ML20069G588

Dqe 1993 Annual Rept to Shareholders

ML20069G588
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1993
From:	Schack W DQE
To:
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ML20069G506	List: ML20069G504 ML20069G516 ML20069G565 ML20069G588 ML20069G599
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NUDOCS 9406100083
Download: ML20069G588 (46)

Text

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DOE FINANCIAL AND OPERATING HIGHLIGHTS Change Change from From 1993 1992 1992 1991 1991 PeakLoad 2,499 MW 8.3% 2,308 MW -3.9% 2,402 MW Duquesne Customer Sales (millions) 11,851 KWIi 2.490 11,569 KWII -2.5% 11,861 KWII Operating Revenues (billions) s1.196 0.2nn $1.194 -0.8"o $1.2N Net Income (millions) $144.0 1.8ao $141.5 5.9"n $ 133.6 Year-End Shares Outstanding (millions) 53.0 -

53.0 0.2% 52.9 Return on Average Common Equity 12.00n -3.290 12.4 % 1.6% 12.2 %

Inng-Term Debt (billions) $ 1.41 -- 0.3 % $ 1.413 -0.6o b $1.421 Interest - long-Term Debt (millions) $ 108.5 -12.19o $123.4 -6.2"'n $131.5 Preferred and Preferente Dividends of Subsidiary (millions) 59.2 -2.1"b $9.4 -13.0% $10.8 Net Operating Cash I' low (millions) (A) $383.1 -3.4 " n $396.6 14.9 % $345.3 Capital Expenditures- Utility (millions) 5100.6 -10.5% $ 112.4 - 10.4% $125.4 Mw - a meg.m n m memurc orchwk use u ent in nmc.

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t A1 - bdudn worlung tapual and odwr - net t hanns CONTENTS 04WC6frik 1.ike the common light bulb, the electric utility industry is changing. Competition is increasing, as are options to help businesses work smarter, cleaner and more cost-effectively through use of electrotechnologies. In 1993, DQE people again demonstrated they have energy to adapt to change in their industry and to meet the changing needs of their tustomers.

h:vennh'dmm 2 Wesley W. von Schack discusses a year of change and challenge, and outlines our competitive position and strategies for the future.

M 4 To compete successfully in the new energy marketplace, we must work even harder to increase customer satisfaction, improve emciency and reduce costs, without compromising our environmental commitment.

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is an energy services holding company nationally and region-s so ,.P W WM ally recognized for excellence, quality, integrity and value.

e_ J w_ Duquesne Light Company, whose origin dates to 1880, is the principal d"

subsidiary of DQE. Duquesne Light is engaged in the production, transmis-m so sion, distribution and sale of electric energy. Its service territory is approxi-e mately 800 square miles in southwestern Pennsylvania, with a population of 1.5 million. In addition to serving almost 580,000 customers in Allegheny and Beaver counties, the company sells electricity to other utilities.

DQE's other subsidiaries include Duquesne Enterprises and

] p,o Montauk. Duquesne Enterprises owns Allegheny Development Corporation and Property Ventures, Ltd., and has substantial equity interests in Chester n :oly p Environmental, Inc. and International Power Machines. These companies are

s. y-involved in initiatives related to the core business, including energy services, um environmental services, power quality equipment, and real estate investment.

w Montauk makes both short and long term investments for the enterprise, and provides a source of capital for these other subsidiaries.

COMMON STOCK TRENDS  !

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( .n wh 1993 1992 1991 1990 1989 1988 R.ut Earninp Per Share 52.72 $2.67 $2.50 $2.24 $2.03 $1.86 7.9%

Dividends Paid Per Share 5140 $ 1.52 $1.44 $1.36 $ 1.28 $ 1.20 5.9%

Book Value at Year-End 523.21 $22.12 $21.00 $20.07 $19.27 $18.51 4.6%

Market Price Per Share f ligh $37 $32% $31 $25% $233 $18% 14 A%

Liw S31 % $26% $23% $20% $17% $11% 21.7 %

Year-End $34% $32% $30% $24~s $23'k $18% 13.0 %

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7h our Throughout 1993, our DQE team kept its focus on three basic objectives: delivering Shareho/ der; a fair return to our shareholders; providing top quality service to our customers; and preparing ihr emerging changes in the electric utility industry. Our resuhs continue to be good on all three fronts.

Net income for 1993 increased $2.5 million over that ihr 1992, and earnings per share rose from $2.67 in 1992 to $2.72. Since year end 1988, DQE's earnings per share have increased 46 percent. In November, the annual dividend was increased by 5 percent, to $1.68.

l DQE possesses an abundance of energy resources that hold long term promise and opportunity as the market fbr power grows. A recent industry Ibrecast projects annual growth of 2 percent in electric demand through 2010. 'Ib meet such demand, more than 210 gigawatts of additional generation will be required. I ess than 20 percent of this additional capacity currently is under construction.

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DQE has a total of 3,374 megawatts of environmentally clean generating capacity, of which only 2,834 megawatts currently are in service. This generation provides what we believe is an important long term competitive advantage and a benefit to our customers.

For example, during the deep freae ofJanuary 1994 when rolling blackouts disrupted wester u . n,n waa. the lives and businesses of millions of people in castern and central Pennsylvania, New

.zi n,c s< cut, aioniour Jersey, Maryland, Delaware, Virginia and the District of Columbia, Duquesne 1.ight hikuty and inhnty forttinately did not !! ave to instillite voltage redllClions of rolling blaChouls.

iran / one of rhe t oni. It was, therefore, ironic that our planned sale, to be initiated in January 1994, of pany s manr ennn,n. 500 megawatts to General Public Utilities (GPU) did not take place. In December meni.s parincrships 1993, GPU abruptly cancelled its three-year-old agreement to purchase bulk power nccpayc so from Duquesne 1 ight and to construct a jointly owned high voltage transmission line.

Termination of the project resuhed in a charge to DQE carnings of $15 million (16 cents per share).

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j As reported to you in last year's annual report, we expect 7 much change in our industry because of the National Energy Policy Act of 1992. This legislation gives federal regulators broad power to mandate the transfer of whole-sale bulk power over the nation's high voltage transmission

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.. . 's. systems. The net result will be increased competition in the elecinc unh.ty mdustry.

j Electric companies now have one fbot in competition

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ment team has demonstrated the ability to fbcus on build-ing a market and customer driven company while at the same time remaining responsive to the requirements and i

} obligations of state regulation. During the last eight years,

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you have been kept apprised of the excellent progress we've been able to make in positioning our company fbr the changes ahead.

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Y One strategy continuously evident in all aspects of our 1 1' 1 .

business is to be prepared for the market based realities that ,

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the industry is experiencing. We are fbcused on constantly improving perfbrmance to lower the cost of production, and our least cost planning and innovative pricing policies reflect our conunitment to deliver a competitive product to our customers. In fact, through our continued cHbrts, we are positioned to reduce average retail rates by ,

approximately 8 percent, as of April 1994.

Also, the marginal cost for us to produce a kilowatt-hour of electricity is competitive.

This low cost of production enabled us to sell more than 19 percent of our output to other electric utilities in the bulk power market in 1993.

Our fundamental strategy is to be recognized for excel-

"OUR FUNDAMENTAL STRATEGY 5 TO BE RECOGNIZED lence in our operations and to provide a high level of customer satisfaction. Independent surveys and our own FOR sur sii sqCE WI OUR OPERATIONS AND TO PROVIDE A HIGH .

mternal measurements ind.icate that customers are highly Lsvet OF CUSTOMER SATEFACTION." satisfied with the way we treat them and the quality of service. Our system reliability is among the top 25 percent in the nation. Duquesne 1.ight customers experience fewer minutes of power interrup-tions each year than the customers of any other utility in Pennsylvania. Our customers are getting good value.

This commitment to customers was put to the test in 1993 when the "Blinard of the Century" blanketed the eastern United States. A state-of the-art automated distribution system pinpointed weather related damage to electrical equipment and allowed our operators to switch service circuits by computer so that customers atrected by the blinard were restored to service in quick order.

Environmental leadership remains a strong component of our overall strategy, and we are proud of maintaining the highest standards in this area of public interest.

All of our wholly owned Ibssil fuel units currently emit sulfur dioxide (SO.) at a lower rate than federal standards fbr the year 2000. In 1993, we completed installation oflow nitrogen oxide (NO )s burners at our Cheswick station. We will need to invest only $35 million more to meet Phase I and Phase 11 SO, and NO s Clean Air Act of 1990 requirements. Environmental leadership represents good value ihr shareholders.

Utility companies that have not invested in the environmental quality of their operations over the years will see production costs increase as they catch up with our nation's new environmental standards.

For reasons that are both natural and man-made, the electric utility business will con-tinue to be challenging. Our people are up to meeting these challenges. We are gratefbl for their leadership and contributions, and to you, our shareholders, fbr your continued confidence in DQE.

On behalf of the Board of Directors,

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1 Msky W von Schack Chainnan of the Board and Chief Executive 00icer February 15,1994 i

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Energyfi>r Change Whave no doubt that ith passage of the National Energy Policy Act (NEPA) in 1992, we and allows us to use remote control to reroute electricity almost instantly to all cus-tomers on the circuit except constants in our industry. We know that to compete successfully in the new energy market- those in the immediate vicinity. And for those cus-place, we rnust concentrate on providing high levels of customer satisfaction, improving our romers, some very deter-mined troubleshooters are performance, and reducing costs. Our longstanding corporate objectives, highlighted on on the scene quickly to restore service - usually the following pages, focus our people's energies on five key areas: shareholders, cus- within an hour.

We strive to provide all of tomers, employees, operations, and community. As we work to meet these all-important our customers with a high degree of service. Reliability objectives, we cortinue to demonstrate that we have " energy for change." tops the list. We also want to ensure that any interaction, from meter reading to hilling to repair of storm-damaged electric circuits, is CUSTOMER SATISFACTION fast, reliable and accurate.

Our goal is to deliver cus- advanced technology and Monthly opinion surveys tomer value through a com- good old-fashioned commit- give our people high ratings hination of top quality ment to quality service, we for the way they handle cus-service and helping our cus-were able to limit the effect tomer concerns. That objective: tomers increase their efli- on customers ofextreme approval rating is signifi-Manage company ciency and reduce their weather conditions in 1993 cantly better than the resources to maximize overall operating costs, and early 1994, including national average, according return on investment. Independent statistics two major winter blinards: to a national firm specializ-show that Duquesne Light extended periods of hot, ing in customer satisfaction customers annually experi- humid summer weather; l

measurements.

ence fewer minutes of power and record-low winter interruptions than the uts- temperatures.

tomers of any other utility in When storms damage Pennsylvania. Thanks to electric lines or equipment, our automated distribution system senses the trouble, identifies the problem area, 4'

pnxess not only reduces dis- size, scheduling and increased posal costs, but also elimi- work fiirce flexibility. New nates any potential future analytical technology is help-liability fiir untreated infec- ing reduce utility pole

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tions waste. replacement cos:s. "Just-in-Application of another Previous annual reports time" tree-trinuning around innovative electrotet hnology have detailed our strong power lines is improving will help a local university fi>cus on cost control and productivity and system reli-reduce its air-conditioning perfi>rmance improvement. ability. A new, state-of-the-costs as well as help level the Thanks to the initiative and art customer information overall customer peak commitment of our people, and billing system increasec demand on our system dur- we continue to find ways to our ability to store a wide q ing periods of high tempera- take costs out of our core range ofinfbrmation that Objective:  ! ture and humidity. Thermal business without sacrificing helps us provide a quick, Be a reliable, low cost storage technology will be customer satisfaction, qual- comprehensive response l

producer of electric energy i showcased at Carnegie Mel- icy perfiirmance, safety, or when customers call.

and be recognized for .

lon University's new research our environmental commit- Benchmarking is a valu-excellence in our operat. l facility, currently under con- ment. By taking a fresh look able source ofinfi>rmation Ing performance. struction at a Pittsburgh- at all facets of the way we do to improve operations per-area advanced technology business, we are discovering fiirmance, implement business park located on the additional measures to process improvements, and site of a lbrmer steel mill. improve efficiency, including reduce costs. We benchmark ice-making to supply air- re-engineering work against the best companies conditioning will occur dur- processes, taking advantage in the industry and leaders ing off-peak hours. The ice of new technologies, and outside the industry. In then will be stored for use as eliminating less important addition to measuring per-needed. This will enable us activities. formance, benchmarking to achieve more eflicient use Clearly defined perfi>r- provides opportunities to of our generating capacity. mance and budget goals are adapt to our operations best h's another example of the at the heart of eflbrts to practices observed at other

" win-win" solutions we are improve operations perfor- companies.

developing with our mance. We've also benefitted We want to be recogniicd customers from changes relating to crew as a low-cost producer of electric energy and known fbr excellence in operating RECYCLABLE REPORT performance. Clean, abun-The annual report you are reading now is an example of both our dant, reasonably priced elec-environmental and our cost-reduction commitments. Printed on recycled iricity will be a key compet-paper, it also is completely recyclable and was produced at a cost itive advantage as the market approximately 30 percent less than last year's report, and approximately responds to NEPA. DQE 40 percent less than the 1991 report.

already is a major supplier of reliable energy to markets outside southwestern Penn-sylvania. Sales to other utili-ties totaled 2.8 billion kilowatt-hours in 1993, 6

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mately 800 square miles. Yet the company's almost 580.000 customers N .- .M( y 3 .( hold a wide range of att;tudes and preferences conceming their use of

, i' [9 electncity and their relationship with the provider of that important ser-f;; / - f / i '>U I vice. By monitonng and analyzing that information, we are finding new and better ways to serve our customers Iw., we t, ,s. ', \\'cie intreasing the satis, on . <n, o ns -a lition of mid- and laige- We've studied vanous customer surveys and reviewed a wide range

,, .,N , , r, , si/ a si/cd tommelt ial and of typicalinteractions with customers, as well as usage pattems and pay-

, du d m on n hs ment histones. Analysis of this research has enabled us to break down

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in ohi d m to M - the company's service temtory into six specific demographic reg lons -

< "s o uorethnologics Ihat om each with its own particular charactenstics. This enabies us to target pro-i 4 '<o improve the cilicienq ot- grams and services to customers who can best benefit from them.

<o e iheir hosinewes uInle redut - We recently initiated a whole-house surge protection program for l s/ , ,

ing their impact on the customers who want added protection from hghtning and voltage surges l cm it onment. for their computers, i!CRs stereos and other sensitive e!ectric equip-

! or cumple, in i493 wc ment. Our analysis helps pinpnt areas where this customer senrice will be most valuable. We use information from the ana!ysis in a number of whd dmb wis Hii-als and indis idual denial ways. from scheduhng tree trimming most effectively to placement of

.md medisal pratIites to cooperahe heat pump advertising with local heating contractors.

