ML20101L229

Forwards Util Consolidated Financial Statements for 12-month Period Ending 951231 & Internal Cash Flow Projection, Including Actual 1995 Data & Projections for 1996,per 10CFR140.21

ML20101L229
Person / Time
Site:	Beaver Valley, Perry
Issue date:	03/29/1996
From:	Clayton D DUQUESNE LIGHT CO.
To:	NRC (Affiliation Not Assigned)
References
NUDOCS 9604030324
Download: ML20101L229 (70)

Text

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One Oxford Centre ts rg.

15279 (412)393 6230 DONALD J CLAYTON Treasurer

. M, arch 29,1996 U. S Nuclear Regulatory Commission 2120 L Street NW Washington, DC 20555 Attn.: Director of Nuclear Reactor Regulation RE:

Docket No. 50-440 - Perry Nuclear Power Plant Unit No. ;

Docket No. 50-334 - Beaver Valley Power Station Unit No.1 Docket No. 5(M12 - Beaver Valley Power Station Unit No. 2 Gentlemen:

In accordance with NRC Regulation 10 CFR Section 140.21, regarding the Price-Anderson Act retrospective premium system guarantee requirements, you will find enclosed:

1.

A copy of Duquesne Light Company's mnsolidated financial statements for the twelve-month period ended December 31,1995;

2. An intemal cash flow projection, including actual 1995 data and projections for 1996. This statement indicates that $7.498 million, our portion of the $30 million retrospective premiums for the three subject units, would be available for the payment of such premiums in 1995.

Duquesne Light Company has a 47.5% ownership in Beaver Valley Unit No.1, a 13.74%

ownership in Perry Unit No.1 and a 13.74% leasehold interest in Beaver Valley Unit No. 2.

Pursuant to Commission rules, Duquesne Light Company has elected to utilize its financial statement as its guarantee of payment of deferred premiums. We are providing these statements to meet our reporting requkements for both Beaver Valley Unit 1 and Unit 2 and Perry Unit 1 at this time.

Sincerely.

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cc:R. Duckworth - BV DELWERING Q U A LliY ENERGV 9604030324 960329 PDR ADOCK 05000334 I

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Source and Application of Funds (In Million of Dollars)

Actual Forecast Capital Requirements 1995 1996 Construction Expenditures

$79

$80 (Excluding AFUDC)(1)

Capital Additions Projected to be Leased 15 35 (Principally nuclear fuel)

Maturities and Sinking Funds 56 50 Total Capital Requirements

$150

$165 Sources of Capital Intemal Sources (2)

Deferred Taxes

($34)

($31)

)

Investment Tax Credit (7)

(6)

Phase-In Plan Deferred Revenues 0

0 l

Other Non-Cash Operating Expenses 222 189 Total internal Sources

$181

$152 (excluding Retained Eamings)

(1) Total AFUDC for 1996 la projected to be $2 million.

(2) Changes in retained oamings have not been renected.

The above forecast Informanon is based upon assumptions concoming many verlebles, and le subject to signinoant changes Accordingly, such Information represents estimates and wNI be updated periodloally. This information le provided for general information purposes only and not for any speciRc use or reliance.

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[ CONFORMED)

UNITED STATES SECURITIES AND EXCI1ANGE COMMISSION Washington, D.C. 20549 FORM 10-K

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ FEE REQUIRED)

For the Fiscal Year Ended December 31.1995

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED)

For the Transition Period From to Commission File Number 1-956 Duquesne 1.icht Comtiany (Exact name of registrant as specified in its charter)

Pennevivania 25 0451600 (State or other jurisdiction of (1.R.S. Employer Identification No.)

incorporation or organization) 411 Seventh Avenue Pittsburgh, Pennsylvania 15219 Formerly:

One Oxford Centre,301 Grant Street fittsburch. Ibnsylvania 15279 (Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (412) 3934400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months and (2) has been subject to ruch filing requirements for the past 90 days. Yes X No DQE is the holder of all shares of autstanding common stock, $1 par value, of Duquesne Light Company consisting of 10 shares as of February 21,1996.

[X]

Indicate by check mark if disdosure of delinquent filers pursuant to item 405 of Regulation S-K is not mntained herein, and will not be contained, to the test l

of the registrant's knowledge,in definitive pmxy or information statements I

incorporated by reference in Part III of this Form 10-K or any unendment to this Form 10-K.

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Securities registered pursuant to Section 12(b) of the Act.

i Name of each exchange Reeistrant Tide ofeach A=

on which recistered l

Duquesne 1.ight Preferred Stock (par value $50)

New York Stock Exchange Company Involuntary Series Uguidation Value i

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3.75%

$50 per share 4.00 %

$50 per share i

4.10 %

$50 per share 4.15 %

$50 per share 4.20 %

$50 per share

$2.10

$50 per share l

)

l Sinking Fund Debentures, due Marrh 1,2010 (5%) New York Stock Exchange i

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v TABE OF CONTENTS I

fags f.ags PARTI ITEM 9. CliANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ITEM 1. BUSINESS ACCOUNTING AND FINANCIAL i

DISCIDSURE 22 General 1

Results of Operations 1

l Liquidity and Capital Resources 5

PARTIH Rate Matters 6

ITEM 10. DIRECTORS AND EXECUTIVE Property Plant & Equipment (PP&E) 7 OFFICERS OF THE REGISTRANT 22 Employees 10 Electric Utility Operations 10 ITEM I1. EXECUTIVE COMPENSATION 22 Fossil Fuel 11 Nuclear Fuel 11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND Nuclear Decommissiomng 12 MANAGEMEN'T 22 Nuclear Insurance 13 Spent Nuclear Fuel Disposal 13 ITEM 13. CERTAIN REIATIONSHIPS AND Uranium Enrichment Decontamination and REIATED TRANSACTIONS 23 Decommissioning Fund 14 Environmental Matters 14 Outlook 15 PARTIV Other 17 ITEM 14. EXHIBITS, FINANCIAL STATEMENT Executive Officers of the Registrant 18 SCHEDUES AND REPORTS ON FORM 8-K 23 ITEM 2. PROPERTIES 20 SCHEDUE H 35 TfEM 3. EGAL PROCEEDINGS 21 SIGNATURES 36 ITEM 4. SUBMISSION OF MATTERS TO A GLOSSARY 37 VOTE OF SECURITY HOLDERS 21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 38 p

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITYAND RELATED SEECTED FINANCIAL DATA 63 SHAREHOLDER MATTERS 21 ITEM 6. SEECTED FINANCIAL DATA 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPEMFNTARY DATA 22

i PARTI l

ITEM 1. BUSINESS.

General Part 1 ofthis Annual Report, Form 10-K(Report) should be readin conjunction with Duquesnes audited consoli-datedpnancialstatements, which are setforth on pages 38 through 62 in Part IVofthis Report. Erplanations of certainfinancialand operating terms usedin this Report arr setforth in a glossary on page 37 ofthis Report.

Duquesne Light Company (Duquesne) is a wholly owned subsidiary of DQE, an energy services hold-

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ing company formed in 1989. Duquesne is engaged in the production, transmission, distribution and sale of electric energy. Duquesne was formed under the laws of Pennsylvania by the consolidation and merger in j

1912 of three constituent companies. Duquesne has one wholly owned subsidiary, Monongahela Light and Power, also a Pennsylvania corporation, which currently holds energy related lease investments.

Service Territory Duquesne provides electric service to customers in Allegheny County, including the City of Pittsburgh, and Beaver County. This represents a service territory of approximately 800 square miles in southwestern Pennsylvania. The population of the area served by Duquesne, based on 1990 census data, is approximately

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1,510,000, of whom 370,000 reside in the City of Pittsburgh. In addition to serving approximately 580,000 l

customers within this service area, Duquesne also sells electricity to other utilities beyond its service territory.

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Regulation Duquesnis operations are subject to regulation by the Pennsylvania Public Utility Commission (PUC),

as well as to regulation by the Federal Energy Regulatory Commission (FERC) under the FederallbwerAct with respect to rates for interstate sales, transmission ofelectric power, accounting and other matters.

Duquesnis operations are also subject to regulation by the Nuclear Regulatory Commission (NRC) under the Atomic Energy Act ofl954, as amended, with respect to the operation ofits jointly owned / leased nuclear power plants, Beaver Valley Unit 1 (BV Unit 1), Beaver Valley Unit 2 (BV Unit 2) and Perry Unit 1.

Duquesne is also subject to the accounting and reporting requirements of the United States Securities and Exchange Commission.

