ML20140B865
| ML20140B865 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley |
| Issue date: | 12/31/1996 |
| From: | Berg D, Boyce D, Marshall D DQE |
| To: | |
| Shared Package | |
| ML20140B855 | List: |
| References | |
| NUDOCS 9706060365 | |
| Download: ML20140B865 (47) | |
Text
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CORPORATE Peoritt .
19 9 6 R f s u tTs < y , , n> a y e - g in i t i, n . E,n,,.,na ilu,, . .o n , in, , ,,n n,o,, 5 s, u n i u i H li< d .I, i.,,h...r. iln , , o i q ,a n , i $ . u .o o n , m i ,4 i h . i , h<i,n
- 1996 earnings per share increased 5.5% mer 1995. I"'""' '
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- DQE's annualized dividend nuri,i . h y , n , ,; ,, , o n ,i n h l I ,1 , n a s a, ,i ,y, n . , a , ,, p u ,,, ,y m A lesel increased by 6.3% q q n o fi n u i n - pi, e io ,fl,. i h i i n .u n ii m nt il , h.ii b i d, j
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- Duquesne Light sold its .u s < n q ,, , o , i . ,1 i n , h,,n interest in Ft. Alanin Power .
Station for a gain, which was cpplied to reducing fhed Our h costs at the utility. s hn,
- Duquesne Light and hargaining unit employees I > o ni \ l " h d l 'l. 'i.u ih,,oq,oi- .n,ino agreed to estend the current "" " " " ' - "h"hI"""il' "' *" " o h h "' u < < pi n ' h o r - io rIn . 1,oo contract through the year "" h* " " I ' ' ' " d l ' '" " " o ' a " J ,14 u o " i n n o o ' p% il in u <u+nio 2001. This three-> car
"'l"""" ' " J " l J " " '" i l h u. tn ah r do. s extension yields a workforte focu ed to meet the challenges /"o' of a competitise industry. \ l ' ' t h- t h n < < o n 1 d i! - o,,un .i, I),njo. ,n, I lt+ lit ( i o lij i li t s l Jiiili s, ii, n 1l ','it ' ut j it , , \l,g,, ,,,j j )( pl l,,,,.. y1 ,g , ' , , ,j
- DQl,.,s market-driven '
I H)I in
- i n e l , \ ls, l NI Ns businesses mntributed 43 '
cents to carnings per share, an increase of 34"o over 1995.
- Alontauk continued to ,,,
prtnide increased income and s,i fern cash flow to support DQE's I.on in,o, d,,,ni ,,o, ability to attract capital and l 'e m f o i i n, e d p1 i h ,i n i o n , ilo,,o h ibie n, ~dd,,o, t, ,n Ih a , e n ,n to unest m new busmess h .o u i < . .i n lI s,.o .u u a n u s ,a6.' r ,o u n i a ,o,I , q , i m m J o i , o, Hn opport unities. in,hh4o,ainn l'ro,i,A.
- Duquesne Enterprises im ested in 11 Pow er Corp., a Irr"tr/'a '
leading fuel cell desclopment o \1in o ni< r u , h s, u . o ,o .o n I .u u h n. , a cannpany that prmides a clean, 'hd'4""'n- o n l t o u r n u ) i . o n h t n o r. il, i .n l ,1 f in.u n i:d i o, sin uts .n n i
IP'Ih""i"di 'hm h"ini efUcient, emironmentally "s nn hnh ,1 hi'his - iinn
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friendly energy alternative. -
- DQEnergy PAirINEns ,
was formed in December 1996 to capitalire on strategic alh.ances m the Inude Had t un s a
energy industry.
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DQE FIN ANCI AL AND OPER ATING HIGHLIGHTS Change Change From From (millions) 1996 1995 1995 1994 1994 12,426 12,428 (
Elcetrie customer sales (KW1I) 0.0% 2.5% 12,122 1
()perating res enues $1,225 0.4 % S1,220 -0.3% S1,224 Non-fuel operating and maintenance expense $377.4 0.8% S 374.5 -8.4 % S 408.7 I)epreciation and amortization $222.9 10.0 % S 202.6 22.1% S 165.9
()perating income $302.0 -6.4 % S 322.5 1.8% S 316.9
()ther income S 74.8 43.0 % S 52.3 21.9 % S 42.9 Net income $179.1 5.0 % S 170.6 8.8% S 156.8 Year-end shares outstanding 77.3 -0.4 % 77.6 - 1.1 % 78.5 Net operating cash Cou (A) S378.4 -2.1 % S 386.4 3.8% S 372.1 Capital expenditures and other long-term investments S196.8 -30.2 % S281.9 50.1 % S187.8 I)QE return on as erage common equity 13.2 % 13.1 % 12.5 %
1)uquesne 1.ight electrie utility return on average cominon equity 10.8 % 12.2% 12.8 %
Average cost of fuel per KWII generated 1.37c -1.4 % 1.39e -3.5% 1.44e As erage cost of generation per KW11 (11) 2.12e -4.5 % 2.22e -0.4 % 2.23 e Peak demand (A1W) 2,463 -7.6% 2,666 5.2% 2,535 KW1I: Kilou an-hpur. A measure of the quantity of electricity consumed in one hour, equn alent to 1.000 u ans consumed m one hour.
AlW: Alegaw att. A measure of the electric generatmg capacity of ju m er plants, equal to 1.00n kilowatts.
( A): Excludes vmrLing capital and other balance sheet changes.
00: Excludes capital cost.
I n c 4.n COMMON STOCK IRENDS o.ny mna ll ( rem th
, 1996 1995 1994 1993 1992 1991 R.nc Earnings per share 5 2.32 S 2.20 $ 1.98 S 1.8 ) S 1.78 S 1.67 6.8%
1)ividends paid per share 5 1.28 S 1.19 5 1.12 S 1.07 5 1.01 S 0.96 5.9%
Alarket price per share liigh S31.50 S30.75 523.00 S24.67 S21.58 520.67 8.8%
1 ou S25.75 $19.63 S18.42 $20.92 S17.92 S15.75 10.3 %
Year-end S29.00 S30.75 S19.75 523.00 S21.50 S20.42 7.3%
Relative to the price of DUQUESNE l.!GHT RESIDENTIAL PRICES (PER KWH) DOE EARNINGS AND DIVIDENDS PAID PER SHARE
- electricity. the average vs. REGIONAL CONSUMER PRICES j
cost of other products and services in Pittsburgh will have famings a $2.20 e increased by about 50% "d' '
Duquesne ught a RELATIVE PRICES $1.98 T by the end of the decade. 8t'940aal E g $ },g g } lhg } g g P $ ] 9 ({ 5 M S 1 O A ! ) ) N2 h $3'39 l
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PRESIDENT'S M ESS AGE I 1
6
~.
((y Building a Strong Company for a 4
[ New Energy Environment
This report covers a year of sweeping change '
, for DQE, and for the electric utility industry.
i With these changes come great opportunities.
DQE's evolution into a dynamic energy ser ice -
company continues. Prudent, incremental, profitable im estments are espanding the breadth and depth of our market-driven business portfolio. The -
T
(
strength of our electric business also is evident. In i
19W., n e achieved improved operating performance, J stning cash ihm, and stable electric sales in preparation g
j ! for a competitive electric pow er market. This winning combination resuhed in 1996 carnings per share of David D. Manhall L 52.32, a 5.5 percent increase m er 1995. Our market-drhen businesses contributed 43 cents to earnings per <\s dramatic as this change appears he assmed that share, a 34 percent increase m er 1995's result. the implementation of customer choice in Pennsylvania will be a gradual, measured process within a structured
'y Customer Choice on Horizon framework. The transition to a competitive market, I
Customer choice soon will become a reality for like all complex changes, must unfold over time.
electric utility customers in Pennsylvania. As a resuh
'i oflegislation passed in late 1996, consumers will be free
( Utility Positioned for Competition to purchase electric pow er from generation suppliers. Positioning our utility operations for competition i The price of electricity will be set by the market, based continues on many fronts:
I on supply and demand. Delivery of electricity to the On October 31,1996, Duquesne Light com-i consumer's home or business will remain the responsi- pleted the sale ofits interest in Ft. Martin j hility of the esisting franchised utility company. We Power Station as a continuation ofits mitigation j $ support this mm e tou ard customer choice in electric plan to reduce transition costs. This plan includes j pow er. We belies e choice w ill bring greater innm ation, the u rite dow n of nuclear plant assets, with the
( tailored services, and market-based prices. one-time SI 30 million gain on the sale of Ft.
[ lj Duquesne Light has filed a pilot program with .\lartin; acceleration of depreciation and amortiza-l 3 the Pennsylvania Public Utility Commission that tion; and an increase in deconunissioning h uillinclude five percent of a cross section of the funding. Our transition strategy is unique in that utility's customers. This program, scheduled to begin w e intend to "let the market set the market price."
September 1, will enable Duquesne 1.ight to gain esper- The differential betw een the market price of f '; tise in a wide range of technical and admir.istrative areas electricity and the price at w hich the utility is able l as the utility changes the w ay it does business to prmide to sell it may be reem ered through a competitive
! choice to customers. Customer choice will open to transition charge.
f] g 33 percent of all customer classes beginningJanuary 1, 1999; 66 percent byJanuary 1,2000; and 100 percent Duquesne Light continues to focus on quality customer service and enhanced operational y* byJanuary 1,2001. The stateN clectrie utilities will be efficiencies through initiatives such as the gh en the opportunity to restructure for retail choice Customer Advanced Reliability Systcm, a state-of-
[j during a transition period beginning in April 1997 the-art customer conununications link through the 2 We believe there will be a reasonable opportunity l 'O electric meter. The system's ability to process infor-i to recover, on your behalf, previous, prudently mation about pouer delhery will pnnide customers
! incurred capital costs. We hcnefit from the fact that with new choices and greater comenience, and will t Pennsylvania legislators and regulators understand the j impor:ance of ensuring that utilities successfully make enable the utility to more effectively manage its electric load grow th profile.
q the tramition to a competithe marketplace.
v
The notion of electric genet 0 tion being a natural monopoly has gradually been reshaped by advancements in eChnology, changes in f i regulatory policy, and the preference of customers for More Opt l ORS. i i n
e On November 6,1996, Duquesne Light bargain- The notion of electric generation being a natural ,
U ing unit employees ratified a three-year contract monopoly has gradually been reshaped by advance- @ h extension, through the year 2001.This agreement ments in technology, changes in regulatory policy, 5 M enables our team to fi>cus on providing the highest and the preference of customers fi>r more options. l l !
f customer satisfaction and the most efficient delis ery of The following pages illustrate u hat measures w e are senice as Pennsylvania transitions to customer choice. taking in each of these areas to prepare fi>r this new }
environment. Transformation of a fi>rmerly regulated i Providing Market-Driven Energy Solutions industry to a competitive market has been successful 5 We continue to develop our market-driven businesses in the past. It will ccriainly w ork in the electricity ..
[
-- Alontaul, Duquesne Enterprises. DQE Energy business. j Senices and DQEnergy PARTNERS - for the We ucleome it. We have the strategies, senices expanding energy senices marketplace. We have and people to be the right kind of company fiar sought and have been successful in identifying businesses that include complementary senices our customers and shareholders. 0 *}3 We thank you for your continucJ support. I and strategies that focus on providing energy s ?
solutions for customers. We have been successful in On behalf of the lloard of Directors. {
demonstrating that we are able to compete effecthcly i outside the traditional utility business. 4
- The .\1ontank porttidio [>fim estments continues to expand, with im esonents in energy-related equipment
- b. ;
t f
and technologies, oil and gas, and affordable housing. David D. Manhall P.
.\1ontaul's contribution to earnings per share President and Chief Executhe Officer
}
a increased by M percent in 1996, while strategically Alarch -1,1997 ) ;
diversifying the DQE portfolio. ; I In 1996, Duquesne Enterprises announced au .
l h im estment in iI Pou er Corp., a leading fuel cell i
,, .. , . . , y.
'I
' ~ '
des elopment company, as well as an order for the 2' g
purchase of tu o residential fuel cell systems for e delis ery in 1997. We belies e Duquesne Enterprises, On February 25,1997, the Board of im estment in this innovative energy technology will Directors named David Marshall CEO h satisfy customer needs for efficient and effective energy alternatis es in the future.
and President of DOE and CEO of ' bi C
e DQE Energy Senices recently finalized a long- Duquesne Light Company. Marshalt, 7
term energy senices agreement with IIcini. - President of Duquesne Light Company, pl g U.S.A. for its Pittsburgh factory complex. We u di be w orking to structure similar transactions at a since 1995, had been serving as DQE's
$d number ofilein7 facilities throuchout the countn. interim CEO and President since f during 1997.
= We also recently announced the fi>rmation of August 1996. He has been a director ( I our newest subsidiary, DQEnergy PARTNERS.
of DOE and Duquesne Light Company !
uhich aligns DQE with strategic partners to further since 1995. .
B (' s[
capitalize on opportunities that complement our total energy strategy.
Marshall has been with the company ,
for 12 years in a variety of senior f
5 i f
Empowered by Choice management positions. He has hlayed Looking to the future, w e know DQE has both the talent and commitment to meet the significant challenges facing our industry.
an integral part in directing the
. - company's transition to competitive
. . (8$3 4
markets. .iy
ABouT 00E .
1
~ #
. CoeuAni . B usine ss '0vrnvie w
- "" d Duquesne 1.icht Compant, u hose origin 1996 events included:
b dates io 1Hx0, is engaged in the production, e i andmark customer choice legislation j J transmission, distnbution and sale of elec- appnwed late in the year offen an orderly 3 ., -
tric energv. Its senice territory is approri. transition to competition O , mately 800 square miles in southu estern
- A three-year bargaining unit contract i Penns)Ivania, with a impulation of 1.5 mil-3 extension, through the year 2001, yiehls a lion, located within a 500-mile radius of one- w orkforce focused to meet the challenges y half of the population of both the United 0 ~~ of a competitive industry 8 .. e States and Canada. In addition to serving
- The innmatise emission reduction h ' %,,,, e -
more than 5HO,000 direct customers, the project at Elrama Power Station carns a
!L'*'*""""" .
company sells electricity to other utihties. 1996 Gncrnor's Award for Environmental Excellence 3W NIC Fonned in 1989, Duquesne Enterprises makes
- Chester Engineers, a subsidiary that is a strategic im estments beneficial to IX)E's leadmg domestic and international u ater core energy business. These investments, and u astewater senices company u hich enhance DQE's capahdities as an
- Exide Electronics Group, Inc., an integrat-energy pnwider, increase asser utdization and ed pnnider of non-interruptible pow er act as a hedge against changing business quality products, systems and services, cotuhtions, in lude: both domestic and international
- Allegheny Deselopment Corporation, a
- Property Ventures Ltd., a subsidiary that subsidiary that provides all energy services ou ns and da elops real estate in south-for the Pittsburgh International Airport ucstern PennssIvania e,: a,-
- EnSite 1..P., a joint s enture with ITRON
- II Power Cori ia leading fuel ce!!
Inc. to provide wireless monitoring and des clopment compant control senices in the region '
I onned in 1990, Montauk is a financial M0NTAUK Asset D viasiTy seniws company that makes long-tenn g investments and provides financing to market- Gas
, dris en businesses and their cmtomers. Resen es Other
, 1996 results reflect: I
~ -
- A 50% increase in net income m er 1995
- Increased imestment prtfoho thversity by . . -
l geograph,ic region and unest nent type .. j
- Enhanced liquiditt of market-drnen tb Leases -
enterprises throuch financing actisities
- lapansion of market-drn en busmesses u n. h Affordabic f lousing innovatis e customer financing packages I onned in August 1995 DQE Energy
- Announced an energy senices agreement y Sen ices provides energy solutions for cus- w ith iIcini U.S.A. to provide enerFF
'~'
tomers in domestic and international markets. senices to the !Icinz factory complex in E @.-- Included are domestic and international Pittsburgh. DQE will operate and maintain
} -
energy facihty Jes clopment, operation and the Pittsburgh mmpleis energy facihty, 3 maintenance, independent power production, incluihng production of electricity, steam and innm ative fuel solutions. and compressed air senices I To date, DQE Energy Services has:
- Deseloped a strategic alliance with CQ Inc.
I
- Fonned a joint venture with Marathon to market I -l uci,"' a new, ahernatise fuel.
Od, ElectroGen International, w hich will E-Fuel replaces industrial coal w ith an E
do elop, ow n and operate pow er generation environmentally sound synthetic substitute projects in selected international markets E Formed in December 1996, DQEnergy the country. Weatherproof Energy llill 3 PARTNERS abgns DQE with strategic customers pay a pre-detennined, guaranteed
- j partners to capitalize on opportunities in the amount for their heating. regardless of the e e i dyn.unic energy senices industry. These severity of the winter i .
alliances enhance the utihration and value of a Estabbshed Secure Energt?" DQl?s corpo-
[
w
, DQE's trategic imesunents and tapabihties. rate, non-regulated marketing company in
'Io date, DQEnergy PAIPNI RS has: I ebruary 1997. Secure i nergy will ensure i
m
- Announced the fonnation of Weatherwise'" that DQE's im estments are fully utihred US \, a joint senture with KN Senices, to and presented to customers as a single j marLet the Weathe Proof Energy thlF" and branded package on a regional basis and
/ other Weatherwise sernces throughout with strategic partners on a national basis
usiness PtAm Busimiss HIGMilGMis C Continue a mitigation plan to reduce transition costs and increase DUQUEsNE LIGHT CUSTOMERS SERVED PER EMPLOYEE capital recovery to better position the utility for competition
+
c Institute a retail access pilot proFram, including a fh e percent cross section of customers, that will provide valuable knowledge in a 164
- 9
. wide range of technical and administrative areas c Provide superior levels of senice reliability, security and convenieace 1,54 j k' J
~
139 through the Customer Advanced Reliability System, a state +f-the. Efficiency improvements 1[3 7 v
g}
art electronic communications link with indhidual customers during the 1990s have p] [p{
p
'through the electric meter c resulted in a 22% p f, j i mcrease in the number 1
of Duquesne Light j{ }
g g g g q customers served u W id L2 L
, per employee. 92 Vi 94 V5 96 o Continue developments with existing subsidiaries and pursue new DUQUEsNE ENTERPRISES Assets
- opportuairies related to the core business, including home security p,unnan pfdonars) $137 y systems, telecommunications businesse$ power quality, energy $123 p '
controls and distributed generation c Leverage experience and assetcarovide additional senices to other $100 n hh 9 hical utilities $73 h d c Prmide hical telephone access senices in the region through a joint Ut h i ,p+j,p .
venture with a national communications company l ,' ; j l
$28 p
x -
Le 92 Vi 94 95 96 1
o Continue to maintain a diversified portfolio of high credit- MONTAUK Assets $472 !
quality investments to minimite risk py,gg,y ygyya,3; y 3 o Access new investment opportunities related to areaA of expertise, .
including fee-based and consuhing initwives $347 a1 c Continue to be a source of financing and financial structuring $250 o expertise for market-drisen activities p o !
o Provide improved results to support the company's ability to attract capital and invest in new business opportunities
$339 p;
, h lh!
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sn r g8 m <:
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92 9.i 94 95 96 4
g o Develop, acquire, own, operate and maintain domestic energy 'k facilities that supply large industrial, manufacturing, institutional gj or airport facilities ~
DOE and Heini U.s.A. M #
o Develop, own and operate power generating facilities in , have signed an international markets ,greement that will o Provi gle low-cost alternative fuel for DQE and industrial energy provide energy services i
to the Hein2 factory h i complex in Pittsburgh. h k0 g
l i - o Establish national and international marketing channels through DOEnergy PARTNERS
{x
?p strategic partnering to enhance the value of DQE's investments c Develop DQE's strategy to Frow through acquisition of gas and announced the formation of ! $
weatherwise usa. a joint g 1 water distnbunon properties venture with KN U i
e Initiate product development and pursue strategic partnerships to services. to market ? -;
market mnovative energy / fuel management programs ,g g,,,7p,gg g gg o Retam and expand DQE's core custorner base by actmg as the
" systems integrator" of products and services while providing Energy Bill and ,
Md quality, value-added services to DQE's regional customers ther weatherwise g services throughout Qj the country. *jf myjj
, qcAA$
BOARD OF DIRECTORS (all terms thnr , carn D A NIEL BERG D AVID D. M AR$H ALL
- 67. Term espires 1997 (1, 6). Institute .
- 44. 'Ibrm espires 1998(3,5,6). President Professor, llensselaer Polytechnic and Chief Faceutive Officer of1)QE;
)' institute. Senior Science Advisor of President and Chief Executi e Otticer of
' the National Science Foundation and .
1)uquesne 1.ight.1)irectorships include Chairman of the Academic Adsisory i Southwestern Penns5lvania Industrial Y lloard of the National Academy of Engineering. Itesource Center (economic des elopment) and
-i I)irectorships include Ily 'lich Atachine, Inc. Chester Engineers. Trustee, Vice President and j (specialty parts),Joachim Machinery Co., Inc. Secretary of Penn's Southwest Association
- (distributor of machine tools), and Chester (economie development).
j Engineers.
3 ROBERT M EH R ABI AN
, D0REEN E. B 0YCE 3 3, 'jbrm espires 1998(1,5,6).
3 62. 'lirm espires 1998 (2, 5). President President, Carnegie Alellon Unh ersity.
3 '
of the lluhl Foundation (supports 4 I)irectorships include PPG Industries, 1 educational and community programs). Inc. (producer of glass, chemicals, g 1)irectorships include Alicrobac coatings and resins), Alellon llank j l.aboratories, Inc. and 1)ollar llank, Corporation, Alellon llank, N.A., and Allegheny Federal Savings llank. Trustee of Franklin A Teledyne, Inc.
i Alarshall College.
i THOM AS J. MURRIN i R0BERT P. B 02 z O N! * .) 67. Teim espires 1997 (3,6).1)can, 1 -
- 63. 'li rm espires 1997 (1,2). Vice A.J. Palumbo School of liusiness
$ Chairman of Alleghenv 'Ibledvne, Inc. 8 Administration,1)uquesne Universirv;
$ (specialty metals prodtiction).'I.ife mem- former I)cputy Secretary of U.S.1)e'pt.
y her of ASM International (engineering of Commerce; former President, d
4 technical society).1)irectorships include Westinghouse Electric Corporation Energy and Allegheny 'lbledyne, Inc. Former Chairman, Advanced 'lichnology Group.1)irectorships include d Pittsburgh branch of the l'ederal itesen e llank of Alotorola, Inc. (manufacturer of electric equipment 3 Cles eland. Trustee of Rensselaer Polvtechnic Institute.
' and components). Member of the Faceutise
$ Committee of the U.S. Council on Competith eness
{ 5iGo FALK and Chairman ofihe 1)istrict Esport Council.
] 62. 'Ibrm espires 1999(2,3,4).
j Alanagement of personal im estments. E RIC W. 5 P RIN G E R
(;hairman of Maurice Falk Medical
- 67. 'Ibrm opires 1999(1,4). Partner k
l'und, the 1. con Falk Family Trust. and the Chatham College lloard of Trustees. h V
of Ilorty, Springer and Mattern, PC.
j !)irectorships include the I listoric;d Society of (attorners-at-law ). Trustee 1:meritus of j Western Pennsylvania and the Allegheny 1.and Trust Preshvterian Unis ersitv llospital and
- the Unhersity of Pittsburgh Medical Center. Past president of tlie Allegheny (:ounty liar n WIL Li A M H. KN0iLL* Association.
p 72. Term espires 1997(3,4,6). Retired J Chairman and Chief Eseemn e ()fficer L of Cyclops Industries, Inc. thasic and
(;
, specialty steels and fabricated steel 1 e products; industrial and commercial con-struction).1)irectorships include Cabot Oil and Gas h]E h Corporation and St. Clair Memorial llospital.1.ife l$ trustee of Carnegie Mellon Unhersity.
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iDiffere,nt c;onipanies compete to supply you the right LE ' m . . Y < qm y%produc.t oriervice, at t.he rihht prickThe choice is : ]4 i Dm-lX xgh [' m"J.
4 - -
' ' pt
%up to;y~os From ~_m. conipiiterl.. chip's to potato chips . . . F g,g y
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MO [ hM C;M' i e s (Pennsylvania hi among only a handful of states. t. $gp pp'Wt sw e w4 =~g' ,>a
% , Whefebohsumers soon u . e - -
will be able to shooservhich $
%p; 4 s. geompany they;want to supply ' h~eir t electric power. fm
$MW y7'y; p 3 g 4333, Rthis report; we will' explain how cus'tomer choice l$
@y , ,
o M7 g '
@il[ work in Pennsylvania. We also will detail the 5 %
W WJ 4 '
t @un6megse.rvic'efa'ndl energy solutions our utility b.i j% l *, )$
g / @7, ' ' y, MF'
, % y 4 Qn;d n3adet-driven' operations have been developing _ J t
Makeidvantage of th$ many opportunities .
g
( ypresessed by this' monumental change. Like our- j./
h,4 ,~' sggs / W ' A +,
. u . .
EcustoniersAvelare empowered by choice. X nF
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L U S t O m e r L n; OR C e
.fg t Governor Ridge's signing of customer choice legislation into law in December
,ggg,g( j jggj
&. ; culminated two years of study by the state's Public Utility 5 'EEr '
Commission (PUC) and several months ofintense negotiations i
k by a wide range of stakeholders who helped siiape the
~l I
h233 '
compromise bill.
