9.9 6.5 statutory income tax rates m both 1988 and 1987.

(.5) The effective income tax rates for 1988,1987 and Totaf . .$ 175.2 $ (8.3) $(22.2) 1986 were 3No, (9%) and (3%), respectively.

Operating revenues are based on rates authorized OMnInmne and mdudons andIntundays by the Pennsylvania Public Utility Commission AHowance f r funds used during construction (PUC) and are designed to recover operating ( AFC) decreased significantly when the Company expenses, plus a rate of return on the investment stopped recording AFCon Beaver Valley 2 and in utility rate base. Perry 1 in late 1987. This decrease was partially The general rate increase and the deferred cus- ffset by carrying charges applicable to those tomer revenues in 1988 resulted from the rate order IJnits rec rded through the first quarter or 1988 and received in March 1988. See Note I. The general rate included m other income. Interest income increased decrease affecting 1988 and 1987 was effective July 1, Primarily due to interest on the proceeds of the sale 8 averV I ey .Interestexpensedecreasedin 1987 and resulted from the final orderin the 1986 rate case. The fluctuations in electrical consumption 1988 due to the Company's purchases of its first resulted from changes in kilowatt hour sales to m rtg gebondsbegmnmgmOctober1987.

residential, commercial and industrial customers. . The effects in each year on net income and earn-Additionally, industrial sales increased in 1988 com- mgs per share resulting fmm the adoption of State-pared to 1987 due to the adverse effect in the first ment of Fmancial Accounting Standards No.901s quarter of1987 of the strike against a major steel pro- included in Note D. The adverse effects in 1987 of d ucer. The decreases in energy cost rate revenues in "C rding thelosses on the cancelled generating 1988 and 1987 were primarily due to decreases in the timts and on the sale of Beaver Valley 2 are discussed energy cost rate. Favorable capacity situations and in Notes D and E. The adverse effect of the option the requirements of neighboring utilities resulted rder refund in 1986 is discussed in Note C.

in increased sales to other utilities. Currently, all The electr c mdustry is subject to m, flationary pres-benefits from sales to other utilities are required by sures similar to those experienced by other mdus-the PUC to be passed through to the Company's tries. Because the Company s rates are regulated, I

customers. any increases in its cost of sc rvice or construction costs will not be included m, rates charged to cus-Operation and Maintenance Expenses tomers until new rates can be implemented through Fuel expense decreased in 1988 compared to 1987 a rate proceeding with the PUC. To the extent the due to decreases in the cost per ton of coal and the Company incurs additional costs or receives benefits effect of the increased use of lower cost nuclear fuel, resulting from the effects of inflation, it is anticipated which more than offset increases resulting from that those effects ultimately will be reflected in the higher kilowatt hour sales. Other operation and Company's rates, maintenance expenses increased in 1988 and 1987 due to expenses related to Beaver Valley 2 and Perry 1, both of which began commercial operation in November 1987, increases in the generation of electricity and increases in general and administra-tive and raarketing expeme :

17 o,.m a +cmrm

.A 3.g; MANAGEMENT'S DISCUSSION &

ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (Cont.) 1 CAPITAL RESOURCES AND LIQUIDITY Board of Directors, subject to the provisions of the Construction Company's Restated Articles. Pennsylvanialaw pro-Construction expenditures during 1988, exclusive vides that dividends on common stock may be paid of equity AFC and nuclear fuel, were $93 million. only out of positive retained earnings. No dividends These expenditures were made to improve and or distributions may be made on the common stock expand production, transmission and distribution if dividends or sinking fund obligations on the pre-systems. The Company completed a major construc. ferred or preference stock are unpaid. Further, the ,

tion program when Perry l and Beaver Valley 2 went aggregate amount of common stock payments is j into commercial operation in November 1987. limited to certain percentages of net income and by 1 The Compa ny currently estimates that its con. the ratio of common stockholders' equity to total struction expenditures, exclusive of equity AFC capitalization. No portion of retained earnings at i and nuclear fuel, will be $105, $110, $115, $115 and December 31,1988 was restricted. l

$120 million for 1989 through 1993, respectively. Outlook These estimates include expenditures of the During 1989, results of operations will begin to reflect  ;

Company's wholly owned subsidiary, Allegheny the full annual effect of the costs associated with j Development Corporation, and assume, among Perry 1 and Beaver Valley 2 and of the March 1988 other things, that there will be no new environmen- rate increase. As discussed in Note 1, the rate  ;

tal regulations, such as " acid rain" legislation, which increase is being phased in over a six year period. l would require large capital expenditures. Deferred revenues, representing the difference Dnancing between the total rate increase granted by the PUC In October 1987, the Company completed the sale and the amounts currently being collected from cus-and leaseback of its interest in Beaver Valley 2. Pro- tamers, have been reflected in the income statement.

ceeds from this sale were used for the repurchase The Company has been exploring opportunities through December 31,1988 of 15.3 million shares of for long-term power sales to other utilities. In October common stock for $224 million and 104,000 shares of 1988 a letter of intent was signed between the Com-preferred and preference stock for $8.7 million. The Pany and Delmarva Power and Light Company in-l Company also spent $232 million to retire high-inter. volving the sale of up to 100 megawatts annually for a est first mortgage bonds. These transactions reduced period of 20 years beginning in 1990. The Company's interest expense and dividend costs and increased ability to make such long-term power sales is depen-the Company's financial flexibility. The Company's dent upon receiving prompt and equitable regula- j recapitalization program financed by proceeds from tory treatment, j the sale of Beaver Valley 2 essentially has been com. The Company's Board of Directors has approved l pleted. The Company will continue efforts to reduce the formation of a holding company structure, and j its capital costs by making additional purchases of its authorized a filing with the Securities and Exchange securities to the extent funds are available and the Commission relating to the proposed holding com-capital markets permit. Panyandthesubmissionof theplanof mergertothe i in September 1988, $71 million of 30-year pollution holders of the Company's common, preferred and control revenue bonds were issued to finance the Preference stock.

Company's share of the cost of certain Perry 1 facili. The Comprehensive Environmental Response, ties. The Company expects to complete a pollution Compensation and Liability Act of 1980 (Superfund) control financing in 1989 related to Beaver Valley 2, and the Superfund Amendments and Reauthoriza-subject to receipt of state allocation. There were no tion Act of 1986 (SARA) established programs address-equity securities issued by the Company in 1988. ing the clean-up of hazardous waste disposal sites, The Company finances its nuclear fuel require. emergency preparedness, community Right-To-Know, ments primarily by leasing and other arrangements radon gas and other issues. Pursuant thereto, the under which it may finance up to $208 million of Company has been notified of its involvement or nuclearfuel. Asof December 31,1988theCompany's Potentialinvolvement in the clean-up of four hazard-share of the costs of nuclear fuel financed under ous waste sites. The Company is currently determin-these arrangements was $142 million, including ing the extent, if any, of its liability in this regard. The interest, storage and other costs. Company believes that the ultimate outcome of these in 1988, $26.2 million was required for maturities of matters will not have a material adverse effect on its long-term debt and sinking fund requirements. It is financial position or results of operations.

expected that $18.4 million will be required in 1989 The extent to which funds from operations will for similar purposes, continue to be available to pay dividends and finance The Company anticipates that funds for planned the Company's capital needs depends upon its construction expenc.itures in the next several years financial condition, earnings, business prospects, will be provided from cash flows from operations are 1, regulatory climate and other relevant factors.

to a minimal extent, the issuance of additional secu. 'I he Company is affected by rate-related proceed-rities Any interim financing required will be through ings, changes in accounting principles and other bank borrowings and sales of commercial paper. problems which it and the electric utility industry

, Dividends may be paid on the common stock to may expenence.

the extent permitted by law and as declared by the l

l 18 l Duqume raght Compr9

I ,

I A I

%f STATEMENT OF CONSOLIDATED INCOME Year Ended December 31,

.! Thousands of Dollars, Except Per Share Amounts) 1988 1987 1986 OPERATING REVENUES:  !

Customers:

Current .5 883,725 $835,986 $850,744 Deferred (Note 1). . 117,544 - -

Other utilities . 61,964 52,018 45,519 7bta/ OperntingRevenues. 1,063,233 888,004 896,263 OPERATING EXPENSES:

Fuel. 224,900 238,039 233,673 Purchased power . 5,688 5,594 3,765 Other operation. 268,762 189,783 169,555 Maintenance . 73,180 66,380 74,719 Depreciation and amortization . 111,023 82,172 74,325  ;

Taxes other than income taxes. 80,833 67,442 70,987 income taxes (Note F) . 54,505 52,859 79,724 lbtal Operating Expenses . . 818,891 702,269 706,748 OPERATING INCOME . 244,342 185,735 189,515 OrTHER INCOME AND DEDUCTIONS:

Allowance for equity funds used during construction. 1,323 71,234 81,943 Carrying charges on assets not in rate base (Note I) . 23,622 11,093 -

Loss on cancelled generating units (Note D) . -

(34,263) -

la,s on sale of Beaver Valley 2 (Note E) . -

(23,828) -

Rate refunds (including interest expense of

$1,180, $1,854 and $12,953, respectively)(Note C) . (1,180) (1,854) (57,278)

Effects of application of SFAS 90(Note B). 6,586 7,048 (42,051)

Income taxes-credit (Note F) . (7,277) 65,034 83,689 Other-net. 25,972 10,561 2,692 TotalOtherIncome and Deductions . 49,046 105,025 68,995 INCOME BEFORE INTEREST CHARGES . 293,388 290,760 258,510 INTEREST CHARGES:

Interest on long-term debt . 152,693 163,777 147,483  !