Duquesnis consolidated fmancial statements report regulatory assets and liabilities in accordance with Statement ofFinancial Accounting Standards No. 71, Accountingfor the Efects ofCertain Types ofRegulation (SFAS No. 71)and reflect the effects of the ratemaking process. In accordance with SFASNo. 71, Duquesnis j

consolidated financial statements reflect regulatory assets and liabilities based on current cost-based ratemaking regulations. The regulatory assets represent probable future revenue to Duquesne because provisions for these j

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

Duquesnds operations currently satisfy the SFASNo. 71 criteria. However, a company's utility opera-tions or a portion of such operations could cease to meet these criteria for various reasons, including a change in the PUC or the FERC regulations. Should Duquesnis operations cease to meet the SFASNo. 71 criteria, l

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

Results of Operations Seasonality Sales of electricity to customers by Duquesne tend to increase during the warmer summer and colder winter seasons because ofgreater customer use ofelectricity for cooling and heating.

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in the near term, weather conditions and the overalllevel of business activity in Duquesne's service ter-ritory are expected to continue to be the primary factors afTecting sales of electricity to customers. In the long-term Duquesne's electric sales may also be affected by increased competition in the electric utility industry.

(See " Competition" discussion on page 15.)

Sales ofElectricity to Customers Operating revenues are derived from Duquesne's sales ofelectricity to customers and are based on rates authorized by the PUC. These rates are cost-based and are designed to recover Duquesne's energy and other operating expenses and investment in electric utility assets and to provide a return on such investment. Sales to Duquesne's 20 largest customers accounted for 14.2 percent and 14.6 percent ofcustomer revenues in 1995 and 1994, respectively. Sales to USX Corporation, Duquesne's largest customer, accounted for 3.7 per-cent and 3.8 percent of total 1995 and 1994 customer revenues, respectively. Total kilowatt-hour (KWH) sales to customers in 1995 increased 2.5 percent when compared to KWH sales to customers in 1994. In response to extreme 1995 summer and winter temperatures, residential and commercial KWH sales increased 4.9 percent and 3.0 percent, respectively. Industrial sales volume in 1995 declined when compared to the prior year because of temporary production facility outages experienced by some of Duquesne's large industri-al customers. The severe weather conditions in 1995 a'so resulted in higher residential KWH sales volume when compared to 1993 Components of Change in Operating Revenues from the Prior Year 1995 1994 (Amounts in Millions ofDollars)

Revenues from Sales of Electricity:

Net customer revenues

$ 7.8 56.0 Utilities (2.3) 7.6 Revenues from total sales of electricity 5.5 13.6 Other operating revenues 5.7 (5.7) i Tbtal Operating Rewnues

$11.2

$ 7.9 Customer revenues fluctuate as a result of changes in sales volume and changes in fuel and other energy Net customer rewnues in 1995 when compared to 1994 increased by $7.8 million, or 0.7 percent. The change is the net result of higher sales, partially offset by lower energy costs per megawatt hour (MWH), the benefits ofwhich are passed through to the customers in the form oflower rates. The significantly hotter sum-mer temperatures in 1995 resulted in increased sales ofelectricity to residential customers in particular.

Revenues attributable to electric sales to residential customers in 1995 exceeded 1994 residential revenues by

$13.2 million, or 3.3 percent. Net customer irvenues also increased $6.0 million, or 0.6 percent, in 1994 when compared to 1993. The 1994 variation represented higher sales to commercial and industrial customers, driv-en in part by an expanded customer base.

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

Sales to 0:her Utilities Short-term sales to other utilities are regulated by the FERC and are made at market rates. Short-term power sales to other utilities in 1995,1994 and 1993 were 2,974,797 KWH,3,212,110 KWH and 2,820,920 2

KWH, respectively. Fluctuations in electricity sales to other utilities are related to Duquesne's custo.mer energy requirements, the energy market and transmission conditions and the availability of Duquesne's generating stations. Revenues from sales to other utilities were $56.0 million, $58.3 million and $50.7 million in 1995, 1994 and 1993, respectively. Sales to other utilities were less prevalent in 1995 than in 1994 because severe weather conditions resulted in greater sales to Duquesne's customers. (See " Sales of Electricity to Customers" discussion on page 2.) Increased customer sales reduce power available to sell to other utilities. Future levels of short-term sales to other utilities will be affected by the resolution of Duquesne's proposed sale ofits owner-ship interest in the Ft. Martin Power Station and by the outcome of Duquesne's FERC filings requesting firm transmission access. (See " Sale of Ft. Martin" and " Transmission Access" discussions on pages 9 and 16, respectively.)

Generally, Duquesne is permitted to recover (to the extent that such amounts are not included in base rates) fuel and other energy costs from its customers through an Energy Cost Rate Adjustment Clause (ECR),

subject to the PUC review. This revenue adjustment also includes a credit to Duquesne's customers for profits from short-term sales to other utilities. The credit to Duquesne's customers for profits from short-term sales to other utilities was $15.5 million in 1995, $16.6 million in 1994 and $12.1 million in 1993. Included in a petition currently before the PUC, Duquesne proposes a five-year annual $5 million credit to the ECR to compensate Duquesne's customers for the lost profits from any reduced short-term power sales caused by the sale ofits ownership interest in the Ft. Martin Ibwer Station. (See " Energy Cost Rate Adjustment Clause (ECR)" and " Sale of Ft. Martin" discussions on pages 6 and 9, respectively.)

Other Operating Revenues Duquesne*s non-KWH revenues comprise other operating revenues in Duquesne's statement of consoli-dated income. Other operating revenues are primarily comprised of revenues from joint owners of BV Unit 1 and BV Unit 2 for their shares of the administrative,d general costs of operating these units. Otheroperat-ing revenues, therefore, fluctuate depending on the timing of scheduled refueling and maintenance outages at Beaver Valley Power Station (BVPS) when significant costs are incurred. Both BV Unit I and BV Unit 2 underwent refueling outages in 1995 and in 1993. There were no refueling outages in 1994; accordingly, other operating revenues increased $5.7 million in 1995, when compared to the prior year. Conversely, other operating revenues decreased $5.7 million in 1994 when compared to 1993.

Operating Expenses Totaloperating expensesincreased $6.5 million in 1995 when compared to 1994. Totaloperatingexpenses increased from 1993 to 1994 by $8.9 million. Fueland purehasedpouerexpense fluctuations generally result from changes in the cost of fuel, the mix between coal and nuclear generation, the total KWHs sold and gen-erating station availability. Because of the ECR, changes in fuel and purchased power cost normally do not impact earnings.

Componente ofChange in Fueland Purchased Power Erpensefrvm the Prior Year 1995 1994 (Amounts in Millions ofDollars)

Average unit cost offuel 5 (2.3)

$(3.4)

Generation mix (5.2)

(5.5)

Generation volume (6.4) 7.6 Purchased power 1.7 7.7 TotalEnergy Erpense

$(l2.2)

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

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

Generation volume during 1995 decreased 2.7 percent when compared to 1994 due to more generat-ing station outages. Overall nuclear generation increased in 1995 due to strong performances at the nuclear units. (See " Beaver Valley Power Station (BVPS)" and " Perry Unit 1" discussions on page 9.) Major outages at j

coal stations, including an extended forced outage at the Ft. Martin Power Station, resulted in reduced coal generation which more than offset the increased nuclear generation. During 1994, generation increased 3.4 percent from 1993 due to fewer generating station outages.

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

Other operatingexperre continued to decrease in 1995. The $7.8 million decrease from 1994 to 1995 and the $18.9 million decrease from 1993 to 1994, are largely attributable to cost reduction measures institut-ed by Duquesne.

Maintenance expense fluctuations primarily result from the timing ofscheduled generating station out-ages, the timing ofscheduled transmission and distribution line maintenance and the effect of storms on over-head lines and transformers. Incremental maintenance expense incurred for scheduled refueling outages at Duquesne's nuclear units is deferred for amortization over the period between refueling outages (generally 18 months). Influenced by extreme weather conditions and the timing ofoutages at both fossil and nuclear sta-tions, maintenance costs incurred by Duquesne in 1995 exceeded the prior year by $2.0 million. During 1994 and 1993, amortization of deferred nuclear refueling outage expense increased, reflecting the higher costs of refueling outages. Offsetting this increase in 1994 was a decrease in transmission and distribution line mainte-nance expenn.