! no ey arge adence is N mom man Whspem mtrodote det t rotec hnolo-t:ics th.a safile stcrili/c infet- who move into new residences each year. Within three days of their tious medied waste. The mat one of our representatives delivers a welcome package that j Deliver quality service includes information about our services and coupons to local attractions

! and provide superior n n n dm and other money-saving offers We also survey these new customers to customer satisfaction in a way that differentiates r n hqid ah p leam how we can better ser/e them. For example, we know that many us within the energy nm dm 3'900 w ll be making decisions about adding or upgrading coohng and heating equ:pment. Response to the welcome program has been very favorable.

services marketplace.

m er dm m Th!s good first impression provides a solid customer satisfaction founda-cause disease. l'hrough use tion to build on.

of Ihese elet t r otet h nologies, of om customer sabsfachon achvities recognize that as competi-gg jg g g;,; tron increases, the importance of each interaction with each of our cus-fet ted on-siic. h then can he tomers increases.

hmied in standard landdlls, clinunating higher-priced a spet ial handling. The 5

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l more than 19 percent of our programs is helping area total sales. That underscores youths increase their envi-the importante of the ronmental awareness. I or om peop/c sement:c w holesale market and our are among the cleanest in cumple, a cooperative pm-inar u,cir ac ri<nn on ability to provide it with the United States. We pio- gram with the Western ans o// u,c foh af/ca competitiscly priced power. nected indust rial use of fly I ennsylvania Conservancy, a use u oild aromia ash in highway comtruction. regional conservation group, u,cm ucicprom/of ,

y.r Our Be.ner Valley Power helps dementary through om cunionmental Station is an indmiry leader high school students increase per/m mam e - from Shumiosy  : -

m nunnmnng the volume of- their understanding of the maini nnmolcan Through the years, we low-level radioactis e waste. environment and their roles pon er plants. to have carned a reputation as in 190, we timnaliecd in it.

cancarinx mnu,. to an environmental leader our long-standing conunit- Another very successfid im/mn my u c halutar within our industry. Opin- ment by descloping an envi- program enables grade p,r n u.ui/c ion surveys show that ronmental snategic plan, sehool students to learn pg adopting a corporate envi- about and plant trees

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h ronmental t haner, and descended liom those with 7 QpymQ \ B 9p establishing an emironmen- historie importance. We ECwh - 9*Tn;r .

tal stewardship program. receised a special wonnen-In a move we believe is dation from American

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% unique io our indust ry, we have initiated an environ-Forests, the nation's oldest non-profit fi>restry oiganita-g tion, liir the resuhs of this

%g g , g g jE p $s - [Ql[ mcmal training program p -_- - d for all 1)uquesne I ight program.

s ^ #I employees - not jmt those in a cooperative program

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imolved in power produc- with Allegheny County, our

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want all of our people to be approximately 170 tons of em ironmentally wmtions,

< old appliances and a wide b

s, g . competent and respomible, range of strap metal- from both on and off the job. hot water tanks and amo

+ ggg - ' qqlQy Our appro.Rh to envimn- parts to metal s. m l , and environmental quality is a mental pmtettion goes paint tans. Tiv material will paramount concern to util- beyond simply complying be recpled fi>r use as licd-iry cmiomers. Our commit- with emironmental laws stock fi>r new steel and metal Objective: ment also provides a and regulations. We take products. We received com-Recognize the value of j competitive advantage as pride in carrying our com- mendations from the county the individual, encourage i other utilities begin to make minnent into the unnmun- and the Pennsylvania 1.cgis-increased responsibility ,

imestments netcssary to itics we serve. lature fiir our participation.

and accountability, and ,

comply with new environ- hlucation is a corner- ()n the job, our people provide equal opportunity mental regulations. stone of our stewardship recpled more than 70 tons for personal growth and We pioneered me of wet attivities A wide variety of of paper in 1993, along with development, scrubber systems to help scrap metal from variom monol power plant emis- unnpany operatiom, oil siom. Our Pennsylvania fiom tramlimners, and wal fired genciating units

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wooden pallets. We also We hope to encourage the increased the use of environ- community to emulate the mentally compatible paints, achievements of the suc-non-hazardous solvents and enjoy a new recreational cessful nominees, thereby parts deaners, and are work- facility and better electric promoting innovative envi-ing with vendors to accept service at the same time. ronmental efTorts and fur-return of boxes, pallets and We expect the commu- ther enhancing the quality other packaging / shipping nity partnership aspect of oflife.

materials, ou wironmental charter to Another community out-Our llrunot Island y .a additional momentum reach initiative planned for Wildlife Habitat enhance- with the inaugural Three 1994 will help small and ment project continues to Rivers Environmental mid-si/cd businesses learn demon trate the ability of Awards in 1994. The goal of more about environmental Be a community leader in .

our power facilities to coex- the awards. cosponsored by regulations related to the.ir improving the quality of I g  ; gg  ; ggggg life in our service territory , ,, ,,

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g by being recognized  ! trial Resource Center, we are project along a transmission C,ounc.d, .is to honor organi-as a premier economi b f i d Wividd b m p wigh b &

development organiza- ,

j another example of. this facet have demonstrated a com- series of seminars this spring tion and by enhancing I .

! of our environmental com- mitment to environmental that will link these important the overallvalue of the  ! .

i mmrent. M,e recently ener- excellence, leadersh.ip and customers with regulatory human and natural .

greed a new 7.3 m.de power accomplishment m business, and legal experts who can resources of the region.

line near the new Pittsburgh education, com munity, gov- help them develop cost-effec-International Airport. The ernment, communication, tive strategies to meet their line runs along an old rail- or design and development. environmental obligations.

toad right-of-way that was developed as a segment of a CHESTER ENymoNMENin Acouism0N -

hiking and hiking trail. We In 1993, our Duquesne Enterprises subsidiary acquired a controlling -

worked dosely with the interest in Chester Environmental, Inc., an engineering and consulting Montour Trail Council to company that specializes in environmental rnatters.

ensure our line blended in We made this investment because Chester's experience and exper-with the picturesque setting. tise relate closely to our cors business. We believe the strong demand -

The right-of-way was con- for environmental services will continue to grow in response to new structed using selective tree regulations. Investment in Chester provides an opportunity to extend our trimming and state-of-the- environmentalleadership.

art crosion and sedimenta- Chester provides water quality, residual solid waste and air quality tion control. The 110 poles consulting and analytical laboratory services to industrial and govemment that carry the line along the clients around the world. Two major contracts were signed in 1993 with '

right-of-way are made of a steel companies in Taiwan and India. -

steel that will oxidize to an carthy brown over time.

Through this cooperative eflbrt, local residents can 3

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core business.

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Allowance for funds Used During Construction (AFC) Kilowall (KW)

AFC is an amount recorded on the books of A kilowatt is a unit of power or capacity. A a utility during the period of construction of kilowatt hour (KWH) is a unit of energy or

plant. The amount represents the estimated kilowatts times the length of time the kilo- i cost of both debt and equity used to fmance watts are used. For example, a 100-watt bulb the construction. has a demand of.1 KW and, if burned con-Central Area Power Coordination Group (CAPCO) t nuously, will consu e 1 KWH in ten i hours. One thousand KWs is a megawatt i These companies (Duquesne Light Cmnpany, (MW). One thousand KWHs is a megawatt j Ohio Edison Company, Pennsylvania Power hour (MWH). '

Company The CIcveland Electric illuminat- j ing Company and The Thledo Edison Com- #888' 8"855'88'88'"8 C8d'

, pany) joined together as CAPCO in 1967 to Decommissioning costs are expenses to be joindy develop power generation and trans- incurred in connection with the entomb-mission facilities. ment, decontamination, dismandement, Construellon Work in Progress (CWIP) renuwal and disposal of the structures, sys-I tems and components of a nuclear power This amount represents utility plant in the plant that has permanently ceased the pro-

process of construction but not yet placed in duction ofelectric energy.

service. The amount is shown on the consoli-Peak Load

dated balance sheet as a component of prop-

] erty, phnt and r<pdptnent. Peak load is the amount of electricity Deterred Energy Costs H " 0"'5"E PE*0' *f hE S h**' 0'*'"0*

Peak periods fluctuate by season and generally In conjunction with the Energy Cost Rate occur in the morning hours in winter and in Adjustment Clause, Duquesne Light Com' late aftemoon during the summer.

pany records deferred energy costs to offset Pennsylvania Public Utility Commission (PUC) difTerences between actual energy costs and the level of energy costs currently recovered The Pennsylvania governmental body that from customers. regulates all utilities (electric, gas, telephone, Energy Cost Rate Adjustment Clause (ECR) * " ' * N""'

Duquesne Light Company recovers through

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• a chamnan appointed by the governor.

the ECR, to the extent that such amounts are Regulatory Asset not included in base rates, the cost of nuclear Costs that Duquesne Light Company would fuel, fossil fuel and purchased power costs otherwise have charged to expense are capi-and passes to its customers the profits fmm talized or deferred because these costs are short-term power sales to other utilities. currently being recovered or because it is Federal Energy Regulatory Commission (FERC) probable th t the PUC will allow recovery of these costs through rates.

FERC is an independent five-member com-mission within the U.S. Department of Energy. Among its many responsibilities, FERC sets rates and charges for the wholesale transportation and sale of natural gas and i electricity, and the licensing of hydroelectric l p(mer projects.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CORPORATE DQE (the Company) is an energy services holding company. Its principal subsidiary, Duquesne STRUCTURE Light Company (Duquesne), is an electric utility engaged in the production, transmission, dis-tribution and sale ofelectric energy. During 1993, Duquesne's operations accounted for most of DQE's total assets, revenues and income.

While electric utility activities will continue to comprise most of DQE's business, the Company has taken important steps to develop its other subsidiaries: Duquesne Enterprises (DE) and Montauk. DE is involved in initiatives related to the core business; these include providing all the energy services for the Pittsburgh International Airport, providing environmental consult-ing and engineering services, and investing in real estate. Montauk makes both short- and long-term investments for the Company, and provides a source of capital for these other subsidiaries.

RESutis or Operating Revenues Customer operating rerrnuer result from Duquesne's sales ofelectricity to ultimate customers and are based on rates authorized by the Pennsylvania Public Utility Commission (PUC). These rates are designed to recover Duquesne's operating expenses and investment in utility assets and to provide a return on the investment. Currentand deferredeustomer rerrnues resulted from a

$232 million rate increase granted in early 1988. The PUC required Duquesne to phase in this increase during a six-year period. The phase-in plan provided that, with no impact on total reported customer revenues, rates would increase by approximately $85 million in April ofeach year from 1988 through 1991, remain constant in 1992 and 1993, and decrease by approxi-mately $85 million in April 1994. The phase-in plan also provided for recovery of defentdree-enues and carrying costs on such deferred revenues. The rate increase has been recognized in operating rezenues since March 1988. A regulatory asset has been established for that portion of revenues yet to he collected from customers, and carrying charges on this deferred asset have been recognized as a component of otherincome in the Statement of Consolidated Income of Du00ESNE CUSTOMER DQE. Duquesne expects the remaining balmec of this deferred asset to be recovered by April SALES 1994, the end of the phase-in period.

1993 VS.1992 ru.Lefrwm Short-term sales to other utilities are made at market rates and are included, along with Duquesne's non-KW1I revenues and revenues of DQE's other subsidiaries, in other operating rerrnues in the Statement of Consolidated Income of DQE.

iso a Components of the Change in Operating Revenues from the Prior Year

, (Amounts in Millions of Dollars)

_ 50 _ _ _ Customer Operating llevenues: I llevenues from sales ofelectricity to ultimate customers $26.9 $(37.3) $21.6 0 -

Energy Cost Itue Adjustment Clause (ECit) revenues (27.0) 4.8 15.1 E l State tax adjusunent surcharge revenues (7.7) 12.0 11.1 j

• Total Customer 0;wrating itevenues (7.8) (20.5) 47.8 M Res6dential er O[wadng benues:

commerciat llevenues from other utilities (21.8) 13.5 13.8 Induste6al - ~ Other revenues 31.0 (2.6) 9.1 Customer sales were Total Other Operating itevenues 9.2 10.9 22.9 i higher due to warmer than normal summer weather.

~

Total $ 1.4 $(9.6) $70.7 ,

l Revenues from sales of electricity to ultimate customers were favorably impacted in 1993 and )

1991 by wanner than normal summer temperatures. Mild summer weather in 1992 had the l opposite effect on residential and commercial customer sales.

ECR revenues are Duquesne's recovery of fuel and other energy costs not otherwise recovered fmm customers through base rates. The ECR is based on projected unit costs,is recalculated  ;

each year, and is subject to PUC review. This revenue adjustment indudes a credit to j l

10 l l

l

f l

l 1

DUQUESNE CUSTOMER Duquesne's customers for profits from short-term power sales to other utilities, as well as an REVENUES  !

adjustment for any over- or under-collections from customers that may have occurred in prior stalm.o q o,l""

The 1993 ECit reduced customer costs from 1992 levels and will continue to reduce rev-enues through the first quarter of 1994 by a greater amount than in the prior year. From April

, 1994 through March 1995, the ECR is expected to reduce revenues by a lesser amount than in the prior year. This ECR treatment is intended to have no impact on net income.

pm State tax adjustment surcharge revenues resuh from the August 1991 tax increases enacted by the Pennsylvania legislature. Most of these increases were retroactive to January 1,1991. The

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PUC allowed Duquesne to recover these increases in tax expense by applying, as of August 24, 1991, an adjustment to customers' bilk.15ecause of the timing of the increase and the rates applied Duquesne recovered more state tax adjustment surcharge revenues in 1992 than in 1993 or 1991. This tax recovery is expected, as of April 1994, to become part of base rates.

This tax recovery treatment is intended to have no impact on net income.

s2m v f Revenues from other utilities declined in 1993, from the record level of 1992, because higher Qr jh system demand and more planned and forced generating station outages in 1993 decreased l in 4E iH Duquesne's capacity available for olT system sales. The increase, fmm 1991 to 1992, in these

"""" short-term sales to other utilities resulted from greater availability of transmission and generat-la usma' ing capacity, increased demand by other utilities for energy and Duquesne's marketing ellbrts.

Commerc6al a neswentta Other revenues include revenues of DE and Montauk, as well as Duquesne's rental income and billings to other companies in the CAPCO gmup. Revenues of DE increased approximately meanest . $23 million in 1993; the increase was partially due to the acquisition of a controlling interest in Chester Environmental, Inc. (See Note A to the consolidated financial statements.) and higher sales to the Pittsburgh International Airport. Primarily as a resuh ofincreased leasing activities and other tax advantaged investments, Montauk revenues increased approximately

$8 million.

Operating Openses Yearly fluctuations infeelandpurchasedpmverexpense result from changes in the cost of fuel, the mix between coal and nuclear generation, the total KWHs generated and the clTects of DUQUESNE defened energy costs. In 1993, the impact of the ECR on deferred energy costs decreased fuel OTHER OPERATING cxpense, in comparison to that for 1992. Also contributing to the decline in fuel expense was a AND MAINTE N ANCE 6 percent decrease in generation that was primarily due to more planned and forced generating EXPENSE plant outages in 1993. Fuel expense for 1992 was greater than that for 1991 because of increased generation of electricity for sale to other utilities; however, the greater fuel expense was partially offset in 1992 by lower coal and nucicar fuel costs per KWH. In 1994, nudear fuel costs are expected to continue to decline, and coal costs are expected to remain near the ym 1993 level.

Other operating expenses were higher in 1993 than 1992. In 1993, Duquesne finalized plans to sub! case the majority ofits oflice space at corporate headquarters; reloculon ofits principal bminess ollices is anticipated in 1994. A charge of approximately $13 million was recorded as

~'om- ~ ~

an operating expense to reflect the shortfall in anticipaied sublea.se revenues from the rental payments related to space leased through January 2003, the date the leasing arrangements expire. Additionally, operating expenses at DE increased appmximately $17 million in 1993 as ,

a reflection of the acquisition of a controlling interest in Chester Envimnmental, Inc. (See Note l

. A to the consolidated fmancial statements.) included in 1991 opemting expenses was an increase, gg 4 caused by the deterioration of Duquesne's past due customer accounts and increased collection

~*Oup4 costs, of $11.9 million in the allowance fhr uncollectible accounts receivable.

Maintenance e.vfemeincurred for scheduled refueling outages at Duquesne's nuclear units is 5n deferred and amortired over the period between scheduled outages. During 1993, amorticulon se on n w u- of deferred nuclear refueling outage expense increased approximately $3.5 million over the R cts og

}992 kgcj. Also increasing maintenana opensein 1993 was Duquesne's change, as ofJanuary 1, gi'"8#8"s g' 4.e i993. in its meihoa ormouming for maimemmce cosis auring m2josassii sr.nion outages.

Prior to 1993, maintenance costs incurred for scheduled major outages at fossil stations were

//

charged to expense as the costs were incurred. Under the new accounting policy, Duquesne accrues, over the period between outages, anticipated expenses for scheduled major fossil station outages. (Maintenance costs incurred for non-major scheduled outages and n>r forced outages continue to be charged to expense as the costs are incurred.) This new method was adopted to i match more accurately the nuimenane; costs with the revenue produced during the periods between scheduled major fossil outago.

Depreciation andamortization evpmfeincreased in 1993 by comparison whh that for 1992 and 1991. The increase was primarily a result of an increase in depreciable property.

7hver other than income taxes decreased in 1993, primarily as a result of a favorable resolution of property tax assessments. In 1993, Duquesne recorded, on the basis of this revised assessment, the expected refunds of these overpayments in prior years. By comparison with those for 1991, taxes other than income taves decreased in 1992 as the result of favorable resolut;on of capital stock tax, gross receipts tax and sales tax matters.

DOE INTEREST /ncome taxes increased in 1993 as a result of an increase in taxable income and a 1 percent j EXPENSE AND increase in the corporate federal income tax rate.

OTHER CHARGES )

j pri%mfik!/.m) Other Incorne and Deductions During the founh quaner of 1993, Duquesne recognized a charge to other income of appmxi- ,

mately $15.2 million for its investment in the abandoned General Public Utilities (GPU) trans- '

mission line project. On December 8,1993, the NewJersey Board of Regulatory Commission-E"- ---

ers (BRC) denied a request by GPU's subsidiaryJersey Central Power and Light Company for approval oflong-teun power purchase and operating agreements that were originally signed in 1990 by GPU and Duquesne and further amended in 1993. The BRC rejected an administra-mt tive law judge's recommended decision that the project be approved and, within hours of the BRC decision, GPU terminated its participation in the project. In view ofGPU's decision, Duquesne also terminated its participation in the project and the PUC transmission line siting yo proceeding.

Other income also decreased in 1993, in comparison with that for 1992, as a result of a decrease j "q a_

of approximately $13 million in carrying charges on degrredretrnues. During 1993, the deferred

,~ revenue balance upon which carrying charges are earned declined in comparison with that for e , ,o ,, ,2 ,3 1992 and since April 1993, Duquesne has not recorded additional canying charges on defired  ;

Financial restructuring retenues. (See the discussion of the phase-in plan under the section on operating rerrnues.)  !

has renaces 6nteres gnesg'uere-than Income taves related to otherincomedecreased $15 million in 1993,in comparison with those

• • " D'*"'

for 1992, because of a favorable setdement (related to Duquesne's 1988 tax return and the consolidated 1989 tax return) with the United States Internal Revenue Service. The remaining decrease in 1993 was caused by lower non-operating income.