- The end result - the Electricity Generation Customer Choice and ComIietition Act - makes j -@. ,4, Pennsylvania a leader in charting the way for electric
. , a, :::
- 1 competioon m the nation. 'I,his landmark legislatmn offers an j
2
&> ( orderly transition to deregulation of utility power generation i
gm t
.JY
' in the state.
1, n, i
-4 r Duquesne Light j
The legislation uill enable consumers to purchase electric [xmcr from a variety of suppliers. The price
) is communicating of electricity from the generation supplier will be set by the market, based on supply and demand.
- customer choice Delivery of electricity from the pow er generation supplier to the consumer's home or business, how ever,
- u ill remain the responsibility of the existing utility company. While the generation of electricity will be 8"d 'th"
_? deregulated, the transmission and distribution of electricity and related senices to customers will remain j competition-related under the regulation of the PUC and the l'ederal l'nergy Regulatory Conunission.
Issues to consumers
=
Pilot Goal: Learn from the Real World j in a number of g ,g g g g g,g g, g, g g; , g 7 .; y ,
- ways - print I.ight will initiate a pilot program this year. The pilot will provide valuable knowledge in a wide range of l adnrtisements, technical and administrative areas as I)uquesne changes the w ay it does business to provide choice to
! community work- customers. Participation in the pilot program uilt be offered to a cross section of residential, commercial and industrial customers representing about the percent of the utility's electric load.
shops, visits to key
]
' Customers selected for the pilot program will hase two basic choices:
- customer accounts,
- Ib continue to take regulated, bundled service under I)uquesne I.ight's mos .ccently approved PCC tariffs.
I and its newsletter
- lb purchase power from an alternatise supplier.
1 that accompanies the g
monthly electric bill.
l:.lectrie utility restructuring will he phased-in gradually.1)uquesne 1.ight will fde a transition plan with the PUC this summer. A phase-in period then will prmide an incremental move to customer choice. One-third i
ofI)uquesne's customers will choose their power supplier as early asJanuary 1,1999. Ily the year 2000 no less than 66 percent will have choice. And by the beginning of 2001, all of the utility's customers will
%s-f hase choice. Under the new legislation, the PUC may delay the proposed implementation schedule by up
- v to one year.
- a '
h Fair Treatment of Your Investments j Among the most challenging issues in the implementation of the state's nun e to customer choice g are identification, mitigation and disposition of abm e-market costs associated with utility generation assets.
3 A portion of these imestments-approved by regulators to provide needed power-ma) he at risk if
.g/ existing customers are allow ed to switch to other suppliers of clectricity w ithout paying their share of
_g the costs related to this transition.
=_3 llou does the legislation address these transition costs?
4
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A continued focus on customer service and technology impnnements has been a hallmark of our utility operations, dating back to I)uquesne 1.ight's origin in 1880. In order to position the utility fi>r customer choice, we restructured 1)uquesne Light over the past 10 years, moving its fiscus away from engineering and construction of neu generation plants to an intense focus on improving customer satisfaction and increasing operations efficiency. Ongoing advances in technology has e helped drive this virtually continuous process of change. This complementary combination of technology and tradition is effectively positioning the company fiar growth in a cmnpetitive energy senices market. Energy Management System - Big Production in a Small Package A fraction of the size ofits predecessor, and one-third the cost, I)uquesne Light's new Energy Alanagement System (EAIS) will play a key role in the utility's implementation of customer choice. In a competiti e emironment, EA1S uill be used to incasure and monitor power delivery from outside supplius. Currently the EA1S handles a wide range of l l duties, including helping the util- O g
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ity's system operator coordinate off-system sales and purchases, as Q . { {Q . well as ensure that the lowest cost mis of generation assets is used to meet customer demand. Additionally, the system supenises the utility's unmanned substations, transmission and subtransmission lines. That's a lot of work for a system about the site of a home entertainment center. The ohl system filled tuo large rooms. The new EAIS can handle a much greater s olume ofinfi,rmation, with increased system performance, it play ed a critical role in transmitting data to comply with the l'ederal Energy llegulatory Commission's ruling on open transmission access, know n as Order 888. In-house experts from system aperations, management infiinnation systems, fi>ssil generation, purchasing and telecommunications helped design, procure and install the new system. t
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Utility customers will be linksd to the
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. , .L % , *\ operating systems. cata communications th 8 $ ,f, offered by this technology will result in a w ;-y g ' ~ ~.
I { variety of services that provide added N4 reliability, security and convenience. ph-R - . ; T- g, , Ca <ing j, , e. , , y g c . ~ . .
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Mw+ to new . e v e .s CARS Provides Customer Choice Link
'lh he able to offer customers the ability to purchase electricity from other energy suppliers, utilities will have to be able to accurately measure that purchase and account fi>r it. The Customer Ach anced Reliability System (CARS) will do that, and a lot more.
The ability to read meters automatically only scratches the surface of this data conununications link. CARS also uill enable Duquesne to detect and promptly respond to service interruptions. Alore frequent readings will enable the utility to des clop a daily profile of the electricity use of each customer. With these profiles, flexible rates - such as time-of-day rates that charge different prices for usage at different times of the day - couhl be tailored to provide added value to customers. CARS service options are being evaluated through a marketing research study. Duquesne 1.ight signed a 15-year, full-senice contract in,lanuary 1996 with ITRON, Inc., a leading supplier of energy information and communication solutions to the utility industry, to install, operate and maintain the system. At the time of this report, more than 30 percent of customers' meters have been adapted fi>r C ARS. Initial services have begun, with more than 200,000 meters now being read automatically. Computerized Service Territory Snapshot Using a digital land base of more than half ofits h00-square-mile service territory, Duquesne 1.ight is C g developing a Geographic Infi>rmation System (GIS) that will accurately map and identify both company j facilities and customer locations. ;' A GIS basically is a computerized map with information attached to it. The land base w as created from h aerial photographs. The company currently is pursuing acquisition of a GIS land base liir the balance of $ its service territory. GIS alrcady is being used - at significant cost savings - to identify right-of-way boundaries for transmission line clearance studies and to pinpoint customer locations in relationship to service territory lines. (
l l Work Management System on Track With the rollout of !)uquesne 1.ight's new %rk .\lanagement Sy stem in 1997, w orkers u ill be able to pinpoint exactly w here any particular job stands, fn>m design to closure of the u ork onter. Com ersion to a new system will greatly enhance the utility's ability to proside senice in a more effective and efficient manncr. While segments of the uork process already have been streamlined through the use of various technologies, the neu %rk Alanagement System uill create more efficient interfaces between the various computer programs and systems that impact completion of a particular job. When fully operational, the new system will process a request for sen-ice, generate uurk orders to various field personnel, Lecp track of the required material, and feed information back to the utility's record-Leeping system, providing a centralized work tracking process. The Wireless Conununications Project, currenoy in the pilot stage, will be an important contributor to the success of the new %rk Alanagement System. In the future, ue expect to have remote data terminals in the field, enabling w orkers to send and receive information. They w ill be able to receive u ork orders, order materials and update records, thus completing the communications loop. A Different Kind of Electronic Partnership Electronic Data Interchange (EDI), a technology Reduced administrative costs. Improsed employee productivity. Automated service, enables Duquesne Light customers to communications and bill analysis. Simplllled billing procedures. Enhanced electronically receive and pay their electric bills, ca aml energy-management. Electronic I)ata Interchange (EDI), a service reducing paperwork and saving money. While Duquesne lj ght introduced in 1993, is delivering those benefits to a growing W list of customegincluding a u orld-class university, ses cral large retailers, atj
, a major telecomtnunications company. EDI offers direct, computer-to- y
, f " '
A X',ig computer transfer I)uquesne eldctronically of eustotNr bills the structured as each ['mhisial business mit$ is read and receiv'e doctuneh
! h electronic pj7nent-thus str5ihhninktSperations, r,$ducing unnecessary j
paperwork .md saving money for both the utility and the customer. Duquisne 1 partners witfibust6mers and seNb pMiders to desih proc $ses that sophrt[$y the customer's business objectives on a daily and monthly basis. Service Delivery Project Creating New Paradigms An added benefit of new technology like the CARS, w ork management, wireless communications and GIS projects will be their contribution to the linchpin customer service project of the 1990s, the Service Delhery
'C Optimization Project (SDOP).
technology drives the program, people make it Scheduled for implementation by the end of 1998, the SDOP is designed to put the people and equipment needed to serve utility customers closer to those happen. Duquesne Light representatives work closely customers. SD()P began this year with the consolidation of Duquesne 1.ight's with customers-like Carnegie Mellon University- tu o customer service divisions into one. Es entually, one centrally located and to tailor EDI to their operations, cipht to 14 smaller, dispen.ed headquarters are envisioned to be located throughout our utility sen ice territory. The SDOP significantly changes the war in w hich services traditionallt have been provided to customers by redeploying and decentrali&g the resources needed to maintain and j espand the electrical distribution system. In the future, some field employees will receive their first service call g assignment electronically each morning at their home and ieport directly to the work site. 'Ib he successful in E the coming era of competition requires throwing out ohl paradigms about service delis ery and des eloping new [ ones. We belies e our utility operations will offer the types of senices customers will be looking for in the new unrld of choice.
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i In the imreasingly competitive
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i . A electric marketplace, it has been
}[ DQE's consistent strategy to grow
] carnings through the sale ofnew s
f products andservices related to the l, -. core business. Alany aftbese energy
!i j
6 solutions are being developed through wy - our n/arNet-driten businesses. l H.J. Heinz: Extending Core Business Energy Services j inJanuary 1997,1)QE and iI.J. Ileinz Company announced an energy services agreement for the iIcin7 U.S.A. j Pittsburgh factory complet Under a 15-year agreement,1)QE will operate, maintain and make capital improvements j to the factory's energy facility.1)QE also will supply fuel (br the facility and u ill supply the factory with electricity,
! steam and compressed air. This arrangement represents a natural cuension of1)QE's core competencies of operating
] and maintaining pow er production facilities to one of our most valued and long-term customers.1)QE will provide IIcinz with energy-cost containment for the term of the agreement. In addition, IIcinz has selected I)QE Energy Senices to expand this concept to its other facilities.
j Secure Energy'": Providing Total Energy Services for the Region i 1)QE continues to focus on expanding its customer base and providing a larger platform for new competitive energy
; markets. DQEnergy PARTNERS recently announced the ihrmation of Secure Energy, which will provide compre-hensis e, cost-effective, total energy solutions to regional customers. Secure Energy has integrated a complementary line of energy products and senices supported by the strategic investments, product des elopment, and fmancial l (E services ofI)QE, along with selected product alliances and joint ventures. In addition,1)QE's unique products and
; senices uilt be offtred in both national and international markets through marketing alliances, further enhancing the
!i 1)QE brand.
'f f Weatherproof Energy Bill 5": Complementing Energy Retailers' Options 5 The Weatherproof Energy llill climinates uncertainty from energy hills by pnniding residential and connnercial
=g customers with a predetermined annual heating bill that does not change, regardless of the ses erity of the winter. This
}= inn n ative service is offered by Weatherwise
- USA through cooperati e arrangements uith energy utihties and other d
5 _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _
l energy suppliers that want to build customer loyalty by offering the Weatherproof Fnergy Ilill to their customers. Weatherwise, a venture berucen 1)QEnergy PARTNERS and KN Senices, develops and markets services that provide small energy consumers with simplicity and predictability in their energy choices. Weatherwise was formed following extensive research and development by I)QE to create the systems and other infrastructure needed to support its national marketing effort. Weatherwise combines advanced technology, consumer _- marketing expertise and energy industry experience to help energy suppliers gain a competitive edge. Weatherwise's - advanced technology and growing national distribution network place it and 1)QEnergy PARTNERS in a unique position to benefit from increased competition in the energy industry. Although Weatherwise was only recently established, the Weatherproof Energy llill e already is offered in six states, and Weatherwise is uorling with energy suppliers in sirtually 6 , es ery region of the country. E-Fuel *: An Environmentally Sound Energy Alternative Duquesne Energy, Inc., a 1)QE af61iate, recently announced that it has entered into a strategic alliance and an exclusive licensing arrangement with CQ inc., a fuel technology company. E-Fuel is a new, environmentally sound synthetic fuel that offers a low er cost, reduced emission alternative to industrial coal.1)uquesne Energy uill build plants to produce this _ pelletired fuel product that combines coal and by-products from the recycling of paper and plastics. E-Fuel can be used as an alternative fuel in a variety of industries that use coal. CQ Inc. currently is producing E-Fuel for industrial use. We believe E-Fuel will be very competitise in the marketplace and will e h h proside important environmental advantages to its customers. H Power: Producing Affordable Distributed Power in September 1996,1)uquesne Enterprises announced its investment in N - ~ 11 Pou er Corp., a leading fuel cell des clopment company.11 Power's fuel cell A converts a hydrogen source (typically natural gas) directly into elenricity, u ith
#fV pure w ater its only ef6uent.11 Pouer has designed, developed and extensively tested practical fuel cell systems that are non-polluting. highly ef6cient, quiet, safe, and adaptable to provide electric power for a broad range of uses.
Fuel cell systems can operate on a variety of conunonly available fuels, and, due to their con 6guration and siting Besibility, can be located close to electricity users. Their unique characteristics allow fuel cell systems to complement com entional pou er generation sources, or act as a stand-alone h system, to provide homes, businesses, and industrial plants with all the electric power they require, as u ell as usable heat and pure water. Alodular fuel cell systems are particularly l well-suited to provide electricity to remote areas not served by traditional sources of L electric power.1)uquesne Enterprises, w hich has the exclusise right to market 11 Power fuel cell systems regionally, has ordered tuo residential fuel cell systems for delivery in 1997. We expect I)uquesne Enterprises' investment in this innovative energy technology will satisfy customer needs for ef6cient and effective energy alternatives in the future. ; ,pm S 5-Affordable housing devetopment investments made by Duquesne Light A l and Montauk, DQE's financial services subsidiary, are economically + sound ventures that benefit communities in need. One example is the - Crawford Square development in Pittsburgh's Hill District, which offers 4 A cost-effective housing for eligible families and senior citizens. 9. y, V - w
l I 1994 1993 1992 1991 1990 1989 1988 1987 1986
$1,134 $1,120 $1,116 $1,139 $1,094 $1,086 $1,039 $ 855 $ 869 244 238 239 254 229 220 231 228 234 L._
890 882 877 885 865 866 808 627 635 90 63 37 38 31 48 43 22 15 980 945 914 923 896 914 851 649 650 409 403 354 361 372 342 327 250 234 166 158 132 123 123 123 117 82 74 88 71 84 94 80 93 81 67 71 663 632 570 578 575 558 525 399 379 317 313 344 345 321 356 326 250 271 43 31 42 36 46 (3) 30 29 (17) 110 120 !32 142 157 165 175 156 148 93 80 1A2 105 88 75 62 (12) (4)
$ 157 $ 144 $ 142 5 134 5 122 S 113 S 119 $ 135 5 110 l $ 1.98 $ 1.81 $ 1.78 $ 1.67 $ 1.49 5 1.35 S 1.24 S 1.23 S 1.00 2.57 2.29 2.24 2.10 1.90 1.78 1.72 1.58 1.51 $ 196 $ 126 5 59 5 44 $ 18 $ - $ - $ - S -- i $3,140 53,168 $3,037 $3,053 $3,048 53,055 $3,066 $3,098 $3,491 $4,427 $4,550 $3,778 $3,851 $3,834 $3,921 S3,881 54,152 S3,997 $2,750 $2,781 $2,716 S2,669 $2,770 $2,827 $2,866 $3,169 $3,085 46.4 % 44.2 % 43.1 % 41.6 % 39.0 % 37.7 % 37.4 % 38.4 % 39.0 %
3.5% 4.8% 4.9% 5.2% 6.8% 7.8% 8.5% 8.2% 8.7% 50.1 % 51.0 % 52.0 % 53.2% 54.2% 54.5 % 54.1 % 53.4% 52.3 % 79.0 79.5 79.4 80.1 81.6 83.7 95.6 109.3 109.4 78.5 79.5 79.4 79.4 80.6 83.0 86.7 105.1 109.7 51,550 $1,829 $1,708 S1,621 S1,337 S1,321 51,084 5 824 $ 896
$ 89 $ 86 $ 81 5 78 $ 75 $ 73 5 78 $ 87 $ 103 $ 1.13 $ 1.08 5 1.03 5 .97 $ .92 S .87 5 .81 $ .80 $ .94 56.4 % 58.8 % 56.9 % 57.6 % 60.7 % 63.1 % 64.5 % 64.9 % 107.9 %
5.7% 4.6% 5.0% 5.0% 5.8% 5.7% 6.8% 10.2 % 9.8% 9.9 12.7 12.1 12.3 11.1 11.8 10,1 6.4 8.1 12.5 % 12.0 % 12.4 % 12.2 % 11.3 % 10.6 % 10.4% 11.1 % 9.3%
$16.27 515.47 $14.75 $14.00 513.38 S12.85 512.34 $11.58 $10.98
l SELECTED FIN ANCI AL DATA l (unftwns ofdollars. except per share amounts) i F 7 1996 1995 ; Selected Income Statement Items: llevenues from sales of electricity St.I 4 4 $1,139 Fuel and purchased p<mer expenses r47 232 i Net electric res enues M96 907 1 Other revenues 92 81 ( l Net operating revenues 9KH 988 Operating and maintenance expenses 477 374 Depreciatmn and amortization 224 203 ; hes other than income taxes M6 89 j Non-energy operating expenses 6x6 666 Operating ineoine 402 322 Equity investment and other income ,4 52 Interest and other charges i10 107 ; income taxes N7 96 I i DIPRECIATION AND AMORTIZATION EXPENSE Fanings per shair i % 2.42 $ 2.20 l l l vmilions ofdoll<us) g,,,, p,,.,,, , ,9 p.g, ,,, ( ,,_ ,,,, L69 2.33 j l ) I , m Selected llalance Sheet items: ) yy Long-term im estments s s 19 $ 441 j
$3,060 l
'
- Property, plant and equipment s2.H I 7 J
'Ibtal assets %4,649 $4,459 i g3 }$y }f
'lbtal capitahzation 5 4.os s $2,801 !
3 e r m i ;. :
, m = 0 3 ]1 y4 [ Capitalization Itatios: l
= a a a 1 < := i li Common sharehohlers' equity 4 s .6"~ 47.5 %l L ) 3
, i Preferred and preference stock 4 ",, 2.5%'
;g .
g Ih
,. s s jy h.: II cs 9 s- j h}t.
Long-term debt 4 7 1 "e 50.0 % e ? (3 d 0 !} -lj 3
}q
(?g ; h ) [ lj h Selected Common Stock Information:
}
4 d d h( )hhdj Average shares outstanding (millions) Shares outstanding at year-end (millions) 77.4 77.4 77.7 77.6 DUUMDBEDUGE
.\larket capitahration %2,2,41 $2,386 . !
A6 67 AY #9 99 91 92 91 94 95 96 3 Dividends declared $.101 $ 94 i Increased capital recovery will lower fixed Dhidends declared per share $ 1.40 $ 1.21 l generation costs and better position Dividend payout ratio s s .2"o 54.1 % l I)ividend yichl at year-end 4. 7 ".. 4.2%! Duquesne Light for increasing competition. Price-carnings ratio at year-end 12.s 14.0 g iteturn on average conunon equity I 4.2 "" 13.1 %' g llook value per share at year-end s i H.01 $17.13 1 y w i N A
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CONDENSED FIN ANCI AL STATEMENTS CONDENSED STATEMENT OF CON 500 DATED INCOME tmdlions ofdoll,ns, enrpt per dwr amou:.ts) hr Ended Darmber 31, 1996 1995 Revenues from sales of electricity S1,133 $1,139 Fuel and purchased power expenses 237 232 Nob \e N h M Wb Net electric revenues 896 907 CO(15lN Q E Cott tter2 DOI er revenues 92 H1 SO\es gtTwith Net operating revenues 988 98H ggggg qg Operating and maintenance expenses 377 374 ggg g Depreciation and amortization 223 203 l' axes other than income taxes 86 H9 Non-enesgy operating expenses 686 666 Operatingincome 302 322 Equity investment and other income 74 52 g Interest and other charges 110 107 Co h o y:MieC
;p @5 bgj\CC-incorne befour incorne taxes 266 267 Income tases 87 96 Net incorne S 179 S l7I Earnings per shaw S 2.32 S 2.20
\ttyVettaY MARKET-DRIVEN BUSINESSES' CONTRIBUTION TO EARNINGS PER SHARE Our market-driven businesses 14 continue to increase their percentage :[
th contribution to earnings per share. I wg x
) W 2
s h h,
, b [l n i
@ 4% [. lh, i
a 1% k L, p Et ' I u: 92 91 94 95 96
l SELECTED OPER ATING D ATA l i I F 199(, 7 ' 1995 1 Sales of Electricity (kilowatt-hours): l Average annual residential use (i.42 6,474 l Electric energy sales billed (millions): 1 Residential . 4. il l 3,378 ) Commercial s.~ 4 7 5,729 [ Industrial 3,237 4.2 H s ( Miscellaneous N4 84 Total sales to custoneets i 2 Alt, 12,428 Sales to other utilities 4.410 2,975 Etalsales I s .7 ifi 15,403 Percentage Change in Energy Sales: Residential <lA 4.9 Conunercial 0I 3.0 Industrial 13 (0.6) l i Miscellaneous ( l .2 i 0.0 . ) COMMERCIAL ELECTRIC ENERGY $ ALES Ltalsalts to customers 0.0 2,5 .1 I14 (mdhons effdcatt hount Sales to other utilities . (7.4) Totalsales 2.2 0.4 l gA Energy Supply and Production Data: i q Energy supply (millions of kilow att-hours): i 4. lf ti
, h>*'y,] ]6$ g ? ?$ l y/
S! m Net generation - system plants Purchased and net interchanged power I .F0 14,201 1,202 l
, @my $q :>yy~. f )a Totalenergy supply I s 31, 15,403 ga h] j L Generating capability (megawatts)
Peak demand (megawatts)
. 2 A70 2.% i 2,834 2,666 l
., j d 1 j H # $
@$lg3
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^t i 94
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j{ Cost of fuel per million IrlU i10:2h 2 12 r 131.37e 2.22e 3 9 }s ? ]b Q-g @q a p!! r d ?h ] N
]' ;
Average cost of generation per kilowatt-hour (A) l j )y fj I j f j 3 dO j Customer Data: d] d j ]j [jj 1 j J
) Li id Lil 3 9 W
]
ii Telephone access:
% of customers u aitinc less than 30 seconds NN"m 87 %
/d A]h }d d dOLI O d 3 $ Customer Service Guarantee Program error rate O(C "- .007 % i ggggggggggg Number of customers at year-end (thousands): 1 Residential 5 2 2.N 522.9 36 rl xs sv vo 91 9: vi 94 v5 96 Commercial s40 53.8 l Industrial 10 2.0 ;
Commercial sales have grown at an average Other i9 1.9 rate of 2% since 1986, and represent 36.5% Total custaincpy s No? 580.6 , of total electric energy sales in 1996. , Office rental property occupancy rate 92 "- 91 % I Energy facility availability 100"- 100 % , 19"<
% contribution to DQE earnings per share 15 %
i F ( A) Excludes capital cost. L N , l 1
1994 1993 1992 1991 1990 1989 1988 1987 1986 6,170 6,201 5,901 6,331 ssr 5,953 6,060 6,168 6,019 5,821 g 3,219 3,231 5,563 5,490 3,069 5,358 3,285 3,078 3,119 3,156 3,065 2,957 I 5,450 5,236 5,145 5,055 4,899 4,724 3,256 3,046 3,059 3,042 3,296 3,221 3,302 2,918 2,734 84 84 83 84 84 84 91 98 99 12,122 11,851 11,569 11,861 11,694 11,569 11,604 10,980 10,514 3,212 2,821 4,060 2,979 1,830 2,100 2,716 2,426 2,091 19,334 14,672 15,629 14,840 13,524 13,669 14,320 13,406 12,605 (0.4) 5.3 (6.6) 6.7 (1.3) (1.2) 3.0 3.7 3.8 1.3 2.5 4.1 (1.7) 1.8 1.8 3.2 3.7 4.1 6.9 (0.4) 0.6 (7.7) 2.3 (2.5) 13.2 6.7 (22.4) 0.0 1.2 (1.2) 0.0 0.0 (7.7) (7.1) (1.0) . (2.0) 2.3 2.4 (2.5) 1.4 1.1 (0.3) 5.7 4.4 (4.5) 13.9 (30.5) 36.3 62.8 (12.9) (22.7) 12.0 16.0 5.6 4.5 (6.1) 5.3 9.7 (1,1) (4.5) 6.8 6.4 (3.0) 14,678 14,056 15,074 14,220 13,266 13,455 14,144 13,208 12,456 - 656 616 555 620 258 214 176 198 149 15,334 14,672 15,629 14,840 13,524
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13,669 14,320 13,406 12,605 2,834 2,834 2,834 2,835 2,835 2,835 2,836 2,852 2,908 2,535 2,499 2,308 137.23e 2,402 2,379 2,381 2,372 2,280 2,132 i 143.65e 140.15e 153.70c 149.62c 143.87c 145.74e 150.99e 165.34e 2.23e 2.33 e 2.19e 2.44e 2.51c 2.73c 2.58e 2.33e 2.55e _ U 86 % 76 % 41 % 26 % - - - - - h t 522.6 5223 521.2 520.0 518.3 516.8 513.8 510.8 509.1 53.6 52.9 52.8 52.6 52.3 52.0 51.5 50.9 50.3 2.0 2.0 2.0 2.0 [ 2.0 2.0 2.0 2.0 2.0 1.9 1.9 1.8 1.9 1.9 1.8 1.8 1.8 1.8 : 580.1 579.1 577.8 576.5 574.5 572.6 569.1 565.5 563.2 h-s 1 e E b 91 % 75 % f 99.99 % 99.97 % - - - - - - - 10 % 4% 1% - - - p E-E;
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l CONDENSED CONSOLIDATED BALANCE SHEET (mdlions c{dullan)
. Is ofDcccmber 3I, Coniinued growth 1996 i995 In t%OFOdriVen $
bggjneggs Current assets S 622 5 238 I ong-term investments 519 441 Genera 4ing staaion property, piani ana e iuipmeni 2,siv 3 ono , Sole and nucleo( llegulatory assets 637 679 l g{-gfjo g g cjf e d o W n Other non-current assets 44 41 Tota / assets S4,639 S4,459 occe\cf (ch. 00 - (ode recoVek opdSY# Current liabilities S 261 S 286 pgqJe50 Deferred income 189 222 > SMOO Non-current liabilities 1,134 1,150 , l.ong-term debt 1,440 1,401 l retailiabilitic, 3,024 3,o59 Mon %)y Inco,ne ftdetted b riYIc5 jg ,e c 7pgg q gggf- Preferred and prefirence stock 223 71 Conunon shareholders' ettuity 1.392 1,329 l lbtalliabilitics and equity $4,639 54,459
}
l-l 6 h LONG-IERM INVESTMENTS Future earnings growth will come (""Ill"8I I'lo/I'#3) { from the sale of new products and services related to our core business. These energy solutions
$ 5,,19 f.
are being developed and :' implemented through our market-h ,' j drivin subsidiaries, ;
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$196 ,
f E
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? #:
$126 gu
[U] Ba l L o i
$59 h A c
, ?