Otherinterest . 4 977 4,566 8,792 Allowance for borrowed funds used during construction, net ofincome taxes . (1,704) (32,343) (28,641)

TotalInterest Charges . 155,966 136,000 127,634 4 NET INCOME . 137,422 154,'/60 130,876 DIVIDENDS ON PREFERRED AND PREFERENCE STOCK . 18,856 19,788 20,547 EARN!NGS FOR COMMON STOCK . .$ 118,566 $134,972 $110,329 AVERAG E NUMBER OF COMMON SH ARES OUTSTANDING (000) . 63,748 72,845 72,930 EARNINGS PER SHARE OF COMMON STOCK . $L86 $1.85 $1.51 DIVIDENDS DECLARED PER SH ARE OF COMMON STOCK $1.22 $L20 $1.415 See Notes to Consolidated Financial Statements.

19 ouqww bght Compwny s

sN.

"'A r5 CONSOLIDATED BALANCE SHEET As of December 31, fThousands of Dollars) 1988 1987

-ASSETS PROPERTY, PLANT AND EQUIPMENT:

Electric plantin service . . . . $3,512,943 $3,429,422 Construction work in progress . , . '70,980 74,094

- Property held under capitalleases(Note E) . 303,673 290,907 Pr operty held for future use (Note l). . 214,982 213,128 7btal . . . 4,102,578 4,007,551 Less accumulated depreciation and amortization . . 1,036,656 908,654 Property, Plant and Equipment-Net . 3,065,922 - 3,098,897 OTHER PROPERTY AND INVESTMENTS (at cost) . . 21,953 '20,477 CURRENT ASSETS:

Cash and temporary cash investments (at cost which approximates market) . . 44,941 74,699 Cash held by trustee . , 616 345,439 Accounts receivable:

Customers (less allowance for uncollectible accounts of

$7,721 and $5,417, respectively). . 96,640 90,592 Other (including tax claims of $120 and $14,199, respectively) . . 58,493 56,538 Materials and supplies (generally at average cost):

Coal . 25,088 40,642 Operating and construction . 47,208 44,102 Other current assets . . 6,941 34,336 TotalCurrent Assets. 279,927 686,348 DEFERRED DEBITS:

Extraordinary property loss (Note B) . 107,453 117,570 Unamortized loss on reacquired debt (Note K). 58,015 39,862 Deferred coal costs (Note 1) . . . 12,768 16,200 l Income taxes on sale of Beaver Valley 2 (Note E). . 82,090 85,086 Deferred costs of units not in rate base (Note 1)-. 51,127 11,582 Phase-in plan deferrals (Note l) . 117,544 -

Other deferred debits. , 79,782 75,593 7btalDeferred Debits . . 508,779 345,893 Total Assets . . . .53,876,581 $4,151,615 i

see Notes to Consolidated Financial Statements.

l i

l 20 own.,w upt compny

I A. l Tit 5~

l 1988 1987 CAPITALIZATION AND LIABILITIES )

CAPITALIZATION (Note K): l Common stock (authorized-90,000,000 shares, issued-73,119,446 shares). .$ 73,119 73,119 j Capital surplus . , 927,446 926,131 Retained earnings . 293,854: 252,859 Less treasury stock (at cost)(15,288,090 and 3,023,800 shares, respectively) . (223,844) (34,748)

TotalCommon Stockholders' Equity. 1,070,575 1,217,361 Non-redeemable preferred and preference stock . 154,073 156,137 Redeemable preferred and preference stock. 90,743 104,768 First mortgage bonds , 1,187,903 1,401,669 1 Other long-term debt . 368,694 297,599 Unamortized debt discount and premium-net . (6,366) (8,668)

TotalCapitalization . 2,865,622 3,168,866 i

j OBLIGATIONS UNDER CAPITAL LEASES (Note E) . 121,793 140,535

'1 CURRENT LI ABILITIES:

Long-term debt and lease obligations due within one year (Notes E and K). . 39,852 53,529 Accounts payable. 110,669 107,040 Accrued income taxes. , 8,535 9,968 Deferred income taxes and other accrued taxes . 26,257 19,068 Accrued interest . 47,475 43,597 I Dividends declared . 23,810 26,404 Deferred energy costs. . 12,545 18,064 Sinking fund and purchase requirements (Note K) . 19,170 18,645 Rate refunds due within one year (Note C) . , 4,442 3,500 7btal Current Liabilities. 292,755 299,815 UTHER NONCURRENT LI ABILITIES:

Investment tax credits unamortized . 161,038 165,452 l

. Accumulated deferred income taxes . 400,710 351,736 Other deferred credits . , 34,663 25,211 Total O ther Noncurrent Lia bilities . 596,411 542,399 COMMITMENTS AND CONTINGENCIES (Notes B through L)

Total Capitalization and Liabilities . . . $3,876,581 - $4,151,615 2I tw,m av,, c.,,,,,,

d4 y 4 STATEMENT OF CONSOLIDATED CASH FLOWS Year Ended December 31, l

(Thousands of Dollars) 1988 1987 1986 CASH FLOWS FROM OPERATING ACTIVITIES: s Net income . . $137,422 $154,760 $130,876

)

Principal noncash charges (credits) to net income: j Depreciation and amortization. 154,042 114,002 97,265 j Deferred income taxes and investment tax credits-net . 44,560 69,866 8,663 Allowance for equity funds used during construction . (1,323) (71,234) (81,943)

Effectsof applicationof SFAS90, , . (6,586) (7,048) 42,051 Phase-in plan deterred revenues . . (117,544) - -

J Loss on cancelled generating units . - 34,263 -

1 Loss on sale of Beaver Valley 2. .

- 23,828 -

Rate refunds (including accrued interest). - - 51,770 Carrying charges on assets not in rate base . . . (23,622) (11,093) -

Changes in working capital other than cash:

Accounts receivable. (8,003) (19,630) (10,498)

Materials and supplies . 12,448 (8,605) 4,089 l Othercurrent assets . 27,395 (569) 1,560 Accounts payable . . . 3,629 9,523 (10,477)

Other currentliabilities . 1,522 29,626 (12,605)

Other-net . , 9,392 (15,160) (11,872)

Net Cash Provided Frorn Operating Activities , , . 233,332 302,529 208,879 CASH FLOWS FROM INVESTING ACFIVITIES:

1 Construction expenditures . (93,253) (187,302) (207,406)

Sale of Beaver Valley 2. - 537,921 .-

Income taxes on sale of Beaver Valley 2. -

(85,086) -

Other-net . (4,039) (1,925) (3,991) l l Net Cash I4ovided Frorn (Used in) Investing Activities . (97,292) 263,608 (211,397)

CASH FLOWS FROM FINANCING ACTIVITIES:

i Sale of bonds . . 71,000 100,000 100,000 l l Issuance of common stock . .

- - 27,313 l Increase (decrease) in notes payable. -

(15,000) 15,000 l Dividends on capital stock. (96,427) (107,084) (123,645)

Reductions of long-term obligations . .(276,464) (43,853) (68,360) j Rate refund payments . (3,192) (47,636) (1,891)

Repurchase of common stock . . (189,096) (34,858) -

l Premium on reacquired debt . (18,387) (177) (2,745)

Other-net . 1,945 (212) (286)

Net Cash (Used In) Financing Activities. ..(510,621) (148,820) (54,614)

Net increase (decrease)in cash and temporary cash investments , , . .(374,581) 417,317 (57,132)

Cash and temporary cash investments at beginning of year . 420,138 2,821 59,953 Cash and temporary cash investments at end of year , . $ 45,557 $420,138 $ 2,821 Cash paid during the year for:

Interest (net of amount capitalized). . $132,913 $134,819 $130,689 Income taxes . . .5 16,021 $ 36,211 5 14,460 Noncash investing and financing activities:

Capital lease obligations recorded . .$ 14,811 $ 20,851 $ 20,178 See Notes to Consolidated Financial Staternents.

22 Dugw,w bgkt Company

Me.

V STATEMENT OF CONSOLIDATED RETAINED. EARNINGS Year Ended December 31, (Thousands ofDollars) 1988 1987 1986 BALANCE, JANUARY 1, AS PREVIOUSLY REPORTED. , .$269,965 $225,733 $197,952 CUMULATIVE EFFECT OF RETROACTIVE APPLICATION OF CHANGE IN ACCOUNTING METHOD (NOTE B). (17,106) (20,550) -

BALANCE, JANUARY 1, AS ADJUSTED . 252,859 -205,183 197,952 NET INCOME FOR THE YEAR. 137,422 154,760 130,876 Total . 390,281 359,943 328,828 Cash dividends declared:

Preferred stock . 8,664 9,131 9,284 Preference stock. 10,192 10,657 11,263 Common stock . 77,571 87,296 103,098 TotalCash Dividends Declared. , 96,427 107,084 123,645 BALANCE AT END OF YEAR. .$293,854 $252,859 $205,183 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A.