Other income for 1992 increased, in comparison with that for 1991, primarily as the result of an increase of $3.5 million in interest income and a decrease of $3.7 million in fees related to Duquesne's sale of receivables. Other income for 1991 included a $5.3 million regulatory accounting reclassiOcatior that decreased otherincome, reduced depreciation expense and had no impact on netincome, laterest and Other Charges Duquesne achieved reductions in interest andother chargesin 1993 and 1992 through re6nanc-.

ing first mortgage bonds and through obtaining lower average short-term rates on certaiti tax exempt pollution control notes. Duquesne also retired $24.2 million of preferred and prefer-ence stock during 1992. Interest expense and dividends on preferred and preference stock declined to $121 million in 1993 from $135 million in 1992 and $145 million in 1991. Inter-est expense and preferred stock dividends are expected to decline in 1994 by approximately

$9 million from the 1993 level.

12

CAPITAL Rtsouncts constructinn AND lJOUIDITY I)uring 1993, Duquesne spent approximately $100 million for construction. Duquesne expended these amounts to improve and expand its production, transmission and distribution systems. Duquesne estimates that it will spend approximately $110 million for construction in 1994. Construction expenditures are estimated to be $70 million in 1995 and $80 million in 1996. These amounts exclude AFC, nuclear fuel and expenditures for possible early replace-ment of steam generators at the licaver Valley Power Station. (See Note K to the consolidated DOE NET CASH FLOW financial statements.) Duquesne currently has no plans for construction of new base load gener-FROM OPERATIONS ating plants and expects that funds generated from operations will continue to be sudicient to i ms.,-mr." '

h aI ofi i d mA lovesting Through DE and hiontauk, DQE's investments are fbcused in four principal areas: energy, l

.5)oo. environmental services, leasing and tax-advantaged investments. After achieving a modest profit

! of $.02 per DQE share in 1992, these subsidiaries contributed $.13 per share to the Company's i 1993 carnings. During 1993, the level ofinvesting activities increased in comparison with that 32no 5

for 1992. On August 17,1993, DE acquired a controlling interest in Chester Environmental,

, Inc. for approximately $12 million. Chester provides total environmental consuhing and engi-

. g; j neering services to a wide range of cliems. During 1993. DE also made real estate investments

.! totaling approximately $22 million. Previous DE investments included Allegheny Development

.SMRg(h {t Corporation (which pmvides all energy services Ihr the Pittsburgh International Airport) and "h '

international Power hiachines (which manufactures products and systems designed to provide non-interruptible electric power). During 1993, hiontauk invested appmximately $44 million 50 in leases and other tax-advantaged investmems. The lease rentals in these transactions are

1. HI O ' guaranteed by ihe lessee's parents or affiliates.

glEgensime; Financing g O - .

The Company plans to meet its current obligations and debt maturities through 1998 with adelbsNet -~^.f';

--- '- ~

funds generated fmm operations and through new financings. At December 31,1993, the Company was in compliance with all ofits debt covenants.

Duquesne continues to reduce capital costs by refinancing and retiring securities. During 1993, Duquesne issued $695 million of first collateral trust bonds with maturities ranging from the

year 1996 through the year 2025 and with an average interest rate of 6.58 percent. The proceeds of these sales were used to redeem $713.7 million of first mortgage bonds with an average interest rate of 8.16 percent.

DQE RAll0 0F in June 1993, Duquesne participated in the issuance of $25 million oflleaver County Industrial EARNINGS TO Development Authority Pollution Control Revenue Bonds. In August 1993, Duquesne partici-

- Fin 0 CHARGES pated in the issuance of $20.5 million of Ohio Air Quality Development Authority Pollution -

---

R Comml Revenue Refunding Bonds to refund a like amount of pollution control obligations.

I In August 1993, hiontauk entered inm a revolving credit agreement with a group of banks.

A""- - Under this agreement, hionrauF can borrow, on a revolving basis, up to $50 million Ihr work-ing capital and other genecal coquate purposes. If the agreement is not extended at the end of

-~

go its 364-day conunitmen. period, hiont :uk can convert any outstanding bormwings into a two-year, amortizing term laan. At December 31,1993, hiontauk had borrowed $25 million under this agreement.

On January 14,1994, Duquesne redeemed all ofits outstanding shares of $2.10 preference stock and $7.50 preference stock for approximately $38 million.

N In 1992, Duquesne refinanced $312.9 million and retired $82.1 million oflong-term debt, 4Q.

Duquesne established, as ofJanuary 1,1992, an Employee Stock Ow nership Plan (ESOP) to l fund a match of a portion of employee contributions for a 401(k) plan. Duquesne may pur-j g j

, . ,, , g .g thase shares of DQE common stock from DQE or on the open market to satisfy the exchange feature ofits Preference Stock, Plan Series A. The Company expects the ESOP to have minimal g.inymaties

. .. .1

' < dilutive impact on earnings per share.

13

l l

l Sale of Accounts Receivable In 1989, Duquesne and an unafIlliated corporation entered into an agreement that entitled Duquesne to sell and the corporation to purchase, on an ongoing basis, up to $100 million of accounts receivable. At December 31,1993, Duquesne had soki $9 million of receivables. The accounts receivable sales agreement, which expires in June 1994, is one of many sources of funds available to Duquesne. Duquesne is currently evaluating whether to seek an extension of the agreement.

DOE NET INCOME Nutlear fuelleasing orsw na.s Dyu fences us acqmsioons of nuclear fuel through a leasing arrangement under which it may fmance up to $75 million of nuclear fuel. As of December 31,1993, the amount of 5140 nuclear fuel financed by Duquesne under this arrangement totakd approximately $65 million.

Duquesne plans to continue leasing nuclear fuel to fulfill its requirements at least through 1995, 500 _

the remaining term of the current leasing arrangement.

gun Dividends The Company or its prednessor, Duquesne, has continuously paid dividends on common

_5110 _

lq stock since 1953. The quarterly dividends paid have increased by an average annual rate of 5.9 percent over the past five years, even though the Company has maintainal a more conservative 51m __

.. L payour ratio than the industry in general. The Company expects that fimds generated from no L q -- ' ' = ' ~ [ operations will continue to be sumcient to meet sinking fund and long-term debt maturities and to pay dividends. The Company's need for ftmds and the availability of those generated from operations will be alTected by the level of economic activity in Duquesne's service area and 5"" ,

by legislation, rate-related proceedings, competition and environmental and other matters l g experienced by the Company and the electric utility industry generally. l st: ' si 92 9s Dividends may be paid on DQE common stock to the extent permitted by law and as declared Natacameniweases by the board of directors. However, in Duquesne's RestatedArticles ofincorporation, provisions M#

relating to preferred and preference stock may restrict the payment of Duquesne's common div-idends. No dividends or distributions may be made on Duquesne's common stock if Duquesne has not paid dividends or sinking fund obligations on its preferred or preference stock. Further, the aggregate amount of Duquesne's common stock dividend payments or distributions may not exceed certain percentages of net income if the ratio of common stockholders' equity to total capitalization is less than specified percentages. As all of Duquesne's common stock is owned by DQE, to the extent that Duquesne cannot pay common dividends, DQE may not be able to pay dividends to its common shareholders. No part of the retained earnings of DQE or any ofits subsidiaries was restricted at December 31,1993.

Duttoon comperaion Duquesne, like the electric utility industry in general, faces increasing competition. The Com-pany is continuing to assess the impact of these competitive forces on its future operations. The National Energy Policy Act of 1992 (energy act) was designed, among other things, to foster competition. Among other provisions, the energy act amends the Public Utility Holding Com-pany Act of 1935 (1935 act) and the Federal Power Act. Amendments to the 1935 act create a new class ofindependent power producers known as Exempt Wholesale Generators (EWG3),

which are exempt from the corporate structure regulations of the 1935 act. EWGs, which may indude independent power producers as well as amliates of electric utilities, do not require Securities and Exchange Commission approval or regulation. At the current time, the Company has not made any investment, and has no plans to make any investment, in EWGs. Amendments to the Federal Power Act create the potential for utilities and other power producers to gain increased access to transmission systems ofother utilities to facilitate s. des to other utilities. The amendments would permit the Federal Energy Regulatory Commission (FERC) to order utili-ties to transmit power over their lines for use by other suppliers and to enlarge or construct additional transmission capacity to provide these services. The FERC may not, however, issue any order that would unreasonably impair the continuing reliability of affected electric systems.

Finally, brokers and marketers, without owning or operating any generation or transmission facilities, have also entered into the business of buying and selling electric capacity and en M

Industrial and large commercial customers may have the ability to own and operate facilities to generate their own electric energy requirements and, if such facilities are qualifying facilities, to require the displaced electric utility to purchase the output of such facilities Customers may also have the option of substituting fuels, such as the use of natural gas, oil or wood for heating and/or cooling purimses rather than electric energy or of rehicating their facilities to a lower cost envirof tment.

in addition, increased competition may also result from the 1990 Amendments to the Clean. Air Act. Such ainendments exempt from sulfur dioxide (SO,) and oxides of nitrogen (NOx ) control requiremen;s existing units with less than 25 MWs of generating capability, and new or existing co-generatien units supplying less than one-third of their electric output and less than 25 MWs for commercial sale.

Generating Units Hetti for future Use in 1986, the PUC approved Duquesne's request to remove the Phillips and most of the Brunot Island (BI) power stations from service and place them in cold reserve. Duquesne's capitali7ed costs and net investment in the plants at December 31,1993 totaled $130 million. (See Note L to the consolidated financial statements.)

Duquesne expects to recover its net investment in these plants through future sales. Phillips and BI represent licensed, certified, clean sources of electricity that will be necessary to meet expanding opportunities in the power markets. Duquesne believes that anticipated growth in peak load demand for electricity within its service territory will require additional peaking gener:, tion. Duquesne kmks to BI to meet this need. The Phillips Power Plant is an important component in meeting market opimrtunities to supply long term bulk power. Itecent legislation may permit wider transmission access to these long term bulk power markets. In summary, Duquesne believes its investment in these cold-reserved plants will be necessary in order to meet future business needs. If business opportunities do not develop as expected, Duquesne will consider the sale of these assets. In the event that market demand, transmission access or rate recmery do not support the utilization or sale of the plants, Duquesne may have to write off part or all of their costs.

Environinental Mallers The Comprehensive Environmental 1(esponse, Compensation and Liability Act of 1980 (Superfund) and the Superftmd Amendments and Reauthorization Act of 1986 established a variety ofinformational and environmental action programs. The Environmental Protection Agency (EPA) has infonaed Duquesne ofits involvement or potential involvement in three hazardous waste sites. If Duquesne is ultimately determined to be a resimnsible party with respect to these sites, it could be liable for all or a portion of the cleanup costs. However, in each case, other solvent, potentially responsible parties that may bear all or part of any liability are also invohed. In addition, Duquesne believes that available defenses, along with other factors (including overall limited involvement and low estimated remediation costs for one site) will limit any [mtential liability that Duquesne may have for cleanup costs. Duquesne believes that it is adequately reserved for all known liabilities and costs and, accordingly, that these matters will not have a materially adverse effect on its financial position or results ofoperations.

In 1990, Congress approved amendments to the Clean Air Act. Among other innovations, this legislation established the Emission Allowance Trading System. Emission allowances are permits to emit one ton of SO, for one year. These allowances are issued by the EPA to fossil-fired stations with generating capability of more than 25 megawatts that were in existence as of the passage of the 1990 amendments. Allowances are part of a market-based approach to SO, reduction. Emission allowances can also be obtained through purchases on the open market or directly from other sources. Excess allowances may be banked for future use or sohl on the open market to other parties for their use in offsetting emissions.

The legislation requires significant reductions of 50, and NO, by 1995 and additional reduc-tions by the year 2000. Duquesne continues to work with the operators ofits jointly owned

=

15

stations to implement cost-effective compliance strategies to meet these requirements.

Duquesne's plans for meeting the 1995 SO, compliance requirements include increasing the use of scrubbed capacity, switching to fuel with a lower sulfur content and purchasing emission allowances. NO, reductions under Title IV are required by 1995 at only the Cheswick station; work to achieve the reductions was completed in 1993. The ozone attainment provisions of

'litle i of the Clean Air Act Amendments will require NO reductiom x by 1995 at Duquesne's Elrama plant and at the jointly owned Mansfeld plant. Duquesne plans to achieve such reduc-tions with low NO, burner technology. The estimated capital costs to achieve 1995 compliance standards are approximately $30 million, ofwhich approximately $15 million has already been spent. Through the year 2000, Duquesne is planning a combination ofcompliance methods that include fuel switching; increased use of, and improvements in, scrubbed capacity; due gas conditioning; low NO, burner technology; and the purchase of emission allowances. The Company currently estimates that additional capital costs to comply with environmental requirements from 1995 through the year 2000 will be approximately $20 million. This estimate is subject to the Gnalization of federal and state regulations. 1 1

Duquesne is closely monitoring other imtential air quality programs and air emission control requirements that could be imposed in the future. These areas include additional NOx control requirements that could be imposed on fossil fuel plants by the Ozone Transport Commission, more stringent ambient air quality and emiulon standards for So, and particulates, or CO, control measures. As these potential pmgrams are in various stages of discussion and considera-tion, it is impossible to make reasonable estimates of the potential costs and impacts of these programs at this time.

In July 1992, the Pennsylvania Department of Environmental Resources (DER) issued Residual Waste Management Regulations governing the generation and management of non-hazardous waste. Duquesne is currently conducting tests and developing wmpliance strategies. Capital compliance costs are estimated, on the basis ofinformation currendy available, at $10 million I through 1995. The expected additional capital cost ofcompliance from 1995 through 2000 is appmximately $25 million; this estimate is subject to the resuhs of gmund water assessments and DER final approval of compliance plans.

Duquesne operates the scrubbed Elrama plant and converts the scrubber slurry to a fixated pomionic material. This material is placed at an off-site disposal area having approximately six years of remaining capacity. Additionally, Duquesne owns 17 percent of the scrubbed Manslickl plant, which is operated by Pennsylvania Power. This plant pumps a similar slurry to an olT-site  ;

impoundment where the slurry is treated by using a Calcitox fixation process. The site has at least 14 years of remaining capacity. Both plants have limited temporary on-site storage for due gas desulfurization material and no pennanent on-site disposal capacity. While there is no imminent shortage ofdisposal capacity, Duquesne continues to monitor this situation and to plan for future disposal. The siting of future disimsal facilities will be facilitated by the 1993 -

EPA determination that coal combustion waste products are not hazardous waste and are there-fore exempt from the llazardous Waste Regulations, l

Under the Nuclear Waste Policy Act of 1982, which establishes a policy fbr handling and dis-jusing of spent nuclear fuel and requires the establishment of a final repository to accept spent i

fuel, the CAPCO companies have entered into contracts with the Department of Energy l (DOE) for permanent disposal of spent nuclear fuel and high-level radioactive waste, The l DOE has indicated that the repository will not be available for acceptance ofspent fuel bcfore t

2010. Existing on-site spent fuel storage capacities at Itcaver Valley 1, Beaver Valley 2 and Perry are expected to be sullicient until 1996,2010, and 2009, respectively. Duquesne is currently increasing the storage capacity at Beaver Valley I by equipping the spent fuel pool with high density fuel storage racks. Duquesne anticipates that such action will increase the spent fuel j

storage capacity at Beaver Valley 1 to provide for suflicient storage through 2014.

i I

16

Other Subsidiary Operations The continued growth of DE and Montauk is expected to play an increasing role in DQE's overall corporate strategy and future earnings.

Retirement I'lan hieasurement Assumptions The Company reduced the discount rate used to determine the projected benefit obligation on the Company's retirement plans at December 31,1993, to 7 percent. The assumed change in future compensation levels was also decreased by 0.5 percent to reflect current market and economic conditions.

The cfTects of these caanges on the Company's retirement plan obligations are reflected in the amounts shown in Note I to the consolidated financial statements. The resulting increase in related expenses for subsequent years is not expected to be material.

General Electric Seillement in January 1991, the CAPCO wmpanies reached a settlement in connection with a 1991 lawsuit against General Electric Company (GE) regarding the Perry Plant. The settlement provides for cash payments to the CAPCO companies and discounts on fiuure purchases from GE. This setdement will not materially affect the Company's results of operations in future years.

Other Duquesne's utility operations are subject to regulation by the PUC and the FERC. This regulation is designed to provide for the remvery of operating costs and investment and the opportunity to earn a fair retmn on funds invested in the utility business. The regulatory process imposes a time lag during which increases in operating expenses, capital costs or construction costs may not be recovered.