- bb 9: n u b$ 3 n
b vn f m v, Vs
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS pudhons ofJulian) 1hir Endal Ducodrr 31, 1996 I995 Coniinved . strong COSH OOW - ()perating cash flows '$ 379 S386 Changes in u orking capital (1) 47
/ ()rher -
21
$nc\JbeS inVeSSmeNS 50 Cashfivnt operating activitics 378 454 H Swec oFordoble saic of generating station 169 -
i hoggjpg, pgj gag 1)isposition ofinvestments 18 - ggggqq gggjgggg y 1.ong-term imestments (96) (188) Capital expenditures (101) (94) ()ther (2) (4)
. Ca3hfivm inrcrting aalritics (12) (286)
COMinded M.lVi.dend 9 D- Conunon stoc k dividends (101) (94) j Common stock repurchases (12) (21)
! Net change in long-term obligations 15 (17) gg/ 7 ..
-- Net change in preferred and preference stot t Change in notes payable 150 (29)
(10) (20) I#" CU I#8 ()ther
#0 (3) (II)
WO Casbfinnsfinancing activitics 20 (l43) i, Net change in cash $ 386 5 (25) i NET OPERATING CASH Flow * (vulhons ufHlan) Positive cash flow allows DOE to meet its operating and construction
- requirements, improve its capital structure and develop its market- $398 53 7 5372 $386 $ g driven operations.
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3 A D & Le d A T 9; 94 95 w j
- Excludes working capital and other balance sheet changes I/
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1 t ! 19 9 6 FIN ANCI AL INFORM ATION COMPANY REPORT ON FINANCIAL STATEMENTS l l 4 he Company is responsible for the financial pw Tinfonnation and represen financial statements and other sections of this annual report to shareholders. The Company belies es that
.w the consolidated financial statements have been prepared in 'y confonnity with generally accepted accounting principles ,
that are appropriate in the circumstances to reflect, in all material respects, the substance of events and transactions that should be included in the statements and that the other in < infonnation in the annual report to shareholders is consistent - o with those statements. In preparing the financial statements, P the Company makes infonned judgments and estimates , l based on currently available infonnation about the effects of Xy; j certain events and transactions. The Company maintains a % system of internal accounting control designed to provide reasonable assurance that the Company's assets are safe-hj:!" 71 l guarded and that transactions are executed and recorded in gg accordance with established procedures. There are limits l l, inherent in any system ofinternal control and such limits are based on recognition that the cost of such a system g .g l should not exceed the benefits derived. The system ofinternal accounting control is supported by written policies and ' guidelines and is supplemented by a staff ofinternal auditors. " g. ' The Company believes that the internal accounting control g system provides reasonable assurance that its assets are safeguarded and the financial infonnation is reliable. g s , K
~
k % David D. Marshall l President and Chief Executive Officer l [; l; b 4 Gary L. Schwass e ij Executive Mee President and i Chief Financial Officer m x s 4 4 3 1 it i l g o < T u
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Glossary of Terms Folicing air c.nplanations ofartainfinan dal and operating terms used in our trport. Competitive Transition Charge (CTC)/ Peak Demand intangible Transition Charge (ITC) Peak demand is the amount of electricity During the electric utility restructuring from required during periods of highest usage. Peak the traditional regulatory framework to customer periods fluctuate by season and generally occur choice, utilities will have the opportunity to in the morning hours in winter and in late recover transition costs from customers through afternoon during the summer. a surcharge, or competith e transition charge. Alternauvely, if the utihty gains 1 UL approval Pennsylvania Public Utility Commission (PUC) and securitizes its transition costs, it may then The PUC is the Pennsylvania governmental charge an intangible transition charge. ' body that regulates all utilities (electric, gas, M q Customer Chor.ce telephone, u ater, etc.) and is made up of five rnembers nominated by the governor and
'Ik Pennsvivania Customer Choice Act (see confinned by the senate.
Kustomer Choice Act"gliscussion on page 31)
) wdl gise consumers the nght to contract for Regulatory Assets electricity at market prices from PUC-approved Regulatory assets are costs that the Company
'; electric generation suppliers. would otherwise have charged to expense which Decommissionmg Costs are capitalized or deferred because these costs are currently being recovered or because it is Decommissioning costs are expenses to be probable that the PUC and the FERC will incurred in connection with the entombment, allow recovery of these costs through the
! decontamination, dismantlement, removal and ratemaking pn> cess. For example, under tradi-
- j. '
disposal of structures, systems and components (g of a power plant that has pennanently ceased the production of electric energy. tional regulation, tax benefits associated with electric generating as< cts were required to be immediately passed on to a utility's customers. 1 Deferred Energy Costs These same benefits later would be incurred as a tax cost, which the utihty would expect to col-l In conjunction with the Energy Cost Rate j ; lect from its customers under the traditional Adjustmc.it Clause, the Company records regulatory framework. deferred energy costs to offset differences l between actual energy costs and the level of Transition Costs ' energy costs currently recovered from its rate- Transition or stranded costs are the net regulated electric utility customers. present value of a utility's known or measurable Demand costs related to electric generation that are recoverable under the current regulatory frame-Demand is the amount of electricity delivered work, but which may not be recoverable in a to consumers at any instant or averaged over a competitive generation market and uhich will penod of time. remain follov ing mitigation efforts taken by Energy Cost Rate Adjustment Clause ([CR) such utility to recover the costs. Examples of
.The C,ompany recovers through the ECR, to potennal transition costs include regulatory
' assets; the unfunded portion of decommission-
., the extent that such amounts are not meluded m base rates, the cost of nuclear fuel, fossil fuel ing costs; costs of employee severance, retrain-in'g, early retirement, and outplacement; and and purchascd power costs and passes to its customers the profits from short-tenn power generation-related costs, including the associat-p ed capital costs. The PUC will detennine the sales to other unhnes.
level of transition costs a utility may recover. l Federal Energy Regulatory Commission (FERC)
~ Unbundled Clectric Service The FERC is an independent five-member
, commission withm the Umted $tates Electric utilities traditionally base been obligated to sene customers from the generation
]j ,
Department of Energy. Among its many responsibiho,es, the FERL sets rates and through the delivery of electricity. Under the gg charges for the wholesale tran90rtation and Pennsylvania Customer Choice Act, electric y sale of natural gas and electncay. sen-ice will be unbundled. Although customer choice will give consumers their choice of
,e Kilowatt (KW) electric generation suppliers, delivery of the
~l R A kilowatt is equal to 1,000 watts. A watt is electricity from the generation supplier to the mnsunier will remam the responsibihty of the
" the rate at which electricity is generated or consumed. A kilowatt-hour (KW1I) is a existing franchised utility.
measure of the quantity of electricity generated or consumed in one hour. I l r
DQE 1996 F NANCIAL INFORMATION Corporate Structure DQE is an energy senices holding company. Its subsidiaries are Duquesne Light Company (Duquesne), Duquesne Enterprises (DE), DQE Energy Set. ices (DES), DQEnergy Partners and Montauk. DQE and its subsidiaries are collectively refened to as "the Company." Duquesne is an electric utility engaged in the production, transmission, distribution and sale of electric energy and is the largest of DQE's subsidiaries. DE makes strategic investments beneficial to DQE's core energy business. These investments enhance DQE's capabilities as an energy prmider, increase asset utilization, and act as a hedge against changing business conditions. DES is a diversified myy energy senices company offering a wide range of energy solutions for industrial, utility and consumer iH markets worldwide. DES initiatives include energy facility development and operation, domestic and j internationalindependent power production, and the production and supply ofinnovative fuels. J! DQEnergy Partners was fonned in December 1996 to align DQE with strategic partners to e$%M capitalize on opportunities in the dynamic energy senices industry. These alliances enhance the utilization and value of DQE's strategic investments and capabilities while establishing DQE as a total energy provider. Montank is a financial senices company that makes long-tenn investments <c and provides financing for the Company's other market-driven businesses and their customers. The Company's Electric Sendce Territory (glj The Company's utility operat ons pnnide electric senice to customers in Allegheny County, hmp including the City of Pittsburgh, Beaver County and Wesunoreland County. This represents approximately 800 square miles in southwestern Pennsylvania, h>cated within a 500-mile radius of 74
}~i g' one-half of the population of the United States and Canada. The population of the area sened by the Company's electric utility operations, based on 1990 census data, is approximately 1,510,000, of whom 370,000 reside in the City of Pittsburgh. In addition to sening approximately 580,000 direct customers, the Company's utility operations also sell electricity to other utilities. m pm Regulation e; The Company is subject to the accounting and reporting requirements of the United States b Securitics and Exchange Commission (SEC). In addition, the Company's electric utility operations ,
i are subject to regulation by the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatog Commission (FERC) under the Federe/ PourAct with respect to rates for h'- interstate sales, transmission of electric power, accounting and other matters. The Electncity Generation Customer Choice and Competition Aa (Customer Choice Act) went into = efTect in Pennsylvania onJanuary 1,1997. This legislation provides for a gradual deregulation of 4~, the generation of electricity, while maintaining repdation of the transmission and distribution of electricity and related senices to customers. (See " Rate Matters" and " Competition" discussions on pages 31 and 38.) < The Company's electric utility operations are also subject to regulation by the Nuclear Regulatory . Commission (NRC) under the Atomic Energy An cfl9H, as amended, with respect to the operation v ofits jointly ou ned/ leased nuclear power plants, Beaver Valley Unit 1 (BV Unit 1), Beaver Valley p" Unit 2 (BV Unit 2) and Perry Unit 1. The Company's consolidated fmancial statements report regulatory assets and liabilities in accor- . s dance uith Statement ofFinancial Acmunting Standards No. 71, Accountingfor the Ef]ccis ofCertain Types , ' ofRepdation (SE4S No. 71), and reflect the effects of the current ratemaking process. In accordance with SE4S No. 71, the Company's consolidated fmancial statements reflect regulatory assets and liabilities consistent with cost-based, pre-competition ratemaking regtdations. The regulatory assets g,p represent probable future revenue to the Company because provisions for these costs are currently tv : j included, or are expected to be included, in charges to electric utility customers through the h ratemaking process. h A company's electric utility operations or a portion of such operaHons could cease to meet the p SE4S No. 71 criteria for various reasons, including a change in the FERC regtdations or the f competition-related changes in the PUC regulations described above. (See " Rate Matters" and T'
" Competition" discussions on pages 31 and 38.) The Company currently believes its electricity generating assets and related regulatory assets continue to satisfy these criteria in light of the jg g p~
transition to competitive generation under the Customer Choice Act. Should any portion of the > Company's electric utility operations be deemed to no longer meet the SE4S No. 71 criteria, the s Company may be required to write off any above-market cost assets, the reawery of which is uncertain, p and any regtdatory assets or liabilities for those operations that no longer meet these requirements. 5 p Results of Soles of Electricity to Customers 4~ Opemtions The increase in 1996 totaloperating renues was $5.0 million, as compared to 1995. Comparing s , 1995 tota / operating nrenues to 1994, there was a decrease of $3.7 million. Operating revenues are , primarily derived from the Company's sales ofclectdcity. The PUC authorizes rates for electricity sales g k r h
l i which are cost-based and are designed to recover the Company's operating expenses and investment l in electric utility assets and to provide a return on the investment. (See " Rate Atatters" and
" Competition" discussions on pages 31 and 38.)
Electric Utility Sales by Customer Class (Kilowatt-Hours in Millions): 1996 1995 1994 l Residential 3,321 3,378 3,219 i py Conuner<;ial 5,737 5,729 5,563
' ,1 Industrial 3,285 3,237 3,256 3 Aliscellaneous 83 84 84 I
,I Sales to Electric Utility Customers 12,426 12,428 12,122 I. / Sales to Other Utilities 3,310
-4 2,975 3,212
'1 7btalSales 15,736 15,403 15,334 9
a
'h Sales to residential and conunercial customers are strongly influenced by weather conditions.
J Wanner sununer and colder winter seasons lead to increased customer use of electricity for cooling Q and heating. Commercial sales are also affected by regional economie development. Sales to industrial
- g. , j customers are influenced by national and global economic conditions. Customer revenues fluctuate j as a result of changes in sales volume and changes in fuel and other energy costs.
',) Net Customer Revenues Ncr custunur rcrcunes, reflected on the statement of consolidated income, decreased $8.2 million i 8, or 0.8 percent in 1996 compared to 1995. The variance can be attributed primarily to decreased 1 residential customer kilowatt-hour (KWII) sales of 1.7 percent due to unseasonably wann summer 7
temperatures in 1995, as compared to 1996, resulting in decreased revenues of $8.9 million. Industrial KWil sales volume in 1996 increased when compared to the prior year because of a y self-generation outage experienced in 1996 by one of the Company's large industrial customers.
,b Sales to the Company's 20 largest customers accounted for approximately 14 percent of customer y revenues in 1996,1995 and 1994.
In 1995 as compared to 1994, net customer revenuer increased by $7.8 million, or 0.7 percent. The !',,N,,. increase is the net result of higher KWil sales to residential customers by 4.9 percent in ro,ponse to i extreme 1995 summer temperatures, partially ofTset by lower fuel and other energy costs per KWII,
! the benefits of which are passed through to the customers in the funn oflower rates. Revenues from i.( .. electric sales to residential customers in 1995 exceeded 1994 residential revenues by $13.0 million.
Vf Sales to Other Utilities Short-term sales to other utilities are regulated by the FERC and are made at market rates. j Fluctuations in electricity sales to other utilitics are related to the Company's customer energy y requirements, the energy market and transmission conditions, and the availability of the Company's L} hh generating stations. The Company's electricity sales to other utilitics in 1995 were less than 1996 and 1994 due to the timing of generating station outages and the fluctuating level of sales to the l j Company's electric utility customers. Future levels of short-tenn sales to other utilitics will be affected i j h by the Company's sale ofits ownership interest in the Ft. A1artin Power Station (Ft. A1artin), the j . possible sale of other generating stations, market rates, and by the outcome of the Companyi, j FERC filings requesting firm transmission access. (See "Alitigation Plan" and " Transmission Access" y discussions on pages 32 and 41.) l
} Other Operating Revenues jj Other operating revenues include the Company's non-KWil utility revenues and revenues from A- market-based operating activities. The increase of $10.9 million in other operating revenues when comparing 1996 and 1995 is primarily due to increased revenues at Chester Engineers (Chester), a d[eE wholly owned subsidiary of DE, and revenues of GSF Energy, a Atontauk acquisition in the fourth ay $ quarter of 1996. During 1997, GSF Energy is expected to contribute approximately $20 million to 1
j]p es other operating revenues, as compared to 52.8 million in 1996. Other operating revenues decreased
$9.2 million in 1995 when compared to the prior year. This decrease largely reflects the restructuring 4? of Chester.
Y j The discussion in the preceding paragraph reganling GSF Energy contains forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially W j from those projected. Estimates of GSF Energy's contribution to operating revenues will depend on gas prices and operational effectiveness. i a i1 Y
1 1 Operating Expenses Fuc/andpurchasedpo:cer expense fluctuations generally result from changes in the cost of fuel, the ! mix between coal and nuclear generation, the total KWils sold, and generating station availability. ; Because of the Energy Cost Rate Adjustment Clause (ECR), changes in fuel and purchased power costs did not impact earnings in 1996,1995 and 1994. Fuelandpurrhasedp<nrer expense increased in 1996 compared to 1995 as a result of a 33 percent increase in purchased power prices. This increase was partially offset by lower nuclear fuel costs. Fuc/ andpurchasedpmver expense decreased in 1995 compared to 1994 due to lower nuclear fuel costs, a more favorable generation mix and a 2.7 perent decline in KWil generation. gg Other operating expense increased $6.0 million u hen comparing 1996 to 1995. The increase was the [. result of several factors, including a one-time lease charge, a full year of expense for DES in 1996 and operating costs of GSF Energy, acquired in the fourth quarter of 1996. In 1995, other operating y* i expense decreased $36.2 million when compared to 1994. This 1995 reduction reflects the Q restructuring of Chester and cost savings attributable to the Companys electric utility operations. Depirciation and amortization expense increased $20.4 million in 1996 when compared to 1995 h, primarily due to the increase in the Company's electric utility operations' composite depreciation rate from 3.5 percent to 4.25 percent effective Alay 1,1996. During the third quarter of 1996, the Company completed recovery ofits investment in Perry Unit 2, the construction of which was abandoned by the Company in 1986. The resultant decrease in amortization expense was offset by y the Company's increase in depreciation, as well as $9 million that was expensed related to the depreciation portion of deferred rate synchronization costs in conjunction with the Company's N. Alitigation Plan. Deprniation and amortizarian expense increased $36.6 million in 1995, primarily due to the change in the Company's electric utility operations' composite depreciation rate from 3.0 per- p& cent to 3.5 percent effectiveJanuary 1,1995. The Company did not seek a rate increase to recover W the additional costs. (See "Alitigation Plan" discussion on page 32.) OtherIncome The increase of $22.5 million in otherincome, when comparing 1996 to 1995, was primarily the result ofincome from long-tenn investments made during late 1995 and 1996. Otherinanne increased
$9.4 million in 1995 w hen compared to 1994 primarily due to additional investing activity, including the one-time gain recognized at the merger of International Power Aiachines Corporation (IPA 1) p and Exide Electronics Group, Inc. (Exide). !L Interest and Other Charges The increase in interrn and other charges in 1996 from 1995 was $2.7 million despite the payment of N
$7.9 million in dividends related to preferred stock issued in Alay 1996 and $2.5 million ofinterest on new tenn loans. The interest expense increase was offset by a decrease due to the retirement of long-tenn debt and preferred stock of subsidiaries during 1995. Interrst and other charges were lower in 1995 when compared to 1994 also due to the retirement oflong-tenn debt and preferred stock of g subsidiaries. The Company's interest on long-term debt and other interest declined to $99.4 million s+
in 1996 from $102.4 million in 1995 and $105.1 million in 1994. p g Income Taxes n lnamme taxes decreased in 1996 when compared to 1995 by $9.3 million, primarily due to redaced 'h taxable income. In 1995, taxable income was greater than in 1994, resulting in increased income taxes of $3.7 million. p4
.q Liquidity and Capital Expenditures Capital Resources The Company spent approximately $101.2 million in 1996, $94.2 million in 1995 and $121.1 million in 1994 for capital expenditures, of w hich $88.5 million in 1996, $78.7 million in 1995 and j
$94.3 million in 1994 was spent for electric utility construction. The remaining capital expenditures M were related to the Company's market-driven real estate investments. The Company's capital expenditures for electric utility construction focus on impnning and/or expanding electric utility j'g P'.
production, transmission and distribution systems. The Company estimates that it will spend, s ' excluding allowance for funds used during construction (AFC) and nuclear fuel, approximately
$110 million, $110 million and $95 million for electric utility construction during 1997,1998 and [,j g
1999. These estimates also exclude any potential expenditures for reliability enhancements to the p Brunot Island (Ill) Unit 3 combustion turbine. (See "Alitigation Plan" discussion on page 32.) The h~ Company expects that funds generated from operations will continue to be sufficient to fund a large p, part ofits capital needs. [^ ki g kg
I long Term Investments The Company has made market-driven long-tcrm investments in the following areas: leases, , affordable housing, gas reserves, real estate, energy solutions and engineering senices. Investing ' aethities during 1996 included approximately $50 million in lease investments, $30 million in gas ; reserve investments, $15 million in afTordable housing investments, and $3 million in energy solution 1 investments. Investing activities of approximately $188 million and $67 million during 1995 and 1994 were balanced between investment types. mm Financing
$ The Company expects to meet its current obligations and debt maturities through the year 2001 j with funds generated from operations and through new financings. A: December 31,1996, the l
Pg Company was in compliance with all ofits debt covenants. l ej On May 14,1996, Duquesne Capital LP., a Delaware special-purpose limited partnership the j Q sole general partner of which is Duquesne, issued $150 million principal amount of 8% percent ! n Cumulative Monthly Income Preferred Securities (MIPS), Series A, with a stated liquidation value of $25.00. A portion of the proceeds was used to retire $50 million oflong-tenn debt maturing May 15,1996. The Company intends to continue to apply the remaining proceeds to the purchase
,i or redemption of outstanding securities and for general corporate purposes.
j During 1996, the Company entered into five-year bank term loans totaling $85 million with fixed d interest rates averaging 7.25 percent. These loans pay interest semi-annually. ; j In November 1997, $50 million of mongage bonds will mature. The Company expects to retire j j these bonds with availabic cash or to refinance the bonds. q ] i Short-Term Borrowings ' n \
~d At December 31,1996, the Company had two extendible revohing credit arrangements, including I J a $125 million facility expiring inJune 1997 and a $150 million facility expiring in October 1997. !
] Interest rates can,in accordance with the option selected at the time of the borrowing, he based on j j prime, Eurodollar or certificate of deposit rates. Commitment fees are based on the unborrowed j amount of the commitments. Both credit facilities contain two-year repayment periods for any !
gj amounts outstanding at the expiration of the revolving credit periods. At December 31,1996, there
] were no short-term borrowings outstanding. At December 31,1995, shon-tenn borrowings were
,j $35 million. The weighted average interest rate applied to such borrowings was 6.5 percent.
# a l
'3 Sale of Accounts Receivable
}3 The Company and an unaffiliated corporation have an agreement that entitles the Company m a sell, and the corporation to purchase, on an ongoing basis, up to $50 million of accounts receivable.
l The Company had no receivables sold at December 31,1996. At December 31,1995, the Company 1 had sold $7 million of receivables to the unaffiliated corporation. The accounts receivable sales 3 agreement, u hich expires in June 1997, is one of many sources of funds available to the Company. The Company has not determined, but may attempt to extend the agreement or to replace the facility l with a similar arrangement or to climinate it upon expiration. Nuclear fuel Leasing The Company finances its acquisitions of nuclear fuel through a leasing arrangement under which it may finance up to $75 million of nuclear fuel. As of December 31,1996, the amount of nuclear fuel N financed by the Company under this arrangement totaled approximately $35 million. The Company .
~O plans to continue leasing nuclear fuel to fulfill its requirements at least through September 1998, the l
] remaining term of the leasing arrangement.