SUMMARY

OF ACCOUNTING POLICIES Revenues Consolidation Customer meters are read monthly or bimonthly The consolidated financial statements include the and customers are billed monthly. Revenues are j accounts of Duquesne Light Company and its recorded in the accounting periods in which they are wholly owned subsidiaries-Allegheny Develop billed. Deferred revenues representing the phased-ment Corporation and Monongahela Light and in portion of the rate increase have been recorded in PowerCompany. Allsignificantintercompany perating revenues. See Note 1.

balances and transactions have been eliminated Depreciation in the preparation of the consolidated financial Depreciation of electric plant, except for coal prop-statements. erties, is provided on a straight-line basis over the Property, Plant and Equipment estimated usefullives of property. Depreciation, Properties are stated at the original cost of construc. amortization and depletion of other property are tion, including related payroll taxes, pensions and calculated on various bases, such as amount of other fringe benefits, administrative and ge neral nuclear fuel burned and tons of coal mined.

costs and an allowance for funds used during con. AS Permitted by the PUC, the Company recovers struction ( AFC). AFC, which represents the esti. through rates its share of the estimated future mated combined debt and equity cost of funds used decommissioning costs for three jointly owned to finance construction, varies according to changes nuclear units. These costs are estimated at $70 million in the level of construction work in progress (CWlP) f r Beaver Valley 1, $20 million for Beaver Valley 2 and in the cost of capital. AFC is credited to income, and $38 million for Perry 1. Amounts collected from and while cash is not realized currently from this customers through rates are deposited in segregated allowance, it is realized over the service life of the accounts which can be used only for future decom-plant through increased revenues resulting from missioning costs.

higher rate base and higher depreciation expense. Income Taxes The AFC rates applied to CWIP, net of the tax effect, Deferred income taxes are recorded principally for were 9.2%,9% and 9.4% in 1988,1987 and 1986, timing differences between depreciation for income respectively, tax purposes and depreciation for accounting pur-l Additions and replacements of property units are poses to the extent permitted by the PUC. Deferred charged to plant accounts. Maintenance, repairs and taxes also are provided for expenses which are de-replacement of minor items of property are charged ferred for accounting purposes but are deducted -

to expense as incurred. The cost of property retired currently for income tax purposes. These expenses plus removal costs, after deducting any salvage include fuel, extraordinary property losses and value, is charged to the accumulated provision for losses on early retirement of debt. Deferred tax -

depreciation. Substantially all of the Company's credits are recorded for certain rate refunds which properties are subject to a first mortgage lien. are recognized currently as losses for accounting 23 Dwqwne bght Company

NOTES (Continued) purposes but are deducted over the refund period on the quantity of electric energy generated by the  !

for income tax purposes. Deferred taxes are also reactors. The U.S. Department of Energy (DOE) is ,

provided for the phase-in plan deferred revenues responsible for the ultimate storage and disposition l which are recognized as taxable income when billed of spent nuclear fuel. The Company pays DOE a i to customers. fee for future disposal service, which it recovers Certain other timing differences are not deferred. through rates.

They are recognized for book purposes, and in rates, Restaternent of Fnancial Staternents in the year they affect taxes payable. These timin8 In 1988 the Company changed its method of account-differences relate primarily to the difference between ing for abandonments and disallowances of plant tax depreciation and book depreciation related to costs. The change was made to conform with SFAS property placed in service prior to 1971. Based upon No. 90. The Company's previously issued financial ,

established PUC ratemaking practices, the Company statements for 1987 and 1986 were restated to reflect i believes that deferred taxes which have not been the abandonment of Perry 2 in March 1986. See Note B. I provided will be collected from its customers when Also in 1988, the Company adopted the provisions the taxes become payable. As of December 31,1988 of SFAS 95, " Statement of Cash Flows". The Com-the cumulative net amount of timing differences for pany has included a statement of cash flows for the which deferred income taxes have not been provided year ended December 31,1988 and restated the was approximately $271 million. previously issued statements of changes in financial The Company allocates income taxes between position for 1987 and 1986. For the purpose of the operating expenses and other income principally statement of cash flows, the Company considers all with respect to interest charges related to CWIP. For highly liquid investments which mature in three certain property, the Company received investment months orless to be cash equivalents.

tax credits which resulted in a reduction of federal income taxes payable. Investment tax credits gen- B. EXTRAORDINARY PROPERTY LOSS erally are deferred when used and reflected as reduc-In 1984 the CAPCO companies agreed to minimize i tions to tax expense over the lives of the related assets

• construction work and cash expenditures on Perry 2 In December 1987 the Fmancial Accounting Stan-pending consideration of several alternatives, in-  ;

dards Board (FASB) issued Statement of Financial cluding resumption of construction or cancellation of i Accounting Standards (SFAS) No. 96, ' Accounting ,, i the Unit. The Company believes that any decision for Income Taxes", which changes the method of to resume construction of the Unit must be approved l accounting for income taxes. The Company must by all of the CAPCO companies. Based on present j adopt the Statement by January 1,1990. When the conditions, the Company will not approve resummg  ;

new standard is adopted, significant adjustments to c nstruction. In 1987 the Company received approval j balances of accumulated deferred income taxes will fr m the PUC to amortize and recover its $155 milhon j have to be made to record additional deferred income investment in Perry 2 over a ten-year period which j tax liabilities. Significant adjustments also will be began July 1,1987, on the basis that the Company j recorded for the net reduction in previously recorded had abandoned its interest in the Unit in March 1986. l deferred income taxes resulting from income tax rate The Company is not earning a return on the unre-

~

changes and for the recognition of deferred income c vered cost of the Unit, which was $131.5 milhon tax effects related to unamortized investment tax t December 31,1988.

credits. The Company has not yet determined the The effect of adopting SFAS 90 was to decrease the amounts of such adjustments. It is expected that the reported cost of the Unit to the present value of the additional deferred income tax assets and liabilities future revenues allowed to recover the investment will be offset primarily by regulatory assets and lla-in the plant, and to record a corresponding loss.

bilities representing the expected future revenue Accordingly, the Unit s cost was restated to $106.9 requiremen'impactof theseadjustments.

milhon at March 1986. As restated, retamed earnings Dcferred Tuct Costs at January 1,1987 decreased by $20.6 million.

The Company recovers from customers fuel and Net income for 1986 decreased by $20.6 million other energy costs not otherwise recovered through ($.28 per share), net of taxes of $215 million. Net base rates, through an annual energy cost rate (ECR). income for 1988 and 1987 increased by $3.2 million The ECR is based on projected costs and is recalcu- ($.05 per share) and $3.4 million ($.04 per share), ,

lated each year. It includes an adjustment for any net of taxes of $3.4 million and $3.6 million, respec- l previous over or undercollections from customers. tively. Adoption of the Statement willincrease net The Company defers the difference between actual income by decreasing amounts over the remainder energy costs and the amounts currently recovered of therecoveryperiod, i from customers through the ECR. It records the SFAS 90 represents a change in accounting for the l difference as payable to or receivable from customers- fmancialimpact of a plant abandonment. It does not Nuclear fuel Costs affect cash flows or the actual cost recovery procedure The Company finances its acquisition of nuclear fuel authorized by the PUC. The difference in accounting ,

through capital lease and other arrangements. The is merely in the timing of the recognition of the eco-cost of nuclear fuelis charged to fuelexpense based nomic effects of the transaction.

24 DMw,wlnght Company

C. OITION ORDER REFUND Leased nuclear fuelis amortized as the fuel is in 1986 the PUC ordered the Company to refund burned. The amortization of leased electric plant is

$32.8 million of revenues collected under a 1981 PUC based on the rental payments made. Amortization of option order which later was ruled invalid by the leased property amounted to $40.5 million, $27.6 mil-lion and $19.5 million for 1988,1987 and 1986, I pennsylvania Supreme Court. Pending an appeal of the PUC's refund order to the Pennsylvania Com- respectively.

monwealth Court, the Companyimplemented a re- Le se payments in 1988,1987 and 1986 amounted fund program over an 18-month period which began to $117.4 million, $59.9 million and $38.6 million, July 30,1987, respectively, of which $111 million, $54.1 milhon and The Company recorded the $32.8 million principal $35.5 million (including deferred nuclear fuellease amount of refunds and $10.3 million of interest in Payments) were charged to operating expenses. )

1986. Additional interest expense is being recorded On October 2,1987 the Company sold its 13.74% ,

over the refund period. On December 30,1987 the interest in Beaver Valley 2, exclusive of transmission i Company deposited $30.8 million in an escrow nd common facilities. The total sales price was account established for repayment of the unpaid $537.9 million, which was the appraised value of the principal amount of the refunds and interest accrued Company's interest in the property. Simultaneous through December 31,1987. This transaction was with the sale, the Company leased back its interest m, accounted for as an extinguishment of debt, so that the Unit for a term of 29% years. The leases provide the liability for the refunds was removed from the f r semiannual payments and are accounted for as balance sheet. The remaining balance in the escrow Perating leases. The Company remains responsible account at December 31,1988 was $7 million. under the terms of the leases for its share of all oper-ation, maintenance and decommissioning costs of D. LOSS ON CANCELLED GENERATING UNITS the Unit.