Duquesne changed, as ofJanuary 1,1993, its method of accounting for maintenancecosts during scheduled major fossil generating station outages. Under the new accounting policy, Duquesne accrues, over the periods between outages, anticipated expenses for scheduled major fossil generating station outages. The cumulative effect (approximately $5.4 million, net ofincome taxes of approximately $3.9 million) of the 1

change on prior years was included in netincome in 1993. The effect of the change in 1993 was to reduce l

income, before the cumulative efect ofchanga in accountingprincipin, by approximately $2.4 million and to reduce net income, after the cumulative effect of changes in accounting principles, by approximately $7.8 mil-lion.

Depreciation andamonization expense increased $25.9 million in 1995, primarily due to the change in Duquesne*s composite depreciation rate from 3.0 percent to 3.5 percent effective January 1,1995.

Depreciation andamorrization expense increased $12.3 million in 1994 when compared to the prict year due to increases in depreciable property and nuclear decommissioning expense.

As part of Duquesne's plan to optimize generation capacity, a petition pending before the PUC propos-es an annual increase in depreciation andamortization expense related to Duquesne's nuclear power investment of $25 million for three years. Consistent with the 1995 increase in the composite depreciation rate, Duquesne is not seeking a rate increase to recover these additional costs. (See " Sale of Ft. Martin" discussion on page 9.)

'lixn other than income taxu were lower in 1993 compared to 1995 and 1994, primarily as a result of a favorable resolution ofcertain property tax assessments. In 1993, Duquesne recorded, on the basis of these revised assessments, the expected refunds for overpayments in prior years.

Income taxawere lower in 1993, when compared to 1995 and 1994, because of a favorable settlement with the Interna Revenue Service (related to Duquesne's 1988 federal income tax retwn and DQE's 1989 l

consolidated federal income tax return). The remaining fluctuations result from changes in taxable income.

During 1994 the statutory Pennsylvania income tax rate was reduced from 12.25 percent to 9.99 percent.

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

OtherIncome andDeductions l

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Otherincome anddeductions decreased $4.9 million in 1995 when compared to 1994 primarily due to increases in income taxes related to other income. The $5.4 million decrease in otherincome anddeductions from 1993 to 1994 reflects the favorable corporate federal income tax settlements recorded in 1993 offset that year l

by a $15.2 million long-term power sale write-off.

CapitalExpendirures Duquesne spent approximately $78.7 million in 1995, $94.3 million in 1994 and $100.6 million in 1993 for construction. These amounts were expended to improve and/or expand electric production, transmis-sion and distribution systems. Duquesne's capital expenditures for construction focus on extending service to i

new customers, providing for the replacement of utility propeny and modifying facilities consistent with the most current environmental and safety regulations. Duquesne estimates that it will spend, excluding the allowance for funds med during construction (AFC) and nuclear fuel, approximately $90 million, $90 million and $100 million for construction during 1996,1997 and 1998, respectively. Approximately $5 million ofcap-ital expenditures for reliability enhancements to the simple cycle units located at Brunot Island (BI) contem-plated in Duquesne's petition before the PUC are excluded from these estimates. (See " Sale of Ft. Manin" discussion on page 9.) Duquesne expects that funds generated from operations will continue to be sufficient to finance a large pan ofits capital needs.

Inwsting Duquesne's long-term investments consist of Duquesne's holdings of DQE common stock, investments in affordable housing, leasehold and other investments, and Duquesne's nuclear decommissioning trusts.

Investing activities increased in 1995, after staying relatively constant in 1994 when compared to 1993.

Duquesne invested $5.4 million and $5.3 million in affordable housing funds during 1995 and 1994, respec-tively. In addition, Duquesne invested $57.5 million in other leases and investments during 1995.

Liquidity and Capital Resources Financing Duquesne expects to meet its current obligations and debt maturities through the year 2000 with funds generated from operations and through new financings. At December 31,1995, Duquesne was in compliance with all ofits debt covenants.

Duquesne's 1947 first mongage bond indenture was retired in the third quaner ofl995 following the maturity of the last bond series issued under the indenture. All of Duquesne's First Collateral Trust Bonds have been issued under a new mongage indenture that was established in April 1992 (the 1992 Indenture).

All First Collateral Trust Bonds became first mortgage bonds when the 1947 mortgage indenture was retired.

The 1992 Indenture includes more flexible provisions and eliminates conventions such as mandatory sinking funds and formula-derived maintenance and replacement clauses.

On September 1,1995, Duquesne redeemed all ofits outstanding shares of $7.20 Preferred Stock for

$29.9 million. On August 29,1995, Duquesne repurchased $7 million ofits 8-3/8% First Collateral Trust Bonds maturing in 2024.

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

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Short-Term Borrowings i

At December 31,1995, Duquesne had an extendible revolving credit agreements with a group of banks totaling $150 million. This facility expires in October 1996. Interest rates on this credit agreement vary.

Commitment fees are based on the unborrowed amount of the commitments. The credit facility contains a two-year repayment period for any amount outstanding at the expiration of the revolving credit period. At December 31,1995 and 1994, there were no shon-term borrowings outstanding.

Interest Charges 1

Duquesne achieved a $3.8 million and a $9.1 million reduction in intenst chargesin 1995 and 1994, respectively, primarily due to the retirement oflong-term debt. Duquesne's interrst on long-term debt and divi-dends on preferredandpreference stock declined to $100.7 million in 1995 from $107.1 million in 1994 and

$117.7 million in 1993. Interest expense in 1996 will be influenced by fluctuations in short-term rates and any new fmancing.

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

Nuclear FuelLeasing Duquesne finances its acquisitions of nuclear fuel through a leasing arrangement under which it may finance up to $75 million of nuclear fuel. As of December 31,1995, the amount ofnuclear fuel financed by Duquesne under this arrangement totaled approximately $40.8 million. Duquesne plans to continue leasing nuclear fuel to fulfill its requirements at least through September 1998, the remaining term of the leasing i

arrangement.

i Rate Matters Electric rates charged by Duquesne to its customers are regulated by the PUC. Electric rates charged to the Borough of Pitcairn and rates charged for sales to other electric utilities are regulated by the FERC. These rates are designed to recover Duquesne's operating expenses, investment in utility assets, and to provide a return on those investments. Sales to other utilities are made at market rates. At this time, Duquesne has no pending base rate case and has no immediate plans to file a base rate case, in Duquesne's petition currently before the PUC for the sale ofits ownership interest in the Ft. Martin Power Station, Duquesne proposes to freeze its base rates for a five-year period. (See " Sale of Ft. Martin" discussion on page 9.)

Energy Cost Rate Adjustment Clause (ECR)

Through the ECR, Duquesne recovers (to the extent that such amounts are not included in base rates) nuclear fuel, fossil fuel and purchased power expenses and, also through the ECR, passes to its customers the profits from short-term power sales to other utilities (collectively, ECR energy costs). Nuclear fuel expense is recorded on the basis of the quantity of electric energy generated and includes such costs as the fee imposed by the United States Department of Energy (DOE) for future disposal and ultimate storage and disposition of 6

spent nuclear fuel. Fossil fuel expense includes the costs of coal, natural gas and fuel oil used in the generation ofelectricity.

On Duquesnis statement of consolidated income, these ECR revenues are included as a component of opemting rewnues. For ECR purposes, Duquesne defers fuel and other energy expenses for recovery, or refund-ing, in subsequent years. The deferrals reflect the difference between the amount that Duquesne is currently collecting from customers and its actual ECR energy costs. The PUC annually reviews Duquesne*s ECR ener-gy costs for the fiscal year April through March, compares them to previously projected ECR energy costs and adjusts the ECR for over-or under-recoveries and for two PUC-established coal cost standards. (See " Deferred Coal Costs" and "Warwick Mine Costs" discussions in Note F to the consolidated financial statements on pages 49 and 50, respectively.)

Over-or under-recoveries from customers are recorded on the consolidated balance sheet as payable to, or receivable from, customers. At December 31,1995, $5.8 million was payable to customers and shown as ot/xr currentliabilities. At December 31,1994, $5.9 million was receivable from customers and shown as other i

current assets.

DefmedRate Synchronization Costs In 1987, the PUC approved Duquesnis petition to defer initial operating and other costs of Perry Unit I and BV Unit 2. Duquesne deferred the costs incurred from November 17,1987, when the units went into commercial operation, until March 25,1988, when a rate order was issued. In its order, the PUC postponed ruling on whether these costs would be recoverable from Duquesnis customers. At December 31,1995, these costs totaled $51.1 million, net of deferred fuel savings related to the two units. Duquesne is not earning a return on the deferred costs. Duquesne believes that these costs are recoverable. In 1990 and 1995, the PUC permitted other Pennsylvania electric utilities rate recovery ofsuch costs.