%) Dividends je The Company has continuously paid dividends on$vnnnon stod since 1953 and in each of the last jj 10 years has increased its dividend paid per share. The Company's annualized dividends per share were $1.36, $1.28 and $1.17 at December 31,1996,1995 and 1994. The annual dividends paid have jg increased by an average compounded rate of 5.9 percent over the past five years, even though the y g Company has maintained a lower payout ratio than the electric utility industry in general. During 3 1996, the Company paid a quarterly dividend of $0.32 per share on each ofJanuary 1, April 1, July I and October 1. The quarterly dividend declared in the fourth quarter of 1996 was increased from j $0.32 to $0.34 per share payable January 1,1997. The Company expects that funds generated from
] operations will continue to be sufficient to pay divklends. The Company's need for and the availability
, w q ~ , EhhMM
of funds will be influenced by, among other things, new investment op;mrtunities, the economic activity within the Company's utdity senice territory, competitise and environmental legislation, and regtdatory matters experienced by the electric utility indusuy generally. (See " Competition" discussion on page 38.) The Company's stock price w as $29.00 at the end of 1996. The book value per share of conunon stock was $18.01 at December 31,1996, v hich represents a 5.1 percent increase in book value since December 31,1995. Dividends may be paid on the Company's common stock to the extent pennitted by law and as declared by the board of directorr. Ilowever, payments of dhidends on Duquesne's conunon stock may be restricted by Duquesne's obligations to hohlers of preferred and preference stock pursuant to Duquesne's Resrated Artides ofincorimration. No dividends or distributions may be made on l: Duquesne's conunon stock if Duquesne has not paid dividends or sinking fund obligations on its i preferred or preference stock. Further, the aggregate amount of Duquesne's conunon stock dividend payments or distributions may not exceed certain percentages of net inarme if the ratio of totalarmmon ! sbarcho/Jcis' equity to totalcapitalization is less than specified percentages. As all of Duquesne's common c stock is owned by the Company, to the extent that Duquesne cannot pay common dividends, the ; Company may not be able to pay dividends to its common shareholders. No part of the retained i carnings of the Company was restricted at December 31,1996. {, Changes in the Number of Shares of DOE Common Stock Outstanding ( 1996 1995 1994 [' (Amounts in Thousands ofShairs) l 1 Outstanding as ofjanuary l 77,556 78,459 79,518 ! Reissuance from treasmy stock 157 83 116 Repurchase of common stock (440) (986) (1,175) Outstanding as ofDecember 31 77,273 77,556 78,459 h Rate Matters Custort'er Choice Act j Under the Customer Choice Act, which went into efTect on January 1,1997, Pennsylvania has [ become a leader in customer choice. The Customer Choice Act will enable Pennsylvania's electric b utility customers to purchase electticity at market prices from a variety of electric generation suppliers l (customer choice). Electric utility restructuring will be accomplished through a two-stage process { consisting of a pilot period (running through 1998) and a phase-in period (1999 through 2001). The ! pilot period will give utilities an opportunity to examine a wide range of technical and administrative ; details related to competitive markets, including metering, billing, and cost and design of unbundled j. electric senices. Duquesne filed a pilot program with the PUC on February 27,1997, which proposes F unbundling transmission, distribution, electricity and competitive transition charges and offers 4 participating customers the same options that will be available in a competitive generation market. [M The pilot program will comprise approximately 5 percent of Duquesne's residential, commercial and industrial demand beginning September 1,1997. Customers participating in the pilot will have b ' two basic options. First, customers can choose to continue taking bundled senice from Duquesne under appraved tariffs. Second, customers can choose unbundled senice with their electricity provided by an alternative electric generation supplier. All customers that choose unbundled electric f senice will be subject to unbundled distribution charges approved by the PUC and unbundled [ transmission charges pursuant to Duquesne's FERC-approved tariff. Each customer that elects i unbundled senice also will be required to pay a non-bypassable access fee (competitive transition charge) that prmides Duquesne with a reasonable opportunity to recover transition costs. p,_ o The Company must file a restructuring plan with the PUC by August 1,1997 setting forth its y proposals for the transition to customer choice and the recovery of transition costs. (See " Competition" ; discussion on page 38.) The phase-in to competition begins on January 1,1999 when 33 percent of { y'?- consumers will have customer choice (including consumers covered by the pilot programh 66 percent gy of consumers will have customer choice byJanuary 1,2000; and all consumers will have customer ap j choice byJanuary 1,2001. Although the Customer Choice Act will give customers their choice of {; i electric generation suppliers, delivery of the ciectricity from the generation supplier to the customer 5; 4
;I will remain the responsibility of the existing franchised utility. Delivery of electricity (including
! transmission, distribution and customer senice) will continue to be regtdated in substantially the y f current manner. ( i i W
Mitigation Man The Company has taken a number of steps to mitigate its potential transition costs. (See
" Competition" discussion on page 38.) In addition to the steps taken during the last 10 years to prepare for competition, effectiveJanuary 1,1995, the Company accelerated its rate of depreciation on its fixed nuclear assets without seeking a rate increase to recover the additional costs. On October 31, 1996, the sale of the Company's ownership interest in Ft. A1artin was completed. Ft. A1artin Unit I was owned 50 percent by Duquesne and 50 percent by its operator, Allegheny Power System (APS). ;
qq 'Ihe sale and a plan, to be ftmded in part by the proceeds of the Ft. A1artin transaction, were approved a by the PUC on Alay 23,1996. Under the approved plan, the Company will not increase its base rates
'% for a period of five years through Alay 2001. In addition, the Company recorded in October 1996 a g" W one-time reduction of approximately $130 million in the book value of the Company's nuclear plant y investmeat.The proceeds from the sale are expected to be used to fund reliability enhancements to the BI Unit 3 combustion turbine and to reduce the Company's capitalization. The approved plan L?d W also pnnides for incremental increases of $25 million in depirciation and amortization expense in 1996, ,p 1997 and 1998 related to the Company's nuclear investment, as well as additional annual contributions 4 to its nuclear plant decommissioning funds of $5 million, without any increase in existing electric rates. Also, the Company will record an annual $5 million credit to the ECR during the plan period
$y,ph to compensate the Company's electric utility customers for lost profits from any short-tenn power sales foregone by the sale ofits ownership interest in Ft. A1artin. In addition, the Company will cap
$ energy costs, beginning April 1,1997 through the remainder of the plan period, at a historical five-year average of 1 A7 cents per KWil. In accordance with the approved plan, the Company has
$j expensed $9 million related to the depreciation portion of the deferred rate synchronization costs
't associated with IW Unit 2 and Perry Unit 1. The Company's approved plan provides for the amorti-N zation of the remaining deferred rate synchronization costs over a 10-year period. At December 31, .; 1996, the unamortized ponion of these costs totaled $41 A million, net of deferred fuel savings related to the two units. (See " Deferred Rate Synchronization Costs" below.) Finally, the Company's approved O plan also provides for annual assistance of 50.5 million to low-income customers.
Deferred Rate Synchronization Costs Mll{N In 1987, the PUC approved the Company's petition to defer initial operating and other costs of IW Unit 2 and Peny Unit 1. The Company deferred the costs incurred from November 1987, when d the units went into comme:cial operation, until Alarch 1988, when a rate order was issued. In its 31 rate order, the PUC postponed ruling on whether these costs would be recoverable from the ,
] a Company's electric utility customers. The Company is not earning a return on the deferred costs.
(See "Alitigation Plan" discussion above.) j mM Vf Energy Cost Rote Adjustment Clause (ECR) p df Through the ECR, the Company remvers (to the extent that such amounts are not included in base rates) nuclear fuel, fossil fuel and purchased power expenses and, also through the ECR, passes to its My [ customers the profits from short-term power sales to other utilities (collectively, ECR energy costs). On the Company's statement of consolidated income, these ECR revenues are included as a 'j component of operating rnrnues. For ECR purposes, the Company defers fuel and other energy gh expenses for recovery, or refunding, in subsequent years. The deferrals reflect the ditTerence between l the amount that the Company is currently collecting from customers and its actual ECR energy Q'N 7 costs. The PUC ar.nually reviews the Company's ECR energy costs for the fiscal year April through Alarch, compares them to previously projected ECR energy costs, and adjusts the ECR for over- or yj under-recoveries and for two PUC-established coal cost standards. (See " Fossil Fuel" discussion on page 35.) J Under the Customer Choice Act, the Company may replace the ECR effective April 1,1997 by rolling its ECR energy costs into its base rates. The effect of this change would be to provide to the i@&f,g ;! Company an opportunity to further mitigate its deferred energy costs based upon its ability to manage its energy costs. Under the Company's PUC-approved Alitigation Plan, the level of energy cost
. n recovery is capped at l A7 cents per KWil through Alay 2001. 'Ib the extent that projections do not
%@d 9 support recovery of previously deferred costs through this pricing mechanism, these costs would
]li g5 become transition costs subject to recovery through a competitive transition charge (CTC). (See
" Competition" discussion on page 38.)
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- A - .
Property, Plant and Investment in PP&E and Accumulated Depreciation Equipment (PP&E) The Company's total investment in property, plant and equipwnt and the related accumulated depreciation balances for major classes of property at December 31,1996 and 1995, are as follows: r l PP&E and Related Accumulated Depreciation at December 31 (4mountsin Thousands ofDollars) 1996 1995 l Accumulated Net Accumulated Net fFl l Investment Depreciation Investment Investment Depreciation Investment {y Electric Production $2,467,786 S1,092,928 S1,374,858 $2,501,974 S 885,389 $1,616,585 Electric Transmission 299,895 114,406 185,489 296,953 110,242 186,711 g' g Electric Distribution 1,176,738 374,180 802,558 1,143,111 347,399 795,712 h Electric General 324,366 168,470 155,896 314,844 141,133 173,711 F.1 es Property Ileld for Future Use 190,821 82,737 108,084 216,633 94,283 122,350 p, Property Ifeld Under Capital Leases 99,608 47,670 51,938 133,381 74,874 5H,507 228,256 89,554 138,702 139,217 32,557 106,660 {i Other 7bral $4,787,470 51,969,945 S2,817,525 $4,746,113 $1,685,877 $3,060,236 g{ e Joint interests in Generating Units J The Company has various contracts with Ohio Edison Company, Pennsylvania Power Company, y"f The Cleveland Electric Illuminating Company (CEI) and The 'Ibledo Edison Company, with respect gq y to several jointly owned / leased generating units, that include pnnisions for coordinated maintenance responsibilities, limited and qualified mutual back-up in the event of outages. and certain capacity h.. and energy transactions. p4 In September 1995, the Company commenced arbitration against CEl, seeking damages, tennina- pj tion of the Operating Agreement for Eastlake Unit 5 (Eastlake) and partition of the parties' interests in Eastlake through a sale and division of the proceeds. The arbitration demand alleged, among p}4 n other things, the improper allocation by CEI of fuel and related costs; the mismanagement of the administration of the Saginaw coal contract in connection with the closing of the Saginaw mine, @h w hich Fistorically supplied coal to Eastlake; and the concealment by CEI of material infonnation. k in October 1995, CEI commenced an action against the Company in the Coun of Common Pleas, G Lake County, Ohio seeking to enjoin the Company from taking any action to effect a partition on b the basis of a waiver of partition covenant contained in the deed to the land underlying Eastlake. h CEI also seeks monetary damages from the Company for alleged unpaid joint costs in connection with the operation of Eastlake. The Company removed the action to the United States District Court for the Northern District of Ohio, Eastern Division, where it is now pending. Currently, the Q t4 k parties are engaged in settlement discussions. 'Ib provide the parties with the opportunity to settle their claims, the court has postponed litigation proceedings until April 1,1997. Joint Interests in Nuclear Power Stations (h Ileaver Wiley Perry p[. l" Unit 1 Unit 2 Unit 1 Duquesne
- 47.50 %
- 13.74% (c) 13.74 %
Ohio Edison Company 35.00 % 41.88 % 30.00 % h, ~, Pennsylvania Power Company (a) 17.50 % - 5.24 % F CEI (b) - 24.47 %
- 31.11 % [
Toledo Edison Company (b) - 19.91 % 19.91 % T g
&[9
- Denotes Operator -]
(a) Subsidiary of Ohio Edison Company 3 (b) Subsidiary of Centerior Energy Corporation {( (c) In 1987, the Company sold and leased back its 13.74 percent interest in IW Unit 2; the sale was exclusive of transmission and common facilities. The total sales price of 5537.9 million was the appraised value of the ph] j 5 {' " l Company's interest in the property. The Company subsequently leased back its interest in the unit for a term of 29.5 years. The lease pmvides for semi-annual payments and is accounted for as an operating lease, t i The Company is responsible under the terms of the lease for all costs related to its interest in the unit. i;
~
k
3: int Interests in fossil Power Stations Sammis Bruce Atansfield Eastlake Unit 7 Unit 1 Unit 2 Unit 3 Unit 5 Duquesna 31.20 % 29.30 % 8.00 % 13.74 % 31.20 % Ohio Edison Company
- 48.00 % 60.00 % 39.30 % 35.60 % -
Pennsylvania Power Company (a) 20.80 %
- 4.20%
- 6.80%
- 6.28% -
.n CEI(b) -
6.50 % 28.60 % 24A7%
- 68.80 %
'b a 'Ibledo Edison Company (b) - -
17.30 % 19.91 % - j
- Denotes Operator S (a) Subsidiary of Ohio Edison Company j (b) Subsidiary of Centerior Energy Corporation 7
On September 13,1996, Ohio Edson Company and Centerior Energy Corporation entered into an agreement and plan of merger to form FirstEnergy Corporation.The regulatory approval process 4 for the proposed merger is expected to take approximately 12 to 18 months.
}bl, Property Heldfor future Use in 1986, the PUC approved the Company's request to remove Phillips Power Station (Phillips) and 4 a portion of111 from senice and from rate base. In accordance with the Company's Alitigation Plan, 112 A1Ws related to Ill Units 2a and 2b were moved from pivpeny bridfhrfuturr use to electricplant 4
in scrcice in 1996. The Company expects to recover its investment in ill Units 3 and 4, which remain ( in pivpeny beldfhrfutuir use through future electricity sales. The Company believes its investment in l Ill will be necessary in order to meet future business needs. A portion of the proceeds of the sale of
~3 Ft. A1artin is expected to be used to fund reliability enhancements to the Ill Unit 3 combustion j turbine. The reliability enhancements are contingent upon the projects meeting a least-cost test versus other potential sources of peaking capacity. (See "Alitigation Plan" discussion on page 32.) The i Company is analyzing the effects of customer choice on its future generating requirements. The j Company is planning to seek recovery ofits investment and associated costs of Phillips through a CTC. (See " Competition" discussion on page 38.) In the event that market demand, transmission 1
access or rate recovery do not support the utilization of these plants, the Company may have to write 4 off part or all of these investments and associated costs. At December 31,1996, the Company's net of I 1 tax investment in Phillips and B1 held for future use was $53.6 million and $17.2 million. I L p Employees At December 31,1996, DQE and its subsidiaries had 3,810 employees, including 1,157 employees 4 at the Company-operated lleaver Valley Power Station (BVPS). In November 1996, the Company reached an agreement on a three-year contract extension through September 30,2001 with the 3 International llrotherhood of Electrical Workers, w hich represents approximately 2,000 of the j Company's employees.
,2 Electric utility The Company's fossil plants operated at 76 percent availability in 1996 and 1995. The Company's Operations nuclear plants operated at 76 percent availability in 1996 and 83 percent in 1995. The timing and h ,i duration of scheduled maintenance and refueling outages, as well as the duration of forced outages, t, affect the availability of pow er stations. The Company nonnally experiences its peak demand in the 4
summer. The 1996 customer system peak demand of 2,463 A1W occurred on August 7,1996. The Company's plan for optimizing generation resources is designed to reduce under-utilized p' generating capacity and employ cost-effective sources of peaking capacity. The sale of the Company's j ownership interest in Ft. A1artin reduced in-senice capacity by 276 A1W. In conjunction with the p} , sale, the Company returned 112 AlW of peaking capacity at 111 to electricplant in scrrice. Additionally, g through potential reliability enhancements to the 111 Unit 3 combustion turbine, the Company could F" ! return to senice another 56 A1W of oil-fired peaking capacity. (See " Property Held for Future Use"
,y discussion above.)
f3 The Company has a 13.74 percent ownership interest in Perry Unit 1, a nuclear generating da unit hicated in Ohio and operated by CEl. CEI management has athised the Company that the 47[ Perry Course of Action (PCA), an action plan submitted to the NRC in 1993, w as completed at j the end of the unit's fifth refueling outage in the spring of 1996. Perry Unit I has followed the 3 PCA with the Perry Plan for Excellence, w hich is the long-tenn phase of the unit's performance improvement program. The Company will continue to monitor closely the status of the perfonnance improvement program. j t
*e4 wee ansk
Fossfl fuel The Company believes that sufficient coal for its coal-fired generating units will be available from various sources to satisfy its requirements for the foreseeable future. During 1996, approximately 2.4 million tons of coal were consumed at the Company's two wholly owned coal-fired stations, ! Cheswick Power Station (Cheswick) and Elrama Power Station (Elrama). The Company owns Warwick Aline, an underground mine located approximately 83 river miles from Pittsburgh. At December 31,1996, the Company's net investment in the mine was
$11.4 million. The Company estimates that, at December 31,1996, its economically recoverable coal reserves at Warwick Aline were in excess of 1.5 million tons. The unaffiliated contract operator gm 4-i at Warwick Aline encountered adverse geologic conditions late in 1996 that resulted in a significant change to the mining plan. Commencing in 1997, the operator will be producing approximately J l
15 percent of the amount previously mined, or 360,000 tons of coal per year, for exclusive use at %1 Elrama. The Company will purchase the remaining coal on the open market. This change should M4 not impact the Company's ability to recover all ofits investment in Warwick Aline, the $2.6 million p, of unrecovered system-wide cost of coal which excludes the Bruce Alansfield Power Station (Bruce Atansfield), or to accrue funds for future liabilities. It is anticipated that this effort will be successfully completed by Alarch 31,2000 when the system-wide coal cost cap expires.The current estimated (h liability for mine closing, including final site reclamation, mine water treatment and certain labor ; l liabilities is $34.1 million, and the Company has recorded a liability on the consolidated balance .
- sheet of approximately $20.2 million toward these costs. Od During 1996,69 percent of the Company's coal supplies were provided by contracts including L Warwick Aline, with the remainder sa isfied through purchases on the spot market. The Company R l had four long-term contracts in effect at December 31,1996 that,in combination with spot market f'j
' ~
purchases, are expected to furnish an adequate future coal supply. The Company does not anticipate any difficulty in replacing or renewing these contracts as they expire from 1997 through 2002. At ,0 December 31,1996, the Company's wholly owned and jointly owned generating units had on hand p l an average coal supply of 45 days. p l The PUC has established two market price coal cost standards for the Company. One applies only 4< l to coal delivered at Bruce Alansfield. The other, the system-wide coal cost standard, applies to coal delivered to the remainder of the Company's system. Both standards are updated monthly to reflect h' i[( prevailing market prices of similar coal. The PUC has directed the Company to defer recovery of ; the delivered cost of coal to the extent that such cost exceeds generally prevailing market prices for {3 ! similar coal, as detennined by the PUC. The PUC allows deferred amounts to be recovered from l customers when the delivered costs of coal fall below such PUC-determined prevailing market prices. . l The Company's obligations to pay certain debt senice costs associated with the Bruce Alansfield coal f/[g l supply will end on January 1,2000. The Bruce Alansfield coal cost-capping mechanism does not y expire until the recovery of all deferrals has been resolved. The Company believes that Bruce [ ! Alansfidd deferrals may increase through the end of this decade and then be reduced to zero by the p i end of the year 2002. The unrecovered cost of Bruce Alansfield coal was $9.6 million and the unre- B covered cost of the remainder of the system-wide coal was $2.6 million at December 31,1996. ne p Company believes that all deferred coal costs will be recovered. [ Nuclear fuel The cycle of production and utilization of nuclear fuel consists of(1) mining and milling of p uranium ore and processing the ore into uranium concentrates, (2) converting uranium concentrates p to uranium hexafluoride, (3) enriching the uranium hexafluoride, (4) fabricating fuel assemblies, (5) p i utilizing the nuclear fuel in the generating station reactor and (6) storing and disposing of spent fuel. Adequate supplies of uranium and conversion senices are under contract for the Company's b( requirements for its jointly owned / leased nuclear units through June and December 1997, respec- ? tively. Enrichment senices are supplied under a 1984 United States Enrichment Corporation Utility h Senices Contract entered into for a period of 30 years by the Company for joint interests in Perry ,,, k Unit 1, BV Unit I and BV Unit 2. Under the tenns and conditions of this contract, the Company l[ is committed to 100 percent ofits enrichment needs through 1999; the Company has tenninated, ji ( at zero cost, all of its enrichment senices requirements for fiscal years 2000 through 2005. The ?@ pk Company continues to review the need for further enrichment senices for the years 2006 through 2014 and may tenninate these future years'senices under the contract. Fuel fabrication contracts are $k in place to supply reload requirements for the next 18-month cycle for BV Unit 1 and BV Unit 2 f and the next fifteen 18-month cycles for Perry Unit 1. The Company will m ike arrangements for ([N , , . future uranium supply and related senices, as required. a p 5- [ w r
Each utility company is responsible for financing its proportionate share of the costs of nuclear fuel for each nuclear unit in which it has an ownership or leasehold interest. The Company's nuclear fuel costs, which are amortized to reflect fuel consmned, are charged to fuel expense and are currently recovered through rates. The Company estimates that, over the next three years, the expenditures for new fuel will exceed the amortization of nuclear fuel consumed by approximately $4.4 million. The actual nuclear fuel costs to be financed and amortized will be influenced by such factors as changes in interest rates; lengths of the respective fuel cycles; reload cycle design; and changes in g.m nuclear material costs and senices, the prices and availability of which are not known at this time. gg Such costs may also be influenced by other events not presently foreseen. ; h j Nuclear The PUC ruled that recovery of the decommissioning costs for BV Unit I could begin in 1977, p4 7 Decorninissioning and that recovery for BV Unit 2 and Perry Unit I could begin in 1988. The Company expects to i 3 decommission BV Unit 1, BV Unit 2 and Perry Unit I no earlier than the expiration of each plant's ij operating license in 2016,2027 and 2026. At the end ofits operating life, BV Unit I may be placed fj in safe storage until BV Unit 2 is ready to be decommissioned, at which time the units may be C decommissioned together. Based on site-specific studies finalized in 1992 for BV Unit 2, and in 1994 for BV Unit I and g y Perry Unit 1, the Company's share of the total estimated decommissioning costs, including removal and decontamination costs, currently being used to determine the Company's cost of senice, is $122 million for BV Unit 1, $35 million for 13V Unit 2, and $67 million for Perry Unit 1. A study will be q 6 performed in 1997 to update the Company's estimated decommissioning costs of BV Unit I and BV Unit 2. "]g OnJuly 18,1996, the PUC issued a Proposed Polity Statement Regarding Nuclear Dearmmissioning Cost litimation and Cost Recovery fbr the purpose of obtaining comments from the public. The proposed policy includes guidelines for a site-specific study to estimate the cost of decommissioning. @q Guidelines require that studies be perfonned at least every five years, address radiological and "S non-radiological costs, and include a contingency factor of not more than 10 percent. Under the Mj proposed policy, annual decommissioning funding levels are based on an annuity calculatic,n recog-nizing inflation in the cost estimates and earnings on fund assets. With respect to the transition to a f] competitive generation market, the Customer Choice Act requires that utilities include a plan to %,9 mitigate any shortfall in decommissioning trust fund payments for the life of the facility with any j future decommissioning filings. Consistent with this requirement, the Company has increased its nuclear decommissioning funding by $5 million under the PUC-approved plan for the sale of the
] Company's ownership interest in Ft. A1artin. (See "Alitigation Plan" discussion on page 32.) These Q additional annual contributions bring the total annual funding to approximately $9 million. Also, on j October 17,1996, the PUC adopted an Accounting Order filed by the Company to recognize the i d
increased ftmding as part of the Company's cost of service. The Company expects to receive approval ,e from the Internal Revenue Senice (IRS) for qualification of 100 percent of additional nuclear decom-Q missioning trust funding for BV Unit 2 and Perry Unit 1, and 79 percent for BV Unit 1. I j The Company records nuclear decommissioning expense under the category of depreciation and g amortization expense and accrues a liability, equal to that amount, for nuclear decommissioning costs. 1 Funding for nuclear decommissioning costs is deposited in external, segregated trust accounts and j may be invested in a portfolio of corporate common stock and debt securities, municipal bonds, l
,1 certificates of deposit and United states government securities. Trust fund earnings increase the fund balance and the recorded liability. The market value of the aggregate trust fund balances at Q}j 3
December 31,1996 totaled approximately $33.7 million. On the Company's consolidated balance sheet, the decommissioning trusts have been reflected in otherlong-term imiemnents, and the related liability has been recorded as other non-curirnt liabilities.
}y Nuclear Insurance The Price-Anderson Amendments to the Atomic Energy Act of19H limit public liability from a gay single incident at a nuclear plant to $8.9 billion. The maximum available private primary insurance of $200 million has been purchased by the Company. Additional protection of $8.7 billion would be p3 provided by an assessment of up to $79.3 million per incident on each nuclear unit in the United qt States. The Company's maximum total possible assessment, $59A million, which is based on its 49 ownership or leasehold interests in three nuclear generating units, would be limited to a maximum Q,[5 4 of $7.5 million per incident per year. This assessment is subject to indexing for inflation and may be subject to state premium taxes. If funds prove insufficient to pay claims, the United States Congress *\ could impose other revenue-raising measures on the nuclear industry.