COMPANY flEPORT ON The Company is responsible for the financial infi>rruation and representations contained in the FINANCIAL STATEMINTS financial statements and other sections of this annual report. The Company believes that the consolidated financial statements have been prepared in confbrmity 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 induded in the statements and that the other inibrmation in the annual report is consistent with those statements. In preparing the financial statements, the Company makes informed judgments and estimates based on cur-rently available infbrmation about the effects of certain events and transactions. The Company maintains a system ofinternal accounting contml designed to provide reasonable assurance that the Company's assets are safeguarded and that transactions are executed and reconfed in accor-dance with established procedures. There are limits inherent in any system ofinternal control and such limits are based on recognition that the cost of such a system should not exceed the benefits derived. The system ofinternal accounting control is supported by written policies and guidelines and is supplemented by a stalTofinternal auditors. The Company believes that the internal accounting control system provides reasonable assurance that its assets are safeguarded and the financial information is reliable.

NY C C k+r** '

Wesley W. von Schack Gary L Schwass Chairman of the Board, President Vice President and ,

and Chief Executive Officer Treasurer l l

l l

/7

Rlrons av To the Directors and stockholders or 00E:

lNDEPtNDENr We have audited the accompanying consolidated balance sheets of DQE and its subsidiaries as Crstuito Pusuc of December 31,1993 and 1992, and the related consolidated statements ofincome, common AcCOUNTWS stockhoklers' equity, and cash flows for each of the three years in the period ended December 31,1993. These financial statements are the responsibility of the Company's management. Our respomibility 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 stan-dards 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 provide a reasonable basis for our opinion.

In our opinion, such consolidated fmancial statements present fairly, in all material respects, the financial position of DQE and its subsidiaries as of December 31,1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1993 in conformity with generally accepted accounting principles.

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

M k yl .

Deloitte & Touche Pittsburgh, Pennsylvania January 25,1994 HEPORT OF THE The Audit Committee, composed entirely of non-employee directors, meets regularly with the Auo:T CommitTtt independent public accountants and the internal auditors to discuss results of their audit work, OF THE BOAnD their evaluation of the adequacy of the internal accounting controls and the quality of financial or Dinterons reponing. I or DOE I In fulfilling its responsibilities in 1993, the Audit Committee recommended to the Board of  !

Directors, the selection, subject to shareholder approval, of the Company's independent public )

accountants. The Audit Committee reviewed the overall scope and details of the independent public acceantants' and internal auditors' respective audit plans and reviewed and approved the independent public accountants' general audit fees and non-audit services.

Audit Committee meetings are designed to facilitate open communications with internal auditors and independent public accountants. Tb ensure auditor independence, both the inde-pendent public accountants and the internal auditors have ftdl and free access to the Audit Committee.

The Audit Committee of the Board of Directors of DQE j i

1 i

18 l

l

l STATEMENT OF CONSOUDATED INCOME (husarub ofDolkm, Eurpt Per Slure Amounn) l' ear Ended December 31, 1993 1992 1991 OPERATING REVENUES Cttstomers:

Current $1,175,024 $1,180,707 $1,181.332 Deferred (Note j) (100,315) (98,201) (78344)

Other 120,851 111,698 100,846 TotalOperating Revenues 1.195,560 1,194,204 1,203,834 OPERAllNo EXPENSES Fuel and purchasni power 220,928 265340 250,755 ,

Other operating 319,071 282,953 291,253 Maintenance 80,292 79,146 83,773 Depreciation and amortization 142,657 127,924 119,264 Taxes other than income taxes 73,126 85,733 95,175 Income taxes (Note F) 106,286 97,193 96,690 Total Operating Frpenses 942,360 938,289 936,910 i Operating Income 253,200 255,915 266,924 0THER INCOME Allowante for ajuity funds used during construction 869 2,598 1,855 AND (DEDUCTIONS) Iong-term power sale write-off(Note J) (15,225) - -

Carrying charges on deferred revenues 1,801 15,145 21,514 income taxes (Note F) 19,033 (11,747) (5,132) J Other - net 2,187 12.582 (9,398) j 1

TotalOtherIncome 8,665 18,578 8,839 Income llefore In terest and Other Charv,es 261,865 274A93 275,763 lNTEREST AND Interest on long-term dcht 108,479 123A02 131,499 i OTHER CHARcES Other intercsr 3,517 2A58 2316 Allowance for borrowal funds und during tonstruuion (726) (2,296) (2A18)

Preferrni and preference stak dividends of subsidiary 9,188 9A11 10,801 TotsdInterrst and Other Clunges 120A58 132,975 142,198 Income Before Cumulative FJfect on Prior Years of Changes in Accounting Principles 141,407 141,518 133,565 Adoption of SFAS 109 - Income Taxes (Notes A and F) 8,000 - -

Accounting for maintenance costs - net (Note A) (5A25) - --

Nti INCOME Net Income 5 143,982 $ 141,518 $ 133,565 Average Number of Common Shares Outstanding (000) 52,979 52,913 53391 l EARNINGS PER SHARE Earnings Per Share of Common Stocle Income liefore Cumulative Effect on Prior Years of )

Changes in Accounting Principles $2.67 $2.67 $2.50 l Adoption of SFAS 109 - Income Taxes (Notes A and F) ,15 - -

Actuunting for maintenance costs - net (Note A) (.10) - -

Earnings Per Share of Common Stock 52.72 $2.67 $2.50 DIVIDENDS DCCLARED Dividends Declared Per Share of Common Stock $1.62 $1.54 $1 6 See nota to wnwlidardjnanddstatemenu.

I 19 l

CONSOLIDATED BALANCE SHEET (Tkanub egfDollm)

As ofDeconber31, 1993 1992 Assus Property, Plant and lijuipment:

Elatric plant in servit.c (Note A)

$ 1,100,05ci $3,860,040 Construction work in pnigress 59,777 67,435 Property heki under capital leases (Note E) 177,800 212,172 Property held Ihr future use (Note J) 216,863 216,893 Total 4,554,498 4,356,540 Ias accumulated depntiation and amortiution (1,435,732) (1,340,846)

_ 1%perty, Plant and1& fuipment- Net 3,118,766 3.015,694 Other Property and Investments (at cost) 124,082 43,462 Current Assets:

Cash and temporary cash imestments (at cost which approximates market) 32.234 37,782 Receivables (Note 1)):

Ekctric cmtomer aaounts racivable 107,342 109,692 CAPCO rneivables 22,937 17,915 Tax receivabhs 18,857 2A03 Other receivables 43,919 5.785 Irss: Allowance for uncolktrible aaounts (13,282) (7,707)

Rncivables less allowance fbt uncolktrible accounts 179,73 128,088

! css: Racivables sold (9,000) (6,000)

TotalReceir aHes _ _ . _

170,~73 52,088 Materiah and supplies (at average uist):

Coal 26,793 39,297 Operating and uinstruction 64,885 66,016 TotalMaterials andSupplia 91,678 105,313 Other current assets 9,719 11,791 Total Current Aucts 304,401 206,974 Other Ass <tu Extraordinary property loss (Note B) 35,781 46,447 Unamortizal low on reacquired debt (Note C) 95,266 70,324 Beaver Valley Unit 2 sale / leaseback premium (Note E) 36,903 36,371 1)cferred r;ue synt bronicuion costs (Note J) 51,149 51,149 Phase-in plan deferrals (Note J) 28,621 127,996 Investment in hveragal leases (Note E) 48,102 32,140 Uncolktted deferral income taxes (Note A) 569,555 -

Deferrul debits 163,412 157,141 TotalOther Anets 1.026,789 52l.568 Tota / Assets 54,574,041 $3,787,698 See notes to amschdnedfinanci.da nnnenn 20

. ___ _ _ _ _ _ _ . - - - - - - _ - _ . - - - - - - - - - - - - - - - - - - - - - - - - - ~

(Mwands ofDollm)

At ofDacrnlaJL 1993 1992 i CAPITAUZA110N Capitalization (Note C):

AND llABluTIES Common su(k (authorized - 125,000,000 shares, issued - 73,119,436 shares) 5 73,119 $ 73,i19 Capital surplus 928,140 927,925 Itetainni carnings 554,606 496,711 Irss treasury stock (at cost) (20,107.209 and 20,169,349 shara, respectively) (325,280) (326,295)

Total common sn(khoklers' niuity 1,230,583 1,171,460 Non-re&cmable preferred and preference stock 121,906 121,906 Raleemable preferred and preference sutk 8,392 8,579 Non-raicemable preference snick, Plan Series A 29,956 29,995 Total preferred and preference sutk before deferred ESOP tknclit (involuntary liquidation values of $160,117 and $160,342 excul par by $81,585 and $81,808, rn;wrively) 160,254 160,480 Deferred employee snxk ownership plan (ESOP) benefit (27,126) (28,471)

Total preferral and preference snwk (Note C) 133,128 132,009 Senior secural debt (excluding Pollution Control Notes) 999,400 1,018,098 Other long-tenu debt 422,817 398,915 Unamortimi debt discount and premium - net (5,219) (4,012)

Total long-term debt 1,416,998 1,413,001 7bralGrpitaliution 2,780,709 2,716,470 Obligations Under Capital leases (Note E) 55,733 71,876 Current Liabilities:

Notes payable 36,267 -

Current maturities and sinking fund requirements (Notes C and E) 45,741 46,054 Accounts payable 117,191 119,828 Accrued taxes 45,887 42,31i Deferred energy costs (Note A) 10,108 18,893 Acuual interest 14,419 28,258 Dividends dn.lared 26,699 26,445 lbtalCurrent Liabilities 196,312 281,784 Other Nonmrrent Ilabilities:

Investment tax credits unamortizal 129,574 135,580 Accumulated deferred inmme taxes (Note A) 1,169,148 480,248 Deferred credits (Note A) 142,565 101,735 TotalOtlxr Noncurrrnt Liabilities 1,441,287 717,563 Commitments and Contingencies (Notes 11 through I.)

Total G1pitaliution and Liabilities $4,574,041 $3,787,698 21 -

1

)

STATEMENT OF CONSOLIDATED CASH FLOWS l

(& wands ofDollan)

Year EndedDewmber31, 1993 1992 1991 CASH FLOWS FROM Net income $143,982 $141,518 $133,565 OetRAriNo Activmts Principal non-cash durges (credits) to net income:

Depreciation and amortization per income statement 142,657 127,924 119,264 Capitallease and other amonization 30,271 49,001 56,437 Deferral income taxes and investment tax cralits - net (32,305) (2,318) (18,974)

Allowance for ajuity funds used during construction (869) (2,598) (1,855)

Deferred revenues and carrying charges recovered 99,375 83,056 56,830 Changes in working capital other than cash (Note I !) (III,677) 48,670 (43,050) '

Other -- net 29,421 (1,958) 32,559 Net Cash Mridedfmm Operating Activities 300,855 443,295 334,776 CASH FLOWS USto By Construction expendimres - utility (100,628) (112,409) (125,358) lNVESilNo AcTivmts Repurchase of common stock - -

(23.703)

Allowance Ihr borrowed funds used during wnstruction (726) (2,296) (2A18)

Investments (85,324) (19,598) (16,042)

Payment for purchase of Chester Environmental, Inc., net of cash acquired (11,886) - -

Ot her - net (4,452) (7,877) (6,905) l Net Cash thed by Investing Activities (203,016) (l42,180) (l74A26) l CASH fL0wS Usto lN Salc of fmnd3 740,500 312,925 50,(XX) flNANclNa Activmts increase in notes payable 36,267 - -

Dividends on common stock (86,089) (81,491) (78,040)

Reductions oflong-term obligations:

Preferred and preference stock (I87) (24,158) (38,505)

Inng-term debt (735,418) (394,95I) (58,782)

Other obligations (27,751) (43,686) (42,99'7)

J Ikaver Valley Unit 2 sale / leaseback premium (Note E) - (3(i,371) -

, Premium on icacquired debt (31,702) (18,127) (2,947)

]

] Other - net 623 (2,719) (2,410) l l

Net Cash f/sedIn I7nancing Activities (103,387) (288,578) (173,681)

Net inct use (decrease) in cash and temporary cash investments (5,5 18) 12,537 (13,331)

Cash and temporary cash investments at lxy, inning ofyear 37,782 25,245 38,576 Cash and temporary cash investments at end ofyear $ 32.234 $ 37,782 $ 25,245 SUPPLEMENTAL CASH FLOW INFORMATION ,

. I

! CASH PAio DURING Interest (net ofamount otpitalizal) $125,306 $126,014 $136,147 THE YEAR income taxes $133,303 $112,859 $ 86,201 NON-CASH INVESTING Capital lease obligations recorded (Note E) $ 11,811 $ 17,089 $ 22,028

, ANo flNANCING }30p reference p stak issued $ -

$ - $ 30,000 ActiviritS (

!ar notes to conw!idnedjnand.dstaternents.

22 l

J

STATEMENT OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY (71eusands ofDollars) 1993 1992 1991 1990 COMMON ST0cx Common stock par value ($1 per share) $ 73,119 $ 73,119 $ 73,119 $ 73,119 Capital stock expense and other (change) 215 (437) (49) 368 CAPITAL SuRetus Italana at end ofyear 928,140 927,925 928,362 928,411 Net income 143,982 141,518 133,565 121,672 Dividends declared (86,089) (81,491) (78,040) (74,972)

RETAINED EARNINGS Italance at end of year 554,601 496,711 4 % 684 381,159 Sur_k reisc.ued (repurchased)- net 1,015 749 (23,496) (34.117)

TntAsuRY S10cx Italance at end ofyear 0 25,280) (326,295) (327,044) (303,548)

Total Common Stoc&lders*Eyuiry $1,230,583 $1,171,460 $1,111,121 $1,079,14i See notes to consoliditedfnauialstatemena.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A.

SUMMARY

OF Consolidation OUN M The consolidated fmancial statements include the accounts of DQE (the Company) and its oms subsidiaries. All material intercompany balances and transactions have been eliminated in the preparation of the Consolidated Financial Statements of DQE.

On August 17,1993, DE acquired a controlling interest in Chester Environmental, Inc.

(Chester) for approximately $12 million. The acquisition was accounted for under the purchase  ;

method of accounting and Chester's results ofoperations have been included in the Company's consolidated Onancial statements since that date.

Basis of Accounting The consolidated financial statements rc0cct the rate-making practices of Duquesne 1.ight Company (Duquesne) and, as a result, contain regulatory assets and liabilities as deferred chan;es and credits in accordance with Statement ofFinancialAccounting Standards Number 71, Accountingfor the E(Rcts ofCertain Types ofRegulation (S&1S Na 71). Duquesne's accounting practices conform to the Uniform System of Accounts prescribed by the Federal Energy Regula- i tory Commission (FERC) and the requirements of the Pennsylvania Public Utility Commission ,

(PUC). The Company is also subject to the accounting and reporting requirements of the Securities and Exchange Commission (SEC).  !

l Property. Plant and Quipment The asset values of properties are stated at original construction cost, which includes related payroll taxes, pensions, and other fringe benefits, as well as administrative and general costs.  !

l Also included in original construction cost is an allowance for funds used during construction (AFC), which represents the estimated cost ofdebt and equity funds used to fmance construc-tion. The amount of AFC that is capitalized will vary according to changes in the cost of capital and in the level of construction work in progress (CWIP). On a current basis, Duquesne does l not realize cash from the allowance for funds used during construction. Duquesne does realire i cash, during the service life of the plant, through increased revenues reflecting a higher rate base l (upon which a return is earned) and increased depreciation. The AFC rates applied to CWIP were 9.6 percent in 1993,10.3 percent in 1992, and 9.6 percent in 1991.

Additions to, and replacements of, property units are charged to plant accounts. Maintenance, repairs and replacement of minor items of property are recorded as expenses when they are incurred. The costs of properties that are retired (plus removal costs and less any salvage value) are charged to the accumulated provision for depreciation.

Substantially all of Duquesne's properties are subject to a f rst mortgage lien, and substantially all of Duquesne's electric properties are subject to junior liens.

23

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

Depreciallon Depreciation of fraperty.f int l andryulpment, including plant-related intangibles, is recorded on a straight-line basis over the estimated useful lives of properties. Amortization ofother intan-gibles is recorded on a straight-line basis over a five-year period. Depreciation and amortization ofother properties are calculated on various bases.

Nuclear Decommissioning The PUC ruled that recovery of the decommissioning costs for Beaver Valley Unit I could begin in 1977 and that recovery for lleaver Valley Unit 2 and Perry Unit 1 could begin in 1988.

Duquesne expects to decommission each nuclear plant at the end ofits life, a date that currently coincides with the expiration ofeach plant's operating license. (See Note L) The total estimated decommissioning costs, including removal and decontamination costs, being recovered in rates

~

are $70 million fbr Beaver Valley Unit 1, $20 million for Beaver Valley Unit 2, and $38 million lbr Perry Unit 1. These amounts were based upon the most recent studies available at the time of Duquesne's last rate case.

Since the time of Duquesne's last rate case, site specific studies have been performed to update the estimated decommissioning costs, in current dollars, for each ofits nuclear generating units.