Due to the difference between the Unit's cost at In 1980 the CAPCO companies cancelled construc-completion and its appraised value, the Company tion of four nuclear generating units. The Company recorded a book loss of $23.8 million, or $.33 per received approval from the Federal Energy Regula-share, in September 1987. Because AFC was not in-tory Commission and the PUC to amortize and re-

, cluded in the tax basis of the Unit, the sale resulted cover from customers its share of the accumulated in a taxable gain. The Company received permission costs of the cancelled units ($34.3 million) over from the PUC to recover the related taxes through '

ten-year period which began in 1983. The Company rates over the term of the leases.

subsequently collected from customers $17 milhon Future minimum lease payments for capitalleases under the rate order. The PUC s order approvmg are related principally to building leases and the esti-the recovery of these costs w as affirmed by the Pennsylvama Commonwealth Court in 1985, mated usage of nuclear fuel financed through leasing in October 1987 the Pennsylvania Supreme Court and trust arrangements. Minimum payments for operatingleases are related principally to Beaver found that the Pennsylvania Public Utility Code prohibited the recovery of the cancelled units' costs Valley 2 and the corporate headquarters. Future minimum lease payments at December 31,1988 because the units never providad service to the Com-pany's customers. On January 11,1989 the United States Supreme Court upheld the october 1987 deci- Year Ending December 31, Operating Capital sion of the Pennsylvania Supreme Court prohibiting (Thousands ofDollars) bases bases the Company's recovery of the cancelled units' costs.

Because the Company recorded a loss in September 1989. .5 66,007 $ 31,337 1987 equal to its original investment in the units of 1990. 63,965 40,188

$34.3 million, the Court's decision is not expected to 1991. 62,858 28,948 have a significant financialimpact on the Company. 1992. . 62,329 23,483 1993. 61,548 22,513 E. LEASES 1,482,382 1994 and thereafter . 69,255 Capital Leases: December 31, Totalminimum (Thousands ofDollars) 1988 1987 leasepayments . . $1,799,089 215,724 Nuclear fuel. . $274,210 $261,444 Less amount representinginterest . 50,490 Electric plant . 29,463 29,463 Present value of net Total . . 303,673 290,907 minimum lease Payments . . . $165,234 j Less accumulated )

amortization . 153,179 112,643 I Property held under capitalleases-net . .5150,494 $178,264 i

25 l%ww Laght Company

1. e.

%s NOTES (Continued)

F. INCOME TAXES (Thousands of Dollars) 1988' 1987 1986 Includedin operating expenses:

Currently payable:

Federal . , , . $ (3,954) $(23,929) $ 15,913 State. (899) (1,053) 7,939 Deferred-net:

Federal . . .. 61,661 60,911 40,871 State. . , . 2,667 1,434 (34)

Investment tax credits deferred-net . (4,970) 15,496 15,035 Totalincluded in operating expenses . .

54,505 52,859 79,724 Included in otherincome:

Currently payable:

Federal . , , 3,400 (25,655) (28,073) j i

State. ,

929 (5,966) ' (6,4%)

Deferred:

Federal . , 2,742 (9,831) (39,830)

State. 626 (2,414) (9,089)

Investment tax credits . (420) (21,168) (291)

Totalinclusledin otherincorne . 7,277 (65,034) (83,689)

Totalincorne tax expense (credit) . . $61,782 $(12,175) $(3,965)

Totalincome taxes were less than the amount computed by applying the statutory federal income tax rate to ,

income before income taxes. The reasons for this difference in each year were as follows: )

Computed federal income tax at statutory rate . . $67,729 $ 56,963 $ 58,378 l Increase (decrease) in taxes resulting from:

Allowance for funds used during construction . (1,029) (41,379) (50,869)

Carrying charges on assets not in rate base . (8,032) - -

Excess of book over tax depreciation . 4,201 (3,986) (594)

State income taxes, net of federalincome tax benefit . 2,193 (4,804) (4,098)

Amortization of deferred investment tax credits . (6,921) (24,651) (6,120)

Other-net . 3,641 5,682 (662)

Totalinconte tax expense (credit) . . $61,782 $(12,175) $ (3,965)

Sources of income taxes deferred and the related tax effects were:

Excess of accelerated over straight-line depreciation . . $28,336 $ 36,427 $ 34,769 Deferred revenues recorded for book but not for tax purposes. 45,367 - -

Unbilled revenues recorded for tax but not for book purposes . (3,395) ' (3,519) -

Expensed on tax return and deferred on books:

Loss on early retirement of bonds. , 6,976 (395) 1,403 Perry 1 test period costs. -

8,319 -

Property taxes . (4,104) 7,038 22 Fuel costs . 675 (7,810) (1,630)

Expensed on books but not deducted for tax purposes:

Rate refunds (includinginterest) . . ,, 1,998 23,196 (27,418)

Loss on cancelled generating units . (56) (17,016) -

Amortization of extraordinary property losses. (565) (565) (1,738)

Loss on abandonment of Perry 2 . (1,912) 1,017 (21,501)

Other-net. , (5,624) 3,408 8,011 Totalincorne taxes deferred-net. . $67,696 $50,100 $ (8,082)

The Company's income tax returns are settied through 1981. The returns for 1982 through 1985 have beers exam-ined, and the returns for 1986 and 1987 are currently being reviewed. The Company s management believes that the settlement of federal and state taxes will not have a material adverse effect on the Company's financial posi-tion or results of operations. Investment tax credits included in other income in 1987 related principally to the sale and leaseback of Beaver Valley 2.

26 omw wu cy,.y l

k i

i G. EMPI.OYEE BENEFITS The Company has trusteed retirement plans to pro- 1987 and 1986 were $12.5 million, $12.3 million and vide pensions for all full-time employees, except coal $13.5 milliun, respectively. Costs related to the UMW .

mine employees who are covered under a plan ad- plan were $1.7 million, $3.1 million and $2.9 million $

ministered by the United Mine Workers of America for 1988,1987 and 1986, respectively. ]

(UMW). Upon retirement, employees receive a The Company adopted the provisions of SFAS ]

monthly pension based on length of service and com- No. 87, " Employers' Accounting for Pensions", as of pensation. The Company's policy is to expense and fund the pension cost determined using the unit January 1,1987. Adopting this Statement did not have a material effect on the Company's pension expense.

l l

credit actuarial cost method, provided that this The following sets forth the funded status of the i amount is at least equal to the minimum funding plans and amounts recognized on the balance sheet l requirements required by the Employee Retirement at December 31,1988 and 1987. Since the UMW plan l Income Security Act (ERISA) and does not exceed the is a multi-employer plan, information concerning maximum tax deductible amount for the year. Pen- such plan is not determinable by the Company and l sion costs charged to expense or construction for 1988, is not included in theinformation below.

(Thousands of Dollars) 1988 1987 Actuarial present value of benefits rendered to date: .

Vested benefits. . $204,906 $191,665 l Nonvested benefits.. 17,275 14,212 Accumulated benefit obligations based on compensation to date . 222,181 205,877 Additional benefits based on estimated future salary levels . 59,672 60,512 Projected benefit obligation . 281,853 266,389 Fair market value of plan assets. 266,014 244,060 Projected benefit obligation in excess of plan assets . .5(15,839) $(22,329)

Unrecognized net gain .$ 33,524 $ 24,417 Unrecognized prior service cost . (19,407) (15,159)

Unrecognized net transition liability . (28,349) (30,160)

Net pension liability per balance sheet . (1,607) (1,427)

Total. . . $ (15,839) $(22,329) I Assumed rate of return on plan assets . 8.0% 7.5%

Discount rate used to determine projected benefit obligation . 8.0% 8.0%

Assumed change in compensation levels . 5.7% 5.7%

]

Plan assets consist primarily of common stocks, United States obligations and corporate debt securities. ]

Net pension cost for 1988 and 1987 was computed as follows: 4 fThousands ofDollars) 1988 1987 Service cost benefits earned during the year .5 8,212 $ S,449 Interest on projected benefit obligation . 20,782 18,645 Return on plan assets . (22,827) (22,458)

Net amortization of deferrals . 6,323 7,662 Net pension cost . .$ 12,490 $ 12,298 li. SilORT/IERM BORROWING AND REVOINING CREDIT ARRANGEMENTS 1

The Compa ny has a revolving credit agreement with There were no short-term borrowings in 1988.

a group of banks totaling $225 million available to During 1987 and 1986, the maximum short-term March 22,1991. Under certain conditions, borrow- bank and commercial paper borrowings outstanding ings outstanding under this agreement may be were $46.5 million and $120 million, the average daily converted to term notes. Depending on the option short-term borrowings outstanding were $15.4 million selected by the Company at the time of each borrow- and $59.4 million, and the weighted average daily ing, interest rates fluctuate based on prime, Eurodollar interest rate applicable to such borrowings was 7%

and CD rates. The Company pays a commitment fee and 6.6%, respectively.

on the unused amount of the commitment. 27 Duqu,<ne Lught compeny

sM.