3 m
", " )
p 1 ay j Q , ,_ 1 t
The Onnpany's share ofinsurance coverage for property damage, decommissioning and deconta-mination liability is $1.2 billion. The Company would be responsible for its share of any damages in excess ofinsurance coverage. In addition, if the property damage reserves of Nuclear Electric Insurance Limited (NEIL), an industry mutual insurance company that provides a portion of this coverage, are inadequate to cover claims arising from an incident at any United States nuclear site covered by that insurer, the Onnpany could be assessed retrospective premiums totaling a maximum I of $7.3 million. In addition, the Company participates in a NEIL program that provides insurance for the increased cost of generation and/or purchased power resulting from an accidental outage of a nuclear unit. ky M <> l Subject to the policy limit, the coverage provides for 100 percent of the estimated incremental casts l j per week during the 52-week period starting 21 weeks after an accident and 80 percent of such {4 9,'j l estimate per week for the following 104 weeks, with no coverage thereafter. If NEIUs kisses for this program ever exceed its reserves, the Company could be assessed retrospective premiums totaling a
% [,
l ' maximum of $3.5 million. Spent Nuclear The Nuclear Waste Policy Act ofl982 established a policy for handling and disposing of spent nuc: ear , fuel Disposal fuel and a policy requiring the establishment of a final repository to accept spent nuclear fuel. Electric (d utility companies have entered into contracts with the United States Department of Energy (DOE) E~ for the pennanent disposal of spent nuclear fuel and high-level radioactive waste in compliance with W this legislation. The DOE has indicated that its repository under these contracts will not be available f_
! 4 j for acceptance of spent nuclear fuel before 2010. On July 23,1996, the U.S. Coun of Appeals for the l
District of Columbia Circuit, in response to a suit brought by 25 electric utilities and 18 states and f l state agencies, unanimously ruled that the DOE has a legal obligation to begin taking spent nuclear p fuel byJanuary 31,1998. The DOE has not yet established an interim or pennanent storage facility, and has indicated that it will be unable to begin acceptance of spent nuclear fuel for disposal by {C January 31,1998. Further, Congress is considering amendments to the Nuclear Waste Policy Act ofl982 k that could give the DOE authority to proceed with the development of a federal interim storage f
- facility. In the event the DOE does not begin accepting spent nuclear fuel, existing on-site spent y l nuclear fuel storage capacities at IW Unit 1, IW Unit 2 and Perry Unit I are expected to be sufficient b until 2016 (end of operating license),2013 and 2011. h*
b On January 31,1997, the Company joined 35 other electric utilities and 46 states, state agencies and regulatory commissions in filing a suit in the U.S. Court of Appeals for the District of Columbia 4 against the DOE. The suit requests the court to suspend the utilities' payments into the Nuclear Waste Fund and to place future payments into an escrow account until the DOE ftdfills its obligation ([ to accept spent nudear fuel. Significant additior=1 expenditures for the storage of spent nuclear fuel at IW Unit 2 and Perry Unit I could be required if the DOE does not fulfill its obligation to accept b spent nuclear fuel. (M b. p Uranium Emichment Nuclear reactor licensees in the United States are assessed annually for the decontamination and Q Decontamination decommissioning of DOE uranium enrichment facilities. Assessments are based on the amount of kQ and uranium a utility had processed for enrichment prior to enactment of the NationalEnergy Policy Act Decommissioning ofl992 (NEPA) and are to be paid by such utilities over a 15-year period. At December 31,1996, f{[ the Company's liability for contributions was approximately $9.3 million (subject to an inflation adjustment). Contributions, when made, are currently recovered from electric utility customers ;L through the ECR. [ Environmental The Comprrhensive Envinmmental Response, Compensation and LiaNiity Act of1980 and the Superfund fl y Matters Amendments and Reauthorization Aa ofl986 (Superfund) established a variety ofinformational and emironmental action programs. The United States Emironmental Protection Agency (EPA) infonned k, the Company ofits potential involvement in three hazardous waste sites. The Company reached [ agreements to make de minimus financial payments in 1995 related to two sites in order to resolve any p associated liability. Related to the remaining site, the Company believes that available defenses, along jk with other factors (including overall limited involvement, low estimated remediation costs and other gh< solvent, potentially responsible parties) will limit any potential liability that the Company may have for g{ cleanup costs. The Company believes that any settlement or associated costs n lated to the remaining 5o site will not have a materially adverse effect on its financial position, resuhs of operations or cash flows. %( , As required by Title V of the Ocan AirAct Amendments (Ocan Air Act), the Company filed g'
~
comprehensive air operating permit applications for Cheswick, Elrama,111 and Phillips during the ^j; last half of 1995.These applications are still pending appmval. The Company also filed its Title IV g , Phase 11 Ocan Air Act compliance plan with the PUC on December 27,1995. { 7
- f. -
r% p l
Although the Company believes it has satisfied all of the Phase I Acid Rain Program requirements of the Clcan Air Aa, Phase 11 Acid Rain Program requires significant additional reductions of sulfur dioxide (SO2 ) and oxides of nitrogen (NOx) by the year 2000. 'Ihe Company currently has 662 A1W of nuclear capacity and 1,187 A1W of coal capacity equipped with SO, emission-reducing equipment ! (including 300 MW of n>pertyf bc/dferfutun use at Phillips). Through the year 2000, the Company is considering a combination of compliance methods that include fuel switching; increased use of, , and improvements in, SO, emission-reducing equipment; low NOx burner technology; and the ' eq purchase of emission allowances for those remaining stations not in compliance. .
"j In addition to the 'litle W Acid Rain Program requirements, the Company is responsible for *g additional NOx reduction requirements to meet Ozone Ambient Air Quality Standards under Title I 3y f of the Clean AirAct. Flue gas conditioning and post-combustion NOx reduction technologies may be employed if economically justified. Also, the Company is examining and developing innovative
~,4 emissions technologies designed to reduce costs. The Company continues to work with the g] operators ofits jointly owned stations to implement cost-effective compliance strategies to meet g these requirements. g4 The Company is closely monitoring other potential future air quality programs and air emission ' control requirements that could restdt from more stringent ambient air quality and emission standards
@3 for SO, and NOx particulates and other by-pnxiucts of coal combustion. The Company expects the , Pennsylvania Department of Environmental Protection (DEP) to fmalize in 1997 a regulation to g implement the additional NOx control requirements that were recommended by the Ozone Transport q1 Onnmission. The estimated costs to comply with this program have been included in the Company's capital cost estimates thmugh the year 2000. Since other potential programs are in various stages of O discussion and consideration, it is impossible to make reasonable estimates of the potential costs S and impacts, if any. The Company currently estimates that additional capital costs to comply with C/can Air Act requirements through the year 2000 will be approximately $20 million.
N} j The Cmnpany has deseloped, patented and installed low NOx burner technology for the Elrama boilers. These cost-effective NOx reduction systems in,talled on the Elrama roof fired boilers were , j specified as the benchmark for the industry for this class of boilers in the EPA's fmal Group Il rule- i h making. The Company is also currently evaluating additional low-cost, developmental NOx reduction l ~d technologies at Cheswick and Elrama. An Artificial Neural Network control system enhancement, { q co-sponsored by the Electric Power Research Institute and the Company, will be demonstrated at j* Cheswick. The Gas Research Institute and the Company are sponsoring a targeted natural gas , reburn demonstration at Eframa. Both demonstrations were initiated in 1996 and will be completed i in 1997. D in 1992, the DEP issued Residual IVaste Managewnt Regulations governing the generation and d management of non-hazardous residual waste, such as coal ash. The Company is assessing the sites it j utilizes and has developed compliance strategies that are currently under review by the DEP. Capital .Q costs of $2.5 million were incurred by the Company 1996 to comply with these DEP regulations. j 1 ased on information currently available, an additional 52.8 million will be spent in 1997. The addi-Q tional capital cost of compliance through the year 2000 is estimated, based on current information, j to be 515 million. This estimate is subject to the results of roundwater F assessments and DEP fmal
<d approval of compliance plans.
d The Company is involved in various other emironmental matters. The Company believes that y such matters, in total, will not have a materially adverse effect on its fmancial position, results of
] operations or cash flows.
l Outlook Competition j}g c The electric utility industry continues to undergo fundamental change m response to open trans-mission access and increased availability of energy alternatives. Under historical PUC ratemaking, regulated electric utilities were granted exclusive geographic franchises to sell electricity in exchange [N y for making investments and incurring obligations to serve customers under the then-existing %E regulatory framework. Through the ratemaking process, those prudendy incurred costs were
- 9E recovered from customers, along with a return on the investment. Additionally, certain operating 3 costs were approved for deferral for future recovery from customers. As a result of this historical M[q ratemaking pmcess, utilities have assets recorded on their balance sheets at above-market costs and
,j, have commitments to purchase power at above-market prices (transition costs).
'i- I
<,N
,d
&A
In Pennsylvania, under.the Customer Choice Act which became effective onJanuary 1,1997, consumers in a utility's traditional franchised territmy will ultimately be able to purchase electricity at market prices from a variety of electric generation suppliers. Before the phase-in to customer choice begins in 1999, the PUC expects utilities to take sigorous steps to mitigate transition costs as much as possible without increasing the price they currently charge customers. The PUC will detennine what portion of a utility's remaining transition costs will be recoverable from customers through a CTC. This charge will be paid by consumers who choose alternative generation suppliers as well as customers who choose their franchised utility. The CTC could last as long as 2005, providing a utility mm a total of up to nine years to recover transition costs. An overall four-and-one-half yeai price cap will .. , @ p[y^ be imposed on the transmission and distribution charges of existing electric utility companies. Additionally, existing electric utility companies may not increase the generation price component of prices as long as transition costs are being recovered, with certain exceptions. If a utility ultimately gd is unable to recover its transition costs within this pricing structure and timeframe, the costs will be OW written off. I[ The Company has already been effective in mitigating its exposure to transition costs. As the k% following table demonstrates, generating plant, decommissioning and related regulatory asset costs j have been reduced by approximately $400 million during the past two years. These reductions have g resulted from a variety of strategies, such as selling generating assets, accelerating recovery of fixed costs, increasing nuclear decommissioning charges and reducing capitalized costs. The Company g v expects to continue these steps to address its remaining transition costs. The Customer Choice Act p provides another option to mitigate transition costs. With PUC approvat utilities are pennitted to ky issue transition bonds with a maturity of 10 years or less. Proceeds can be used to reduce transition W costs. The Company is currently reviewing this alternative as well as others to further mitigate its h' D-transition costs. (See " Regulation" and " Rate Matters" discussions on pages 27 and 31.) Potential Transition Costs c iI U , December 31, January 1, 1996 1995 # tw p m (Amounts in Millions ofDollars) V' p< Nuclear plant S 910.5 $1,149;0 p , 417.9 Generation-related regulatory assets BV Unit 2 lease 399.1 495.8 401.0 {4 {~ Unfunded generating plant decommissioning Phillips 299.5 78.3 371.0 78.3 {&4 Warwick Mine 15.3 25.0 L9 Purchase power contracts - - gy Total S2,120.6 S2,520.1 ' t Any estimate of transition costs, including those in the table above, is forward-hmking and is highly dependent on estimates of the future market prices for electric power. Higher market prices for h' T electricity reduce transition cost exposure, while lower market prices increase exposure. As part of its transition filing, the Company is proposing to make a long-tenn sale of electricity during the transition period to detennine the market rate for pow er. In addition to market-related impacts, b[ any estimate of the ultimate level of transition costs also depends on, among other things, the < extent to w hich such costs are deemed recoverable by the PUC, the ongoing level of the Duquesne's kq7 costs of operations, regional and national economic conditions, and growth of the Duquesne's sales. Duquesne anticipates making its transition filing, including the identification of potential transition ,,, h[ costs, as required by the PUC by August 1,1997. The PUC is expected to rule on the Company's jQ ability to recover these costs through a CTC by May 1,1998. The Company believes, based upon prior rulings of the PUC, that it is entitled to reemer substantially all ofits transition costs, but jE k" 3 cannot predict the outcome of this regulatory process. In the event that the PL'C rules that any or gp' all of these transition costs cannot be recovered through a CTC mechanism or the Company fails 5h to satisfy the requirements of SE4S No. 71, these costs will be written off. As the Company has substantial exposure to transition costs relative to its size, significant transition cost write-offs could {[W g p L __ r
i ' have a materially adverse effect on the Company's financial position, results of operations and cash flows. Various financial covenants and restrictions could be violated if substantial write-off of assets or recognition ofliabilities occurs. In addition to the mitigation of transition costs, the Company has been preparing for competition l in a variety of ways. In 1989, a holding company structure was fonned to add flexibility to the Company's strategy for managing assets. With this structure the Company has been able to pursue new business opportunities that have capitalized on the Company's leadership in engineering, energy production and the application of technology. The Company's market-driven businesses have grown My] f in a manner that complements its core business. The Company has also been building its financial g strength through the retirement and refinancing of kng-tmn debt and the repurchase of stock. In
%p p 1995, the Company's restrictive first mortgage bond indenture was replaced with a new indenture Q with more flexible provisions and the Company completed a 3-for-2 stock split. In 1996, the
;1 Company issued A11PS to further add to its financial flexibility and creditworthiness.
'y Meanwhile, the Company has better positioned its electric utility business for competition through .
g improving operations and enhancing customer relations. In recognition ofimpending industry compe-f ,Nition and in an effort to optimize its generation resources, in 1989 the Company signed a contract with e f Ddmarva Power for a bulk power sale for a period of 20 years. This initiative would have resulted in j]j the refurbishment and return to senice of the Company's cold-reserved generating stations. Following the plan's failure to receive regulatory approval,in 1990 the Company announced a second long-term jj power sale initiative to restart these power plants. This plan would have provided significant impetus to y economic development in Pennsylvania as well as providinF the Company's customers with substantial f9 benefits in the fonn oflower rates. The Company's efforts to upgrade and maintain the cold-reserved h g units have enabled the Company to utilize the El units to meet peak demand during periods of extreme weather in recent years and have enabled the BI units to more quickly return to senice as part of the l kj Ft. A1artin sale. In 1991, Duquesne reorganized into strategic business units along market lines and instituted cost reduction targets for capital, operation and maintenance, and inventory expenditures.
;} As part of this process, workforce reductions were achieved primarily through attrition; since 1989 Duquesne has reduced its number of employees by 25 percent. Recently, Duquesne signed a three-yh year contract extension with its bargaining unit employees through September 2001. Throughout the j
period, Duquesne has been aggressively reducing its fuel costs, achieving a 13 percent reduction in j,y the unit cost of fuel since 1990. These measures have enabled Duquesne to reduce its rates by nearly b}h 36 percent, in real tenus, since 1990. When considering the price freeze component of Duquesne's Alitigation Plan, prices will have declined by nearly 50 pcreent in real tenns during the decade of 9 the 1990s. From a customer relations standpoint, Duquesne negotiated long-term contracts with j more than 30 key industrial and commercial customers and was recognized in 1996 for its economic j development efforts in attracting major new industrial expansions. In 1995, Duquesne became one of f'?q the first electric utilities in the country to offer a fidl customer senice Fuarantee and also guaranteed to match any competing electricity supplier's price for new businesses or for the expansion of existing {
. 01 businesses. Duquesne also is offering to customers increased bill-paying options, including an i advanced technology senice that enables customers to electronically receive and pay their electric l @h ?
bills. This senice assists major customers just as its earlier Electricheck option helped smaller commercial and residential customers. Additionally, Duquesne will be positioned to offer customers ,
,i a wide range of new senices with the Customer Advanced Reliability System (CARS). Utility
[$ customers will be linked to CARS by encoder receiver transmitters contained in new or retrofitted y electric meters. Data communications offered by this technology are expected to result in improved Q g reliability, security, and customer satisfaction. At the national level, in 1996 the FERC issued two related final rules that address the terms on f;d which electric utilities will be required to provide wholesale suppliers of electric energy with non- 1
] q, discriminatmy access to the utility's wholesale transmission system. The first rule, Order No. 888, requires each public utility that owns, controls or operates interstate transmission facilities to file a gg tariff offering unbundled transmission senices containing non-rate terms that confonn to the Qv $ l FERC's pro fonna tariff. Order No. 888 also allows full recovery of prudently incurred costs from ;
departing customers. FERC deferred to state regulators with respect to retail access, recovery of (( j$ j retail transition costs and the scope of state regulatory jurisdiction. The second nde, Order No. 889, i ig prohibits transmission owners and their affiliates from gaining preferential access to information l V concerning transmission and establishes a code of conduct to ensure the complete separation of a !
. }7 utility's w holesale pow er marketing and transmission operation ftmetions.
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i Finally, the FERC simultaneously issued a new Notice ofPivposed Rulemaking (NOPR) on Capacity Resceration Open Axess Trannnission Tarrgs (CRT), which would require all market participants to reserve firm capacity rights between designated receipt and delivery points. If adopted, the CRT , would replace the open access pro forma tariff implemented in Order No. 888. (See " Transmission l Access" discussion below.) The Company is aware of the foregoing state and federal regulatory and business uncertainties and is attempting to position itself to operate in a more competitive emironment. Transmission Access 9V % 8 In March 1994, the Company submitted, pursuant to the FederalPcreer Act, two separate " good g faith" requests for transmission senice with APS and the Pennsylvania-NewJersey-Maryland Interconnection Association (PJM Companies). Because of a lack of progress on pricing and other g(' , , issues, the Company subsequently filed with the FERC applications for transmission senice. In May 1995, the FERC instructed APS and the PJM Companies to prmide transmission senice to the {"' Company and directed the parties to negotiate specific rates, tenns and conditions. No terms were aFreed to, and briefs were filed with the FERC outlining the areas of disagreement. ne matter is now g, pending before the FERC. InJuly 1996, the Company filed with the FERC a request for acceptance p of a capacity reservation taritT to replace the previously filed FERC Order No. 888 pro fonna tariff. r (See " Competition" discussion on page 38.) The Company's tariff proposes to adopt marginal cost 4 pricing for transmission senice on the Company transmission system. In February 1997, the FERC ;;7 rejected the Company's tariff filing, but permitted the Company to request a hearing to determine ? p whether the Company's tariffis just and reasonable as well as consistent with or superior to the Order No. 888 pro forma tariff. The Company has requested such a hearing. ,, The Company is currently evaluating the impact of FERC regulatory actions on these proceedings. Qg The Company cannot predict the final outcome of these proceedings. g
~
Beaver Valley Power Station (BVPS) Steam Generators i L, BVPS's two units are equipped with steam generators designed and built by Westinghouse Electric [, Corporation (Westinghouse). Similar to other Westinghouse nuclear plants, outside diameter stress % corrosion cracking (ODSCC) has occurred in the steam generator tubes of both units. The units g' continue to operate at 100 percent reactor power although 15 percent of BV Unit 1 and 2 percent i* of BV Unit 2 steam generator tubes have been removed from senice. Material acceleration in the rate of ODSCC could lead to a loss in plant efficiency and significant repairs or replacement of BV s' Unit I steam generators. The total replacement cost of the BV Unit I steam generators is estimated g~ at $125 million, $59 million of which would be the Company's responsibility. The earliest that the BV Unit i steam generators could be replaced during a scheduled refueling outage is the fall of 2000. Other Retirement Plan Measurement Assumptions ( , 1 q The Company increased the discount rate used to detennine the projected benefit obligation on g41 h the Company's retirement plans at December 31,1996 to 7.5 percent. The assumed change in future , compensation levels and assumed rate of return on plan assets were also increased to reflect current [d market and economic conditions. The effects of these changes on the Company's retirement plan ?N obligations are reflected in the amounts shown in " Employee Benefits," Note N to the consolidated , financial statements, on page 61. The resulting change in related expenses for subsequent years is not expected to be material. {(q y h F J! i kI i $sc. I p g p .. f .j
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f Except for historical infonnation Antaine2herein, the matters discussed in this annual report are forwakd-looking' F
- statements which involve risks and ' uncertainties including, but not limited to, economic, competitive, governmental {j and technological factors affecting the Companyt operations, markets, products, senices and prices and other factors - 4 E
f discussed in the Company's filings with the Securities and Exchange Commission. ' k y i, 4 c .
Report of To the Directors and Shoreholders of DQE: Independent Certified Pubh.c We have audited the acemnpanying consolidated balance sheet of DQE and its subsidiaries as of I
####""##"#8 December 31,1996 and 1995, and the related consolidated statements ofincome, retained earnings, l and cash flows for each of the three years in the period ended December 31,1996. These financial ;
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those ! t-
' standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
) includes assessing the accounting principles used and significant estimates made by management, as
@> well as evaluating the overall financial statement presentation. We believe that our audits prmide a 3 reasonable basis for our opinion. i In our opinion, such consolidated financial statements present fairly, in all material respects, the 1 financial position of DQE and its subsidiaries as of December 31,1996 and 1995, and the results of 4 their operations and their cash flows for each of the three years in the period ended December 31, i j 1996 in confonnity with generally accepted accounting principles. a k d Deloitte & 'Ibuche LLP M) Pittsburgh, Pennsylvania 3 January 28,1997 y(
#3 i Report of the The Audit Committee, composed entirely of non-employee directors, meets regularly with the 6
Audit Committee independent certified public accountants and the internal auditors to discuss results of their audit j of the Board of work, their evaluation of the adequacy of the internal accounting controls and the quality of financial l Directors of DOE reporting. In fulfilling its responsibilities in 1996, the Audit Committee recommended to the Board of 4 Directors, subject to shareholder approval, the selection of the Company's independent certified public accountants. The Audit C(>mmittee reviewed the overall scope and details of the independent certified public accountants' and internal auditors' respective audit plans and reviewed and approved the independent certified public accountants' general audit fees and non-audit senices. Audit Committee meetings are designed to facilitate open communications with internal j auditors and independent certified public accountants. To ensure auditor independence, both the ( independent certified public accountants and the internal auditors have full and free access to the Audit Committee. y 4 The Audit Committee of the Board of Directors of DQE I
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y.... . . ~ . - . . . . - . . - - - - - - . - - - - - - _ ~ STATEMENT OF CONSOUDATED INCOME (Thousands ofDollan, Ercept Per Share Amormts) i
- l 1 car Ended Daember 31, 1996 1995 1994 Operating Revenues Sales of Electricity:
Residential S 405,392 5 414,291 5 401,246 Commercial 489,646 491,789 490,309 PM mm Industrial 190,723 190,689 195,852 QH Provision for doubtful accounts (10,582) (13,430) (11,890) is y ] Net customer revenues Utilities 1,075,179 58,292 1,083,339 55,963 1,075,517 58,295 k$9 Total Sales of Electricity 1,133,471 1,139,302 1,133,812 Other 91,724 80,860 90,098 h[] Q. ! 7bral Operating Revenues 1,225,195 1,220,162 1,223,910 ?7
. Operating Expenses Fuel and purchased power 236,924 231,968 244,135 p Other operating 298,977 292,997 329,177 pJ, Maintenance 78,386 81,516 79,488 iM Depreciation and amortization 222,928 202,558 165,912 ' ~"
l i Taxes other than income taxes 85,974 88,658 88,331 iS
&m Total Operating Expenses 923,189 897,697 907,043 4f l Operating Income Operating Income 302,006 322,465 316,867 _,31 Other Income 74,790 52,314 42,924 %
l Interest and Other Charges 110,270 266,526 107,555 267,224 110,002 249,789 fh
@g l Income Before Income Taxes Income Taxes 87,388 96,661 92,973 M
- Net Income Net Income S 179,138 5 170,563 S 156,816 kj$
gy; l-e n l Average Number of Common Shares R2 Outstanding (rhousands of Shares) 77,349 77,674 79,046 3
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Earnfags Per Shore Earnings Per Share of Common Stock S2.32 $2.20 $1.98 i Mj kB. r Dividends Declared Dividends Declared Per Share of Common Stock St.30 $1.21 $1.13 Iih f See notes to consolidatedfinancialstatements. Gg
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STATEMENT OF CONSOUDATED RETAINED EARNINGS (Thousands ofDollars) k 1996 1995 1994 r m na Balance at beginning of year S 698,986 5 622,072 S 554,604
,j Mg 179,138 170,563 156,816 j i l @g Net income (100,517) (93,649) (89,348)
Dividends declared < Balance at end of year. S 777,607 5 698,986 5 622,072 5 M@ e, , .. See notes to consolidatedfinancialstatements. i
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CONSOLIDATED BALANCE SHEET , (Thotuands ofDollars) As ofDecember 31, 1996 1995 Assets Current Assets: ' Cash and temporary cash investments S 410,978 S 24,767 ; T Ek Receivables: [ 7 ,) Electric customer accounts receivable Other utility receivables 92,475 22,402 103,821 22,441 g Other receivables 33,936 25,164 l Less: Allowance for uncollectible accounts (18,688) (18,658)
; [,h . Receivables less allowance for uncollectible accounts 130,125 132,768 i
,Q Less: Receivables sold - (7,000) l Total Receivables - Net 130,125 125,768 iJ3 L ty, Materials and supplies (at average cost): 8 Coal 19,097 25,454 Operating and construction 52,669 53,298 ,l TotalMaterials and Supplies 71,766 78,752 : g Other current assets 9,359 8,099 I .ND Total Current Assets 622,228 237,386 pg M
$d Long-Term Investments: !
[th Affordable housing 150,270 116,784 ! d% Leveraged leases 134,133 87,834
.w, wf Other leases 85,893 106,916 y Gas tesen es 79,916 69,435 <
M Other 68,477 59,947 Total Long-Term Investments 518,689 440,9l6 ' g$ 4
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- Property, Plant and Equipment:
M Electric plant in service 4,275,110 4,265,161 j Construction work in progress 45,059 38,134 _. j Property held under capital leases 99,608 133,381 J Property held for future use 190,821 216,633 d(m Other 176,872 92,804
. (i Gross property, plant and equipment 4,787,470 4,746,113 F pl Less: Accumulated depreciation and amortization (1,969,945) (1,685,877) yg 7btal Property, Plant and Equipment - Net 2,817,525 3,060,236 w
i . !