Property, Plant and Equipment (PPRE)

Innstment in PP&E andAccumulated Depreciation Duquesnis total investment in ymperty plant andequipmentand the related accumulateddepreciation bal-ances for the following major classes ofproperty at December 31,1995 and 1994, are as follows:

PP&Eand RelatedAccumulated Depreciation at December 31 (Amountsin Thousands ofDollars) 1995 1994 Accumulated Net Accumulated Net 1

Innstment De:Wian Innstment Investment Depreciation Investment Electric Production

$2,501,974 $ 885,389 $1,616,585 $2,474,032 5 7%,338 $1,677,694 Electric Transmission 296,953 110,242 186,711 295,512 105,217 190,295 j

Electric Distribution 1,143,111 347,399 795,712 1,119,247 323,922 795,325 i

Electric General 314,844 141,133 173,711 305,335 123,766 181,569 Property Held for Future Use 216,633 94,283 122,350 216,206 94,283 121,923 Property Held Under Capitalleases 133,381 74,874 58,507 161,775 91,376 70,399 Other 45,114 19,787 25,327 46,859 15,545 31,314 i

Total

$4,652,010 $1,673,107 $2,978,903 $4,618,966 $1,550,447 $3,068,519 I

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Joint Interests in Genentring Units Duquesne has various contracts with The Ntomac Edison Company, Monongahela Nwer Company, Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric illuminating Company (CEI) and The Toledo Edison Company that include provisions for coordinated maintenance responsibilities, limit-ed and qualified mutual back-up in the event of outages and certain capacity and energy transactions.

Under the agreements governing the operation of these jointly owned generating units, the day-to-day operating authority is assigned to a specific company. CEI has sud. authority for Perry Unit I and Eastlake Unit 5; Ohio Edison Company has authority for Sammis Unit 7>, Pennsylvania Nwer Company has authority

~ for Bruce Mansfield Units 1,2 and 3; and Monongahela Power Company operates Ft. Martin Unit 1.

In September 1995, Duquesne served a demand for arbitration on CEI seeking, among other things, a partition of Eastlake Unit 5 through a sale of Duquesne's interest therein and a termination ofits operating agreement with CEI for that unit. The demand alleges, among other things, the improper allocation by CEl-of fuel and related costs between itself and Duquesne; the mismanagement by CEI of the closing of the Saginaw Mine, which historically supplied coal to the unic; and the concealment by CEI ofinformation. In October 1995, CEI filed its own arbitration demand and asserted counterclaims seeking Duquesne's alleged share ofcosts relating to the unit. A panel of arbitrators has been appointed.

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

Beaver Vallev Perry Unit 1 Unit 2 Unit 1 Duquesne

• 47.50 %

• 13.74% (c) 13.74 %

Ohio Edison Company 35.00 %

41.88 %

30.00 %

Pennsylvania Power Company (a) 17.50 %

5.24 %

CEI(b) 24.47 %

• 31.11 %

i Toledo Edison Company (b) 19.91 %

19.91 %

• Denotes Operator l

(a) Subsidiary of Ohio Edison Company (b) Subsidiary of Centerior Energy Corporation l

(c) In 1987, Duquesne sold and subsequently leased back its 13.74 percent interest in BV Unit 2; the sale was exdusive of transmission and common facilities. The total sales price of $537.9 million was the appraised value of Duquesne's i

interest in the property. Duquesne leased back its interest in the unit for a term of 29.5 years. The lease provides for semiannual payments and is accounted for as an operating lease. Duquesne is responsible under the terms of the lease for all costs ofits intercsr in the unit. (See " Property, Plant and Equipment," Note B to the consolidated fmancial statements on page 46.)

)

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

I l

Ft.

Sammis Bruce M-lid Easdake Martin Unit 7 Unit 1 LiniL2 Unit 3 Unit 5 Unit 1 i

Duquesne 31.20 % 29.30 %

8.00 %

13.74 %

31.20 %

50.00 %

Ohio Edison Company

• 48.00 % 60.00 %

39.30%

35.60 %

Pennsylvania Power Company (a) 20.80 %

• 4.20%

• 6.80%

• 6.28%

CEI (b) 6.50 %

28.60 %

24.47 %

• 68.80 %

l' Toledo Edison Company (b) 17.30%

19.91 %

Potomac Edison Company (c)

- 25.00 %

i Monongahela Power Company (c)

-

• 25.00 %

j

• Denotes Operator l

(a) Subsidiary of Ohio Edison Company (b) Subsidiary of Centerior Energy Corporation (c) Subsidiary of, and currently known as, Allegheny Power System 1

8

..__m

. ~,. -

+

• i

Beaver Valley Pour Station BVPS continues to demonstrate excellence in operating performance. During 1995, BV Unit I and BV Unit 2 both underwent scheduled refueling outages, which were completed in the shortest duration in both the units' history. Further exemplifying BVPS' accomplishments, both refueling outages were completed i

under budgeted cost. In spite of these scheduled refueling outages, the combined capacity factor for the units averaged 80 percent during 1995. Capacity factor is a key production measure and indicates how well the j

plant operated based on its design capacity, it is the ratio of the power actually generated by a facility to the facility's rated capacity during a given period of time. Also, BV Unit 2 achieved an unplanned capability loss factor of 0.7 percent, which is significantly better than the industry standard of 4.0 percent. This factor mea-

)

sures how much power production was lost due to unplanned outages.

i In addition to optimizing generation and cost efficiency, BVPS management continues to emphastze safety in operations. During 1995, BVPS employees achieved the milestone of more than three million hours worked without incurring a single lost time accident.

l Perry Unit 1 t

i Duquesne has a 13.74 percent ownership interest in Perry Unit 1, a nuclear generating unit located in Ohio and operated by CEl. Perry Unit 1 experienced improved performance during 1995, a year without a refueling outage, and achieved a capacity factor of 87.5 percent. CEI has submitted to the NRC an action plan, called the Perry Course ofAction (PCA). CEI management continues to represent to Duquesne that the PCA is on schedule and will be an effective program to ensure that Perry Unit 1 is in conformance with appli-cable industry standards. The PCA is scheduled to be completed by the end of Perry Unit l's fifth refueling j

outage, presently scheduled for the spring of 1996. Duquesne cannot predict the effectiveness of the PCA.

Duquesne will continue to monitor closely this situation.

J Sale of Ft. Martin On November 29,1995, Duquesne and AYP Capital, Inc., an unregulated subsidiary of the Allegheny Power System (APS), entered into an agreement for the sale of Duquesne's 50 percent ownership interest in Unit 1 of the Ft. Martin Power Station, for the sum of $169 million. The agreement is subject to all necessary regulatory approvals. On December 20,1995, Duquesne filed a Petition for Declaratory Order with the PUC requesting approval for the sale in conjunction with a six-point plan to be financed in part by the proceeds of the Ft. Martin transaction.

I Under the plan, Duquesne offers to freeze its base rates for a period of five years. If approved, the rate freeze is expected to produce a 14 percent reduction in the real price of electricity based on an average annual inflation rate of 2.7 percent. In addition, Duquesne proposes to cecord a one-time reduction of approximately

$130 million in the value of Duquesne's nuclear plant investment. Duquesne also proposes to use the pro-ceeds from the sale to finance reliability enhancements to the simple cycle units located at B1, to retire debt and to reduce equity. The B1 simple cycle units will provide 135 megawatts (MW) of summer peaking capaci-ty and 168 MW ofwinter peaking capacity and permit Duquesne to achieve greater operational flexibility in meeting peak system demands. The plan also proposes an annual increase of $25 million for three years in depn ciation andamortization expense related to Duquesne's nuclear investment, as well as additional annual contributions to its nuclear plant decommissioning funds of $5 million for five years, without any increase in existing electric rates. Lastly, Duquesne proposes a five-year annual $5 million credit to the ECR to compen-sate Duquesne's customers for the lost profits from any reduced short-term power sales foregone by the sale of i

its ownership interest in the Ft. Martin Power Station. (See

• Energy Cost Rate Adjustment Clause (ECR)"

discussion on page 6.)

f The PUC is currently reviewing Duquesne's petition.

9

Property Hddfor Future Use l

In 1986, the PUC approved Duquesnis request to remove Phillips Power Station (Phillips) and a por-tion of BI from service and from rate base. Duquesne expects to recover its net investment in these plants through future electricity sales. Duquesne believes its investment in these plants will be necessary in order to

[

meet future business needs outlined in Duquesne's plans for optimizing generation resources. (See

" Generation Resource Optimization" discussion on page 17.) If business opportunities do not develop as i

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 p! ants, Duquesne may have to write off part or all of their costs. A portion of the BI combustion turbine capacity currently held for future use may be returned to service pending the outcome of the sale of Duquesnis ownership interest in Ft. Martin. (See

• Sale of Ft. Martin" discussion on page 9.) At December 31,1995, Duquesne's net investment in Phillips and BI

)

held for future use was $77.4 million and $44.9 million, respectively.