%rs NOTES (Continuedi i RATE MATTERS and jointly owned power stations other than the Got Rate Case Mansfield Plant, including coal from the Company's On March 23,1988 the PUC adopted an order which wholly owned Warwick Mine. These deferred costs mounted to $4.8 million at December 31,1988. The increased annual revenues by approximately $232 million. The order reflects the PUC's allowance of a Company believes that the deferred coal costs ulti.

12.87% return on equity and an overall rate of return mately will be recovered.

In June 1988, as a result of excess coalinventories, of 10.94% Although the new rates became effective on March 25,1988, the PUC ordered the increase to the Company temporarily idled the Warwick Mine.

The Company believes that the mine will return to j be phased in over a period of six years.The deficien.

cies in revenues resulting from these scheduled rate Operation. The PUC excluded the mine from rate  !

increases are deferred and will be recovered by the base in 1981. The Company's net investment in the mine was $44.9 million at December 31,1988, endof thesixthyear.Thephase-inplanwasdesigned to include a return equal to an af ter-tax AFC rate on Deferred Costs of Units Not in Ra te Base any revenues deferred for later recovery. A $41 mil- On July 16,1987 the PUC approved the Company's lion reduction in the Company's energy cost rate petition to defer for possible recovery in a future rate reduced the increase during the first year of the proceeding, certain operating and other costs of l Perry 1 and Beaver Valley 2. The costs deferred were I phase-in to 5.4% Deferred revenues of $117.5 million were recorded through December 31,1988. incurred from November 1987 when the Units were  !

As provided in the PUC's earlier orders approving placed in commercial operation until March 25,1988 i the sale and leaseback of Beaver Valley 2, the Com- when the costs of the Units were reflected in rates.

pany agreed to a reduction in its revenue request. Although the PUC refused to consider these costs This reduced revenue level does not provide a com- in the 1987 rate case, the Company believes that the j plete recovery of the lease payments and related costs. costs eventually will be recovered through rates. l The Company has agreed that this adjustment shall These costs, net ofincome tax and deferred fuel ,

be applicable until at least January 1,199L Once the savings related to the two Units, totaled $48.3 million  !

adjustment is removed, the Company expects full at December 31,1988. No return is being accrued on recovery of thelease payments and related costs, the deferred costs.

The PUC concluded that no adjustments for im- 19S6 Rate Case prudent construction or physical excess capacity In 1987 the PUC approved a settlement which con-should be applied to the Company's investment in cluded all litigation relating to the Company's 1986 Perry 1 bu t imposed an " economic" excess capacity rate case and resulted in a rate reduction of $15.8 mil-penalty related to the Unit. This adjustment will 1 on on an annual basis. The rate reduction became reduce the Company's revenues by $5.7 million effective March 10,1987 but was later revised to July annually until the Unit is no longer considered 1,1987undertermsof thesettlement. Asaresultof to be economic excess capacity. extending the old rates through June 30,1987, the Several parties to the rate case, including the Company is recovering $5.2 million plus interest over Company, have filed appeals primarily relating to an 18-month period which began January 1,1988.

the Perry 1 economic excess ca pacity penalty. The This amount was recorded in revenues in 1987.

Company contends that no adjustment was war-ranted. The other parties contend that the amount hornWeldfodutun> Use The PUC approved the Comp my's requests to remove of the annualadjustment should have been in the fr m service and place m " cold reserve" most of the range of $50 million. The Company believes that the Brun t Island and Phillips Power Stations. The Com-contentions of the echer parties have no merit. As in Pany's net investment in the cold-reserved units was any complex litigatian, the Company is unable to $104 million at December 31,1988 and is included in predict the ultimawutcome of this matter. An out-the balance sheet as " Property held for future use".

come which uhimsely increases the excess capacity The Company beheves that its investment in the adjustment would ' nave an adverse effect on the c Id-reservedunits,whichhasbeenremovedfrom Company's results of operations. Argument of the rate base, eventually will be recovered.

appeals before the Pennsylvania Commonwealth Court is scheduled for May 1989.

J. COMMITMENTS AND CONTINGENCIES Deferred Coal Costs Construch.on 1

Beginning in 1981, the PUC directed the Company J The Company estimates that it will spend $565 mil- 1 to defer recovery of the cost of coal delivered to the Bruce Mansfield Plant (Mansfield coal) in excess of II ". n c nstruction, exclusive of nuclear fuel and l equity AFC, during the period 1989 through 1993. i generally prevailing market prices for similar coal; however, amounts deferred may be recovered from Quarto Mining Company I customers during periods that the cost of Mansfield in 1987 the Company, together with the other coalis less than generally prevailing market prices. CAPCO companies, entered into an agreement with The unrecovered cost of Mansfield coal paid by the Consolidation Coal Company (Consol) under which Company was $8 million at December 31,1988. The Consol acquired all the common stock of Quarto J PUC ordered a similar limit on the recovery of the Mining Company (Quarto) and restated in its entirety I cost of all coal delivered to the Company's wholly the coal supply contract for the Bruce Mansfield 28 Duqwne bght Company

A V

l Plant. Under this contract, Consol is obligated to losses in excess of private insurance coverage, up to deliver up to 5 million tons of coal annually through $63 million per incident could be levied against each 1999. It is expected that these arrangements will licensed reactor in the country, but not more than $10 make the supply of coal more secure and economical million per year for each reactor. Based on its present over the period of thecontract, interest in three operating reactors, the Company's The CAPCO companies' guarantees of certain share of the maximum potential assessment under Quarto debt and lease obligations, which were the retrospective program would be approximately incurred in connection with the development and $47 million per incident, limited to $7.5 million per equipping of Quartds coal properties, were not year for each incident. An additional surcharge of 5% {

affected by the changes in the agreement. At Decem- could be levied if the total amount of public claims j ber 31,1988 the Company's share of these guarantees exceeded the funds provided under the retrospective j was $55.1 million. In general, the prices paid for the mgram. The Companys share of the surcharge l coal by the CAPCO companies under the coal sup. would be approximately $2.3 million, subject to any ply contract will be sufficient to satisfy Quartds debt increases for inflation. Congress could impose further and lease obligations. Under the coal supply cor revenue raising measures on the nuclear industry if tract, the minimum future payments to be made by funds prove insufficient to pay claims.

the Company which are related solely to the Quarto Shareholder Suits obligations are: Three complaints against the Company and/or it.s Year Ending Dhernber31, (Thousand;of Dollars) directors are outstanding related to the reduction of the quarterly dividend on the Company's common 1989. . $ 8,337 stock in 1986. The complaints seek compensatory 1990. 8,002 and punitive damages in an undetermined amount

,i 1991- 7,807 for alleged violations of securities laws, as t *as 1992 7,455 c mm n law fr ud and negligent trisrepresentation.

1993' 7,102 A hearing has been scheduled for April 14,1989, at

]

which time the Court will be asked to enter a final J After 1993 . 36,004 order approving a currently proposed settlement i Total. . $74,707 agreement under which the suits would be settled for approximately $3 million, substantially all of ,

The Company's total payments for coa 1 purchased which would be covered by insurance. The settle- l under the current contract with Consol and the ment would be on the basis that neither the Company 1 previous Quarto contract, including amounts related nor its directors committed the violations alleged. l to the Quarto obligations, were $26.4 million, $25.8 LTVSteelCompany 1 million and $28.9 million in 1988,1987 and 1986, The Company was involved in various regulatnry I respectively, and court proceedings with LTV Steel Company, Inc. l Nuc/ car Insurance (LTV), which filed for reorganization under Chapter The CAPCO companies maintain a nuclear insur- 11of thefederalbankruptcylawsin1986.On August ance program to the maximum extent available. This 13,1987 the federal bankruptcy court approved an program currently provides $900 million of primary agreement between LTV and the Company covering a nd excess property insurance and $825 million of all items except the electric service contract at LTV's decontamination liability and excess property insur- Midland works. Under the terms of the agreement, ance for the $5.7 billion interest in Beaver Valley 1 and the amount of the Company's claim in bankruptcy 4

2. The companies have similar property insurance for $9.7 million for past service and $35.8 million j for the $5.3 billion interest in Perry 1. If the property under a long-term electric service contract was damage reserves of one of the insurers are inade- reduced to a total of $30 million. The agreement also quate to cover claims arising from an incident at any permitted the Company to offset against the amount ,

nuclear site in the United States covered by that in- of the claim, LTV's share of certain refunds due from surer, the Company is obligated to pay retrospective the Company. The Company also filed identical claims premiums of up to $4 million per year. of $56.9 million against both LTV Corporation and in August 1988 the Price-Anderson Amendments LTV Steel for guarantees under the electric service to the Atomic Energy Act were amended and extend- contracts at the Midland works. These claims have ed to August 1,2002. The aggregate limit for public not yet been approved by the bankruptcy court.

liability claims that could arise from a single nuclear Recovery of all or part of the $30 million approved incident was increased to approximately $7.3 billion, claim and the $56.9 million proposed claims will  !

subject to increases to reflect the effects of inflation depend upon the amount of funds ultimately 1 and as additional nuclear reactors are licensed for available to pay all of LTV's unsecured creditors.  :

operation. This potential liability would be covered Other by the maximum amount of liability insurance avail- The Company is involved in various other legal  !

able from commercial insurance carriers (currently proceedings. The Company believes such proceed-  !