@ OtherNon-Current Assets:
Q,, Regulatory assets 636,816 678,700 M w eq ., Other 43,734 41,605 i g9' 8 i i Total Other Non-Current Assets 680,550 720,305 1 5 TotalAssets S4,638,992 $4,458,843 ! See notes to consohdatedfinancialstatements. Ma eq. w Y ! p$:4a h i kf 4%rj fy hc' ,
I f (Thousandr ofDollars) As ofDecember 31, 1996 1995 liabilities and Current Liabilities: , Capitalization Notes payable S 749 5 35,098 72,831 71,379 Current maturities and sinking fund requirements 96,230 90,941 ['" F Accour.ts payable Accrued liabilities 58,044 52,063 L Dividends declared 28,633 27,825 1 Other 4,075 9,191
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7btal Cunrnt Liabilities 260,562 286,497 k' Non-Current Liabilitics: [ Deferred income taxes - net 759,089 801,631 i; Deferred investment tax credits 106,201 115,760 h Capital lease obligations 28,407 34,546 [ Deferred income 189,293 221,740 f-Other 240,763 197,973 k Total Non-Cunrut Liabilities 1,323,753 1,371,650 [ , {^ f Commitments and Contingencies (Notes B through N) I [ l Capitalization: Ieng-Term Debt 1,439,746 1,400,993 1 , l1. ' Preferred and Preference Stock of Subsidiaries: Non-redeemable preferred stock 213,608 63,608 [' ! Non-redeemable preference stock 28,997 29,615 I t 4 E
'Ibtal preferred and preference stock before deferred employee stock ownership plan (ESOP) benefit 242,605 93,223 j Deferred ESOP benefit (19,533) (22,257) I 223,072 70,966 lbtal Prrfenrd and Preferrnce Stock ofSubsidiaries Common Shareholders' Equity: [
Common stock - no par value (authorized - 187,500,000 [ , shares; issued - 109,679,154 shares) 990,502 997,461 l l Retained earnings 777,607 698,986 l l Treasury stock (at cost)(32,406,135 and 32,123,601 shares) (376,250) (367,710) [o 1 Total Cornrnon Sharrholders' Equity 1,391,859 1,328,737 p. ' Total Capitalization 3,054,677 2,800,696 f' Total Liabilitles and Capitalization S4,638,992 S4,458,843 7[ l g ;- , See notes to consolidatedfinanaalstatements. ?; .
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i STATEMENT OF CONSOLIDATED CASH FL0wS (Ibousands ofDollan) Har Ended December 31, 1996 1995 1994 l Cash Hows from Net income S179,138 S170,563 S156,816 Operating Activities Principal non-cash charges (credits) to net income:
% Depreciation and amonization 222,928 202,558 165,912 Capital lease, nuclear fuel and investment amortization 53,166 38,847 36,320 Deferred income taxes and investment tax credits - net (60,719) (22,120) (11,342) y Phase-in revenues and carrying charges recovered - -
28,621 Investment income (16.125) (3,475) (4,227) Changes in working capital other than cash (1,033) 46,527 (31,891) l r Other - net 282 21,151 29,418 ! 9 Net Cash Providedfrvrn Operating Activities 377,637 454,051 369,627 Cash flows from Sale of generating station 169,100 - - Investing Activities Capital expenditures (101,150) (94,164) (121,085) Long-term investments (71,419) (187,719) (66,698) Proceeds from disposition ofinvestments 17,661 - - [ Payment for purchase of GSF Energy, net of cash acquired (24.234) - - 4 l Other - net (1,898) (3,854) (12,321) Net Cash Used in Investing Activities (l1,940) (285,737) (200,104)
.j Cash flows from Issuance oflong-tenn debt 85,000 65,000 114,110 Financing Activities issuance of preferred stock 150,000 - -
f (Decrease) increase in notes payable (28,637) (20,236) 32,530
; Dividends on common stock (100,517) (93,649) (89,348)
Repurchase of common stock (11,717) (21,271) (23,307) Reductions oflong-tenn obligations: Preferred and preference stock -- (29,732) (39,958)
. . Long-tenn debt (50,812) (56,114) (114,835)
Capital leases (19,326) (26,373) (33,522) Other - net (3,477) (11,230) 2,631 Net Cash Providedfrvin (Used in) Financing Activities 20,514 (l93,605) (l51,699) Net increase (decrease) in cash and temporary cash investments 386,211 (25,291) 17,824
- j. Cash and temporary cash investments at beginning of year 24,767 50,058 32,234 Cash and temporary cash investments at end of year $410,978 5 24,767 5 50,058 SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid During Interest (net of amount capitalized) S 95,702 S 99,954 S105,900 i the Year income taxes S 91,641 5 82,884 S 84,753
',,, Non-Cash Investing Capital lease obligations recorded S I3,050 S 14,961 S 16,909 o y and financing S 36,716 Equity funding obligations recorded S 21,827 S -
g Activities Preferred stock issued in conjunction with long-tenn B investments S - S 3,000 5 - h sa notes to wnsohdatedfinanaalstatements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Summory of Consolidation Significant DQE is an energy senices holding company. Its subsidiaries are Duquesne Light Company
# "8 (Duquesne), Duquesne Enterprises (DE), DQE Energy Senices (DES), DQEnergy Partners and Montauk. DQE and its subsidiaries are collectively referred to as "the Cmnpany."
Duquesne is an electric utility engaged in the production, transmission, distribution and sale of electric energy and is the largest of DQE's subsidiaries. DE makes strategic investments beneficial to DQE's core energy business. These investments enhance DQE's capabilities as an energy prosider, P increase asset utilization, and act as a hedge against changing bu inm condition . DES is a diversified energy senices company offering a wide range of energy solutions for industrial, utility and consumer markets worldwide. DES initiatives include energy facility development and operation, domestic and g% international independent power pn> duction, and the production and supply ofinnovative fuels. DQEnergy Partners was formed in December 1996 to align DQE with strategic partners to capitalize on opportunities in the dynamic energy senices industry. These alliances enhance the utilization and value of DQE's strategic investments and capabilities whde establishing DQE as a total energy [~: provider. Montauk is a financial senices company that makes long-term investments and provides financing for the Company's other market-driven businesses and their customers. g~ , All material intercompany balances and transactions have been eliminated in the preparation of the consolidated financial statements. ;< r+ Basis of Accounting V p The Company is subject to the accounting and reporting requirements of the United States Securities and Exchange Commission (SEC). In addition, the Company's electric utility operations are subject to regulation by the Pennsylvania Public Utility Commission (PUC) and the Federal p ii Energy Regulatory Commission (FERC) under the FederalPower Aa with respect to rates for interstate sales, transmission of electric power, accounting and other matters. The Company's consolidated financial statements report regulatory assets and liabilities in accor- < dance with Statement ofFinancial Axounting Standants No. 71, Axountingfor the Effirts ofCenain Types , ofRegulation (SE4S No. 71), and reflect the effects of the current ratemaking process. In accordance with SE4S No. 71, the Company's consolidated financial statements reflect regulatory assets and liabilities consistent with cost-based, pre-competition ratemaking regulations. (See " Rate Matters," { p Note F, on page 51.) p^ The preparation of financial statements in conformity with generally accepted accounting i principles requires management to make estimates and assumptions that affect the reported amounts ,j of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial L1 statements. The reported amounts of revenues and expenses during the reporting period may also be ;y affected by the estimates and assumptions management is required to make. Actual results could L,j
~t differ from those estimates. i Revenues from Sales of Gectricity }l Meters are read monthly and electric utility customers are billed on the same basis. Revenues are g recorded in the accounting periods for which they are billed, with the exception of energy cost ,l recovery revenues. (See -Energy Cost Rate Adjustment Clause (ECR)" discussion below.) !
The Company's Electric Service Territory The Company's utility operations provide electric senice to customers in Allegheny County,
' l' including the City of Pittsburgh,13eaver County and Westmoreland County. This represents approximately R00 square miles in southwestern Pennsylvania, located within a 500-mile radius of . ,;
one-half of the population of the United States and Canada. The population of the area served by Iij the Company's electric utility operations, based on 1990 census data, is approximately 1,510,000, of j 4,
whom 370,000 reside in the City of Pittsburgh. In addition to sening approximately 580,000 direct T j customers, the Company's utility operations also sell electricity to other utilities.
Energy Cost Rate Adjustment Gause (ECR) j{ pl
"Warwick Aline Costs" discussions, Note F, on pages 52 and 53.)
Over- or under-recoveries from customers are recorded in the consolidated balance sheet as q payable to, or receivable from, customers. At December 31,1996 and 1995, $1.8 million and Mp s5.8 million were payable to customers and shown as other cumnt liabilities. g Under the Electricity Generation Customer Choia and Competition Act (Customer Choice Act), the Q Company may replace the ECR effective April 1,1997 by rolling its ECR energy costs into its base l
,9 rates. The effect of this change would be to provide to the Company an opportunity to further miti- i
;ff gate its deferred energy costs based upon its ability to manage its energy costs. Under the Company's l g PUC-approved Alitigation Plan, the level of energy cost recovery is capped at 1.47 cents per kilowatt- l eQ hour (KWH) through Alay 2001. 'Io the extent that projections do not support recovery of previously I deferred costs through this pricing mechanism, these costs would become transition costs subject to
' ]q recoveiy through a competitive transition charge (CTC). (See " Customer Choice Act" and "Alitigation
)j Q Plan" discussions, Note F, on page 51.) '
Maintenance
] Incremental maintenance expense incurred for refueling outapes at the Company's nuclear units p is deferred for amortization over the period between refueling outages (generally 18 months). The Q Company accrues, over the periods between outages, anticipated expenses for scheduled major fossil h generating station outages. Alaintenance costs incurred for non-major scheduled outages and for forced outages are charged to expense as such costs are incurred. ']
Qo Depreciation and Amortization Depreciation of pmpeny, plant and equipment, including plant-related intangibles, is recorded on h@ a straight-line basis over the estimated remaining useful lives of properties. Amortization of other
, intangibles is recorded on a straight-line basis over a five-year period. Depreciation and amortization y of other properties are calculated on various bases. 'Q The Company records decommissioning costs under the category of depuciation andamonization ,
9 expense and accrues a liability, equal to that amount, for nuclear decommissioning expense. On the j Company's consolidated balance sheet, the decommissioning trusts have been reflected in other l
^
' Q long-tenn int'estments, and the related liability has been recorded as other non-ament liabilitics.
3 (See " Nuclear Decommissioning" discussion, NoteJ, on page 56.) 4 f The Company's electric utility operations' composite depreciation rate increased from 3.5 percent to 4.25 percent effective Alay 1,1996 and 3.0 percent to 3.5 percent effectiveJanuary 1,1995. Also e in 1996, the Company expensed 59 million related to the depreciation portion of deferred rate %g synchronization costs in conjunction with the Company's Alitigation Plan. Income Taxes tqb The Company uses the liability method in computing deferred taxes on all differences between
' book and tax bases of assets. These book / tax differences occur when events and transactions d recognized for fmancial reporting purposes are not recognized in the same period for tax purposes. , ]a The deferred tax liability or asset is also adjusted in the period of enactment k>r the effect of changes in tax laws or rates.
fl P^ For its electric utility operations, the Company recognizes a regulatory asset for the deferred tar liabilities that are expected to be recovered from customers through rates. (See " Rate Alatters,"
- j. Note F, and " Income Taxes," Note 11, on pages 51 and 54.)
% vl ,
The Company reflects the amortization of the regulatory tax receivable resulting frorn reversals of deferred taxes as depuciation and amonization expense. Reversals of accumulated defmd income taxes
%@ *'{ are included in income tax expense. !
hj When applied to reduce the Company's income tax liability, investment tax credits related to
?e ' electric utility property generally are deferred. Such credits are subsequently reflected, over the lives A of the related assets, as reductions to income tax expense.
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Property, Plant and Equipment The asset values of the Company's electric utility properties are stated at original construction cost, which includes related payroll taxes, pensions and other fringe benefits, as well as administrative and general costs. Also included in original construction cost is an allowance for funds used during construction (AFC), which represents the estimated cost of debt and equity funds used to finance construction. Additions to, and replacements of, pnsperty units are charged to plant accounts. 31aintenance, repairs and replacement of minor items of property are recorded as expenses u hen they are incurred. p' The costs of electric utility properties that are retired (plus removal costs and less any salvage value) y are charged to acatmulated deptrciation and amortization. c Substantially all of the Company's electric utility properties are subject to a first mortgage lien. Asset impairment i l: The effeets of adopting Statennwt ofFinancial Axounting Stamfards No.121, Aaountingfbr the Impairnuwt oflong-Lived Assets andfbr long-l.ived Assis to Be Disposed Of(SE4S No.12H, onjanuary 1, (( i 1996 did not have a material impact on the Company's financial position, results of operations or cash flows, based on the current regulatory structure in which it operates. As competitive factors ll influence pricing in the utility industry, this assessment may change in the future. The general [ requirements of SE4S No.12i apply to non-current assets and require impairment to be coraidered [; whenever evidence suggests that it is no longer probable that future cash flows in an amount at least equal to the asset book value will result. [L Stock Based Compensation l Statement ofFinancial Aaounting Standants No.121, Aaountingfbr Stock-Bascd Compensation L (SE4S No.12 7) encourages, but does not require, companies to record compensation cost for stock- [ based employee compensation plans at fair value. The Company has chosen to continue to account [ for stock-based compensation using the intrinsic value method prescribed in Aavanting Prinap/cs F Board Opinion No. 25, Axountingfbr Stock issued to Employces, and related imerpretations. Accordingly, , compensation cost for stock options is measured as the excess,if any, of the quoted market price of [ the Company's stock at the date of the grant over the amount an employ ee must pay to acquire the {. stock. Compensation cost for stock appreciation rights is recorded annually based on the quoted j market price of the Company's stock at the end of the period. [v Temporary Cash Investments ( Temporary cash investments are short-term, highly liquid investments with original maturities of l three or fewer months. They are stated at market, which approximates cost. The Company considers (-
?
temporary cash invesunents to be cash equivalents. y Reclassifications The 1995 and 1994 consolidated financial statements have been reclassified to conform with accounting presentations adopted during 1996. p B. Receivables The Company and an unaffiliated corporation have an agreement that entitles the Company to [ sell, and the corporation to purchase, on an ongoing basis, up to $50 million of accounts receivable. !' The Company had no receivables sold at December 31,1996. At December 31,1995, the Company I had sold S7 million of receivables to the unaffdiated corporation. The accounts receivable sales [- agreement, w hich expires in June 1997, is one of many sources of funds available to the Company. [ The Company has not determined, but may attempt to extend the agreement or to replace the I facility with a similar arrangement or to eliminate it upon expiration. f. C. Changes in Changes in Working Capital Other than Cash (Net of GSF Energy Acquisition) f Working Capital 1996 1995 1994 Other than Cash (Amounts in Thousands ofDulkn,) f RaciraNcs 31atnials and supplics S (1,946) 1,286 S 34,34i 9,994 S 9,928 2,932 j[l Other curirut assets (948) 3,126 (25,701) E; - m Jaount paraNc 4,691 7,087 (4,455) Other aurrut liabilitics (4,116) (8,021) (l4,595) C 7hral S (1,033) S 46,527 S(31,891) ; i a h
D. Property, Plant In addition to its wholly owned generating units, the Company, together with other electric ! and Equipment ! utilities, has an ownership or leaschold interest in certain jointly owned units. The Company is i required to pay its share of the construction and operating costs of the units. The Company's share l of the operating expenses of the units is included in the statement of consolidated income. l Generating Units at December 31,1996 Generating Net Utility Fuel l Unit Capability Plant Source mn (Alega:vatts) (Afillians ofDollm) N Cheswick 570 5 120.2 Coal j Elrama (a) 487 98.0 Coal f Fastlake Unit 5 186 39.4 Coal i Sanunis Unit 7 187 49.5 Coal J Ilruce Atansfield Unit 1 (a) 228 65.5 Coal h Ilruce Alansfield Unit 2 (a) 62 18.9 Coal M liruce Alansfield Unit 3 (a) 110 49.8 Coal llcaver Valley Unit 1 (b)
%j lleaver Valley Unit 2 (c)(d) 385 113 215.9 Nuclear 14.3 Nuclear , j;d Beaver Valley Conunon Facilities Perry Unit 1 (c) 164 153.2 398.5 Nuclear
~1 !q Ilrunot Island (f) 178 23.t Fuel Oil q Total 2,670 1,246.3 a Property held for future use: j llrunot Island (f) 128 28.5 Fuel Oil i Phillips (a) 300 78.3 Coal Total Generating Units 3,098 SI,353.l y 1 (a) The unit is equipped with flue gas desulfurization equipment. , ]j (li) The Nuclear Repdatory Commission (NRC) has granted a license to operate throughJanuary 2016. (c) On October 2,1987, the Company sold its 13.74 percent interest in Ilcaver Valley Unit 2 and >i leased it back; the sale was exclusive of transmission and common facilities. Amounts shown represent nj facil: ties not sold and subsequent leasehold improvements. },j (d) The NRC has granted a license to operate through Alay 2027. ' ' 1"; t (e) The NRC has granted a license to operate through Alarch 2026. (f) A portion of the pmceeds of the sale of the Ft. Alartin Power Station is expected to be used to fund 1 rchability enhancements to the llrunot Island (111) Unit 3 combustion turbine. The reliability enhancements are
% x mntingent upon the projects meeting a least-cost test versus other potential sources of peaking capacity.
111 Units 2a and 2b were moved from pnsperty hddfurfunnr use to dcasplat in sereice in 1996, in accordance
] with the Company's Alitigation Plan. (See "Alitigation Plan" discussion, Note F, on page 51.)
')M E. Long Term Investments The Company makes equity investments in affordable housing and gas reserve partnerships as a hmited partner. At December 31,1996, the Company had investments in 26 affordable housing funds M and five gas resure partnerships. The Company is the lessor in six leveraged lease arrangements
] intohing mining equipment, rail equipment, a fossil generating station, a waste-to-energy facility
[9 j and natural gas pn> cessing equipment. These leases expire in various years beginning in 2004 M through 2033. The residual value of the equipment at the end of the lease tenns is approximately Bj 3 percent of the original cost. The Company's aggregate investment represents 16 percent of the M aggregate original cost of the property and is secured by guarantees of each lessee's parent or affiliate.
- q The remaining 84 percent was fmanced by non-recourse debt provided by lenders who have been
; granted, as their sole remedy in the event of default by the lessecs, an assignment of rentals due j under the leases and a security interest in the leased property. This debt amounted to S553 million
,j o n and 5364 million at December 31,1996 and 1995. Q i Net leveraged Lease Investments at December 31 lh g$ 1996 1995 (Imounts in Thousands ofDolkm)
}[ Rentals receivable (net of non-recourse debt) 5215,358 S113,641
's Estimated residual value ofleased assets 22,029 26,470 f
\j Less: Unearned income (103,254) (52,277) s Les craged lease investments 134,133 87,834 i 'l Less: Deferred taxes arising from leveraged leases (59,781) (42,392)
Net incraged Lease invesnnents S 74,352 S 45,442
]
d
He Company's orber / cases include investments in fossil generating stations, a waste-to-energy facility, computers, vehicles and equipment. The Company's other investments are primarily in assets of nuclear decommissioning trusts and marketable securities, primarily of Exide Electronics Group, Inc. In accordance uith Statement ofFinancial Aaounting Standards No.115, Accountingfor Certain invenments in Debt and Equity Secmities (SE4S No.115), these investments are classifled as available-for-sale and are stated at market value. The amount of unrealized holding h>sses related to marketable securities at both December 31,1996 and 1995 was $4.4 million (52.6 million net of tax). Defimd ) income primarily relates to the Company's other lease im estments. Deferred amounts will be recog- pu nized as income over the lives of the underlying investments over periods generally not exceeding five years. , F. Rate Matters Customer Choice Act 'y Under the Customer Choice Act, which went into effect on January 1,1997, Pennsyhania has ? become a leader in customer choice. The Customer Choice Act will enable Pennsylvania's electric h*, utility customers to purchase electricity at market prices from a variety of electric generation suppliers (customer choice). Electric utility restructuring will be accomplished thmugh a two-stage process 3 consisting of a pilot period (nmning through 1998) and a phase-in period (1999 through 2001). Before the phase-in to customer choice begins in 1999, the PUC expects utilities to take vigomus p^ - steps to mitigate transition costs as much as possible without increasing the price they currently charge customers. The PUC will determine what portion of a utility's remaining transition costs will be recoverable from customers through a CTC. This charge will be paid by consumers who choose
- b. .
alternative generation suppliers as well as customers who choose their franchised utility. The CTC could last as long as 2005, pmviding a utility a total of up to nine years to recover transition costs. An overall four-and-one-half year price cap will be imposed on the transmission and distribution charges of existing electric utility companies. Additionally, existing electric utility companies may not increase the generation price component of prices as long as transition costs are being recovered, with certain exceptions. If a utility ultimately is unable to recover its transition costs within this pricing structure and timeframe, the costs will be written off. m b Mitigation Plan The Company has taken a number of steps to mitigate its potential transition costs. In addition to 9 the steps taken during the last 10 years to prepare for competition, effective January 1,1995, the k;
~
Company accelerated its rate of depreciation on its fixed nuclear assets without seeking a rate increase to recover the additional costs. On October 31,1996, the sale of the Company's ownership interest in the Ft. A1artin Power Station (Ft. A1artin) was completed. Ft. A1artin Unit I was ouned o 50 percent by Duquesne and 50 percent by its operator, Allegheny Power System. The sale and a W plan, to be funded in part by the proceeds of the Ft. A1artin transaction, w ere approved by the PUC n L on Alay 23,1996. Under the approved plan, the Company will not increase its base rates for a period of five years thmugh Alay 2001. In addition, the Company recorded in October 1996 a one-time e reduction of approximately $130 million in the lxxik value of the Company's nuclear plant investment. ?, The pmceeds from the sale are expected to be used to ftmd reliability enhancements to the BI Unit 3 fi d combustion turbine and to reduce the Company's capitalization. The appmved plan also prmides for by incremental increases of $25 million in depreciation and amortiwtion expense in 1996,1997 and 1998 [~ related to the Company's nuclear investment, as well as additional annual contributions to its nuclear F plant decommissioning funds of 55 million, without any increase in existing electric rates. Also, the Company will record an annual 55 million credit to the ECR during the plan period to compensate {F the Company's electric utility customers for hist pmfits from any short-term power sales foregone by the sale ofits ownership interest in Ft. 31artin. In addition, the Company will cap energy costs, !; beginning April 1,1997 through the remainder of the plan period, at a historical five-year average of , d 1.47 cents per KWII. In accordance with the approved plan, the Company has expensed 59 million j g related to the depreciation portion of the deferred rate synchmnization costs associated with Beaver j q Valley Unit 2 (BV Unit 2) and Perry Unit 1. The Company's approved plan provides for the amorti- g {g j zation of the remaining deferred rate synchronization costs over a 10-year period. At December 31, p 1996, the unamortized portion of these costs totaled 541.4 million, net of deferred fuel savings relat-ed to the two units. (See " Deferred Rate Synchmnization Costs" discussion on page 52.) Finally, the
$[@
Company's approved plan also prmides for annual assistance of $0.5 million to low-income cus- h,? tomers. (W G Q o mm
Regulatory Assets As a result of the application of SEi ? No. 71, the Company records regidatory assets on its consolidated balance sheet. The regu4itory assets represent probable future revenue to the Company because provisions her these costs are currently included, or are expected to be included, in charges to electric utility customers through the ratemaking process. A company's electric utility operations or a portion of such operations couhl cease to meet the } SEIS No. 71 criteria for various reasons, including a change in the FERC regulations or the f"" competition-related changes in the PUC regulations. (See " Customer Choice Act" discussion on page 51.) The Company currently believes its electricity generating assets and related regulatory 1 assets continue to satisfy these criteria in light of the transition to competitive generation under the Customer Choice Act. Should any portion of the Company's electric utility operations he deemed to
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no longer meet the SE4S L 71 criteria, the Company may be required to write off any above-market ( cost assets, the recovery of which is uncertain, and any regtdatory assets or liabilities for those opera-tions that no longer meet these requirements.
. Regulatory Assets at December 31 1996 1995 7:
(Arnonnts in Thousands ofDollars) I Regulatory tax receivable (Note 1I) S394,131 S414,543 1 Unamortized debt costs (Note K)(a) 93,299 98,776 Deferred rate synchronization costs (see below) 41,446 51,149 l j Beaver Valley Unit 2 sale / leaseback premium (Note 1)(b) 30,059 31,564 h Deferred employee costs (c) 29,589 31,218 dj Deferred nuclear maintenance outage costs (Note A) 13,462 6,776
.j Deferred coal costs (see below) 12,191 12,753
[ DOE decontamination and decommissioning receivable (NoteJ) 9,779 10,687 }; Extraordinary property loss (d) - 8,300 Other 12,860 12,934 Total Regulatory Assets SE36,816 $678,700 id 'N (a) The premiums paid to reacquire debt prior to scheduled maturit) dates are deferred for amortization over the hfe of the debt issued to finance the reacquisitions. (b) The premium paid to refinance the IW Unit 2 lease was deferred for amortir.ation over the life of the lease. (c) Includes amounts for recovery of accrued compensated absences and accrued claims for workers' l. compensation. (d) During the third quarter of 1996, the Company completed recovery ofits investment in Perry Unit 2. g Deferred Rate Synchronization Costs ' In 1987, the PUC approved the Company's petition to defer imtial operatig and other costs of BV Unit 2 and Perry Unit 1. The Company deferred the costs incurred from November 1987, w hen the units went into commercial operation, until Alarch 1988, w ben a rate order was issued. In its rate j order, the PUC postponed ruling on whether these costs would be recoverable from the Company's j electric utility customers. The Company is not earning a return on the deferred costa (See ".\ litigation o*j Plan" discussion on page 51.) Deferred Cocl Costs The PUC has established two market price coal cost standards for the Company. One applies only y to coal delivered at the Bruce 31ansfield Power Station (Bruce Alansfield). The other, the system-gg wide coal cost standard, applies to coal delivered to the remainder of the Company's system. Both
.,3 standards are updated monthly to reflect prevailing market prices of similar coal. The PUC has
?E directed the Company to defer recovery of the delivered cost of coal to the extent that such cost
@ exceeds generally prevailing market prices for similar coal, as determined by the PUC. The PUC Q allows deferred amounts to be recovered from customers when the delivered costs of coal fall below Mi such PUC-determined prevailing market prices.