In 1992, Duquesne's share of the estimated decommissioning costs for Beaver Valley Unit 2 was revised to $35 million. Duquesne's share ofdecommissioning costs, which is based on prelimi-nary site specific studies to be finalized early in 1994, is estimated to increase to $134 million lbr Beaver Valley Unit I and to $71 million for Perry.

During 1994, it is Duquesne's intention to increase the annual contribution to its decommis-sioning trusts by $2 million to bring the total annual funding to approximately $4 million per year. Duquesne plans to continue making periodic reevaluations ofestimated decommissioning costs, to provide additional funding from time to time, and to seek regulatory approval lbr recognition of these increased funding levels.

Duquesne records decommissioning costs under the category ofdepreciation expense and accrues a liability, equal to that amount, for nuclear decommissioning expense. Such nuclear  ;

decommissioning timds are deposited in external, segregated trust accounts. Trust fund earnings increase the fund balance and the recorded liability. The aggregate trust ftmd bahnces at the end of 1993 totaled $18.1 million. On the Company's consolidated balance sheet, the decom-missioning trusts have been reflected in otherproperty andinustments, and the related liability has been recorded as otherdeferredcredits.

Maintenance hiaintenance expense incurred fbr scheduled refueling outages at Duquesne's nuclear units is deferred and amortized over the period between scheduled outages. Duquesne changed, as of January 1,1993, its method of accounting for maintenance costs during scheduled major fbssil station outages. Prior to that time, maintenance costs incurred for scheduled major outages at fbssil stations were charged to expense as these costs were incurred. Under the new accounting '

policy, Duquesne accrues, over the periods between outages, anticipated expenses fbr scheduled major fossil station outages. (Maintenance costs incurred for non-maior scheduled outages and fbr forced outages will continue to be charged to expense as such costs are incurred.) This new .

method was adopted to match more accurately the maintenance costs and the revenue produced .

during the periods between scheduled major fossil station outages.

The cumulative efTect (approximately $5.4 million, net ofincome taxes of approximately $3.9 million) of the change on prior years was included in income in 1993. The etTect of the change in 1993 was to reduce income, before the cumulative efTect of changes in accounting principles, by approximately $2.4 rnillion or 5.05 per share and to reduce net income, after the cumulative effect of changes in accounting principles, by approximately $7.8 million or $.15 per share.

Revenues Meters are read monthly and customers are billed on the same basis. Revenues are recorded in l the accounting periods for which they are billed. Deferred revenues are associated with the Company's 1987 rate case. (See NoteJ.)

income Taxes on January 1,1993, the Company adopted Statement ofFinancialAccounting Stanbrds Num-her 109 (SFAS No.109). Implementation of SFAS No.109 involved a change in accounting principles. The cumulative $8 million effect on prior years was reported in 1993 as an increase in net income.

SFAS No.109 requires that the liability method be used in computing deferred taxes on all dif-ferences between book and tax bases of assets. These book tax differences occur when events and transactions recognized for fmancial reporting purposes are not recognized in the same period for tax purposes. As a utility, Duquesne recognizes uncollecteddeferredincome taxes for these deferred tax liabilities that are expected to be recovered from customers through rates. The adoption of SMS No.109on January 1,1993, resulted in a $700 million increase in deferred tax liabilities and the recognition of $550 million in net regulatory assets. Prior to the adoption of SFAS No.109, Duquesne recorded certain costs in electricplant in service net of taxes.

Because SMS No.109 eliminates this " net of tax" accounting, the adoption of SFAS No.109 also resulted in an increase in plant assets of $150 million.

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

Energy Cost Rate Hjustment Clause (ECR)

Through the ECR, Duquesne recovers (to the extent that such amounts are not induded in base rates) nudear fuel, fossil fuel and purchased power expenses and, also through the ECR, passes to its customers the prof ts from short-term power sales to other utilities. Nudcar fuel expense is recorded on the basis of the quantity of electric energy generated and indudes such costs as the fee, imposed by the United States Department of Energy (DOE), for future disposal and uhimate storage and disposition of spent nudear fuel. Fossil fuel expense indudes the costs of coal and fuel oil used in the generation of electricity. l 1

Duquesne defers fuel and other energy expenses for recovery through the ECR in subsequent years. The deferrals reflect the differetice between the amount that Duquesne is currently col-lecting from customers and its actual fuel costs. The Pennsylvania Public Utility Commission (PUC) annually reviews Duquesne's fuel costs for the fiscal year April through March, compares them to previously projected fuel costs and adjusts the ECR for over- or under-recoveries and for two PUC-established coal cost standards. (See NoteJ.)

Over- or under-recoveries from customers are recorded in the C<msolidated Balance Sheet of DQE as payable to, or receivable from, customers. At December 31,1993 and 1992, $10.1 million and $18.9 million were payable to customers and shown as defern denergy costs. j Cash flows For the purpose of the statement of cash flows, the Company considers all highly liquid invest-ments maturing in three or fewer months to be cash equivalents.

Reclassificallons The 1992 and 1991 financial statements have been reclassified to conform with accounting presentations adopted during 1993.

B. ExTRAoRomARY ln 1984, Companies Comprising the CAPCO group agreed to minimize construction work and PROPERTY l.0SS cash expenditures on Perry Unit 2 until several alternatives, induding resumption of construc-tion or cancellation of the unit, were evaluated. Duquesne abandoned its interest in the unit in 1986 and subsequently disposed ofits interest in 1992.

In 1987, the PUC approved recovery, over a 10-year period, of Duquesne's original $155 mil-lion investment in Perry Unit 2. Duquesne is not earning a return on the as yet unrecovered portion (approximately $39A million at December 31,1993) ofits investment in the unit.

25

C. CAPliAUZATION Common Sfack The Company or its predecessor, Duquesne, has continuously paid dividends on common stock since 1953. The quarterly dividend declared in the fourth quarter of 1993 was increased j

to $.42 per share. This annualized dividend of $1.68 per share was increased from $1.60 per share in 1992. The annualized dividend per share was $1.52 in 1991 and $1.44 in 1990.

l l Dividends may be paid on DQE common stock to the extent permitted by law and as declared by the board of directors. I lowever, in Duquesne's Restated Articles of incorporation, provisions relating to preferred and preference stock may restrict the payment of Duquesne's common div-idends. No dividends or distributions may be made on Duquesne's common stock if Duqu sne has not paid dividends or sinking ftmd obligations on its preferred or preference stock Further, t the aggregate amount of Duquesne's common stock dividend payments or distributions may l

not exceed certain percentages of net incomeif the ratio of common stockholders' equity to total capitalization is less than specified percentages. As all of Duquesne's common stock is owned by DQE, to the extent that Duquesne cannot pay common dividends, DQE may not be able to pay dividends to its common stockhoklers. No part of the retainedearnings of DQE or any of its subsidiaries was restricted at December 31,1993.

Changes in the Number of Shares of Common Stock Outstanding 1993 1992 1991 (Amounts in Ihnaands ofShares)

Outstanding as ofJanuary 1 52,950 52,905 53,759 Reissuance from treasury stock 62 45 17 Repurdiase ofcommon stock - -

(871)

Outstandingas ofDecember.H 53,012 52,950 52,905 Preferred and Preference Stock Hoklers of Duquesne's preferred stock are entided to cumulative quarterly dividends. If four quarterly dividends on any series of preferred stock are in arrears, holders of the preferred stock are entitled to elect a majority of Duquesne's board of directors until all dividends have been paid. At December 31,1993, Duquesne had made all preferred stock dividend payments.

Holders of Duquesne's preference stock are entitled to receive cumulative quarterly dividends if dividends on all series of preferred stock are paid. If six quarterly dividends on any series of preference stock are in arrears, holders of the preference stock are entitled to elect two of Duquesne's directors until all dividends have been paid. At December 31,1993, Duquesne had made all dividend payments.

Outstanding pirferndandpreference stock is generally callable, on notice of not less than 30 days, at stated prices (See table on page 27.) plus accrued dividends. On January 14,1994, Duquesne called for redemption of all ofits outstanding shares of $2.10 and $7.50 preference stock. None of the remaining preferred or preference stock issues has mandatory purchase requirements.

In December 1991, the Company established an Employee Stock Ownership Plan (ESOP) to provide matching contributions for a 401(k) Retirement Savings Plan for Management Employees. (See Note I.) Duquesne issued and sold 845,070 shares of redermablepreference stock, plan series A to the trustee of the ESOP. As consideration for the stock, Duquesne received a note valued at $30 million from the trustee.The preference stock has an annual dividend rate of $2.80 per share, and each share of the preference stock is exchangeable for one share of DQE common stock. At December 31,1993, $27.1 million of preference stock issued in connection with the establishment of the ESOP had been offset, for financial statement purposes, by the recognition of a deferred ESOP benefit. Dividends on the preference stock and cash contribu-tions from Duquesne will be used to repay the ESOP note. During 1993, Duquesne made cash 26

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

contributions of approximately $2.1 million, the difTerence between the ESOP debt service and the amount of dividends on ESOP shares (approximately $2.3 million). As shares of preference stock are allocated to the accounts of participants in the ESOP, the Company recognizes com-pensation expense, and the amount of the deferred compensation benefit is amortized. In 1993, the Company recognized $1.7 million of compensation expense related to the 401(k) plan.

Preferred and Preference Stock of Duquesne Iight Company at December 31 (ShiresandAmountsin 7knwids) ai p,;c, IW3 1W2 1991 Per Share Shares Amount Shares Amount Shares Amount Preferred Stock Series:(a) 3.75% (b) (c) $ 51.00 148 $ 7,407 148 $ 7A07 148 $ 7,407 4.00% (b) (c) 51.50 550 27,486 550 27,486 550 27,486 4.10% (b) (c) 51.75 120 6,012 120 6,012 120 6,012  ;

4.15% (b) (c) 51.73 132 6,60 132 6.60 132 6,60 4.20% (b) (c) 51.71 100 5,021 100 5,021 100 5,021

$2.10 (b) (c) 51.84 159 8,039 159 8,039 159 8,039

$7.20 (c) (d) 101.00 319 31,915 319 31,915 319 31,915

$8.375 (d) (c) - - - - -

80 7,945 Tota / PreferredStock 1,528 92,523 1,528 92,523 1,608 100,468 Preference Stock Seriest (0  !

1

$2.100 (c) (g) (h) 25.00 1,175 29,383 1,175 29.383 1,175 29,383

$7.500 (d) (e) (h) 101.00 M 8,392 86 8,579 87 8,692

$9.125 (d) (c) - - - - -

161 16,100 l'lan Series A (c) (i) 37.74 844 29,956 845 29,995 845 30,000 Totalorference Stock 2,103 67,731 2,106 67,957 2,268 84,175 Purchase and sinking fund requirements - - (17,300)

Deferred ESOP benefit (27,126) (28,471) (30,000)

TotalorfenwlandPirferenceStock 3,631 $133,128 3,634 $132,009 3,876 $13730 (a) Prefenal stock: 4,000,000 authotized shares: $50 par value; (O Preference stock: 8.000,000 authoiind shares:

cumulative $1 par value; cmnulative (b) $50 per share involuntary liquitation value (g) $25 per share imuluntary liquklation value (c) Non-ralcenuble (h) Raicemed J.tnuary 14,1994 (d) $100 per share involuntary Ik lukladon value (i) $35.50 per slure involuntary liquidation value (c) Redeemable long Term Debt At December 31,1993, Duquesne had $1.433 billion ofoutstanding debt securities; these con-sisted of $960 million of first collateral trust bonds, $49 million of first mortgage bonds, $418 million of pollution control notes and $6 million of debentures.

During 1992, Duquesne began issuing secured debt under a new first collateral trust indenture.

This indenture will ultimately replace Duquesne's 1947 first mortgage bond indenture.

First collateral trust bonds totaling $695 million and $265 million, and having average interest rates of 6.58 percent and 8.04 percent, were issued in 1993 and 1992.

Since 1985, the Company has reacquired $1.561 billion of first mortgage bonds. The differ-ence between the purchase prices and the net carrying amounts of these bonds has been includ.

ed in the consolidated balance sheet as unamortizedloss on reacquireddebt. At December 31, 1993, the balance of unamortiud hns on reacquireddebt was $95.3 milllon.

27

long. Term Debt al December 31 Senior Secured Debt nincip,dOuutanding (Amounu in hwands ofIMlan)

Interest Rate (a) hiaturity 1993 1992 i:irst Collarcral Tmst Ibnds:

4.75% 5-15-96 $ 50,000 $ -

6.08 % 11 15-97 50,000 50,000 6.I5% 2-12-98 35,000 -

5.85 % 6-01-98 35,000 -

6.55 % 11 15-98 5,0(X) 5,000 5.90 % 7-01-99 75,000 -

6.45% 3-014)0 45,(XX) -

6.10 % 5-104x) 55,000 -

6.65 % 4-01-03 45,000 -

6.70 % 5-15-03 55,000 -

6.625 % 6-154hi 100,000 ---.

8.75 % 5-15-22 100,000 100,(XX) 8.20 % 11-15-22 10,(XX) 10.000 7.625 % 4-15-23 100,000 -

8.375 % 5-15-24 100,000 100,000 7.55 % 6-15-25 100,000 -

Ins current maturities and sinking fund requirements (b) (9,600) -

TotalFirst Collateral Trust Bonds 450,400 265,(XM) 1:irst hiortpge Ibnds; 8.25 % 6-1-95 49,500 50,000 5.125 % 2-1 96 - 22,800 5.25 % 2-1-97 - 24,600 6.375 % 2-1-98 -

34,700 7.0W l-1-99 - 30,000

7.75 % 7-1-99 -

28,647 l 8.75 % 314X) -

29,700 7.875 % 3.I4)l -

34,650 7.50 % 12-1.01 -

26,46i 7.50 % 6 1-02 - 28,470 7.25 % l-1-03 -

32,670 7.75 % 7-1-03 - 35,000 8.625 % 4-1-04 - 43,650 9.50 % 3-1-05 -

49,000 8.375 % 4-1-07 - 96,400 9.50 % 12-1-16 -

98,000 9.00 % 2-1-17 - 99,000 los current nuturities and sinking fund requirements (500) (10,650)

TotalFirst Mortgage Bonds 49,000 753,098 TotalScritorSeneredDebt 999,400 1,018,098 23

, - - - - - - - . ~ - , . - - - - - - . , , . - . , , . , , , , , . ,.--.,-...,.,.,,c, . - , - ., . - - . , . , - - ,--, - - - - , . . . , - ,

I I

Long Term Debt at December 31 Otherlong Term Debt PrincipalOuttanding (Amounuin ThousandsofL)ollan)

Interest Rate (a) Maturity Series 1993 1992 Pollution Control Notes:

(c)(d) 9-1-11 1992 Allegheny County Series A 47,925 47,925 (c) 12-1-13 1990 Allegheny County Series A 50,000 50,000 5.739 % 6-1-03 1973 Beaver County Series A 9,500 9,800 (c) 8-1-09 1990 Beaver County Series B 18,000 18,000 6.90 % 9-1-11 1976 Beaver County Series C 15,000 15,000 11.625 % 12-1-14 1984 Beaver County Series B 51,000 51,000 I (c) 8-1-20 1990 Beaver County Series A 13,700 13,700 )

(c) 8-1-25 1990 Beaver County Series C 44,250 44,250 I (c)(d) 9-1-30 1993 Beaver County Series A 25,000 -

10.50 % 10-1-13 1983 Ohio Development Authority - 20,500 11.125% (d) 2-1-15 1985 Ohio Development Authority 38,610 38,610 (c) 9-1-18 1988 Ohio Development Authority 71,000 71,000 6.65 % (e) 10-1-23 1989 Ohio Devdopment Authority 13,500 13,500 (c)(d) 10-1-27 1993 Ohio Development Authority 20,500 -

Irss current maturities and sinking fund requirements (1,719) (690)

TotalPollution ContndNotes 416,266 392,595 5% sinking fund debentures due March 1,2010 (0 6,042 6,042 Misedlaneous 509 278 Irss unamortized debt discount and premium - net (5,219) (4,012)

TotalLong-Term Debt $1,416,998 $1,413,001 (a) These interest rates are the average coupon rate for mukiple issuances with the same maturity dates.

(b) Sinking ftmd requirement relates to the first mortgage lunds hdd by the trustee as collateral for the publidy-hdd collateral trust lunds. The outstanding collateral trust innds do not have a sinking fund requirement.

(c) OnCertain 30 days'of to the p%iavs' nonce onor to any mterest reser date, the Company can change the rate period on the noies to a ditterent interest rate period ranging from 1 diy to the final maturity of the londs.

(d) Issued in the form of ftrst mortgage lunds or first collateral trust londs.

(e) Fixed rate through first five years, thereafter becoming variable rates as in foomote c.

(f) As ofJanuary 1994, the sinking fund requirement for 1995 had been met and the requirement for 1996 had been partially satisfied.

At December 31,1993 and 1992, the Company was in compliance with all ofits debt covenants.