$200 million) and an amount provided by an indus- ings will not have a material adverse effect on its try retrospective assessment plan. Under the plan, financial position or results of operations.  !

if any umt in the United States had an incident with l' 29 on,a+co,&

t x

l NOTES (Continued) 1 1

K. CAPITALI2ATION Preferred and Preference Stock ' \

s Cominon Stock The preferred stock is entitled to quarterly cumula-The Company has paid a regular quarterly comrnon tive dividends. If four quarterly dividends on any stock dividend each year since 1953. Dividend s series of preferred stock are in arrears, holders of the 1, for each quarter in 1987 and 1988 were 30 cents per stock are entitled to elect a majority of the Board of f share. The quarterly dividend was increased to 32 Ditrctors until a11 dividends have been paid, cents per share, offective with the dividend paid The preference stock is entitled to quarterly cumu-Jan uary l,1989.

lative dividends, provided that no dividends on any q

=

in connection with the Company's recapitalizat. ion series of preferred stock are unpaid, if six quarterly.

plan, the Company repurchased 12,264,290 shares of dividends on any series of preference stock are in

{ arrears, the holders of the preference stock are common stock at a totalcost of $189.1 million during 1988. The Company expects to purchase additional , entitled to elect two directors until all dividends shares during 1989. have been paid. , ..

In 1987 the Company's shareholders approved a The outstanding preferred and preference stock -

Long-Term incentive Plan through which the Com. generally are callable on not less than 30 days' notice ,

pany may grant management employees options to . at the prices stated in the table on page 31, plus accrued dividends. Certain call prices decline in purchase up to a total of 3 million shares of its com.

mon stock during the period 1987-1997 at not less future years. The preferred and preference stock are thanthemarketpriceof thestock. Asof December subject to various purchase and sinking fund re-31,1988 active gra nts were 1,033,998 a nd 191,000 quirements. As of December 31,1988 the maximum shares, at exercise prices of $123125 and $15.3125 per combined aggregate sinking fund and mandatory share, respectively. Stock apprec!ation rights (SARs) Purchase requirements for preferred and preference u have been granted in connection with 1,033,998 of stock is $6,430,000 for each of the next five years.  !

the options outstanding. During 1983,6,356 SARs The following summary indicates the changes in were exercised and 13,491 options lapsed due to ter. the number of shares of common, preferred and minations. None of the remaining options or SARs preference stock outstanding during 1988,1987 .

could have been exercised prior to January 1,1989. and 1986:

YearEnded December 31, ,

(Thousands ofShares) 1988 1987 _ 1986 COMMON STOCK-$1 PAR VALUE:

Outstanding-beginning of year. , 70,096 73,119 71,488 issuances:

Dividend reinvestment . - - 1,631 J Reissuance-treasury stock . -

.9 -

Repurchases-. wmmon stock . . , . . 0 2,265) (3,032) -

Outstanding-end ofyear. 57,831 70,095 73,119  ;

PREFERRED AND PREFERENCE STOCK:

Outstanding-beginning of year. 5,069 5,183 5,355 Purchases and redemptions. 066) (114) (172) 1 Outstanding-end of year . 4,903 ;5,069 5,183 Year Endid December 31, .

(Thousands of Dollars) 1988 1987 1986 CAPITAL SURPLUS:

Premium on common stock . . $933,326 $933,326 - $933,326 Capital stock expense . . (7,497) (7,561) (7,612)

Other . '1,617 366 417 g

Totalcapitalsurplus . , . $927A46 $926,131 $926,131 33 rwn,up cen

PREFERRED AND PREFERENCE STOCK: {

December 31,088 Decernber31,1987 i (Thousands) (Titousands)

CallPrice Shares Shares .\

Series Per Share Outstanding Amount Outstanding Amount .}

PREFERRED STUCK (1):

4% (3)(7) . . $ 51.50 550 $ 27,498 550 $ 27,498 3.75% (3)(7). 51.00 148 7,400 150 7,500 4.15% (3)(7). 51.73 132 6,622 140 7,000 4.20% (3)(7). 51.71 100 5,000 100 5,000 l 4.10% (3)(7). 51.75 120 6,000 120 6,000 l

$2.10(3)(7). . 51.84 160 8,000 160 8,000  !

$7.20 (4)(7). 101.00 334 16,708 350 17,500 l

$3.64 (4)(6). 104.00 185 9,240 233 11,644 i

S8.375(4)(6) . . 105.03 240 12,000 252 12,600 1 PROEERENCE SIOCK (2):

$2.315 (5)(7) . 25.90 1,200 1,200 1,200 1,200

$2.10(5)(7). , 25.70 1,200 1,200 1,200 1,200 1

$7.50(4)(6). 103.00 167 167- 214 214

$9.125 (4)(6) . 104.80 367 367 400 400 Total . , 101,432 105,756 j Paid-in capital . .

. 148,544 160,279  !

Purchase and sinking iund requirements . (5,130) (5,130)

Total preferred and preference stock . . . $244,81b $260,905

(

(1) Preferred stock: 4,000,000 authorizedshares; $ 5'O par iulue; cumulative. (6) Redeemable. i (2) Preference stock: 8,000,000authorimishares; $1 par value; cumulative. _( 7) Non. redeemable.

O) $50 per share involuntary liquidation tulue.

(4) $ 100 per share involuntary liq uidation tulue. l (5) $25pershareiniduntaryliquidation tuiue. I OTHER I.ONG-TERM DEBT:

POI.LUTION CONTROL OBLIGATIONS (ThousandsofDollars):

Principal Amoun! Outstanding Sen.

a lhiaturityor at December 31, Year Average Mandstory Redemption Final luned Interest Rate Beginning Maturity 1988 1987 1972 5.49 % 1983 2002 $ 20,800 $ 21,400 1973 5.685 % 1984 2003 11,0/'0 11,200 1973 5.755 % 1984 2003 14,250 14,625 1974 7.97 % 1989 2004 14,000 14,000 1 1975 7.50 % 1993 2005 17,000 17,000 1 1975 8.40 % 1991 2005 18,000 18,000 1976 6.90 % 1994 2011 15,000 15,000

.)

1981 12.00 % .2002 2011 50,000 50,000 1983 10.50 % -

2013 20,500 20,500 1 l

1984 11'625 % --

2014 51,000 51,000 I

!; 1985 7.75 %

2015. 44,230 44,250 1988 6.875 % -

2018 71,000

. . ~

j TotaI1 .

346,800 276,975 .i Less current maturities and sinking fund requirements . , 1,600 1,175

, -l Totalpollution control obligations ~ . ,

, 345,200 275,800 ,

Nudear fuelobligations . }

4 14740 12,695 5% sinking fund debentures (authorized-$20,000,000) due March 1,2010 . 6,754 9,104 '

~ I

) Total other long-term debt . . $368,694 $297,599 2 w=vn . -

m 1

\

. 31 ouw,,e s.+ cm,n .\

\

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - _ _ _ i i

h NOTES < continued)

The pollu tion control obligations arise from the sale FIRSr MORTGAGE BONDS (Thousands of Dollars):

of bonds by public authorities to finance the con-Prindpal Arnount struction of pollution control facilities at the Com-0ta n pany's plants. The Company is obligated to pay the ,f , '

principal of and interest on the bonds. For certain of Interest -

the pollution control obligations, there is an annual Rate Maturity 1983 1987 commitment fee for an irrevocable letter of credit.

3%% 4-1-88 . .$ - $ 15,000 The letter of credit is avadable, under certain circem-4%% 3-1-89 . 10,000 10,000 stances, for the payment of interest on or redemption of a portion of the bonds. 13%% 3-1-91. 25,119 49,500 The nuclear fuel obligations result from a trust 10%% 12-1-92. 75,000 75,000 arrangement used for the procurement of a portion 10%% 6-1-95 . 50,000 50,000 of the Company's nuclear fuel requirements. Interest 5%% 2496. 22,800 22,800 is capitalized and included with the nuclear fuelin 5%% 2-1-97 . 24,600 24,600 CWIP. The Company will pay the trust obligations 2-1-98 . 34,700 34,700 6%%

as the related fuel is withdrawn from the trust. 30,000 30,000 7% 1-1-99.

The Company was mvolved in the issuance of

$421.6 million of collateralized lease bonds by an 7%% 7499. 28,947 28,947 8%% 3-1-00. 30,000 30,000 unaffiliated corporation for the purpose of financing the lessors' purchases of Beaver Valley 2.1he Com. 7%% 3-1-01 . 35,000 35,000 pany is also associated with a letter of credit securing 7%% 12-1-01. 26,461 26,461 the lessors' $116.3 million equity interest in the Unit 7%% 6-1-02. 28,470 28,470 and certain tax benefits. If certain specified events 7%% 1-1-03 . 32,670 32,670 occur, the leases could terminate and the 1-**er of 7-1-03 . 35,000 35,000 7%%

credit and/or the bonds would become direct 4-1-04. 44,100 44,100 obligations of the Company.