In 1990, the PUC approved a joint petition for settlement that clarified certain aspects of the g system-wide coal cost standard. The Company has exercised options to extend the coal cost F ,g , standard through Alarch 2000. The unrecovered cost of Bruce Alansfield coal was 59.6 million and I
% $8.4 million, and the unrecovered cost of the remainder of the system-wide coal was S2.6 million and
-a 3
4 l
$4.4 million at December 31,1996 and 1995. The Company believes that all deferred coal costs will be recovered.
Warwick Mine Costs The 1990 joint petition for settlement also recognized costs at the Company's Warwick Aline, which had been excluded from rate base since 1981, and allowed for recovery of such costs, including the costs of ultimately closing the mine. (See " Deferred Coal Costs" discussion on page 52.) In 1990, the Company entered into an agreement under which an unaniliated company will operate the mine y until Alarch 2000 and sell the coal produced. Production began in late 1990. The contract operator is at Warwick Aline encountered adverse geologic conditions late in 1996 that resulted in a significant change to the mining plan. Commencing in 1997, the operator will be producing approximately 4%, 15 percent of the amount previously mined, or 360,000 tons of coal per year, for exclusive use at the Elrama Power Station (Elrama). The Company will purchase the remaining coal on the open market. * ' In the past year, the Warwick Aline supplied slightly less than one-fifth of the taal used in the production of electricity at the Company's wholly owned and jointly owned plants. This change should n not impact the Company's ability to recover all ofits investment in Warwick Aline, the $2.6 million of unrecovered system-wide cost of coal which excludes Bruce Alansfield, or to accrue funds for future liabilities. It is anticipated that this effort will be successfully completed by Alarch 31,2000 ; when the system-wide coal cost cap expires. (H Costs at the Warwick Aline and the Company's investment in the mine are expected to be recovered through the cost of coal in the ECR. Recovery is subject to the system-wide coal cost standard and the cap agreed to as part of the Company's Alitigation Plan. The Company also has an opportunity to earn a return on its investment in the mine through the cost of coal during the period of the system-wide coal cost standard, including extensions. At December 31,1996, the Company's net investment in the mine was $11.4 million. The current estimated liability for mine closing, J including final site reclamation, mine water treatment and certai- labor liabilities, is $34.1 million, and the Company has recorded a liability on the consolidated balance sheet of approximately $20.2 million . toward these costs. _. Property Heldfor Future Use f In 1986, the PUC approved the Company's request to remove Phillips Power Station (Phillips) p(w and a portion of Brunot Island (BI) from service and from rate base. In accordance with the N 0 Company's Alitigation Plan,112 A1Ws related to El Units 2a and 2h were moved from pmperty hdd g forfuture use to durricplant in semice in 1996. The Company expects to recover its investment in BI y Units 3 and 4, which remain in pmpeny hddforfuture use through future electricity sales. The Company
'I believes its investment in BI will be necessary in order to meet future business needs. A portion of the proceeds of the sale of Ft. Alartin is expected to be used to fund reliability enhancements to the 0-B1 Unit 3 combustion turbine. The reliability enhancements are contingent upon the projects meeting
. a least-cost te t versus other potential sources of peaking capacity. (See "Alitigation Plan" discussion h[y on page 51.) The Company is analyzing the effects of customer choice on its future generating requirements. The Company is planning to seek recovery ofits investment and associated costs of l Phillips through a CTC. In the event that market demand, transmission access or rate recovery do not support the utilization of these plants, the Company may have to write off part or all of these qO investments and associated costs. At December 31,1996, the Company's net of tax investment in Phillips and BI held for future use was $53.6 million and $17.2 million.
h1 p -j G. Short-Term At December 31,1996, the Company had two estendible revohing credit arrangements, including a Borrowing and a 5125 million facility expiring in June 1997 and a 5150 million facility expiring in October 1997. p" Hi Revolving Credit Interest rates can, in accordance with the option selected at the time of the borrowing, he based on Arrangements prime, Eurodollar or certificate of deposit rates. Commitment fees are based on the unborrowed 7 <@ amount of the commitments. Both credit facilities contain two-year repayment periods for any ] Q amounts outstanding at the expiration of the revohing credit periods. At December 31,1996, there j wH were no short-term borrowings outstanding. At December 31,1995, short-tenn borrowings were a
$35 million. The weighted average interest rate applied to such borrowings was 6.5 percent. g f iipcy ;y '
w r*4
,)
cy 3 c a
H. Income Taxes The annual federal corix> rate income tax returns have been audited by the Internal Revenue Service (IRS) for the tax years through 1992. The tax years 1993 through 1995 remain subject to IRS review. The Company does not believe that final settlement of the federal income tax returns for the years 1991 through 1995 will have a materially adverse effect on its financial position, results of ) operations or cash flows. Deferred Tax Assets (Liabilities) at December 31 7_ y 1996 1995 (Amounts in 1housands ofDollan) o Investment tax credits unamortized 44,067 S $ 48,033
/ Gain on sale / leaseback ofIW Unit 2 61,131 64,124
[ Tax benefit -long-term investments 174,935 214,089 Other 19,952 41,509 Deferred tax assets 300,085 367,755 Property depreciation (785,950) (871,539) I" Regulatory assets (150,346) (172,008) l oss on reacquired debt unamortized (33,331) (35,340) Other (89,547) (90,499) Deferred tax liabilities (1,059,174) (1,169,386) (. [ Nct Defenrd Tax Liabilitics S (759,089) $ (801,631) I l Income Taxes 1996 1995 1994 (Amounts in Thousands ofDollan) j Currently payable: Federal S103,525 5 88,866 S 70,908 State 44,582 29,915 33,407 l' j- Deferred - net: Federal (36,286) (8,649; (13,198) !' State l' (14,874) (5,640) (72,662) Investment tax credits deferred - net (9,559) (7,831) (5,982)
'linx rate adjustment - regulatory tax receivable (a) - -
80,500 Inconte 7?ixes S 87,388 5 96/>61 S 92,973 h) Dunng 1994, the statutory Pennsyhania income tax rate was reduced from 12.25 pe This resulted in a net decrease of 580.5 milhon in deferred tax liabilities and a corresponding reduction in the regidatory receis able.
'lbtal inarme tarrs differ from the amount computed by applying the statutory federal income tax rate to income brhrr inaimc tarrs and before preferred and preference dividends of subsidiaries.
Income Tax Expense Reconciliation i 1996 1995 1994 (Amounts in 7housands ofDollars) Computed federal income tax at statutory rate S 94,752 5 95,591 S 89,524 j Increase (decrease)in taxes resulting from: !- State income taxes, net of federal income tax benefits 19,310 15,779 (25,516) l , Amortization of deferred investment ta credits (9,559) (7,831) (5,982) [ y Adjustment to regulatory receivable, net of federal tax - - 52,325 1 y Fevenue requirement ad i ustment to regulatory taxes - - (12,178) g Other (17,115) (6,878) (5,200) 7btallncome 7?tx Espense S 87,388 5 96,661 S 92,973 4
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L Leases The Company leases nuclear fuel, a portion of a nuclear generating plant, cenain office buildings, computer equipment, and other property and equipment. Capital Leases at December 31 1996 1995 (Imounts in l'housands ofDollan) Nuclear fuel S 79,103 SI12.573 Electric plant 20,505 20,808 pm Total 99,608 133,381 Less: Accumulated amortization (47,670) (74,874) Q Prvperty Held Under Capital Leases - Net (a) S SI,438 5 58,507 Yu (a) Includes $2,618 in 1996 and $2,910 in 1995 of capitalleases with associated obligations retired. In 1987, the Company sold and leased back its 13.74 percent interest in llV Unit 2; the sale was l6 , exclusive of transmission and common facilities. The total sales price of $537.9 million was the { appraied value of the Company's interest in the property. 'I he Company subsequently leased back P its interest in the unit for a tenn of 29.5 years. The lease provides for semi-annual payments and is accounted for as an operating lease. The Company is responsible under the tenns of the lease for all ',[ W costs ofits interest in the unit. In December 1992, the Company participated in the refinancing of I collateralized lease bonds to take advantage oflower interest rates and reduce the annual lease payments. The bonds w cre originally issued in 1987 for the purpose of partially financing the lease ofIIV Unit 2. In acconlance with the IIV t tit 2 lease agreement, the Company paid the premiums of approximately $36.4 million as a supplemental rent payment to the lessors. This amount v.as , deferred and is being amortized over the remaining lease tenn. At December 31,1996, the deferred ! halance was approximately $30.1 million. Leased nuclear fuel is amortized as the fuel is burned and charged tofud andpurchasedpower expense on the staten cnt of consolidated income. The amortization of all other leased property is based on rental payments made. These lease-related expenses are charged to operating c.spenses on the statement of consolidated income. < Summary of Rental Payments ,. p 1996 1995 1994 ff e, (Amounts in Thousands ofDulhus) Y , G. Operating leases $59,503 $57,617 556,437 Amortization of capital leases 19,378 26,705 33,596 Interest on capital leases 3,703 4,332 4,996 hIl 7btal Rental Payments S82,584 588,654 595,029 { l Future Minimum lease Payments , Operating Leases Capital Leases i Year Ended December 31, (Amounts in Thousande ofDoll.us) ,) 1997 5 58,000 5 24,186 g 1998 57,799 11,380 0 1999 57,757 6,516 2000 57,682 4,166 M 2001 56,925 2,481 -F Y 2002 and thereafter 846,851 18,555 T A g TotalMinimum Lease Payments $1,135,0l4 5 67.284 y (4 ; Less: Amount representinginterest (17,964)
] [
Present value of minimum lease payments for capital leases (a) S 49,320 ['n g (a) Includes current obligations of $20.9 million at December 31,1996. o
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t a T t t h en
Future minimum lease payments for capital leases are related principally to the estimated use of nuclear fuel financed thn> ugh leasing arrangements and building leases. Future minimum l lease payments for operating leases are related principally to IW Unit 2 and certain corporate offices. Future payments due to the Company, as of December 31,1996, under subleases of cenain corporate office spare are appnnimately 54.5 million in 1997, S4.6 million in 1998 and
$18.5 million thereafter.
J. Commitments and Construction
- Contingencies Tk Company estimates that it will spend, excluding Al C and nuclear fuel, approximately S110
,1 million, $110 million and 595 million for electric utility construction during 1997,1998 and 1999.
These estimates also exclude any potential expenditures for reliability enhancements to the 111 Unit 3 combustion turbine. (See " Mitigation Plan" discussion Note F, on page 51.) Nuclear-Related Matters The Company has an ou nership interest in three nuclear units, two of u hich it operates. The operation of a nuclear facility inwhes special risks, potential liabihties, and specific regulatory and
]g safety requirements. Specific infonnation about risk management and potential liabilities is discussed j below.
Nuclear Decommirrioning. The PUC ruled that recovery of the deconunissioning costs for licaver Valley Unit 1 (IW Unit 1) couhl begin in 1977, and that recovery for IW Unit 2 and Perry j Unit I could begin in 198H. The Company expects to deconunission IW Unit 1, IW Unit 2 and Perry Unit I no earlier than the expiration of each plant's operating license in 2016,2027 and 2026. At the end ofits operating life, IW Unit I may be placed in safe storage until IN Unit 2 is ready to be deconunissioned, at u hich time the units may be decommissioned together. Ilased on site-specific studies finalized in 1992 for IW Unit 2, and in 1994 for IW Unit I and Perry Unit 1, the Company's share of the total estimated decommissioning costs, including removal and decontamination costs, currently being used to detennine the Company's mst of service, is
$122 million for IW Unit 1, $35 million for IW Unit 2, and S67 million for Perry Unit 1. A study will be perfonned in 1997 to update the Company's estimated deconunissioning costs of IW Unit I and IW Unit 2.
On.luly l8,1996, the PUC issued a Pntosed Poliy Statement Regarding Nudcar Decommissioning S Cost Estimation and Con Recomy for the purpose of obtaining commero from the public. The proposed inlicy includes guidelines for a site-speciGc study to estimate the cost of decommissioning. W , Guidelines require that studies he performed at least every five years, address radiological and non-radiological costs, and include a contingency factor of not more than 10 percent. Under the proposed policy, annual decommissioning funding lesels are based on an annuity calculation recog-r nizing infiation in the cost estimates and earnings on fund assets. With respect to the transition to a ' competitive generation market, the Customer Choice Act requires that utilities include a plan to
>i mitigate any shortfall in decommissioning trust fund payments for the life of the facility with any future decommissioning filings. Consistent with this requirement, the Company has increased its nuclear decommissioning funding by $5 million under the PUC-appnwed plan for the sale of the Company's ownership interest in Ft. Martin. (See " Mitigation Plan" discussion, Note F, on page 51.)
l These additional annual contributions bring the total annual funding to appnnimately 59 million. l J Also, on October 17,1996, the PUC adopted an Accounting Onler filed by the Company to recog-li ni7e the increased funding as part of the Company's cost of senice. The Company expects to receis e I approval from the IRS for qualification of 100 percent of additional nuclear decommissioning trust funding for IW Unit 2 and Perry Unit 1, and 79 percent for IW Unit 1. (- .. Funding for nuclear decommissioning costs is deposited in external, segregated trust accounts
.d and may be invested in a portfolio of corporate common stock and debt securities, municipal bonds,
; certificates of deposit and United States gm enunent securities. 'liust fund earnings increase the fund i balance and the recorded liabilitv. The market value of the aggregate trust fund balances at y December 31,1996 totaled approximately S3 3.7 million.
,'~ l' Y Nuclear Insurance. The Pdce-:Indenon /Imendments to the chomic Encry Ict of19H limit public liability from a single incident at a nuclear plant to 58.9 billion. The maximum available private g primary insurance of $200 million has been pun based by the Company. Additional protection of
[ SH.7 billion would be pnnided by an assessment of up to S79.3 million per incident on each nuclear unit in the United States. The Company's maximum total possible assessment,559.4 million, w hith
; is based on its nu nership or leaschohl interests in three nuclear Fenerating units, wouhl be limited to a maximum of S7.5 million per incident per year. This assessment is subject to indexing for intiation and may be subject to state premium taxes. If funds proce insufficient to pay claims, the United States Congress couhl impose other res enue-raising measures on the nuclear industry.
mm .i
i The Company's share ofinsurance coverage for property damage, decommissioning and deconta-mination liability is $1.2 billion. The Company would be responsible for its share of any damages in ' excess of insurance coverage. In addition, if the propeny damage reserves of Nuclear Electric Insurance Limited (NEIL), an industry mutual insurance company that provides a portion of this ! coverage, are inadequate to cover claims arising from an incident at any United States nuclear site covered by that insurer, the Company could be assessed retrospective premiums totaling a maximum of $7.3 million. In addition, the Company participates in a NEIL program that pnnides insurance for the ,m m' increased cost of generation and/or purchased power resulting from an accidental outage of a nuclear f~ unit. Subject to the policy limit, the coverage prmides for 100 percent of the estimated incremental F'r < costs per week during the 52-week period starting 21 weeks after an accident and 80 percent of such fh $ estimate per week for the following 104 weeks, with no coverage thereafter. If NEll's losses for this %* program ever exceed its reserves, the Company could be assessed retrospective premiums totaling a maximum of $3.5 million. $[4;' Beaver Valley Power Station (RVPS) Steam Generators. IlVPS's two units are equipped with steam generators designed and built by Westinghouse Electric Corporation (Westinghouse). Similar to other Westinghouse nuclear plants, outside diameter stress corrosion cracking (ODSCC) has 1-occurred in the steam generator tubes of both units. IIV Unit 1, which was placed in senice in 1976, ;{' has required removal of approximately 15 percent ofits steam generator tubes from senice through . 'y a process called " plugging." Ilowever, llV Unit I continues to operate at 100 percent reactor power j hy and has the ability to return tubes to senice by repairing them through a process called " sleeving." 'E date, no tubes at either IW Unit 1 or IIV Unit 2 have been sleeved. IIV Unit 2, which was placed M in senice 1i years after BV Unit 1, has not yet exhibited the degree of ODSCC experienced at IIV Unit 1. Approximately 2 percent of BV U' nit 2's tubes are plugged; however,it is too early in the life k[. of the unit to determine the extent to which ODSCC may become a problem. 7 The Company has undertaken certain measures, such as increased inspections, water chemistry g control and tube plugging, to minimize the operational impact of and to reduce susceptibility to ODSCC. Although the Company has taken these steps to allay the effects of ODSCC, the inherent j potential for future ODSCC in steam Fenerator tubes of the Westinghouse design still exists. Material 6 acceleration in the rate of ODSCC could lead to a loss of plant efficiency, significant repairs or the 7 possible replacement of the IW Unit I steam generators. The total replacement cost of the BV Unit
*. e i steam generators is currently estimated at $125 million. The Company would be responsible for $59 million of this total, which includes the cost of equipment removal and replacement steam 9 generators but excludes replacement power costs. The earliest that the BV Unit I steam generators W~
could be replaced during a scheduled refueling outage is the fall of 2000. g IW Unit I completed its i1th refueling outage on May 11,1996. The outage lasted 49 days and ' was the shortest refueling outage in the history of the unit. During the outage, vdous inspections of the unit's steam generators were made, including examinations using a new "Plus Point" pmbe. 7_ As a result of these inspections, the Company returned to senice tubes that had previously been blY plugged. Following the refueling outage,85 percent of the steam generator tubes u ere in senice, h' approximately 1 percent more than at the beginning of the outage. g IW Unit 2 completed its sixth refueling outage on December 16,1996. The outage lasted 107 b days due to unanticipated repairs to two residual heat removal pumps and reactor head vent valves. Various inspections of the unit's steam generators, including inspections using the Plus Point probe, %; W were completed. Upon completion of the outage, approximately 98 percent of the unit's steam generator tubes remained in senice. g The Company continues to explore all viable means of managing ODSCC, including new repair T(,+ technologies, and plans to continue to perform 100 percent tube inspections during future refueling outages, which occur at, approximately,18-month intervals for each unit. The Company will continue _ to monitor and evaluate the ecmdition of the IWPS steam generators. , N Spent Nuclear Fuel Disposal. The Nudear IIaste Policy An of1982 established a policy for l{ handhng and disposing of spent nuclear fuel and a policy requiring the establishment of a final lg 8 [k y-repository to accept spent nuclear fuel. Electric utility companies have entered into contracts with the DOE for the permanent disposal of spent nuclear fuel and high-level radioactive waste in l 3, ; compliance with this legislation. The DOE has indicated that its repository under these contracts will
- g gg not be available for acceptance of spent nuclear fuel before 2010. On July 23,1996, the U.S. Comt l "y 7 of Appeals for the District of Cohunbia Circuit, in response to a suit brought by 25 electric utilities ! & h and 18 states and state agencies, unanimously ruled that the DOE has a legal obliFation to begin yga l
f[I ' O@ J1 ;a
.L . J
taking spent nuclear fuel byJanuary 31,1998. The DOE has not yet established an interim or { permanent storage facility, and has indicated that it will be unable to begin acceptance of spent nuclear fuel for disposal byJanuary 31,1998. Further, Congress is considering amendments to the Nudear lDiste Policy Aa of1982 that could give the DOE authority to proceed with the development of a federal interim storage facility. In the event the DOE does not begin accepting spent nuclear fuel, existing on-site spent nuclear fuel storage capacities at IW Unit 1, IW Unit 2 and Peny Unit I are expected to be su0icient until 2016 (end of operating license),2013 and 2011.
,3 OnJanuary 31,1997, the Company joined 35 other electric utilities and 46 states, state agencies
%j 1 ..
and regulatory commissions in filing a suit in the U.S. Court of Appeals for the District of Columbia against the DOE. The suit requests the court to suspend the utilities' payments into the Nuclear p Waste Fund and to place future payments into an escrow account until the DOE fidfills its obligation if to accept spent nuclear fuel. Significant additional expenditures for the storage of spent nuclear fuel 1 at IW Unit 2 and Perry Unit I could be required if the DOE does not fulfill its obligation to accept g "s j spent nuclear fuel. l Uranimn Enrichment Decontamination and Deromminioning. Nuclear reactor licensees in the M United States are assessed annually for the decontamination and decommissioning of DOE uranium j enrichment facilities. Assessments are based on the amount of uranium a utility had processed for j enrichment prior to enactment of the NationalEncrgy Policy Aa ofl992 (NEPA) and are to be paid by Q such utilities over a 15-year period. At December 31,1996, the Companyk liability for contributions J was approximately 59.3 million (subject to an inflation adjustment). Contributions, w hen made, are j currently recovered from electric utility customers through the ECR. f fossil Decommissioning 9 Dj In Pennsylvania, current ratemaking does not allow utilities to recover future decommissioning M costs through depreciation charges during the operating life of fossil-fired generating stations. In 1996, the Financial Accoanting Standard floard issued an exposure draft, Anonntingfor Cenain nf Lialilitics Related to Closwr or RemoulofLong-Lived Assets. The primary effeet of this exposure draft W would be to change the way the Company accounts for nuclear and fossil decommissioning costs.
'1 The exposure draft calls for recording the present value of estimated future cash flows to decommis-
] sion the Company's nuclear and fossil power plants as an increase to asset balances and as a liability.
3 This amount is currently estimated to be $299.5 million. The Company will seek to recover these j costs through a CTC. A q Guarantees
% >$ The Company and the other owners of Ilruce Atansfield have guaranteed certain debt and lease Q obligations related to a coal supply contract for Ilruce Alansfield. At December 31,1996 the Company's share of these guarantees was $20.3 million. The prices paid for the coal by the W{ ' companies under this contract are expected to be sufficient to meet debt and lease obligations to be satisfied in the year 2000. (See " Deferred Coal Costs" discussion, Note F, on page 52.) The minimum future payments to be made by the Company solely in relation to these obligations are 55.9 million
%j in 1997, $5.6 million in 1998, $5.3 million in 1999, and 54.2 million in 2000. The Companyk total "i payments for coal purchased under the contract were $26.9 million in 1996, $28.9 million in 1995, and 523.3 million in 1994.
M As part of the Company's investment portfolio in affordable housing, the Company has received j' ] g fees in exchange for guaranteeing a minimum defined yield to third-party investors. A portion of the fees receis ed has been deferred to absorb any required payments with respect to these transactions. al llased on an evaluation of the underlying housing projects, the Company believes that such deferrals are ample for this purpose. 53 Residual Waste Management Regulations
} In 1992, the Pennsylvania Department of Environmental Protection (DEP) issued ResidualIDiste f}j Management Rcgidations gm erning the generation and management of non-hazardous residual waste, " il u such as coal ash. The Company is assessing the sites it utilizes and has developed compi;ance strategies 43 $ that are currently under review by the DEP. Capital costs of S2.5 million were incurred by the jE J; E Company in 1996 to comply with these DEP regulations. Ilased on information currently available, an additional 52.8 million will be spent in 1997. The additional capital cost of compliance through qj O the year 2000 is estimated, based on current infonnation, to be $15 million. This estimate is subject hi to the results of groundwater assessments and DEP final approval of compliance plans.
I
.4 p1 o
. _ . _ _ _ _ ._. .__._____m
Employees in November 1996, the Company reached an agreement on a three-year contract extension through September 30,2001 with the International Brotherhood of Electrical Workers (IBEW), which represents approximately 2,000 of the Company's employees. Other The Company is involved in various other legal proceedings and environmental matters. The Company believes that such proceedings and matters, in total, will not have a materially adverse effect on its financial position, results of operations or cash flows. h__,m K. Long-Term Debt The pollution control notes arise from the sale of bonds by public authorities for the purposes of N; & financing construction of pollution control facilities at the Company's plants or refunding previously b $ issued bonds. The Company is obligated to pay the principal .tnd interest on these bonds. For certain d of the pollution control notes, there is an annual commitment fee for an irrevocable letter of credit. g Under certain circumstances, the letter of credit is available for the payment ofinterest on, or [:}@ redemption of, all or a portion of the notes. gg Long Term Debt at December 31 ll Principal Outstanding h Intcrest (Amosmts in Thousands ofDollan) T Rate Ataturity 1996 1995 s First mortgage bonds 4.75 8.75 % 1997-2025 S 853,000 (a) $ 903,000 (b) l ' Pollution control notes (c) 2009-2030 417,985 417,985 . g Sinking fund debentures 5% 2010 4,891 5,703 0 1 Tenn loans 6.47 % -7.47 % 2000-2001 150,000 65,000 S Aliscellaneous 17,785 13,462 f$ Less: Unamortized debt discount ] and premium - net (3,915) (4,157) 6,i TotalLong-7irm Debt $1,439,746 $1,400,993 (a) Excludes $50.0 million related to current maturities on November 15,1997. E? ! (b) Excludes $50.0 million related to a current maturity on May 15,1996. (e) The pollution control notes have adjustable interest rates. The interest rates at year-end averaged 3.7 percent hL N in 1996 and 3.9 percent in 1995. k1 S s At December 31,1996, sinking fimd requirements and maturities oflong-tenn debt outstanding %u for the next five years were $51.1 million in 1997, $76.3 million in 1998, $81.9 million in 1999, e3
$166.7 million in 2000, and $86.8 million in 2001,
'Ibtal interest costs incurred were $103.9 million in 1996, $107.7 million in 1995, and $110.7 pp1 million in 1994. Interest costs attributable to long-tenn debt and other interest were $99A million, 'M
$102 A million and $105.1 million in 1996,1995 and 1994, respectively. Interest costs incurred also include $4.5 million, $5.3 million and $5.6 million attributable to capital leases in 1996,1995 and a 1994, respectively. Of these amounts, $0.8 million in 1996, $1.0 million in 1995, and $0.6 million in 3 1994 were capitalized as AFC. Debt discount or premium and related issuance expenses are amortized J
}4 over the lives of the applicable issues.