At December 31,1993, sinking ftmd requirements and maturities oflong-term debt outstand-ing for the next five years were: $11.8 million and $.1 million in 1994: $11.4 million and

$49.6 million in 1995: $11.2 million and $50.1 million in 1996: $10.8 million and $50.0 mil-lion in 1997; and $10.1 million and $75.0 million in 1998.

Sinking fund requirements relate primarily to the first mortgage bonds and may be satisfied by cash or the certification of property additions equal to 166% percent of the bonds requ: red to be redeemed. During 1993, annual sinking fund requirements of 5.5 million were sat 6fied by cash and $4.8 million by certification of property additions.

Ltal interest costs incurred were $118.1 million in 1993, $133.9 million in 1992 and $147 2 million in 1991. Of these amounts, which included AFC, $2.0 million in 1993, ',4.7 million in 1992 and $9.3 million in 1991 were capitali7ed. Debt discount or premium .nd related issuance expenses are amortized over the lives of the applicable issues.

29

In 1992, Duquesne was involved in the issuance of $419.0 million of collateralized lease bonds, which were originally issued by an unafliliated corporation for the purpose of partially financ-ing the lease of Beaver %lley Unit 2. Duquesne is also associated with a letter of credit securing the lessors' $188 million equity interest in the unit and certain tax benefits. Ifcertain specified events occur, the letter of credit could be drawn down by the owners, the leases could terminate and the bonds would become direct obligations of Duquesne.

The pollution control notes arise from the sale of bonds by public authorities for the purposes of financing construction of pollution control facilities at Duquesne's plants or refunding previ-ously issued bonds.

Duquesne is obligated to pay the principal and interest on the bonds. For certain of the pollu .

tion control notes, there is an annual commitment fee for an irrevocable letter of credit. Under certain circumstances, the letter ofcredit is available for the payment ofinterest on, or redemp-tion of, a portion of the notes. In June 1993, $25 million of pollution control notes were issued; the proceeds were used to reimburse Duquesne for pollution control expenditures related to the Beaver Wiley plant. In August 17)3, pollution control notes totaling $20.5 million were refinanced at lower interest rates.

At December 31,1993, the fair value of the Company's long-term debt and redeemable prefer-ence stock approximated the carrying value. The fair value of the Company's long-term debt and redeemable preference stock was estimated on the basis of(a) quoted market prices for the same or similar issues or (b) current rates offered to the Company for debt of the same remain-ing maturities.

D. RECUVABUS .An arrangement between Duquesne and an unaffiliated corporation entides Duquesne to sell, and the corporation to purchase, up to $100 million of Duquesne's accounts receivable. At December 31,1993 and 1992, Duquesne had sold $7.1 million and $66.3 million of electric customer ammnts wceivab/cand $1.9 million and $9.7 million of CAPCO uceivables, respectively, to the unaffiliated corporation. The sides agreement includes a limited recourse obligation under which Duquesne could be required to repurchase certain of the receivables. The maxi-mum amount of Duquesne's contingent liability was $2.8 million at December 31,1993. -)

Other receivablesin the Consolidated Balance Sheet of DQE include receivables of DQE's other subsidiaries. These receivables amounted to $31.8 million and $1.0 million at December 31, 1993 and 1992, respectively.

E. LEA $tS Duquesne leases nucIcar fuel, a portion of a nuclear generating plJnt, office buildings, computer equipment and other property and equipment.

CapHalleases al December 31 1993 1992 (Amounnin Thowands ofDollm)

Nuclear fuel $136,755 5169,837 Electric plant 41,045 42,335 Total 177,800 212,172 trss accumulated amortization (84,717) (101,860)

Property Held Under CapitalLeases - Net (a) $ 93,083 $110,312 (2) includes $3A92 in 1993 and $3.782 in 1992 of capital leases with associated obligations retired.

In 1987, Duquesne sold its 13.74 percent interest in Beaver %11ey Unit 2; the sale was exclu- I sive of transmission and common facilities. The total sales price of$537.9 million was the appraised value of Duquesne's interest in the property. Duquesne subsequently leased back its i interest in the unit for a term of 29.5 years. The lease provides for semiannual payments and is accounted for as an operating lease. Duquesne is responsible under the terms of the lease for all costs ofits interest in the unit. In December 1992, Duquesne participated in the refinancing of 30 I

1

collateraliwd lease bonds originally issued in 1987 for the purpose of partially fmancing the lease of Beaver Valley Unit 2 In accordance with the Beaver Valley Unit 2 lease agreement, Duquesne paid the premiums of approximately $36.4 million as a supplemental rent payment t > the lessors. This amount was deferred and is being amortiwd over the remaining lease term.

. it December 31,1993, the balance was approximately $34.9 million.

Irased nuclear fuel is amortiwd as the fuel is burned. The amortization of all other leased prop-erty is based on remal payments made. Payments for capital and operating ! cases are charged to operating expenses on the statement of consolidated income.

Summary of Rental Payments 1993 1992 1991 (Amountsin Anatnds ofDoEm)

Operating leases 557,398 5 64,986 $ 65,414 Amortization ofcapitalleases 28,758 43,1;9 39,323 Interest on capital leases 5.382 7,880 10,057 TotalRentalPaymenis 591,538 $115,985 $114,794 Future minimum lease payments for capital leases are related principally to the estimated use of nuclear fuel fmanced through leasing arrangements and building leases. Minimum payments for operating leases are related principally to Beaver Valley Unit 2 and the corporate headquarters.

Future Minimum iease Payments Operating leases Capital leases Year Endcd December 31, (Amounn m husands ofDollm) 1994 $ 53,467 $ 39,500 1995 51,970 24,987 19'X, 51,949 13,811 1997 51,836 8,041 1998 51,711 4,749 1999 and ihereafter 976,176 28,278 TotalMinimum Lease Payments $ l,237,109 119,36G Irss amount representing interest (29,775)

Present value of minimum lease payments for capital leases $ 89,591 Future payments due to the Company, as of December 31,1993, under subleases of hs corpo-rate headquarters space are approximately $1.7 million in 1994, R4 million in 1995 and

$24.9 million thereafter.

The Company, through its Montauk subsidiary, is the lessor in five leveraged lease arrange-ments involving manufacturing equipment, mining, equipment, rail equipment and natural gas processing equipment. These leases expire in various years beginning 2001 through 2012.

The residual value of the equipment, which belongs to the Company after the leases expire, is estimated to approximate 14 percent of the original cost. The Company's aggregate equity investment represents 22 percent of the aggregate original cost of the property and is secured by guarantees of each lessee's parent or afTiliate. The remaining 78 percent was fmanced by non-recourse debt pnwided by lenders who have been granted, as their sole remedy in the event of defatdt by the lessecs, an assignment of rentals due under the leases and a security interest in the leased pmperty. This debt amounted to $143.5 million at December 31,1993.

31

)

Nel Investarent in ieveraged ieases at December 31 1993 1992  ;

(Amounn in lleusands of[kilm) itentals receivable (net of principal and interest on the non-rauurse debt) $52,016 $34,322 I Estirnatal residual value ofleasal assets 26,470 15,951

! css: Unearned income (30,384) (18,133)

Investntnt in leverapxlleases 48,102 32,140 lese. Deferred zaxes arising from leveraged leases (22,845) (8,910)

Net Investment in IrreragedIsases $25,257 $23,230

( In 1993, the Company's pre-tax and after-tax income from leveraged leasing in 1993 was $5.1 million and $3.2 million, respectively.

F. INCOME IAXES The annual federal corporate income tax returns have been audited by the United States Internal Revenue Service (IRS) for the tax years through 1989. Returns filed for the tax years 1990 to date remain subject to IRS review. The Company does not believe that final settlement of the federal tax returns for these years will have a materially adverse effect on its financial position or results of operations. The eFects of the 1993 adoption of SFAS No.109are discussed in Note A Implementation of the standard involved a change in accounting principles. The cumulativc effect of $8 million on prior years was reported in 1993 as an increase in net income. The SFAS No.109 impact to 1993 income before cumulative effect of changes in accounting principles is immaterial.

At December 31,1993, the accumulated deferred income taxes of the Company totaled $1.169 billion. As discussed in Note A, this includes the deferred tax liability for the book and tax bases differences associated with (i) electricf Arnt in service of $855 million: (ii) uncollecteddeferred l income taves of $ 199 million; and (iii) unamorticedloss on reaufuireddebt of $40.9 million. The Company also nets against this liability balance the deferred tax assets associated with (i) invest-ment tax credits unamorticedof $45.3 million and (ii) the gain on the sale and leaseback of Beaver Valley Unit 2 of $67.1 million. The Company expects to realize these deferred tax assets.

Totalincome Tax Expense 1993 1992 1991 (Amountsin 71wusands offklLm)

Included in operating expenscs:

Currently pgable: Federal $100,360 $ 73,135 $ 85,511 State 37,975 27,875 32,080 Deferral- net: Federal (17,M3) 5,369 (4,823)

State (9,007) (3,750) (10,750)

Investment tax credits deferred - net (5,399) (5,436) (5,328)

Totalincludedin LperatingT2penses 106,286 97,193 96,690 ,

indudal in otbcr income ar.d deductions.

Currently payable: FeJeral (17,557) 7,265 2,131 Ltate (1,220) 2,983 1,074 Deferred: 2e deral 251 1,654 1,943 State 100 37/ 443 Investment tax cralits (607) (532) (459)

Totalincludedin OtherincomrandDeductions (l9,033) l1,747 5,132 Totallname Tax Erpense $ 87,253 $108,940 $101,822 l'

32

Total income taxes differ from the amount computed by applying the statutory federal income tax rate to income before income taxes, preferred and preference dividends of subsidiary and before the cumulative effect of changes in accounting principles.

Income Tax Expense Reconciliation 1993 1992 1991 (Amounn in Timusands ofDollan)

Computed federal income tax at statutory rate $ 83,247 $ 88,355 $ 83,704 Increase (decrease) in taxes resulting from:

Tax audit settlement (15,000) - __.

Excess oflxx>k over tax depreciation 7,162 3,830 5,333 State income taxes, net of federal income tax benefn 18,101 18,140 15,079 Amortization ofdeferred investment tax credits (6,006) (5,969) (5,787)

Other - net (251) 4,584 3,493 Totallmome Tax Erpense $ 87,253 $108,940 $101,822 Sources of Deferred Tax Expense 1993 1992 1991 (Amouna in Tieusands ofDollars)

Sources ofincome taxes deferred and the related tax effects were:

Excess of tax depreciation $ 19,141 $ 25.188 $ 20,957 Deferred revenues recorded /(recovered) for Exx>k purposes (37,576) (30,702) (21,240)

Allowance for uncollectible aaoums (2,890) 9,760 (5,930)

Fuel costs 4,829 (10,820) 1,047 loss on early retirement ofdebt 9,798 20,999 (166)

Other - net (19,601) (10,775) (7,855)

TotalDeferndIncome Tax Erpense (Beneft) $(26,299) $ 3,650 $(13,187)

G. SHonT-TtRM BORROWING The Company, through its subsidiaries, has, with banks, extendable revolving credit agreements AND REVOLVING CREGIT totaling $278.5 million. Expiration dates vary during 1994. Interest rates can, in accordance MRRANGEMENTS with the option selected at the time ofeach borrowing, be based on prime, federal funds, Eurodollar or CD rates. Commitment fees are based on the unborrowed amount of the commitments.

There were no short-term borrowings during 1992. During 1993 and 1991, the maximum short-term bank and commercial paper borrowings outstanding were $36 million and $66 mil-tion; the average daily short-term borrowings outstanding were $9.9 million and $11.0 million; and the weighted average daily interest rates applied to such borrowings were 3.91 percent and 6.36 percent, respectively. At December 31,1993, short-tcrm borrowings were $36 million.

There were no short-term borrowings at December 31,1992 or 1991.

H. CHANGts nN changes in working capital other Than Cash. Nel of Effects From Purchase of Chester Environmental. Inc.

WonKING CAPITAL g99)

OtHER THAN CASH (Amountsin TlwusandsofDollars)

Accounts receivable $(103.188) $64,088 $(53,829)

Materials and supplies 13,635 (4,151) (3,122)

Other current assets 4.631 7,140 (8,084)

Accounts payable (7,961) (8,818) (827)

Other current liabilities (18,794) (9,589) 22,812 Total 5(l11.677) $48,670 $(43,050) 33

i I. EWLOTLE BENEFITS Relirement Plans The Company maintains retirement plans to provide pensions for all full-time employees.

Upon retirement, an employee receives a monthly pension based on his or her length of service and compensation. The cost of fimding the pension plan is determined by the unit credit actu-arial cost method. The Company's policy is to record this cost as an expense and to fund the pension plans by an amount that is at least equal to the minimum funding requirements of the Employee Retirement income Security Act (ERISA) but not to exceed the maximum tax deductible amount for the year. Pension costs charged to expense or construction were $9.8 million for 1993, $11.4 million for 1992 and $11.2 million for 1991.

Funded Status of the Retirement Plans and Amounts Recognized on the Consolidated Balante Sheet of 00E at December 31 1993 1992 1991 (Amounnin 71wusands offkflan)

Actuarial present value of benefas rendered to date:

Vested benefits $321,219 $287,360 $279,917 Non-vested benefas 16,826 16,252 14.294 Accumulated benefn obligations basul on compensation to date 338,075 303,612 294,211 Additional benefus based on estimated future salary levels 74.7I8 77,017 64,919 Projected benefit obligation 412,793 380,629 359,130 Fair market value of plan assets 434,384 411,440 392,027 Projected benefit obligation under plan assets $ 21,591 $ 30,811 $ 32,897 Unrecognimi net gain $ 80,411 $ 81,971 $ 86,695 Unrecognimi prior service cost (21,449) (20,848) (22,317)

Unrecognimi net transition liability (19,289) (21,102) (22,913)

Net pension liability per balance sheet (18,082) (9,210) (8,568)

Total $ 21,591 $ 30,811 $ 32,897 Assumed rate of return on plan assets 8.00 % 8.00 % 7.50 %

Discount rate used to determine projected benefit '

obligation 7.00 % 7.50 % 7.50 % i I

Assumed change in compensation leveh 5.25 % 5.75 % 5.75 %

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

Components of Net Pension Cost 1993 1992 1991 (Amountsin Tlwusands ofDollan)

Service cost (Benef ts earned during the year) $ 11,657 $ 11,397 $ 9,911  !

Interest on projected benefn obligation 27,423 26,390 24,705

)

Return on plan assets (41,725) (26,736) (80,716)

Net amortization and deferrals 12,454 325 - 57,319 Net Pension Cost S 9,809 $ 11,376 5 11,219

=:

l Retirement Savings Plan and Other Benefit Optioris '

The Company sponsors separate 401(k) retirement plans for its union-represented employees and its management employees. The 401(k) Retirement Savings Plan for Management Employees pmvides that the Company will match employee contributions to a 401(k) ,

I l

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-- . . . . - . - ~ _ - - - - - - - - , . - - - ~ ~ - - . - . .- -, ,. --.~.--~ .--.-..- - -- .. . - - - - - ~ - - - -

account up to a maximum of 6 p:rcent of his or her eligible salary. The Company match con-sists of a $.25 base match and an additional $.25 incentive match, if targets approved by the Company's board of directors are met. The 1993 incentive target was met. The Company is funding its matching contributions with contributions to an ESOP established in December 1991. (See Note C.)

DQE shareholders have approved a long-term incentive plan through which the Company may grant management employees options to purchase, during the years 1987 through 2003, up to a total of five million shares of DQE common stoch at prices equal to the fair market value of such stock on the dates the options were granted. At December 31,1993, approximately 2.9 million of these shares were available for future grants.

As of December 31,1993,1992 and 1991, respectively, active grants totaled 1,204,000; 848,000; and 1,278,000 shares. Exercise prices of these options ranged from $12.3125 to

$34.1875 at December 31,1993 and from $12.3125 to $28.75 at December 31,1992 and 1991. Expiration dates of these grants ranged from 1997 to 2003 at December 31,1993; from 1997 to 2002 at December 31,1992; and from 1997 to 2001 at December 31,1991. As of December 31,1993,1992 and 1991, respectively, stock appreciation rights (SARs) had been granted in connection with 800,000; 623,000; and 822,000 of the options outstanding. Dur-ing 1993,103,000 SARs were exercised; 16,000 options were exercised at prices ranging from

$12.3125 to $28.375; and 52,000 options lapsed. During 1992,108,000 SARs were exercised:

50,000 options were exercised at prices ranging from $12.3125 to $26.375; and 59,000 options lapsed. During 1991,229,000 SARs were exercised; 11,000 options were exercised at

$12.3125; and 48,000 options lapsed. Of the active grants at December 31,1993,1992 and 1991, respectively, 578,000; 232,000; and 541,000 were not exercisable.

O!!Ier Postretirement Benefits in addition to pension benefits, the Company provides certain health care benefits and life insurance for some retired empk>yces. Substantially all of the Company's full-time employees may, upon attaining the age of 55 and meeting certain service requirements, become eligible for the same benefits available to retired employees. Participating retirees make contributions, which are adjusted annually, to the health care plan. The life insurance plan is non-contributory.