8%%

Sinking fu nd requirements and maturities for the 9% 3-1-05 . 50,000 50,000 9% 6-1-06 . 80,000 80,000 next five years of long-term debt outstanding, er a-sive of nuclear fuel obligations, as of Dem b 31, 8%% 4-1-07. 97,400 97,400 1988 were as follows: 10%% 2-1-09 , 100,000 100,000 12%% 1-1-10. - 57,400 War Ending Sinking Fund 5-1-12. 1,672 2,597 Decernber31, Regturernents Maturittes 16%%

1, % 4_1_13 _ _

g7,9,4 1989 $14,394,000 $10,900,000 13 % 12-1-13 . -

49,500 1990 14,440,000 900,000 11%% 2-1-15 . 39,000 39,000 1991 13,890,000 26,669,000 11%% 12-1-15 . 110,556 123,750 1992 13,565,000 76,000,000 9%% 12-1-16 . 100,000 100,000 1993 14,115,000 1,000,000 9% 2-1-17. 100,000 100,000 The sinking fund requirements relate primarily to Total. 1,211,495 1,429,809 the first mortgage bonds and may be satisfied by the Less: Current portion. 10,252 15,000 certification of property additions equal to 166%% of Current sinking fund the bonds required to be redeemed. During 1988, $3.5 requirements. 13,340 13,140 million of the annual sinking fund requirement was satisfied by cash and $11.6 million by certification of Totalfirst rnortgage bonds . . $1,187,903 $1,401,669 property additions.

Total interest costs incurred during 1988,1987 and 1986 were $174.1 million, $184.3 million and $182.1 During 1987 and 1988 the Company reacquired a total of $210.9 million of first mortgage bonds. The mdlion, respectively, of which $41.9 million, $128.7 difference between the purchase prices and the net million and $124.4 million, including AFC, were carrying am unts f the bonds was $20.2 milhon and capitalized or deferred. Debt discount or premium I as been mcluded in the balance sheet as 'Unamor-and related expenses are amortized over the lives of l tized loss on reacquired debt '. The Company amor-the applicable issues.

tizes and recovers these losses through rates.

32 Duqu,we Dght Compwny

&'L

'A f L JOlolTLYOWNED GENERATING UNITS The Company, together with other electric utilities, has an ownership or leasehold interest in certain jointly owned units. The Company is required to pay its share of the construction and operating costs of the units.

The operating expenses of the units are included in tl:e income statement. Amounts included on the balance sheet et December 31,1988 under " Property, plant and equipment" include the following (thousands of dollam):

Company's interest Percentage Utility Plant Accumulated Construction Unit Interest Megawatts in Service Depreciation Work in Progress

) Ibrt Martin 1. 50.0 276 $ 55,927 $ 21,034 $ 4,864 CAPCO Units:

Eastiake 5. 31.2 186 65,367 17,243 3,846 Sammis 7. 31.2 187 73,319 20,031 3,512 Bruce Mansfield 1. 29.3 228 74,607 25,656 258 Bruce Mansfield 2. 8.0 62 20,632 6,493 63 Druce Mansfield 3. 13.74 110 71,937 18,282 32 Bruce Mansfield common and shared facilities. 65,470 23,461 438 Beaver Valley 1. 47.5 385 388,422 104,410 5,991 Beaver Valley 2. 13.74 114 13,953 269 407 Beaver Valley common facilities . 197,183 18,333 3,605 Perry 1. 13.74 165 747,873 27,985 939 s

Total . 1,713 $1,774,690 $283,197 $23,955 M. QUARTERLY FINANCIAL INFORMATION (Unaudded)

The following is a su mmary of selected quarterly financial data (thousands of dollars, except per share amounts):

First Second Third Fourth Quarter Quarter Quarter Quarter 1988 Operating revenues . . $216,521 5263,250 $306,279 $277,183 Operating income 37,732 60,378 81,275 61,957 Net income 33,336 24,434 45,125 34,527 Earnings per share . .41 .31 .65 .49 Stock price:

Iligh . 14% 15% 15% 18%

Low . 11% 14% 14% 15%

1987(1)

Operating revenues .$215,928 $212,199 $240,955 $218,922 Operating income 47,599 48,908 59,414 29,814 Net income:

l As reported . 45,210 47,806 13,995 44,305 As restated . 46,068 48,674 14,863 45,155 Earnings per share:

As reported . .55 .59 .12 .55(2) i As restated . .56 .60 .14

.55 Stock price:

1ligh . 14% 13% 12% 12%

Low . 12% 11% 11% 10%

(1) Quarterly earnings for 1987 have been restated to reflect Ihe retroactive application of the change in accountingfor alundoned plant costs related to Perry 2. See Note B.

(2) In thefou rth quarter of1987, the Company recorded approximately $21 million ofinvestment tax credits related to the sale and leaseluck of Beaver \ldley 2, which increasedfou rth quarter earnings ty $. 29 per share.

33 Lw.,a,e con,m,,,

_ _ _ _ _ _ _ _ _ _ _ - - _ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ^ - - - ' - - - ' ~ ' - ^ ' - - '

x%

%ts SELECTED FINANCI AL DATA AND STATISTICAL SUFI).MRY (Thousands of Dollars, Except Prr Share Amounts) l 19b8 1987 1986 1933 1984 1983 l

INCOME STATEMENT ITEMS:

Total operating revenues . . $ 1,063,233 $888,004 $896,263 $918,460 $897,140 $814,721  ;

Operating income $244,342 $185,735 $189,515 $190,332 $185,734 $186,672 l

Earnings for common stock (1) . $118,366 $134,972 $110,329 $154,707 $134,839 $122,815 Earnings for common s.tock as % of operating revenues . 11.2 % 15.2 % 12.3 % 16.8 % 15.0 % 15 1 % l Timesinte estcharges  !

earned before income taxes. 2.25 1.84 1.75 2.62 2.69 2.78 l

\

- = =n- .-..-

BALANCE SIIEET ITEMS:

Property, plant and equipment-net . 53,065,922 $3,098,897 $3,490,599 $3,420,133 $3,139,754 $2,737,840 Total assets (1) . 53,876,581 $4,151,615 $3,997,076 $3,854,468 $3,530,310 $3,145,811 Capitalization:

Commor: stockholders' equity (1) . .51,070,575 $1,217,361 51,204,433 $1,169,831 $1,053,465 $ 958,505 Non-redeemable preferred i

and pre'erence stock 154,073 156,137 156,137 156,137 156,137 156,137 Redeemable preferred and preference stock 90 743 104,768 110,653 119,653 127,414 134,919 Long-term debt. 1,550,231 1,690,600 1,613,787 1,549,468 1,416,736 1,322,900 70talcapitalization. 52,865,622 $3,168,866 $3,085,010 $2,995,089 $2,753,752 $2,572,521 C kPITALIZATION RATIOS:

Common stockholders' equity . 37.4 % 38.4 % 39.0 % 39.1 % 38.3 % 37.3 %

Preferred and preference stock. 8.5 8.2 8.7 9.2 10.3 11.3 I ong-term debt. 54.1 53.4 52.3 51.7 51.4 51.4 l Totalcapitalization. 100.0 100.0 100.0 100.0 100.0 100.0 COMMON STOCK DATA:

Shares outstanding (000):

Year-e nd . 57,831 70,096 73,119 71,488 64,775 58,420 l Ave-age 63,748 72,845 72,930 68,543 61,054 55,883 Earnings per share (1) . $1.86 $1.85 $1.51 $2.26 $2.21 32.20 ,

Return on average l common equity . 10.4 % 11.1 % 9.3% 13.9 % 13.4 % 13.4 % l Dividends paid per share . $1.20 $1.20 $1.63 $2.06 $2.045 $1.975 {

Dividend payout rate . 64.5 % 64.9 % 107.9 % 91.2 % 92.5 % 89.8 %  !

Book value per share at year-end . $18.51 $17.37 $16.47 $16.36 $16.26 $16.41 )

Market price per share: I Iligh . 18% 14% 19% 17% 16% 18% l Low. 11% 10 % 12% 14% 11% 13 )'

Year-end . 18% 11 % 12% 16% 15% 13%

MarketIbook --year-end . 1.01 c68 .74 .99 .93 .32 l Price carnings ratio (2) 8.2 6.8 10.5 7.0 6.3 7.1 Dividend yi, ld (2). 7.8% 9.6% 10.3% 13.0 % 14.7 % 12.6 %

(1) 1937 and (986 amowas hair been restated to reflect a change in accou nting standard. See Note B (2) Based on Me atvrage of the high and low market pricesfor rhe year.

ode < ces,n,

s%.  !

l ,

)

W i

1988 1987 1986 1985 1984 1983 'l AVERAGE REVENUE PER KILOWATr.

IlOUR-ALL CUSTOMERS 7.473e 7.517e 8.032( 7.832( 7.389c 7.215C SALES OF ELECTRICITY: i Average annuat residential .

' kilowatt-hour use . . 6,168 6,019 5,821 5,621 5,768 5,752 Electricener ysalesbilled (millionso kilowatt-hours):

Residential. 3,156 3,065 2,957 2,848 2,918 2,905 I Commercial, . 5,055 4,899 4,724 4,537 4,393 4,257 Industrial . . 3,302 2,918 2,734 3,522 4,148 3,717 Other , 91 98 99 101 104 111  !