Employees At December 31,1995, Duquesne had 3,515 employees, including 1,178 employees at Duquesne-operated BVPS. The International Brotherhood of Electrical Workers (IBEW) union represents 2,086 of Duquesne's employees. The current collective bargaining agreement with the IBEW expires on September 30, 1998.

j l

t Electrie Utility Operations l

I Approximately 69 percent of the electric energy generated by Duquesnis system during 1995 was pro-duced by its coal-fired generating capacity and approximately 31 percent was produced by its nuclear generat-ing capacity. Duquesne normally experiences its peak loads in the summer. The 1995 customer system peak of j

2,666 MW, the highest system peak in Duquesnis history, occurred on August 16,1995.

1 Duquesne's fossil plants operated at 76 percent availability in 1995 and 85 percent availability in 1994.

,l Duquesnis nuclear plants operated at 83 percent availability in 1995 and 75 percent in 1994. The timing and i

duration ofscheduled maintenance and refueling outages, as well as the duration of forced outages, affect the l

availability ofpower stations.

Duquesne determines the need for and timing ofgeneration resource additions based on maintaining an adequate level of resources in reserve above the projected weather normalized annual peak demand. In addition, capacity resources throughout the region can supplement Duquesne's in-service generation j

resources, if required, through Duquesnis substantial transmission import capability, currently in excess of j

4,000 MW. The North American Electric Reliability Council, ofwhich Duquesne is a member, uses " capacity l

margin" to report generating capability when compared to customer demand. Capacity margin is one of the l

criteria used by Duquesne in assessing the need for future resources. Duquesnis capacity margin in 1995 was i

11.7 percent. The capacity portfolio reflected in Duquesnis capacity margin includes in-service generating capacity, plus 21 MW capacity provided by non-utility generation contracts, plus a portion of the capacity from property held for future use available to meet customer needs during peaking or emergency conditions.

The customer peak demand reflected in Duquesnis capacity margin is based on the actual peak demand expe-rienced during the extraordinarily hot 1995 summer weather conditions, less 97 MW ofinterruptible load resources available from Duquesne's interruptible customers, but not actually interrupted during the peak period.

The successful resolution of Duquesnis proposed sale ofits ownership interest in Ft. Martin will reduce in-service capacity by 276 MW. Duquesne expects to replace Ft. Martin capacity by(1) utilizing the i

168 MW oil-fired combustion turbines at the BI combined cycle facility, which is property heldforfuture use, and (2) acquiring seasonal peaking capacity from power marketplace resources, as required. These additional resources ensure that adequate capacity will be available to enable Duquesne to continue to maintain the expected !cvel of power generation reliability.

10

e a

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

Duquesne owns Warwick Mine, an underground mine located on the Monongahela River approximate-ly 83 river miles from Pittsburgh. Warwick Mine has been excluded from rate base since 1981. Duquesne temporarily idled the mine in June 1988 due to excess coal inventories. In 1990, Duquesne restarted the mine and entered into an agreement under which an unaffiliated company will operate the mine until March 2000 and sell the coal produced. Production began in late 1990. The mine produced 1.1 million cons of coal in 1995. The Warwick Mine coal reserves include both high and low sulfur coal; the sulfur content averages in the mid-range at 1.7 percent to 1.9 percent. More than 60 percent of the coal mined at Warwick Mine cur-rently is used by Duquesne. Duquesne receives a royalty on any sales ofWarwick coal in the open market.

These royahics are credited to Duquesne's ECR. The Warwick Mine currently supplies less than one-fifth of the coal used in the production of electricity at the plants owned or jointly owned by Duquesne. Duquesne i

estimates that, at December 31,1995, its economically recoverable coal reserves at Warwick Mine were 9.0 million cons. Costs at Warwick Mine and Duquesne's investment in the mine are expected to be recovered through the cost of coal in the ECR. Recovery is subject to the system-wide coal cost standard. Duquesne also has an opportunity to earn a return on its investment in the mine through the cost of coal during the period of the system-wide coal cost standard. At December 31,1995, Duquesne's net investment in the mine was $14.9 million. The current estimated liability, including final site reclamation, mine water treatment and certain labor liabilities, for mine closing is $34.1 million, and Duquesne has recorded a liabiliry on the consolidated i

balance sheet of approximately $15.9 million toward these costs. (See "Warwick Mine Costs" discussion in Note F to the consolidated financial statements on page 50.)

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

The PUC has established two market price coal cost standards. One applies only to coal delivered at the Bruce Mansfield Power Sution (Bruce Mansfield). The other, the system-wide coal cost standard, applies to coal delivered to the remainder of Duquesne's system. Both standards are updated monthly to reflect prevail-ing market prices of similar coal. The PUC has directed Duquesne to defer recoverv of the delivered cost of coal to the extent that such cost exceeds generally prevailing market prices for similar coal, as determined by the PUC. The PUC allows deferred amounts to be recovered from customers when the delivered costs of coal fall below such PUC-determined prevailing market prices.

He system-wide coal cost standard extends through March 2000. The unrecovered cost of Bruce Mansfield coal was $8.4 million and the unrecovered cost of the remainder of the system-wide coal was $4.4 million at December 31,1995. Duquesne estimates that all deferred coal costs will be recovered. Duquesne's average cost per ton of coal consumed, including the cost of delivery, during the past three years at generating units v/hich it operates or in which it has an ownership interest was $38.86, $39.12 and $40.08 in 1995,1994 and 1993, respectively. The cost of coal, which falls within the market price limitations, is recovered from Duquesne's customers through the ECR. (See " Rate Matters" discussion on page 6, and also see " Deferred Coal Costs" discussion in Note F to the consolidated financial statements on page 49.)

Nuclear Fuel The cycle of production and utilization of nuclear fuel consists of(1) mining and milling of uranium ore and processing the ore into uranium concentrates, (2) converting uranium concentrates to uranium hex-11

1 1

l 1

afluoride, (3) enriching the uranium hexafluoride, (4) fabricating fuel assemblies, (5) utilizing the nudear fuel in the generating station reactor and (6) storing and disposing of spent fuel.

l Adequate supplies of uranium and conversion services are under contract for Duquesne's requirements for its jointly owned / leased nuclear units through 1996. Enrichment services are supplied under a 1984 United l

States Enrichment Corporation Utility Services Contract entered into for a period of 30 years by Duquesne for joint interests in Perry Unit 1. BV Unit I and BV Unit 2. Under the terms and conditions of this contract, Duquesne is committed to 100 percent ofits enrichment needs through 1998 and 70 percent in 1999; i

Duquesne has terminated, at zero cost, all ofits enrichment services requirements for fiscal years 2000 through 2005 and continues to review the need for further services on an annual basis. Fuel fabrication con-tracts are in place to supply reload requirements for the next two cycles for BV Unit 1, the next two cycles for BV Unit 2 and the next sixteen cydes for Perry Unit 1. Duquesne will be required to make arrangements for uranium supply and related services as existing commitments expire.

Each utility company is responsible for financing its proportionate share of the costs of nuclear fuel for each nudear unit in which it has an ownership or leasehold interest. (See "Nudear Fuel Leasing" discussion on page 6.) Duquesne's nudear fuel costs, which are amortized to reflect fuel consumed, are charged to fuel expense and are recovered through rates. Duquesne estimates that, over the next three years, the amortization of nudear fuel consumed will exceed the expenditures for new fuel by approximately $1.7 million. The actual nuclear fuel costs to be financed and amortized during the period 1996 through 1998 will be influenced by such factors as changes in interest rates; lengths of the respective fuel cycles; reload cycle design; and changes in nuclear material costs and services, the prices and availability of which are not known at this time. Such costs may also be influenced by other events not presently foreseen.

Duquesne's nuclear fuel costs related to BV Unit 1, BV Unit 2 and Perry Unit I under the fuel lease arrangement are charged to fuel expense based on the quantity ofenergy generated. Nuclear fuel costs for these units averaged.750,.903 and.918 cents per KWH, indusive ofcharges associated with spent fuel, in l

1995,1994 and 1993, respectively. Duquesne is recovering from its customers the costs associated with the ultimate disposal ofspent fuel.

l Nuclear Decommissioning The PUC ruled that recovery of the decommissioning costs for BV Unit I could begin in 1977, and that recovery for BV Unit 2 and Perry Unit I could begin in 1988. Duquesne expects to decommission BV Unit 1, BV Unit 2 and Perry Unit I no earlier than the expiration of each plant's operating license,2016, 2027 and 2026, respectively. BV Unit 1 is expected to be pbced in safe storage until the expiration of the BV Unit 2 operating license, at which time the units may be decommissioned together.