Company-provided health care benefits terminate when covered individuals become eligible for Medicare benefits or reach age 65, whichever comes first. The Company funds actual expendi-tures for obligations under the plans on a " pay-as-you-go basis." The Company has the right to modify or terminate the plans.

As of]anuary 1, .993, the Company adopted Statement ofFinancialAccounting Standards Number 106, E nylejers'Accountingfor Postrctirement Benefits Other Than Pensions, which requires the actu trially determined costs of the aforementioned postretirement benefits to be accrued over the period from the date of hire until the date the employee becomes ftdly eligible for benefits. The Company has adopted the new standard prospectively and has elected to amortize the transition liability over 20 years.

In prior years, the Company recognized the cost of providing postretirement benefits by expensing the contributions as they were made. Costs recognized under this method in 1992 approximated $1.2 million. The new accrual method increased the cost recognized for provid-ing postretirement benefits to approximately $6.0 million.

Components of Postretirement Cost 1993 (Amounain 7howands ofDolkn)

Service cost (Benefits earned during the period) $1,779 Interest cost on accumulated benefit obligation 2A97 Amortization of the transition obligation over twenty years 1,700 ToralPostretimnent Cost $5,976

=

35

l The accumulated postretirement benefit obligation comprises the present value of the estima'ed future benefits payable to current retirees and a pro rata portion ofestimated benefits payable to active employees after retirement.

Funded Status of Postretirernent Plan and Amounts Recognized on the Consolidated Balance Sheet of 00E at Decernber 31,1993 (Amounnin ThousandsofIklLm)

Actuarial present value of benefits:

Retirees 5 4,830 l Fully eligible active pl.m participants 3,482 I Other active plan participants 24,170 Accumuland postretirement benefit oblig;uion 32,482 Fair market value of plan assets 0 Accumula ed benefn obligation in excess of plan assets $(32,482)

Unremgnimi net loss $ (122)

Unrecognimi prior service cost 4,383 Unrecognized net transition lialslity (32,2%)

Postretirement liability per balance sheet (4,447)

Total $(32,482)

For measurement purposes, a 10.5 percent increase in the cost of covered health care benefits was assumcd as ofJanuary 1,1993. This rate is assumed to decrease to 5.5 percent by 1999 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. A 1 percent increase in the heahh care cost trend rate would increase the accumulated postretirement benefit obligation by $4.0 million at January 1,1994, and the  ;

net annual cost by $0.6 million for the year. The weighted average discount rate used in deter-mining the accumulated postretirement benefit obligation was 7 percent.

- J. RATE MAirrns 1987 Rate Case In March 1988, the PUC adopted a rate order that increased Duquesne's annual revenues by

$232 million. This increase is being phased in from April 1,1988 through April 1,1994. Defi-ciencies which resulted from the phase-in plan in current revenues from customers have been included in the consolidated income statement as deferred revenues. Deferred revenues have been recorded on the balance sheet as a deferred asset for future recovery. As customers are billed for deficiencies related to prior periods, this deferred asser is reduced. As designed, the phase-in plan provides for carrying charges (at the after-tax AFC rate) on revenues deferred for future recovery. Since April 1993, Duquesne has not recorded additional carrying charges on the deferred revenue balance Duquesne had recovered previously deferred revenues and carrying charges of $285.9 million as of December 31,1993. Phase-in plan deferrals of $28.6 million remained unrecovered as of that date. Duquesne expects to recover this remaining unre-covered balance by the end of the phase-in period.

At this time, Duquesne has no pending base rate case and has no immediate plans to file a base rate case.

Deterred Rate Synchronizatson Costs in 1987, the PUC approved Duquesne's petition to defer initial operating and other costs of Perry Unit I and Beaver Valley Unit 2. Duquesne deferred the costs incurred from November 17, when the units went into commercial operation, until March 25,1988 when a rate order was issued, in its order, the PUC deferred ruling on whether these costs would be recoverable from ratepayers. At December 31,1993, these costs totaled $51.1 million, net ofdeferred fuel savings related to the two units. Duquesne is not earning a return on the deferred costs.

36

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Duquesne believes that these deferred costs are recoverable. In 1990, another Pennsyhania l utility was permitted recovery, with no return on the unamortized balance, ofsimilar costs over a 10-year period.

Delerted tnergy Costs Duquesne defers fuel and other energy costs for recovery in subsequent years thmugh the ECR. I The deferrals reflect the difference between the amount that Duquesne is currently collecting from customers and its actual fuel costs. The PUC reviews Duquesne's fuel costs annually, for the fiscal year April through March, against the previously projected fuel costs and adjusts the ECR for over- or under-recoveries and for two PUC-established coal cost caps.

The PUC has established market price coal cost standards for all Pennsylvania utilities that have interests in mines that supply coal to their generating stations. Duquesne is subject to two such standards. One applies only to coal delivered at the Mansfield plant. The other, the system-wide coal cost standard, applies to coal delivered to the remainder of Duquesne's system. Both l standards are updated monthly to reflect prevailing market prices for similar coal. The PUC has directed L)uquesne to defer recovery of the delivered cost of coal to the extent that such cost exceeds generally prevailing market prices, as determined by the PUC, for similar coal. The PUC allows deferred amounts to be recovered from customers when the delivered costs ofcoal fall below such PUC-determined prevailing market prices.

In 1990, the PUC approved a joint petition for settlement that clarified certain aspects of the system-wide coal cost standard and gave Duquesne options to extend the standard through 3'

' 2000. In December 1991, Duquesne exercised the first of two options that extended the d- through March 1996. The unrecovered cost of coal used at Mansfield amounted to

..nllion and the unrecovered cost of coal used throughout the system amounted to $8.8 inillion at December 31,1993. Duquesne believes that all deferred coal costs will be recovered.

Warwick Mine Costs The 1990 joint petition for settlement (See preceeding section on deferred energy costs.) also recognized costs at Duquesne's Warwick Mine, which had been on standby since 1988, and allowed for recovery of such costs, including the costs of ultimately closing the mine. In 1990, Duquesne entered into an agreement under which an unalliliated company will operate the mine tmtil March 2000 and sell the coal produced. Production began in late 1990. The mine reached a ftdl production rate in early 1991. The Warwick Mine coal reserves include both high and low sulfur coal; the sulfur content averages in the mid-range at 1.7 percent - 1.9 percent sulfur content. More than 90 percent of the coal mined at Warwick currently is used by Duquesne. Duquesne receives a royalty on sales of coal in the open market. The Warwick Mine currently supplies less than one-fifth of the coal used in the production ofelectricity at the plants operated by Duquesne and those owned by CAPCO.

Costs at the Warwick Mine and Duquesne's investment in the mine are expected to be recov-cred through the ECR. Recovery is subject to the system-wide coal cost standard. Duquesne also has an opportunity to earn, through the ECR, a return on its investment in the mine during the period, including extensions, of the system-wide coal cost standani. At December 31, 1993. Duquesne's net investment in the mine was $24.5 million. The estimated current liability for mine closing (including final site reclamation, mine water treatment and certain labor liabilities) is $33.0 million and Duquesne has collected approximately $8.9 million toward these costs.

Property Held for future Use In 1986, the PUC approved Duquesne's request to remove the Phillips and most of the Brunot Island (BI) pmver stations from service and place them in cold reserve. Duquesne's capitalized costs and net investment in the plants at December 31,1993 totaled $130 million. (See Note L.)

On December 8,1993, the New Jersey Board of Regulatory Commissioners (BRC) denied a request by General Public Utilities' (GPU) subsidiary Jersey Central Power and Light Company for approval of the long-term power purchase and operating agreements, originally signed in 37

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

1

. 1990, between GPU and Duquesne and further amended earlier in 1993, The BRC rejected an administrative law judge's recommended decision that the project be approved and, within hours of the BRC decision, GPU terminated its participation in the project. In view of GPU's decision not to proceed, Duquesne terminated its participation in the project and in the PUC transmission line siting pmceeding. During the founh quarter of 1993, Duquesne recognized a charge of approximately $15.2 million for its investment in this abandoned GPU transmission line project.

Duquesne expects to recover its net investment in these plants through future sales. Phillips and BI represent licensed, certified, clean sources of electricity that will be necessary to meet expanding op[mrtunities in the imwer markets. Duquesne believes that anticipated growth in peak load demand for electricity within its service territory will require additional peaking generation. Duquesne kmks to BI to meet this need. The Phillips Power Plant is an important component in meeting market opportunities to supply long term bulk power. Recent legislation may permit wider transmission access to these long term bulk power markets. In summary, Duquesne believes its investment in these coki-reserved plants will be necessary in order to meet future bminess needs. If business opportunities do not develop as expected, Duquesne will consider the sale of these assets. In the event that market demand, transmission access or rate recovery do not support the utilization or sale of the plants, Duquesne may have to write off part or all of their costs.

K. Comunutnis ANo construction CONTINGENClfS Duquesne estimates that it will spend approximately $110 million on construction during 1994. Construction expenditures are estimated to be $70 million in 1995 and $80 million in 1996. These amounts exclude AFC, nuclear fuel and expenditures for possible early replace-ment of steam generators at the Beaver Valley Station.

Westingtsouse lawsuit The CAPCO companies are owners ofvarious portions of Beaver Valley Units 1 and 2. In 1991, the CAPCO companies fded suit against Westinghouse Electric Corporation (Westinghouse) in the United States District Court for the Western District of Pennsylvania. The suit alleges that six steam generators supplied by Westinghouse for the two units contain serious defects -in particular defects causing tube corrosion and cracking. The Company is seeking monetary and corrective relief. Steam generator maintenance costs have increased as a result of these defects and are likely to continue increasing. The condition of the steam generators is being monitored closely. If the corrosion and cracking continue, replacement of the steam generators could be required prior to the ends of their 40-year design lives. The Company is continuing to conduct a corrective maintenance program and to explore longer term options, including replacement of the steam generators. While the Company has no current plans to replace the steam generators and has not yet completed a detailed, site-specific study, replacement cost per unit is estimated to be between $100 million and $150 million. (Other utilities with similar units have replaced steam generamrs at costs in this range.) The Company cannot predict the outcome of this mat-ter; however, the Company does not believe that resolution will have a materially adverse efTect on the Company's financial position or results ofoperations. The Company's percentage inter-ests (ownership and leasehold) in Beaver Valley Unit 1 and in Beaver Valley Unit 2 are 47.5 percent and 13.74 percent, respectively. The remainder is held by the other CAPCO companies.

Duquesne operates both units on behalf of the CAPCO companies.

Nuclear insurance The CAPCO companies maintain the maximum available nuclear insurance for the $5.9 billion teral investment in Beaver Valley Units 1 and 2. The insurance program provides $2.7 billion for propetry damage, decommissioning, and decontamination liabilities. The CAPCO companies have similar property insurance fbr the $5.4 billion total investment in Perry Unit 1.

1

)t

Duquesne would be responsible for its share of any damages in excess ofinsurance coverage. In addition, if the property damage reserves of Nudear Electric Insurance Limited (NEIL), an +

industry mutual, are inadequate to cover claims arising from an incident at any United States nudear site covered by that insurer, Duquesne could be assessed retrospective premiums of as much as $6.5 million for up to seven years.

The Price-Anderson Amendments to the Atomic Energy Act limit public liability from a single incident at a nudcar plant to $9.4 billion. Duquesne has purchased $200 million ofinsurance, the maximum amount available, which provides the first level of fmancial protection. Additional protection of $8.8 billion would be provided by a assessment of up to $75.5 million per incident on each nudear unit in the United States. Duquesne's maximum total assessment,

$56.6 million, which is based upon its ownership interests in nuclear generating stations, would be limited to a maximum of $7.5 million per incident per year. A further surcharge of 5 percent could be levied if the total amount of public claims exceeded the funds provided under the assessment program. Additionally, a premium tax of 3 percent would be charged on the assess-ment and surcharge. Finally, the United States Congress could impose other revenue-raising measures on the nudear industry if funds prove insufTicient to pay daims.

Duquesne carries extra expense insurance; coverage includes the incremental cost of any replacement power purchased (in addition to costs that would have been incurred had the units ,

been operating) and other incidental expense after the occurrence of certain types of accidents j at the Company's nuclear units. The amounts of the coverage are 100 percent of the estimated extra expense per week during the 52-week period starting 21 weeks after an accident and 67 percent of such estimate per week for the following 104 weeks. The amount and duration of actual extra expense could substantially exceed insurance coverage.

Guarantees Duquesne and the other CAPCO companies have guaranteed certain debt and lease obligations related to a coal supply contract for the Bruce Mans 6cid plant. At December 31,1993, Duquesne's share of these guarantees was $35.2 million. The prices paid for the coal by the  ;

CAPCO companies under this contract are expected to be suGcient to meet debt and lease J

obligations to be satisned in the year 2000. (See Note J.) The minimum future payments to be made by Duquesne solely in relation to these obligations are $6.9 million in 1994, $6.6 million in 1995, $6.3 million in 1996, $5.9 million in 1997, $5.6 million in 1998, $5.3 million in 1999 and $4.1 million in 2000. Duquesne's total payments for coal purchased under the con-tract were $26.5 million in 1993, $25.2 million in 1992 and $32.6 million in 1991.

Residual Waste Management Regulations in July 1992, the Pennsylvania Department of Environmental Resources (DER) issued residual waste management regulations governing the generation and management of non-hazardous waste. Duquesne is currendy conducting tests and developing compliance strategies for these regulations. Capital compliance costs are estimated, on the basis of currently available informa-tion, at $10 million through 1995. Through the year 2000, the expected additional capital cost 1 of compliance, which is subject to the results ofground water assessments and DER fmal j approval of compliance plans, is approximately $25 million, l Offter l 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 efrect on its financial position or resuhs of operations.

L GtNERATING ljNITS in addition to its wholly owned generating units, Duquesne, together with other electric utili-ties, has an ownership or leaschoki interest in certain joindy owned units. Duquesne is required to payits share of the construction and operating costs of the units. I)uque ne's share of the operating expenses of the units is induded in the statement of consolidated income.

39

Generating Units al December 31.1993 Net Percentage Utility Fuel Unit Interest Megawatts Plant Source l (Millions of Dollars)

Cheswick 100.0 570 $ 124.4 Coal FJrama (a) 100.0 487 91.7 Coal Ft. Martin 1 50.0 276 39.2 Coal Eastlake 5 31.2 186 46.9 Coal Sammis 7 31.2 187 54.7 Coal Bruce Mansfield 1 (a) 29 3 228 65.3 Coal ilruce Mansfield 2 (a) 8.0 62 17.5 Coal Bruce Mansfield 3 (a) 13.74 110 51.0 Coal Beaver Wiley 1 (b) 47.5 385 262.3 Nuclear Beaver Wiley 2 (c)(d) 13.74 113 15.5 Nuclear Beaver Wiley Common Facilities 169.5 Perry 1 (e) 13.74 164 608.7 Nuclear Brunot Island 100.0 66 7.4 Fuel Oil Total 2,834 1,554.1 Cold-resermi units:

Brunot Island 100.0 240 44.5 Fuel Oil Phillips (a) 100.0 300 78.0 Coal TotalGenerating Units 3,374 $ l,676.6 (a) The unit is equipped with flue gas desulfurization equipment.

(b) The NRC has granted a license to operate through January 2016.

(c) On October 2,1987 Duquesne sold its 13.74 percent interest in Beaver Valley Unit 2; the sale was exclusive of transmission and common facilities. Amounts shown represent facilities not sold and subsequent leasehold improvements.

(d) The NRC has granted a license to operate through May 2027.

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

M.QUARIEnLY Summary of Selected Quarterly financial Data (thousands of dollars, except per share amounts)

N#"

[The quarterly data reflect seasonal weather variations in Duquesne's service territory.]

INFORMAil0N (UNAUDITED) 1993 (a) First Quarter Second Quarter Third Quarter Fourth Quarter Operating Revenues $286,743 $278,731 $336,488 $293,598 Operating Income 60,450 61,762 68,616 62,372 income Before Cumulative Effect on Prior Years ofChanges in Accounting Principles 31,839 33,017 48,294 28,257 Net income 34,414 33,017 48,294 28,257 Earnings Per Share .65 .62 .91 .54 Stock price:

High 36 % 36 37 367s 1nw 31 % 32 % 34 % 32 1992 Operating Revenues (b) $299,596 $291,803 $316.613 $286,192 Operating income (b) 63,131 59.396 74,941 58,447 Net income 33,863 30,488 45,877 31,290 Earnings Per Share I4 .58 .86 .59 Stock price:

liigh 30 % 30 % 32 32 %

low 26 % 27% 29M 30 %

(a) Fourth quaner 1993 results induded the effects of a $15.2 million charge for the write.off or Duquesne's investment in abandoned transmission line project (See Note J.) and a $14.6 million reduction of taxes other than income as a result of a favorable resolution of tax assessments.