Totalsales to customers . 11,604 10,980 10,514 11,008 11,563 - 10,990 Sales to other utilities . . 2,797 2,486- 2,136 1,981 - 1,019 327 Totalsales. . . 14,401 13,466.. 12,650 12,989 12,582 11,317 OPERATING REVENUES (ThousandsofDallars):

Residential revenues . $318,552 $299,562 $297,520 $286,260 ' $280,647 $267,110 Commercial revenues . 362,012 345,585 347,364 335,012 314,129 290,370 Industrial revenues . 171,779 165,550 178,425 225,692 244,970 221,107 Other revenues. , 31,382 25,289 27,435 25,447 25,955 25,663 Current revenues from eustomers . 883,725 835,986 850,744 872,411 865,701 L 804,250 Deferred customer revenues . 117,544 -- - - - -

1 Revenues from other utilities. . . 61,964 52,018 45,519 46,049 31,439 10,471 7btaloperatingrevenues . . $1,063,233 $888,004 $8%,263 $918,460 $897,140 $814,721 ENERGY SUPPLY AND PRODUCTION DATA:

Energy supply (millions c,f kilowatt-hours):

Net generation-system plants . 14,976 14,025 13,264 13,590 12,983 , 11,900 .l Purchased and net i inadvertent power . 257 258 194 184 216 163 7btalenergy supply . 15,233' 14,283 13,458 13,774 13,199 12,063 Losses and Company use. (832) (817) (808) (783) (617) (746)

Net energy supply 14,401 13,466 12,650 12,989 12,582 11,317

.m r Generating capability (thousands of kilowatts) . 2,836 2,852 2,707 3,148 3,148 3,148 Peak load (thousands of kilowatts) 2,372 2,280 '2,132 2,127 2,172 2,184 Cost of fuel per million UTU . . 145.738e 150.991c 165.340( 168.450(' 165.868(. 167.140(

l IITU per kilowatt-hour generated . 10,304 10,449 10,624 10,633 10,682 10,635 Average production cost per kilowatt. hour . 2.573< 2.328/. 2,545e 2.462( 2.559c 2.541c

=

NUM BER OF CUSTOMERS-END OF YEAR:

Residential. 513,760 510,823 509,054 507,824 506,883 505,781 Commercial.. , 51,456 50,904 50,346 49,927 49,837 49,493 Industrial . . . 2,017 '1,978 1,970 1,981 1,990 1,984 Other .

j 1,828 1,831 1,826 1,817 1,588 1,633 Totalrustomers. 569,061 565,536 563,196 561 549 560,298 558,891 j

35 _

Duqus,w lykt Gespny o ,

_ E

A

%rs BOARD OF DIRECTORS l

Wesley W. von Schack is* Daniel Berg *

• Sigo Falk tg Eric W. Springer t6 Chairman of the Board, institute Professor, President and ihrtner, President and RensselaeriblytechnicInstitute Chief Executitt Officer, florty, Springerand A1attern, PC.

Ekcled to the Board in 1983 Cranberry Ewergencyand Attorneys-at-biw Chief Executus Officer Elected to the Boardin 1986 Diagnostic Center Elected to the Boardin 1977 Doreen E. Boyce 1t Elected to the Boardin 1979 Henry G. AllynJr. *% Director, e AlemberofAudit Committee Retired President and The BuhlToundation William H. Knoell *

• t kfemberofCompensation Elected to the Board in 197S Chairman of the Board, Committee l Chief Executive Officer.

The Pittsburgh and Cyclops industries, Inc t MemberofEmploymentand l Commumty Relations  !

Lake Frie Railroad Company John H. Demmter

• t Elected to the Boardin 1980 Elected to the Boardin 1981 (krtner, Committee }

Reed $mith Shaw & AfcClay G. Christian Lantzsch " 5 Afembero/ Nominating "

Attorneys-at.inw Retired Vice Chairman, Committee JahnM. Arthur t* Afellon Bank, N. A., and retired Retired Chairman Elected to the Boardin 1977 e MemberofNuclearReview Vice Chairman and Treasurer, Committee ofIhe Board, Duquesne Light Company Afellon Bank Corporation Elected to the Boardin 1973  ;

Elected to the Boardin 1967 COMPANY OFFICERS Wesley W. von Schack Gary R. Brandenberge: David D. Marshall Diane S. Eismont i Vice President Vice President Secretary Chairman ofIhe Board.

Presider.t and Porar Supply Corporate Darlopment Chief necutive Officer James O. Ellenberger Dianna L. Green Gary L. Schwass Controller John J. Carey Vice President bice President Executitw Vice President fluman Resources Finance A. William Stein Christine A. Hamcn John D. Sieber Roger D. Beck Vice Preside" Vice President James D. Mitchell Vice President Law and Corpomte Affairs Nuclear Assistant Treasurer Afarketing and customer Services Joan S. Senchyshyn Assistant Secretary UNIT M ANAGERS Edwyna G. Anderson Donald H. DeVos H. Donald Morine Ernest M. Varhola GeneralCounsel System Darlopment Afarketingand GovernmentalRelaticns Economic Darlopment George E. Bentz C. Eugene Ewing Joseph F. Zagorski fiuman Resources Nuclear Quality Assurance Frank M. Nadolny Customer $ervices--

Rates and Regulatory Affairs  % stern Division Julian A. Chandler Robert A. Irvin GeneralServices System Operations and Thomas E. Nist Armand G. Zitelli ,

Telecommunications Customer Services- Customerand GeneralServices Thomas H. Cook Eastern Division Afanagement Information Thomas D. Jones II Sertkes fossil Genemtion Steve L. Fernick Jr.

Envinmmental Affairs J

James O. Crockett William S. Lacey Corporate Nuclear Services Nuclear Operations Robert C. Schopper Afaterials Afanagement William J. DeLeo John E. Laudenslager Planning, Budgeting and Corporate communications Donald A. Shirer Jr.

Business Darlopment Fossil Tuels l

1 36 l

l 0ltslldW ljft citmfW994

SHAREHOLDER REFERENCE GUIDE ___

CORPORATE OFFICES actually tt 'Asfer stock, contact our transfer agent:

Duquesne Light Company Mellon Securities Trust Company One Oxford Centre At ention: Joseph Varca l 301 Grant Street Stock Transfer Department l' l Pittst>urgh, PA 15279 Fort Lee ExecutivePark l One Executive Drive

COMMON STOCK Fort Lee, NJ 07024-3309 201 592-4053.

Trading Symbol. ,

.DQU.

)

is ed nd aded., .New York, FINANCIALCOMMUNITYINQUIRIES _

Philadelphia Analysts or brokers should direct their inquiries i to the company's Treasury U rut at 412-393-6420.

Number of Common Shareholders of Record at Year End . .106,878 \Vritten inquiries should be sent to:

Treasurer Duouesne Light Company ANNUALMEETING Shareholders are cordially invited to attend our One Oxford Centre (28-1)

Annual Meeting of Shareholders at 10 a.m., local 301 Grant Stmt Pittsburgh, PA 15279.

time, April 18,1989, on the campus of Beaver County Community College, Monaca, Pa.

FORM 10-K OFFER If you hold or are a beneficial owner of any class of DIVIDENDS our stock as of the record date for the 1989 Annual The Board of Directors historically has declared quar- Meeting, we will send you, free upon request, a copy terly dividends payable on or r. bout the first day of of Duquesne Light's Annual Report on Form 10-K, 3 January, April, July and October. The record .iates filed with the Securities and Exchange Commission for dividend payment in 1989 are expected to be for 1988. All requests must be made in writing to:

March 10, June 9, September 11, and December 8.

Corporate Secretary Duquesne Light Company {

SHAREHOLDER SERVICESIASSISTANCE One Oxford Centre (17-6)

Shareholder inquiries relating to changes of address, 301 Grant Street missing stock certificates, dividend reinvestment, Pittsburgh, PA 15279.

dividends, and other account information should be I

directed to:

TAX STATUS OF COMMON STOCK DIVIDENDS Shareholder Relations Department The company estimates that portions of the common Duquesne Light Company stock dividends paid in 1988 represent a return of One Oxford Centre (17-5) capital and are not taxable as dividend income, 301 Grant Street as shown on the following chart.

Pittsburgh, PA 15279.

You may call toll free from anywhere in the con- Not Taxable as tinental United States weekdays between 7:30 a.m. Taxable as DividendIncome and 4:30 p.m., Eastern Standard Time. Please have l'ayment Date DividendInanne $cturn agapital) your account number handy when calling. The tele- January 1 100.00 % 0.00 %

phone numbers are:

April 1 100.00 % 0.00 %

Pittsburgharea , . .393-6167 1 R3% Um Pennsylvania (except Pittsburgh). .1-800-367-6400 October 1 25.0 % 74.94 %

Outside Pennsylvania. .1-800-247-0400.

Questions relating to stock transfer can be handled by our Shareholder Relations Department, but to These estimates are subject to aadit by the Internal Revenue Service.

Duquesne Light Company is an Equal Opportunity Employer.

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i' vag %uesneIJoht One Oxford Centre Pittsburgh, PA 15279 t

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