Based on site-specific studies finalized in 1992 for BV Unit 2, and in 1994 for BV Unit 1 and Perry Unit 1, Duquesne's share of the total estimated decommissioning costs, including removal and decontamination costs, currently being used to determine Duquesne's cost ofservice, are $122 million for BV Unit 1 $35 mil-lion for BV Unit 2 and $67 million for Perry Unit 1.

l In conjunction with an August 18,1994 PUC Accounting Order. Duquesne has increased the annual l

contribution to its decommissioning trusts by approximately $2 million to bring the total annual funding to approximately $4 million per year. In collaboration with Duquesne and several other Pennsylvania utilities, the PUC Office of Special Assistants is evaluating various decommissioning issues, including funding methods.

Duquesne expects that any action relating to any forthcoming PUC report will result in further increases in annual contributions to its decommissioning trusts. Consistent with these anticipated future PUC actions, Duquesne's petition before the PUC for the sale ofits ownership intercsr in the Ft. Martin Power Station pro-vides for additional annual contributions to its nuclear decommissioning funds of $5 million for five years without any increase in existing electric rates. (See

• Sale of Ft. Martin" discussion on page 9.)

Duquesne records decommissioning costs under the category of deptrelation andamonization expense l

and accrues a liability, equal to that amount, for nuclear decommissioning expense. Such nuclear decommis-12 l

l i

sioning funds are deposited in external, segregated trust accounts. The funds are invested in a portfolio ofmunic-ipal bonds, certificates of deposit and United States government securities having a weighted average duration of four to seven years. Trust fund earnings increase the fund balance and the recorded liability. The market value of the aggregate trust fund balances at December 31,1995, totaled approximately $28.5 million. On Duquesne's consolidated balance sheet, the decommissioning trusts have been reflected in other long-term invest-ments, and the related liability has been recorded as other non-currentliabilities.

I Nuclear Insurance All of the companies with an interest in BV Unit 1, BV Unit 2 and Perry Unit I maintain nuclear proper-ry insurance, which provides coverage for property damage, decommissioning and decontamination liabilities.

Duquesne's share of this program provides for $1.2 billion ofinsurance coverage for its net investment of $407.8 million in the BVPS and $565.5 million in Perry Unit 1, plus its interest in BV Unit 2 with lease commitments of $405.2 million, at December 31,1995. The lease commitments of $405.2 million represent the net present value of future lease payments discounted at 10.94 percent, the return currendy authorized Duquesne by the PUC. Duquesne would be responsible for its share of any damages in excess ofinsurance coverage. In addition,

)

if the property damage reserves of Nuclear Electric Insurance Limited (NEIL), an industry mutual insurance company, are inadequate to cover claims arising from an incident at any United States nuclear site covered by that insurer, Duquesne could be assessed retrospective premiums totaling a maximum of $10.9 million.

The Price-Anderson Amendments to the Aromic Energy An of1954 limit public liability from a single inci-dent at a nuclear plant to $8.9 billion. Duquesne has purchased $200 million ofinsurance, the maximum amount available, which provides the first level of fmancial protection.

Additional protection of $8.3 billion would be provided by an assessment of up to $75.5 million per inci-dent on each nuclear unit in the United States. Duquesne's maximum total assessment, $56.6 million, which is based on its ownership or leaschold interests in three nuclear generating units, would be limited to a maximum of $7.5 million per incident per year. A further surcharge of 5 percent could be levied if the total amount.of public claims exceeded the funds provided under the assessment program. Additionally, a s: ate premium tax may be charged on the assessment and surcharge. Finally, the United States Congress could impose other rev-enue-raising measures on the nuclear industrf if funds prove insufficient to pay claims.

Duquesne carries extra expense insurance which would pay the incremental cost of any replacement i

power purchased (in addition to costs that would have been incurred had the units been operating) and other incidental expense after the occurrence of certain types of accidents at its nuclear units in a limited amount for a limited period of time. The coverage provides for 100 percent of the estimated extra expense per week during the 52-week period starting 21 weeks after an accident and 80 percent ofsuch estimate per week for the follow-ing 104 weeks, with no coverage thereafter. The amount and duration of actual extra expense could substantial-ly exceed insurance coverage. NEIL also provides this insurance. If NEll's reserves are inadequate to cover claims at any United States nuclear site covered by that insurer, Duquesne could be assessed retrospective premi-ums totaling a maximum of $3.5 million.

Spent Nuclear Fuel Disposal The Nuclear Waste Policy Act ofl982 established a policy for handling and disposing of spent nuclear fuel and a policy requiring the established final repository to accept spent fuel. Electric utility companies have entered into contracts with the DOE for the permanent disposal ofspent nuclear fuel and high-level radioactive waste in compliance with this legislation. The DOE has indicated that its repository under these contracts will not be available for acceptance of spent fuel before 2010 at the earliest. Existing on-site spent fuel storage capac-ities at BV Unit 1, BV Unit 2 and Perry Unit 1 are expected to be sufficient until 2016,2010 and 2011, respec-tively.

13

1 1

Uranium Enrichment Decontamination and Decommissioning Fund l

Nuclear reactor licensees in the United States are assessed annually for the decontamination and decommissioning of DOE uranium enrichment facilities. Assessments are based on the amount of uranium a utility had processed for enrichment prior to enactment of the NationalEnergy Policy Act ofl992 (NEPA) and are to be paid by such utilities over a 15-year period. At December 31,1995, Duquesne's liability for contri-butions is approximately $9.9 million (subject to an inflation adjustment). Contributions, when made, are recovered from electric utility customers through the ECR.

Environmental Matters The Compnhensive EnvironmentalResponse, Compensation and Liability Act of1980 and the Superfund Amendments and Reauthorization Act of1986(Superfund) established a variety ofinformational and environ-mental action programs.The United States Environmental Protection Agency (EPA) has informed Duquesne 1

ofits involvement or potential involvement in three hazardous waste sites. Duquesne has reached agreements to make minimal financial payments related to two of the three sites in order to resolve any associated liability.

If Duquesne is ultimately determined to be a responsible party with respect to the remaining site, it could be i

liable for all or a portion of the cleanup costs. However, other solvent, potentially responsible parties that may bear all or part of any liability are alsn involved. In addition, Duquesne believes that available defenses, along

)

with other factors (including overall limited involvement and low estimated remediation costs) will limit any potential liability that Duquesne may have for cleanup costs. Duquesne believes that it is adequately reserved

{

for all known liabilities and costs and, accordingly, that this matter will not have a materially adverse effect on its financial position or results ofoperations.

In 1990, Congress approved amendments to the Clean Air Act, which established the Emission Allowance Trading System. Allowances are issued by the EPA to fossil-fired stations with generating capability of more than 25 MW that were in existence as of the passage of the 1990 amendments. Allowances are part of an innovative market-based approach to sulfur dioxide (SO ) reduction. Emission allowances can also be 2

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

Although Duquesne has satisfied all of the Phase I requirements of the Chan Air Act, Phase 11 requires significant additional reductions of SO, and oxides of nitrogen (NOx) by the year 2000. Duquesne currently I

has 662 MW of nuclear capacity,1,187 MW of coal capaci:y equipped with SO, emission reducing equipment (including 300 MW ofproperty heldforfutun use at Phillips) as well as 757 MW of capacity that meets the 1995 standards of the Chan Air Act Amendmenu through the use oflow sulfur coal. Through the year 2000, Duquesne is considering a combination of compliance methods that include fuel switching; increased use of, and improvements in, SO, emission reducing equipment; low NOx burner technology; and the purchase of emission allowances. Flue gas conditioning and post combustion NOx reduction technologies may also be employed if economically justified. In addition, Duquesne is examining and developing innovative emissions technologies designed to reduce costs. Duquesne continues to work with the operators ofits jointly owned sta-tions to implement cost-effective compliance strategies to meet these requirements. NOx reductions under Title IVofthe Chan Air Actwere required at Cheswick, and the work to achieve the reductions was completed in 1993. The ozone attainment provisions of Tith / ofthe Clean Air Act Amendments also required NO reduc-x tions by mid-1995 at Cheswick, Elrama and Bruce Mansfield. Duquesne achieved such reductions using innovative combustion system modifications and low NOx burner technology. Duquesne currently estimates that additional capital costs to comply with Clean Air Act requirements through the year 200 will be approxi-mately $20 million. This estimate is subject to the finalization of federal and state regulations and the PUC approval of the sale of Duquesne's interest in the Ft. Martin Power Station. (See

• Sale of Fr. Martin" discus-sion on page 9.)