During 1994, the Company's BV Unit 2 lease arrangement was amended to reflect an merease m 's federal income tax rates. At the same time, the associated letter of credit securing the lessor's equity . interest in the unit was increased from $188 million to $194 million and the tenn of the letter of E credit was extended to 1999. If certain specified events occur, the letter of credit could be drawn b% down by the owners, the leases could tenninate, and collateralized lease bonds ($391.8 :nillion at , q" December 31,1996) would become direct obligations of the Company. At December 31,1996 and 1995, the Company was in compliance with all ofits debt covenants. At December 31,1996, the fair vahae of the Company's long-tenn debt, including current 1 [h g 9g maturities and sinking fund requirements, estimated on the basis of quoted market prices for the s i; same or similar issues or current rates offered to the Company for debt of the same remaining {g3 O maturities, was $1,492.5 million. The principal amount included in the Company's consolidated g(
"' 0 balance sheet is $1,495.6 million.
g i [d ; , y e<, fj
i L. Preferred and Preferred and Preference Stock of Subsidiaries at December 31 Preference Stock of Subsidiaries S"'" ""M"'"""" '. " U"""O Call Price 1996 IWS Per Share Shares Amount Shares Amount Preferred Stock Series: 3.75% (a)(b)(c) 551.00 148 5 7,407 148 $ 7,407 4.00% (a)(b)(c) 51.50 550 27,486 27,486 [pf f 4.10% (a)(b)(c) 51.75 120 6,012 550 120 6,012 g 4.15% (a)(b)(c) 51.73 132 6,643 132 6,643 N a 4.20% (a)(b)(c) 51.71 100 5,021 100 5,021 9 $2.10 (a)(b)(c) 51.84 159 8,039 159 8,039 9.00% (d) - 3,000 - 3,000 8.375% (e) - 6,000 150,000 - - F TotalPirferird Stock 7,209 213,608 1,209 63,608 , y Preference Stock Series: (f) l P Plan Series A (c)(g) 37.18 817 28,997 834 29,615
- f' Q
Tota / Pirferrnce Stock 817 28,997 834 29,615 kh Deferred ESOP benefit (19,533) (22,257) My Total 14rfenrd and15rferrnce Stock S223,072 $70,966 Dh[ D; h?f (a) Preferred stock: 4,000,000 authorized shares;
$50 par value; cumulative (e) Cumulative Monddy income Preferred Securities, Series A: 6,000,000 authorized shares; G (b) $50 per share involuntary liquidation value $25 involuntary liquidation value hj'+ (c) Non-redeemable (f) Preference stock: 8,000,000 authorized shares; gg (d) 500 authorized shares; 10 issued $300,000 par $1 par value cumulative y value; involuntary liquidation value $300,000 (g) $35.50 per share involuntary liquidation value gg per share; mandatory redemption beginning pg gzy August 2000 i
IIh$ lloiders of Duquesne's preferred stock are entitled to cumulative quarterly dividends. If four ! [Q quarterly dividends on any series of preferred stock are in arrears, holders of the preferred stock are pkq entitled to elect a majority of Duquesne's board of directors until all dividends have been paid. IIolders of Duquesne's preference stock are entitled to receive cumulative quarterly dividends if M( dividends on all series of preferred stock are paid. If six quarterly dividends on any series of preference y stock are in arrears, holders of the preference stock are entitled to elect two of Duquesne's directors ,Q until all dividends have been paid. At December 31,1996, Duquesne had made all dividend payments. j Preferred and preference dividends of subsidiaries included in intnrst and othy charycs were J $12.1 million, $5.9 million and $6.0 million in 1996,1995 and 1994. 'Etal preferred and preference $ stock had involuntary liquidation values of $242,467 and $93,086, which exceeded par by $28,180 f' and $28,781 at December 31,1996 and 1995. hg In December 1991, the Company established an Employee Stock Ownership Plan (ESOP) to ,2 j provide matching contributions for a 401(k) Retirement Savings Plan for Management Employees. (See " Employee llenefits," Note N, on page 61.) The Company issued and sold 845,070 shatrs of $g - pirferrrur stock, plan scrics A to the trustee of the ESOP. As consideration for the stock, the Company i y received a note valued at $30 million fmm the trustee. The preference stock has an annual dividend $ rate of $2.80 per share, and each share of the preference stock is exchangeable for one and one half $g [@' g ' shares of DQE common stock. At December 31,1996, $19.5 million of preference stock issued in etmnection with the establishment of the ESOP had been offset, for fmancial statement purposes, by e d ,, the recognition of a deferred ESOP benefit. Dividends on the preference stock and cash contributions M1 h:j-r o from the Company are used to repay the ESOP note. The Company made cash contributions of approximately $1.4 million for 1996, $1.6 million for 1995, and $2.2 million for 1994. These cash b #! contributions u ere the difference between the ESOP debt service and the amount of dividends on ESOP shares ($2.3 million in 1995 and 1995, and $2.4 million in 1994). As shares of preference stock 7 are allocated to the accounts of participants in the ESOP, the Company recognizes compensation Q
=! I expense, and the amount of the deferred compensation benefit is amortized. The Company recogni7ed compensation expense related to the 401(k) plans of $2.3 million in 1996, $2.3 million
/ Rd , in 1995, and $1.8 million in 1994. Outstandingpnfhnrd andpnfhrrnce stock is generally callable, on 7y notice of not less than 30 days, at stated prices plus accrued dhidends. None of the remaining g Duquesne preferred or preference stock issues has mandatory purchase requirements. a
M. Common Stock Changes in the Number of Shares of DOE Common Stock Outstanding 1996 1995 1994 (Amounts in Thousands ofSbarts) Outstanding as ofJanuary 1 77,556 78,459 79,518 Reissuance funn treasury stock 157 83 116 Repurchase of common stock (440) (986) (1,175) 1 Outstanding as ofDecember 31 77,273 77,556 78,459 }
,! I The Company has continuously paid dividends on common stock since 1953 and in each of the last L 10 years has increased its dividend paid per share. The Company's annualized dividends per share Y were 51.36,51.28 and $1.17 at December 31,1996,1995 and 1994. During 1996, the Company paid a quarterly dividend of 50.32 per share on each ofJanuary 1, April 1, July 1 and October 1. The [l
( quarterly dividend declared in the fourth quarter of 1996 was increased from S0.32 to 50.34 per j. share payable January 1,1997. b l Dividends may be paid on the Company's common rtock to the extent permitted by law and as L declared by the board of directors. Iloweser, payments of dividends on Duquesne's common stock may be restricted by Duquesne's obligations to holders of preferred and preference stock pursuant io h( Duquesne's Rcrtated Artides ofincorporation. No dividends or distributions may be made on [ Duquesne's common stock if Duquesne has not paid dividends or sinking fund obligations on its preferred or preference stock. Further, the aggregate amount of Duquesne's common stock dividend j* payments or distributions may not exceed certain percentages of nct inanne if the ratio of toca/ cemmon k shanholders' c<fuity to tota / capitalization is less than specified percentages. As all of Duquesne's common stock is owned by the Company, to the extent that Duquesne cannot pay common dividends, the g i Company may not be able to pay dividends to its common shareholders. No part of the ivrained Fl carnings of the Company was restricted at December 31,1996. { N. Employee Retirement Plans Benefits The Company n'aintains retirement plans to provide pensions for all eligible employees. Upon retirement, an employee receives a monthly pension based on his or her length of service and compensation. The cost of funding the pension plan is determined by the unit credit actuarial cost f method. The Company's policy is to record this cost as an expense and to fund the pension plans by t an amount that is at least equal to the minimum funding requirements of the Emplovce Retirement . l Income Sccmity Act afl974 (ERILO but that does not exceed the maximum tax-deductible amount for ! the year. Pension costs charged to expense or construction were SI1.9 million for 1996,56.1 million for 1995, and 58.9 million for 1994. i Funded Status of the Retirement Plans and Amounts Recognized on the [ Consolidated Balance Sheet at December 31 l[ 1996 1995 f' (Amounts in l' housande of Doll.m) l Actuarial present value of benefits rendered to date: [ , Vested benefits $413,109 5378,344 [.; Non-sested benefits 22,551 19,110 f Accumulated benefits obligations based on compensation to date 435,660 397,454 ; Additional bencfits based on estimated future salary levels 61,438 53,757 ! [ Projected benefits obligation 497,098 451,211 j Fair market value of plan assets 525,871 490,870 F y Projected benefits obligation under plan assets S 28,773 S 39,659 Unrecognized net gain S128,382 $124,794 p e(( 4 Unrecognized prior service cost (43,790) (37,535) g[ g Unrecognized net transition liability (13,853) (15,665) ; i, . Net pension liability per consolidated balance sheet (41,966) (31,935) 7otal S 28,773 5 39,659 { ![ P A$sumed rate of return on plan assets 8.25 % 8.00 % ! [ l Discount rate used to detennine projected benefits obligation 7.50"o 7.00 % l Assumed change in compensation levels 5.25"o SML i b. i.
Pension assets consist primarily of common stocks, United States obligations and corporate debt securities. Components of Net Pension Cost 1996 1995 1994 (Amounts in Thousands ofDollars) Senice cost (benefits earned during the year) $ 12,209 $ 9,953 $ 12,482 Interest on projected benefits obligation 32,597 30,063 28,221 i Return on plan assets (58,173) (99,246) 1,967 Net amortization and deferrals 25,312 65,316 (33,783) Net Pension Cost S 11,945 5 6,086 $ 8,887 i Retirement Savings Plan and Other Benefit Options I The Company sponsors separate 401(k) retirement plans for its management and bargaining s unit employees. , The 401(k) Retirement Savings Plan for Management Emphiyees provides that the Company will ( match employee contributions to a 401(k) account up to a maximum of 6 percent of an employee's b
- cligible salary. The Company match consists of a 50.25 base match per eligible contribution dollar and an additional $0.25 incentive match per eligible contribution dollar, if Board-appmved targets are achieved. The 1996 incentive target for management was accomplished. The Company is funding its matching contributions to the 401(k) Retirement Savings Plan for Management Employees with payments to an ESOP established in December 1991. (See " Preferred and Preference Stock of Subsidiaries," Note L, on page 60.)
The 401(k) Retirement Savings Plan for IBEW Represented Employees provides that, beginning in 1995, the Company will match employee contributions to a 401(k) account up to a maximum of a 4 percent of an employee's eligible salary. The Company match consists of a $0.25 base match per eligible contribution dollar and an additional 50.25 incentive match per eligible contribution dollar, if certain targets are met. In 1996, these incentive targets were not met by the Company's union-represented employees. The Company's shareholders have approved a long-tenn incentive plan through w hich the Company may grant management employees options to purchase, during the years 1987 through j 2006, up to a total of 7.5 million shares of the Company's common stock at prices equal to the fair market value of such stock on the dates the options were granted. At December 31,1996, approximately 3.1 million of these shares were available for future grants As of December 31,1996,1995 and 1994, active grants totaled 1,698,000; 2,159,000; and 2,118,000 shares. Exercise prices of these options ranged from $8.2084 to $30.875 at December 31, 1996, and from $8.2084 to $27.625 at December 31,1995, and from $8.2084 to $23.0833 at December 31,1994. Expiration dates of these grants ranged from 1997 to 2006 at December 31,1996; from 1997 to 2005 at December 31,1995; and from 1997 ta 2004 at December 31,1994. As of f December 31,1996,1995 and 1994, stock appreciation rights (SARs) had been granted in connection with 984,000; 1,202,000; and 1,190,000 of the options outstanding. During 1996,715,000 SARs u ere exercised; 267,000 options were exercised at prices ranging from $8.2084 to 520.3334; and 150 options w ere cancelled. During 1995,367,000 SARs were exercised; 133,000 options were exercised at prices ranging from $8.2084 to $21.6667; ano 28,000 options u ere cancelled. During 1994,
, 1,254,000 SW were exercised; 339,000 options were exercised at prices ranging from $8.2084 to
$18.916% r ' a0,000 options w ere cancelled. Of the active grants at December 31,1996,1995 and 1994, u ' uo,929,000; and 918,000 were not exercisable.
F Other fat-Retirement Benefits in addition to pension benefits, the Company provides certain health care benefits and hfe E! insurance for some retired employees. Substantially all of the Company's full-time employees may,
$ upon attaining the age of 55 and meeting certain senice requirements, become eligible for the same
'; & benefts avaliable to retired employees. Participating retirees make contributions, w hich are adjusted
$ annually, to the health care plan. The life insurance plan is non-contributory. Company-provided g heahh care benefits tenninate when covered individuals become eligible for Medicare benefits or i reach age 65, u hichever comes first. The Company funds actual expenditures for obligations under the plans on a " pay-as.you-go" basis. The Company has the right to modify or tenninate the plans.
j The Company accrues the actuarially detennined costs of the aforementioned post-retirement benefits over the period from the date of hire until the date the employee becomes fully eligible for y benefits. The Company has elected to amortize the transition liability over 20 years. i ti kMg
i Components of Post-Retirement Cost 1996 1995 (Amounts in Thousands ofDollars) Service cost (benefits earned during the period) 51,182 SI,315 Interest cost on accumulated benefit obligation 2,046 2,340 Amortization of the transition obligation over 20 years 1,700 1,700 Other (812) (582) -
,y Total Post-Retirrinent Cost S4,116 $4,773 fi ,
The accu nulated postretirement benefit obligation comprises the present value of the estimated future benefits payable to current retirees and a pro rata portion of estimated benefits payable to active employees after retirement.
}[
[ fancied Status of Post-Retirement Plan at December 31 ?^i i ' 1996 1995 l (<Imounts in Thousands ofDollan) f Actuarial present value of benefits: Retirees S 8,840 $ 7,359 Fully eligible active plan participants 3,829 3,187 Other actice plan participants 26,352 21,935 p. Accumulated post-retirement benefit obligation 39,021 32,481 [ Fair market value of plan assets - - [ Accumulated benefit obligation in excess of plan assets S(39,021) $(32,481) [ Unrecognized net actuarial gains S 2,874 S 8,42/ Unrecognized net transition liability (27,198) (28,898) g[. c [ Post-retirement liability per consolidated balance sheet (14,697) (12,010) l t 7btal S(39,021) $(32,481) [ 1 Discount rate used to detennine projected benefit obligation 7,50 % 7.00 % t Ilealth care cost trend rates: b L For year beginningJanuary 1 6.96 % 8.80 % [. Ultimate rate in the year 2000 6.00 % 5,50 % j;- Effect of a one percent increase in health care cost trend rates: ! On accumulated projected benefit obligation S 2,920 S 3,228 [ On aggregate of annual service and interest costs S 391 S 435 g li i
- 0. Quarterly Summary of Selected Quarterly financial:Jata (Thousands of Dollars, Except Per Shore Amounts) l.
Financial ? m quand data reCat wasonal u eather variations in the utility's senice terrinity.} Information ! (Unaudited) 1996 First Quaner Second Quaner Third Quaner Fo"rth Quarter Operating Revenues (a) S300,518 S293,357 S335,430 S295,890 , Operating Income (a) 71,316 67,385 104,891 58,414 [ Net income 42,305 38,972 57,412 40,449 ? Earnings Per Share Stock Price: 0.55 0.50 0.74 0.53 j. Iligh 31 % 28N 28% 30 % F Inw 27% m 25% 27 27 7b
;g g 1995 First Quaner Second Quaner Third Quarter Fourth Quaner 'i )
Operatmg Res enues (a) S298,277 S283.472 5347,264 S291,249 0 I' ()perating income (a) 80,607 66,870 103,528 69,460 40,901 55,269 38,708 i[ Net income 3 5,6H 5 [t l'arnings Per Share 0.52 0.46 0.72 0.50 5l Stml l irice: Iligh 22 % 25 26% 30% 1/m 19 % 21% 230 265 { (a) Restated to confonn with prrsentations adopted during 1996. (
DQE OFFICERS DAVID D. MARSHALL,44. President and ChiefExecutive Officer. Previously held senior executive positions in fmance at Central Vermont Public Senice. Joined the Company in 1985. Directorships included on page 6. GARY L. SCHWAss, 51. Executive 17cc President and Chieffinancial Ogicer. Previously served in a variety of senior executive positions in finance and management with Consumers Power Company. Joined the Company in 1985. Directorships include Chair, Western Pennsylvania Development Credit Corporation (promotes small business v]j through lending activities), and Vice President and Treasurer, lloly Family Foundation (supports families in crisis). 8 DIANNA .. GattN, 50. Senior 17ce President. Previously held senior management positions with Xerox Corporation. A Joined the Company in 1988. Directorships include PNC Bank; Phipps Conservatory; Chair, Urban League of $ j Pittsburgh; and Board President, the Whale's Tale (helps troubled youth). JAMts D. MricHELL,45.17ce President. Previously held senior fmancial positions with Duquesne Light and U.S. y West, Inc. Joined the Company in 1988. Directorships include Three Rivers Youth (helps troubled teenagers). j VICTOR A. ROOut, 50. l' ice Parsident and General Counsel. Formerly Vice President, General Counsel and Secretary 4a for Orange and Rockland Utilities. Joined the Company in 1994. Directorships indude Pennsylvania Chamber of Business and Industry (economic development), I bil Ilouse Association (provider of social senices) and United Way Good Neighbors Advisory Committee. Member, Salvation Anny Greater Pittsburgh Advisory Board. JACK E. SAxtR, JR.,53.17cc President. Previously held senior financial positions with Gulf Oil and Chevron. Joined M the Company in 1989. Directorships include Point Venture (venture capital) and Pittsburgh Consumer llealth
] Coalition (healthcare adsocacy for the disadvantaged).
.'] DIANE S. ElsMONT, 52 DONALD J. CLAYTON, 42 DEBORRAH E. BttK, 39 JOAN 5. $tNCHYsHYN, 58 Corporute Sectrtary Treasurrr Assistant Contimiler Assistant Secortary
] MORGAN K. O'BRIEN, 36 M ?
Contsviler DUQUESNE LIGHT COMPANY OrrICERS jrh DAvro D. MARSHALL, 44 6ARY R. DIANE 5. ElsMONT, 52 FRED R. ALL!s0N,47 j Persident and Chief BRANDtnalRGER, 59 Corporate Secretary and Assistant Contrailer j Executive Oficer Iice President, Asshtant Generul Counsel gagg 5, gnogy,35 3d GARY L. SCHWAss, 51 Penrer SupplJ MORGAN K. O'BRitN, 36 Assistant T easurrr i .j Senior 17ce Persident and WitLIAM J. DELEO, 46 Controller WitLIAM F. FIELDS,46 Q ChiefFinancialOficer i7ce President, J AtK E. 5AxlR. JR., 53 Assistant Torasurer D JAMis E. CR0ss, SD Madetong and Corporate Perfortnance Assistant Iice Prrsident, 3ngu S, Stucu, guru,5g
$: President, Adoninistration .
?
Generation Givup VICTOR A. ROOut, 50 Assistant Scartary SAtty K. WADf, 43 I"oce Presideni JAMts E. WILSON, 31
} DIANNA L. GREEN, SD gg,j,gggg g y(( pyy,jgggy, ,
Sem.or I sce Press. dent, and General Counsel Assistant Controller 9 iluman Resources Ql Custorner Operations DONALD J. CLAYTON, 42 Trrasurer
.5 DUQUESNE ENTERPRISES OrrICERS h THOMAS A. HuRKMANs, 31 ANTHONY J. Vitt:0m,50 H. DONALD MORINE, 59 JOHN l. WEINHOLD, 60 1 President i1ce President, Iice President, President, Allegheny ;
f Treasurer and Controller Development Corp. and Prvperty I enturrs, Ltd. ' 3 Property l'enturrs, Ltd. g 9 MONTAUK OrrlCERS 1 f- JAMis D. MITcHtLL,45 DONALD J. CLAYTON, 42 WILLIAM F. FIttos,46 ky3 Pirsident l7ce President Tarasurrr
,j$ LYDIA E. YORK, 37 JAMis E. Wils0N,31 M; I7ce Persident Contrviler s
W [, . a-t"{' DQE ENERGY SERVICES Orr1CERS s Attxts TsAGGARIs, 48 JOHN J. DR0ZDOWsKI, 41 g, Persident Trrasurrr and Controller y k % DQENERGY PARTNERS OrrrCtRS JOHN W. WELCH, 45 JOHN J. DROZDOWsKI, 41 ww l President Trasurrr and Controller {.' ._1
DQE SH AREHOLDER REFERENCE GUIDE COMMON STOCK ELECT'RI
- STOCK Trading Symboh I)QE I in h d.h .u o r , u n < s o n - tin' n< v .nlahh dn unch Stock Exchanges Listed an i Traded: In H Jn oh na n un<soim mandam L pon tus pl.m New Wrk, Philadelphia, Chicago '
Number of Conunon Shareholders of Record at Tear-End: 76,521 DinI(i P U R ( H A [E OI D0E 5io(x I H)I ah is n.in ,h n , he ,h h i , i ln iloh n n , pm
.his n ., l ,lo . < i b d o . ,ne h ! !n < < ,n y , o n ( dl.o l DQE INTERNET HOME PAGE e,g, ng , g m g g ; ,n i h ,. g, .po l o pi um u n A varictv of sharehohler and customer information is 5
available on 1)QF/s home page on the World Wide > Web. Eu also can interact with us via electronic mail. Autom Au( (A5H {0NiRIOUTION5 ()ur address is http://www.dge.com. The site is best II""A'l"I"m"""""""""'P" P"'"'P"" "' "' vicued using the latest sersion of Netscape software. pi n . h a a n h 'in' n
" ,n "W d ,h' o' "< "- .Iit"I 'n")Ih< ',' u'n"inn".
a d '" ",",i l h s SHAREHOLDER DIRECT
'" " ""' ~
Shareholders and potential investors are invited to I - - - call 1-888-247-0401 for the latest information on carnings and dis idends. OT H a fi AT uais AN D 5i R V1(( 5 - .
- Pun h m unl iL . a plan ,h n<'.o n..unnal SHAREHOLDER SERVICES / ASSISTAN CE lly telephone, representatives are available from bI"""' 'd'do "' 'h" ah h'I"'U 7:30 a.m. to 4:30 p.m. (Eastern time)
.K- n " " "'<" """' '" 4h 1 a 'h "'I"'hl to assist you with the following i.ersices: * ' i I" C C
. . . *< i. n o n i , a n, e n i nnu .i mh ho I in u h l)irect purchase ofImtlal shares g g , ,,,u ,,,u , , ,y ,
1)irect deposit of dividends
. . mi nphe n i .o 1 3 ,1 r n i n .n , upmn n.pn i Automane cash contrihutions -
l)ividend reinvestment ' ' Stock transfer Unreceis ed dividend payment S1o( x C t 81i t it A1i TRAN5i155
- Change of address - n o in n io 4 , n,, .g m a g n g, g'h g . ,n on on nn y Lost stock certificate o u n < si n n y Am nM e ho o mo n , o and r 'a o, l Please feel free to call at other times. ()ur Message - i n t o m1 h'n M ' "J H n o .<intam' uni o bn J Center uill record yo'ur message and our staff uill . 1 non m n,.unomar mn follow up on the ne.st business day. j n a x g n,n g l;,,g ,a l;, % ,n
., I;< ,s o ,n l' i p n N r s <
FIN ANCI AL COMMUNITY INQUIRIES Pti I;, n si ni i Analysts, investment inanagers and brokers should dos o ,n H \ of 9,<, suan direct their imIuiries to 1-412-393-4133,
. . .. I )n o h ol i un i a u n i n l d.m. p nin ip ons u lo , u :n n n i i
FAX l-412-393-63 e 1. M. .ntten mtIuiries should he v sh n o sin .n h l si n.liln n ii r iun an s and sent to the Imestor Relations I)epartment at the iianshii) 4
,,g,,,g,, , , g g g,, g , g g ,, ,.
address below. .
' .i l.n a hhi . In h u DIVIDEND T AX STATUS '
The company estimates that all common stock D i a I ( T. Dero 5iT o# DIViDl N D5 disidends paid in 1996 are tasable as disidend - b"" I " d 4" " " ' h J n n h n1, a n I n 4 jn noi J income. This estimate is subject to audit hv the
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Internal Revenue Service. "? """ ' + d I *" ' h "4 ' @ I" " '" ' ' " U ' " ' b " 1 T i< n i ii1ll ,i i i I,i t ii in ,, The 1)QE logo is a registered trademark of the Company. - Weatherwise"', Weatherproof Energv liilP" and Secure Energy'" are service marks of the Companv. a I"d - wo ~h. ,h h i la i o n .n E-Fuel"' is a trademark of CQ loc. i;, n ,,s The lleint logo is the registered trademark of P pJ n o hc - P \ i ' ' m ""< ^ 11.l. Ileinz Companv. -
- hi- t ree: I w m a4Lo400 l)QF and its aftiliare3 1companies are in pg a,mg 4y 9, g,-.
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