(b) Restated to conform with presentations adopted during 1993.

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_____ __ _ ._ _ - _ . _ - .m . - _ _ ___ .

SELECTED FINANCIAL DATA Amounta in 7/ousands o[Dollm 1993 1992 1991 1990 1989 19 5 Selected Income Statement items Operating Revenues:

Current revenues fmm customers $ 1,175,024 $1 J 80,707 $1,181,332 $1,044,314 5 947,121 $ 867.141 Deferred customer revenues (100,315) H8,20I) (78,344) 10,784 96.287 117,544 Other resenues 120,851 l'1,698 100,846 78,010 75,875 76,132 Toted Operating Resynues 1,195,560 1,PX.204 1,203.834 1,133,108 1,119,283 1,060,817 Operating Expemes:

Fuel and purchased power 220,928 265,440 250,755 219,511 215,043 228,172 Other operating &

maintenante expenses 399,363 362,0Y1 375,026 366,349 356,120 341,942 Depreciation and amortization 142,657 127,92. 119,264 122,251 119,376 111,023 Income and other taxes 179,412 182,926 191,865 157,819 158,865 135,338 OperatingIncome 253,200 255,915 266,924 267,178 269,879 244,342 Other income, excluding A!U 7,796 15,980 6,984 11,275 8,050 47,723 Total Al C (debt and equity) 1,595 4,894 4,273 2,934 2,872 3,027 Ins Interest and Od er Charges 121,184 135,271 144,616 159,715 167,799 176,526 Cumulative Effect on Prior Years of Changes in Accounting Principles 2,575 - - - - -

Net Income $ 143,982 $ 141,518 $ IB,565 $ 121,672 $ 113,002 $ 118,566 lirrningr Per Sh,nr $2.72 $2.67 $2.50 $2.24 $2.03 $1.86 Sclated llalance Sheet Items Property, plant & equipment - net $3,118,766 $3,015,694 $3,035,115 $3D10,562 $3,055,039 $3,065,922 Total assets $4,574,011 $3,787,698 $3.860,681 $3,843,205 $3,841,495 $3,799,334 Capitalisatiom Common stakhokkTs' equity $ 1,230,583 $1,171,460 $1,111,121 $1,079,141 $ 1,066,190 $1,070,575 Preferred and preference smtk 133,128 132,009 137,343 189,093 219,991 244,816 long-term debt 1,416,998 1,413,001 1,420,726 1,501,295 1,540,329 1,550,231 Tota / Capit<dization $2,780,709 $2,716.470 $2,669,190 $2,769,529 $2.826,510 $2,865,622 Capitalisation Ratios Common sta kholders' equity 44.2 % 43.1 % 41.6 % 39.0 % 37.7 % 37.4 %

Preferred and preferente stock 4.8% 4.9% 5.2% 6.8% 7.8% 8.5%

Inng-term dcht 51.0% 52.0 % 53.2 % 54.2 % 54.5 % 54.1 %

Total Capitalization 100.0 % 100.0 % 100 0 % 100.0 % 100.0 % 100.0 %

Ratio off*en, sings to lived Garges (pre-tar) 2.33 2.22 2.09 1.89 1.78 1.72 Selectal Common Sto k Information Shairs outstanding (In thouwul):

Year-end 53,012 52,950 52,905 53,759 55,340 57,831 Average 52,979 52,913 53,391 54,432 55,790 63,748 Dividends dedarni (In thouwuld $86,089 $81,491 $78,040 $74,972 $72,397 $77,571 Dividends paid per sh.ue $1.60 $1.52 $1A4 $1.36 $1.28 $1.20 Dividend payout ratio 58.8 % 56.9 % 57.6 % 60.7 % 63.1 % 64.5 %

Price earnings ratio at year-end 12.7 12.1 12.3 11.1 11.8 10.1 Dividend yield at year <nd 4.6% 5.0% 5.0% 5.8% 5.7% 6.8%

Return on averap common equiry 12.0 % 12.4 % 12.2 % 11.3 % 10.6 % 10.4 %

41

SELECTED OPERATING DATA 1993 1992 1991 1990 1989 1988 Sales ofIJearicity:

Average annual re,idential kilowatt hourir,e 6,201 5,901 6331 5,953 6,060 6,168 Ekrtric energy ules billed (milhom of KWIi):

Residential 3,231 3,069 3.285 3,078 3,119 3,156 Commercial 5,490 5,358 5,450 5,236 5,145 5,055 Industrial 3,046 3,059 3,442 3,296 3,221 3302 Miscellaneous 84 83 84 84 84 91 Total &du to Customm 11,851 11,569 11,861 11,694 11,569 11,604 Sales to other utilities 2,821 4,060 2,979 1,830 2,100 2,716 7atal&da 14,6"2 15,629 14,840 13,524 13,669 14,320 Percentage Change in Energy Sales:

Residential 5,3 (6.6) 6.7 (13) (1.2) 3.0 Commenial 2.5 (1.7) 4.1 1.8 1.8 32 Industrial (0.4) 6 (7.7) 23 (2.5) 13.2 Aliscellaneous 1.2 (1.2) - -

(7.7) (7.1)

Total &da to Customm 2.4 (2.5) 1.4 1.1 (0.3) 5.7 Sales to other utihties 00.5) %3 62.8 (l 2.9) (22.7) 12.0 Total &da (6.1) 53 9.7 (1.1) (4.5) 6.8 Faergy Supply and Production Data:

Energy supply (millions of KWII):

Net generation - system plants (net of Company use and losses) 14,056 15,074 14,220 13,266 13,455 14,144 l'urchased and ner inadvertent power 616 555 620 258 214 176 Totallinergy Supply 14,672 15,629 14.840 13,524 13,669 14,320 Generating capability (MWs) 2,834 2,834 2,835 2,835 2,835 2,836 Peak kud (MWs) 2,499 2,308 2,402 2,379 2,381 2,372 Cost of fuel per million lil'U 143.65c 140.1 Se 153.70e 149.62e 143.87c 145.74e llTU per kihnvart hour generated 10,437 10370 10,414 10,444 10,411 10,301 Average pnnluction cost per kilowatt-hour 2.71 c 2.54e 2.80e 2.6 t e 2.73e 2.58e Number of Customers - End of Yean Residential 522353 521,152 520.016 518,322 516,801 513,760 Commercial 52,910 52.839 52,617 52330 51,950 51,456 Industrial 1,995 1,987 2,004 2,026 2,023 2,017 Other 1,866 1,833 1,891 1,847 1,818 1,828 Tot.d Customm 579,124 577,811 576.528 574,525 572,592 569,061 42

DOE Bom JOHN M. AnTHun 71. Term expires 1995 (5,6). Retired Chairman, Duquesne Ught. Directorships of DIR[CTORS include Mine Safety Appliances Company (worker and plant protection equipment and systems)

M " '""" 31 ""'

and Chambers Development Company, Inc. (wa3ic management operations).

DQE/nuquesne tip, DANIEL BEnG 64. Term expires 1994 (1,6), Institute Professor, Rensselaer Polytechnic Institute.

Committen Directorships indude Hy-Tech Machine, Inc. (speciahy p.trts), Joachim Machinery Co., Inc.

n emation (distributor of machine tools), and Chester Environmental, Inc. (environmental engineering).

J. Finance

( Nominaung 00nEEN E. BoYCE 59. Term expires 1995(2,5). President of the Buhl Foundation (support of educational and community programs). Directorships include Microbac laboratories, Inc. and Duquesne Lighr c,mmj,,,,y Dollar Bank, Federal Savings Bank. Trustee of Franklin & Marshall College.

S. Impleyment and Community Rdation, RosEnT P. B0ZZONE 60. Term expires 1994 (1,2). President and Chief Executive Officer of 6 Nudrar Rer it* Allegheny Ludlum Corporation (specialty metals pnxluction). Directorships include Allegheny 1.udlum Corporation; Chairman, Pittsburgh branch of the Federal Reserve Bank of Cleveland.

SiGo Faut 59. Term expires 1996 (2,3,4). Management of personal investments. Chairman of Maurice Falk Medical Fund and trustee of Chatham College.

WILuAm H. KNoELL 69. Term expires 1994 (3,4,6). Retired Chairman and Chief Executive Officer of Cyclops Industries, Inc. (hasic and specialry steels and fabricated steel products; industrial and commercial construction). Diredorships indude Cabot Oil and Gas Corporation.1.ife trustee of Carnegie Mellon University.

G. CHntSTIAN LANTZSCH 69. Term expires 1995(2,3). Retired Vice Chairman and Treasurer, Mellon Bank Corporation (bank hokling company); retired Vice Chairman and Chief Financial Omccr, Mellon Bank, N.A. (commercial banking and trust services). Directorships indude Koger Equity, Inc. (real estate investment trust).

RosEni MEHnAstAN 52. Term expires 1995 (1,5). President, Carnegie Mellon University: Dean, Collei;e of Engineering, University of California at Santa Barbara, 1983-90. Directorships include PPG Industries, Inc. (pnxlucer of glass, chemicals, coatings and resins), Mellon Bank Corporation

, and Mellon Bank, N.A.

THouAs J. Munn:N 64. Term expires 1994 (3,6). Dean, A.J. Palumbo School of Business Adminis-tration Duquesne University; former Deputy Secretary of U.S. Dept. of Commerce; former Presi-dent, Westinghouse Electric Corporation Energy and Advanced Technology Group. Directorships indude Motorola, Inc. (manufacturer ofelectrical equipment and components). Member of the private sector Council on Competitiveness and the NASA Advisory Council.

RosEnT B. PEASE 68. Term expires 1996 (1, 5). Senior Vice President, National Development Corporation (real estate): Executive Director, Allegheny Conference on Community Development, 1968 91. Directorships indudt 31ue Cross of Western Pennsylvania, the Port Authority of Allegheny County, and the Regional Industrial Development Corporation of Southwestern Pennsylvania.

Enz W. Sen:NGEn 64. Term expires 1996 (1,4). Partner ofIlorry, Springer and Mattern, llc.

(attorneys-at. law). Directorships indude Presbyterian University Hospital. President of the Allegheny County Bar Association.

WESLEY W. VON SCHACit 49. Term expires 1996 (3, 4, 5. 6). Chairman, President and Chief Executive Omcer of DQE and Duquesne Light. Directorships indude Mellon Bank Corporation, RMllicanium Co. (producer of titanium metal products), the Pittsburgh branch of the Federal Reserve Bank of Cleveland, the Regional Industrial Development Corporation of Southwestern Pennsylvania, the Pennsylvania Business Roundtable, and the Pittsburgh Cultural Trust.

43

DOE OrrictRS WEELEY W. VON SCHACx 49. DQE Chairman of the Board, President and Chief Executive Omcer:

Duquesne Light Chairman of the Board since 1987, President and Chief Executive Omccr since 1986, and Chief Financial Omcer from 1984 through 1986. Previously Senior Vice President -

Finance and Administrative Services for Central Vermont Public Service Corporation. Also setved in executive positions with American Electric Power Company and Appalachian Power Company.

DAVlo D. MARSHALL 41. DQE Vice President; Duquesne Light Executive Vice President since 1992, previously Assistant to the President (1990) and Vice President, Corporate Development (1987). Joined Duquesne Light in 1985 as General hianager, Planning, Budgeting and Rates; previ-ously was Assistant Vice President of Finance for Central Vermont Public Service Corporation.

M 48. DQE Vice President since 1991; previously a senior banker with Bear, >

Stearns & Co., Inc.; a vice president for Planmetrics, Inc.; and an investment banker with hierrill I ynch & Co., Inc.

GARY L SCHWAss 48. DQE Vice President and Treasurer; Duquesne Light Chief Financial Omcer since 1989; Vice President, Finance (1988); and Vice President and Tieasurer (1987). Joined Duquesnc Light in 1985 as Treasurer; previously served in a variety of senior management positions for Consumers Power Company, including Executive Director of Financial Planning and Projects.

DIANE S. EISMONT,49 JAMES D. MITCHELL,42 JOAN S. SENCHYSHYN, 55 Secretary Assistant licasurer Assistant Secretary R AYMOND H. PANZA, 43 MORGAN K. O'BRIEN,33 Controller Assistant Controller WESLEY W. VON SCHACK,49 WILUAM J. DELEO, 43 JAMES 0. MITCHELL,42 DUQUESNE llGHT COMPANY Chairman of the Board, Vice President, Corporate Tieasurer President and Performance and MOND 1. PANZA,43 Chief Executive Omcer information Services DAVID D. MARSHALL,41 DIANNA l. GREEN, 47 DONALD Executive Vice President Vice Ptesident, A*"""k 'CLAMN,39 N"*'"'##

Administrative Services GARY L. SCHWASS,48 Vice President, Finance JOHN D. SIEBER, 54

" 'O Assinant Treasurer and Chief Financial Omcer Vice President, Nuclear ROGER D. BECK,57 EDWYNA G. ANDERSON,64 Assistant Controller Vice President, hiarketing General Counsel JOAN S. SENCHYSHYN, 55 and Customer Services De S. EISMONT, 49 GARY R. BRANDEN8ERGER, 56 Secretary

^*'I"'"'b#"#Y Vice President, Power Supply FREDERICK S. POTTER, 48 IHOMAS A. HuRKMANS,28 H. DONALD MORINE, 56 DUQUESNE ENTERPRISES President Vice President President, Allegheny ebpment %mann ANTHONY J. VittiOTTI, 47 ""

Vice President,

"" PW JOHN l. WEINHOLD, 57

'licasurer and Controller Vice President, Property Ventures, Ltd.

DONALD J. CLAYTON, 39 l DARY L. SCHWASS,48 MONTAUK President Vice President JAMES D. MiTCHELL,42 LYDIA E. YORK, 34 Vice President and lieasurer Controller l

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.f.1

' SHAftEHCLDEn Common Stock Shareholder Services / Assistance REFER [NCE OUIDE Trading Symbob DQE Shareholder inquiries relating to dividends, Stock Exchanges Listed and Traded: missing stock certiGcates, dividend reinvest-New York, Philadelphia, Chicago ment, direct deposit, direct debit, change of Number of Common Shareholders of Record address notiGcation, and other account infor-at Year End: 81,343 mation should include your account number pyy,f g,,fj,,

and be directed to:

Shareholders are cordially invited to attend Shareholder Relations Department our Annual hiceting of Shareholders at DQE Box 68 I1 a.m. (local time), April 20,1994, at the Pittsburgh Theological Seminary,616 Pittsburgh, PA 15230-0068 N. Highland Ave., Pittsburgh, PA 15206. Shareholders also can call between 7:30 a.m.

Dividends and 4:30 p.m., Eastern time, hionday through Friday. Please have your account The Board of Dh ectors historically has number handy.

declared quartedy dividends payable on the Pittsburgh area: 393-6167 first business day of January, April, July and Ocmber The record dates for 1994 are Toll free outside Pittsburgh area:

en pecte.] to be hiarch 7, June 10, b800-247-0400 September 9 and December 9. FAX: 412-393-6087 Ofrect Deposit of Olvidends

' ' ' ' "E ' "U' '

mcluding shares held {m the Dividend m- Re.

Your DQE quarterly dividend payments can vestment and Stock Purchase Plan, can be he deposited automatically into a personal answered by our Shareholder Relations checking; or savings account. Through this Department. To actually transfer stock cer-free service, your dividend income is available tiGcates, contact our transfer agent:

for use on the payment date. Standing in bank lines is eliminated, as well as the fear of Bank of Boston misplacing or losing your check. Call us toll l.'""Sf E*'","8 150 Royall Street 45-01-05 free for more information.

Canton, MA 02021 Tas status at common stock Olvidends 617-575-2900 The company estimates that 'al of the com- oygfj,,,, y,,,j,,,

mon stock dividends paid ;n 1993 are taxable as dividend income. This estimate is subject if y a hold multiple accounts, you may be receiving duphcare mailings of annual and to audit by the Internal lhvenue Service.

quarterly reports. Help us chmmate this form 10 K unnecessary expense by calling our toll free If you hold or are a beneficial owner of our number. Elimination of these duplicate mail-stock as of February 23,1994, the record ings will not alTect separate delivery ofdivi-date fbr the 1994 Annual Meeting, we will dend checks and proxy materials to each send you, free upon request, a copy of DQE's account.

Annual Report on Form 10-K, x Gled with rinanclat communtry inquiries the Securities and Exchange Commission for

^"'I Y S' I""

• agers, and brokers 1993. All requests must be made in writing g should direct the.'"' to* 412-393-ir mqumes ".

4133. Written inquiries should be sent to:

Secretary invest r Relati ns Department DQE Box 68 DQE B x 68 Pittsburgh, PA 15230-0068 Pittsburgh, PA 15230-0068 FAX: 412-393-6448 DQE and its amliated companies are Equal Opportunity Employers.

O Rg U S Px, & Tm. Ott

i I

l l

$% DOE

%r5

@ The 1993 DQE Annual Report was printed entirely on rec)cled paper and is 100 pcreent recglabic.

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