Duquesne has developed, patented and installed low NO burner technology for the Elrama boilers.

x These cost-effective NO reduction systems installed on the Elrama roof fired boilers was specified as the x

benchmark for the industry for this class of boilers in the EPA's pending Group 11 rulemaking. Duquesne is also currently evaluating additional low cost, developmental NOx reduction technologies at Cheswick and 14

I Elrama. An Artificial Neural Network control system enhancement, co-sponsored by the Electric Power i

Research Institute and Duquesne, will be demonstrated at Cheswick. The Gas Research Institute and Duquesne are sponsoring a targeted natural gas reburn demonstration at Elrama. Both demonstrations will be completed in 1996.

As required by Title Vofthe Clean Air Act Amendments, Duquesne has filed comprehensive air operat-ing permit applications for Cheswick, Elrama, BI and Phillips during the last half of 1995. Duquesne also filed its TideIVPhase ll Clean Air Act compliance plan with the PUC on December 27,1995.

Duquesne is closely monitoring other potential future air quality programs and air emission control requirements, including additional NO, control requirements that were recommended for fossil fuel plants by the Ozone Transport Commission and the potential for more stringent ambient air quality and emission stan-dards for SO, paniculates, and other by-products of coal combustion. As these potential programs are in vari-ous stages of discussion and consideration, it is impossible to make reasonable estimates of the potential costs and impacts, if any.

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

l Duquesne is involved in various other environmental matters. Duquesne believes that such matters, in j

total, will not have a materially adverse effect on its financial position or results of operations.

i Outlook Competition l

The electric utility industry is undergoing fundamental change in response to the open transmission access and increased availability of energy alternatives fostered by NEPA which has served to increase comperi-tion in the industry. Previously captive customers are seeking freedom to choose alternative suppliers of ener-gy. These competitive pressures require utilities to offer competitive pricing and terms to retain customers and to develop new markets for the optimal utilization of their generation capacity.

At the national level, NEPA was designed to encourage competition among electric utility companies, improve energy resource planning and to encourage the development of alternative sources of energy. NEPA authorizes the FERC to require electric utilities to provide wholesale suppliers of electric energy with nondis-criminatory access to the utility's wholesale transmission system. In response to this mandate, the FERC has issued a Notice of Proposed Rulemaking (NOPR) on Open Access Nondiscriminatory Transmission Services and a supplemental NOPR on the Recovery of Stranded Costs. The NOPR on open access transmission would define the terms under which independent power producers, neighboring utilities and others could gain access to a utility's transmission grid to deliver power to customers. The supplemental NOPR on strand-ed costs would address the issue of recovery of a utility's unrecovered costs that were incurred to provide ser-vice to customers that subsequently leave a utility's system in favor of another supplier. A final order is expected in mid-1996 on both NOPRs. Also, in January 1996, the FERC announced its plans to reconsider its public utility merger guidelines. The FERC actions are expected to have a significant impact on competi-tion in the electric utility industry.

In Pennsylvania, the PUC currently is conducting an investigation concerning regulatory reform and has indicated an intention to issue a report to the governor and the Pennsylvania General Assembly by June 1996. The PUC staffissued an interim report in August 1995 that recommended that retail wheeling not be 15

implemented at that time because of concerns that retail wheeling would benefic large industrials at the expense of smaller customers and utility shareholders, who would absorb the costs of stranded investments, and that service reliability could be impaired. The report concludes that performance-based ratemaking, wholesale competition and utility cost cutting could provide the benefits of retail wheeling without the atten-

]

dant disruptions.

i Duquesne is aware of the foregoing federal and state regulatory and business uncertainties, and is attempting to position itself to operate in a more competitive environment. Its current rate structure allows some flexibility in setting rates to retain its customer base and attract new business. Furthermore, as discussed

• below, open access transmission offers Duquesne the opportunity to sell power on a market basis to customers outside ofits service terntory.

Duquesne has proposals befo:e both the FERC and the PUC that address specific issues relating to its competitive position. Because of Duquesne's current electric generating configuration, some ofits baseload capacity is used less than optimally. Two options Duquesne is currently considering to align its generating capabilities more closely with customer demand are discussed in " Transmission Access" below and 1

" Generation Resource Optimization" on page 17. First, through open transmission access, Duquesne is seek-i ing to increase its level of fixed demand through the negotiation oflong-term power sale contracts to cus-i comers outside its service territory. Second, Duquesne proposes to change its generation profile through the sale ofits interest in the Ft. Martin Power Station.

As part ofits petition currently before the PUC with respect to the sale ofits interest in Ft. Martin, Duquesne has proposed, among other concessions, a five-year freeze on base rates and a five-year annual $5 million credit to the ECR (which would otherwise remain unaffected by the freeze) to compensate Duquesne's electric utility customers for short-term power sales foregone by the sale ofits interest in the plant. (See " Sale of Ft. Martin" discussion on page 9.) Although Duquesne believes a rate freeze will enable it to maintain and expand its existing customer base, if the rate freeze is implemented, Duquesne could face the risk of reduced rates of return if unforeseen costs arise and if revenues from sales prove inadequate to fund those costs.

Finally, as noted above, open access transmission requirements implicitly create the potential for strand-ed costs. To address these issues, Duquesne has implemented, and will continue to evaluate, the accelerated depreciation ofits generating assets as one method to guard against the competitive risks ofstranded invest-ments. (See " Operating Expenses" discussion on page 4.) At present, the FERC and the PUC appear support-ive ofstranded cost recovery; however, implementation details for recovery ofstranded costs are extremely vague and far from decided. The petition for the sale of Duquesne's ownership interest in the Ft. Martin Power Station currently before the PUC proposes to further increase depruiarion andamorrization expense related to Duquesne's nuclear power investment by $75 million over a three-year period. This petition also proposes to record a one-time write-down in the value of Duquesne's nuclear plant investment of approxi-mately $130 million and to increase by $5 million the annual contribution to Duquesne*s nuclear plant decommissioning funds, for a total of $25 million in contributions over the next five years. (See " Sale of Ft.

Martin" discussion on page 9.) These current and proposed accelerated investment cost recovery measures will be absorbed by Duquesne without an increase in base rates.

Duquesne believes that these and similar initiatives will strengthen its position to succeed in a more competitive environment by eliminating the need to charge its electric utility customers in the future for these currently recognized expenses. At this time, however, there is no assurance as to the extent to which Company initiatives can or will ultimately climinate regulatory and other uncertainties associated with increased compe-tition.

Transmission Access in March 1994, Duquesne submitted, pursuant to the FederalPower Act, two separate " good faith" requests for transmission service with APS and the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM Companics), respectively. Each request is based on 20-year firm service with flexible delivery points for 300 MW of transfer capability over the APS and PJM Companies transmission networks, which 16

~

i l

l together extend from western Pennsylvania to the East Coast. Because of a lack of progress on pricing and other issues, on August 5 and September 16,1994, Duquesne filed with the FERC applications for transmis-sion service from the PJM Companies and APS, respectively. The applications are authorized under Section 211 of the Federa/IguerAct, which requires electric utilities to provide firm wholesale transmission ser-vice. In May 1995, the FERC issued proposed orders instructing APS and the PJM Companies to provide transmission service to Duquesne and directing the parties to negotiate specific rates, terms and conditions.

Duquesne was unable to agree to terms for transmission service with either APS or the PJM Companies. Briefs were filed with the FERC outlining the areas ofdisagreement among the companies. The matter is now pend-ing before the FERC. Duquesne cannot predict the final outcome of these proceedings.

Generation Resource Optimization Duquesne's plans for optimizing generation resources are designed to reduce underutilized generating capacity, promote competition in the wholesale marketplace, maintain stable prices and meet customer-speci-fied levels ofservice reliability. Duquesne is committed to explore firm energy sales to wholesale customers, system power sales, system power sales with specific unit back-up, unit power sales, generating asset sales and any other approach to efficiently managing capacity and energy.

The propued sale of Duquesne's ownership interest in the Fr. Martin Power Station demonstrates l

Duquesne's ongoing efforts to optimize the utilization of generation resources. (See " Sale of Ft. Martin" dis-cussion on page 9.) The sale is expected to reduce power production costs by employing a cost-effective source i

of peaking capacity through enhanced reliability of the simple cycle units at Bl. Implementation of the pro-posed plan will better align Duquesne's generating capabilities with its native load requirements.

Customer Service Guarantecs i

Duquesne's commitment to provide reliable, quality service to its customers is characterized by its cus-j l

tomer service guarantees. On March 6,1995, Duquesne became the first Pennsylvania regulated utility, and I

the third in the United States, to offer its residential customers guarantees ofits commitment to courteous, i

l reliable and efficient service. Duquesne offers a $25 credit to a customer's account if Duquesne fails to provide l

i accurate billings; to meet punctual service appointments; to extend prompt, courteous and professional ser-I vice; or to connect new services within one day of the date requested by the customer.

i Customer Advanced Reliability System l

In January 1996, Duquesne announced its Customer Advanced Reliability System, a new communica-tions service that will provide its customers with superior levels ofservice reliability, security and convenience.

l Duquesne has signed a long-term, full service contract with Itron, Inc. (Irron), a leading supplier of energy information and communication solutions to the electric utility industry. Over the next two years, Itron will

(

install, operate and maintain a communications network that will provide Duquesne with an electronic link to l

its 580,000 customers.

The Customer Advanced Reliability System is designed to respond to customer needs on the basis of immediate information about the status of pcwer delivery at individual homes and businesses. This electronic l

communications service is another major element in Duquesne's multi-step plan to make Duquesne's opera-l tions more competitive and efficient.

i Other Financial Accounting Pronouncement

(

ne Financial Accounting Standards Board issued Statement ofFinancialAccounting Standards No.121, Accountingfor the Impairment ofLong-LivedAssets andfor Long-LivedAssets to be Disposed Of(SFAS No.121),

17 c

in March 1995. This statement is effective for years beginning after December 15,1995. Duquesne antici-pates adopting this standard on January 1,1996, and does not expect that it will have a material impact on its l

financial position or results of operations, based on the current regulatory structure in which it operates. As competitive factors influence pricing in the utility industry, this opinion may change in the future. The gener-al requirements of SFAS No.121 apply to non-current assets and require impairment to be considered when-

)

ever evidence suggests that it is no longer probable that future cash flows in an amount at least equal to the asset will result.

j Retirement Plan Measurement Assumptions Duquesne decreased the discount rate used to determine the projected benefit obligation on Duquesne's retirement plans at December 31,1995, to 7.0 percent. The assumed change in future compensa-tion levels was also decreased to reflect current market and economic conditions. The effects of these changes I

on Duquesne's retirement plan obligations are reflected in the amounts shown in " Employee Benefits," Note M to the consolidated financial statements on page 56. The resulting change in related expenses for subse-quent years is not expected to be material.

l Exuptfor historicalinformation contained herein, the matters discussedin this AnnualReport on Form 10-K, areforward-lookingstatements that involve risks and uncertainties including, but not limited to, economic, 1

competitive, governmentaland technologicalfactors afecti~g Duquesnes operations, markets, products, services and prices, and otherfactors discussedin Duquesnesplings with the Securities and Exchange Commission.

Executive Officers of the Registrant Set forth below are the names, ages as ofMarch 1,1996, positions and brief accounts of the business experience during the past five years of the executive officers of Duquesne.

Name Age Office Wesley W. von Schack 51 Chairman of the Board since September 1987 and Chief Executive Officer since January 1986.

President from January 1986 to February 1995.

David D. Marshall 43 President and Chief Operating Officer since February 1995. Executive Vice President from February 1992 to February 1995, Assistant to the President from October 1990 to February 1992, and Vice President-Corporate Development from August 1987 to February 1992.

Gary L Schwass 50 Senior Vice President since February 1995 and Chief Financial Officer since July 1989. Vice President-Finance from May 1988 to February 1995.

18

. _ _ _ - =

~

i 1

Name Ass OHice James E. Cross 49 Senior Vice President - Nuclear since February 1995.

Vice President - Nuclear from September 1994 to February 1995. Formerly Vice President, Thermal Operations, and Chief Nuclear Officer of Portland General Sectric from May 1993 to September 1994; Vice President and Chief Nuclear Officer of Portland General Electric from December 1991 to May 1993; and Vice President, Nuclear, of Portland General Electric from May 1990 to December 1991.

Dianna L Green 49 Senior Vice President - Customer Operations since April 1995. Senior Vice President - Administration from February 1995 to April 1995. Vice President -

Administrative Services from August 1988 to February 1995.

Roger D. Beck 59 Vice President - Customer Services since April 1995.

i Vice President - Marketing and Customer Services from August 1986 to April 1995.

Gary R. Brandenberger 58 Vice President - Power Supply since August 1986.

William J. DeLeo 45 Vice President - Marketing and Corporate Performance since April 1995. Vice President - Corporate Performance and Information Services from January 1991 to April 1995.

Victor A. Roque 49 Vice President since April 1995 and General Counsel since November 1994. Previously Vice President, General Counsel and Secretary for Orange and Rockland Utilities from April 1989 to November 1994.

Donald J. Clayton 41 Treasurer sinceJanuary 1995. Assistant Treasurer from i

May 1990 toJanuary 1995 and Manager, Valuation and Property Records, from August 1985 to May 1990.

Morgan K. O'Brien 35 Controller and Principal Accounting Officer since October 1995. Assistant Controller from December 1993 to October 1995. Manager, Corporate Taxes, from September 1991 to December 1993. Previously Assistant Vice President - Corporate Taxes at PNC Financial Corporation from 1990 to September 1991.

1 19

i ITEM 2. PROPERTIES.

i Duquesne's properties consist ofelectric generating stations, transmission and distribution facilities, l

and supplemental properties and appurtenances, comprising as a whole an integrated electric utility system, l

located substantially in Allegheny and Beaver counties in southwestern Pennsylvania.

l l

l Duquesne owns all or a portion of the following generating units except Beaver Valley Unit 2, which is l

leased.

Duquesne's Share of Net Plant Output Capacity Year Ended l

(Megawatts)

December 31,1995 Name and Iecation Typs Su = =~

Winter (Menawatt-hours) i Cheswick Coal 562 570 3,431,410 j

Springdale, Pa.

Ft. Martin Unit 1 (1)

Coal 276 276 1,054,790 Maidsville, W. Va.

Elrama Coal 474 487 2,411,635 l

Elrama, Pa.

Sammis Unit 7 (1)

Coal 187 187 1,008,249 Stratton, Ohio l

Eastlake Unit 5 (1)

Coal 186 186 896,065 Eastlake, Ohio Beaver Valley Unit 1 (1)

Nuclev 385 385 2,598,215 Shippingport, Pa.

j l

Beaver Valley Unit 2 (1)

Nuclear 113 113 856,249 Shippingport, Pa.

Perry Unit 1 (1)

Nuclear 161 164 1,255,429 l

l North Perry, Ohio l

Bruce Mansfield Unit 1 (1)

Coal 228 228 1,047,989 Shippingport, Pa.

Bruce Mansfield Unit 2 (1)

Coal 62 62 168,360 Shippingport, Pa.

Bruce Mansfield Unit 3 (1)

Coal 110 110 310,341 i

Shippingport, Pa.

Brunot Island Oil 54 66 (858) l Brunot Island, Pa.

Total 2,798 2,834 15.037.874 Property held for future use:

Brunot Island Oil 204 240 Phillips Coal 300

_3.Lo Total 3302 3384 (1)

Amounts represent Duquesne's share of the unit which is owned by Duquesne in common with one or more other electric utilities (or, in the case of Beavei Valley Unit 2, leased by Duquesne).

Duquesne owns 25 transmission substations (including interests in common in the step-up transform-l crs at Fort Martin Unit 1: Sammis Unit 7; Eastlake Unit 5; Bruce Mansfield Unit 1: Beaver Valley Unit 1; Beaver Valley Unit 2; Perry Unit 1; Bruce Mansfield Uni

• 2; and Bruce Mansfield Unit 3) and 562 distribu-tion substations. Duquesne has 714 circuit-miles of transmission lines, comprising 345,000,138,000 and 69,000 volt lines. Street lighting and distribution circuits of 23,000 volts and less include approximately 50,000 miles oflines anci cable.

20

Duquesne owns the Warwick Mine, including 4,849 acres owned in fee of unmined coal lands and mining rights, located on the Monongahela River in Greene County, Pennsylvania, approximately 83 river miles from Pittsburgh. (See Item 1. BUSINESS. " Fossil Fuel" discussion on page 11.)

Duquesne's 1947 mongage bond indenture was retired in the third quaner of 1995 following the maturi-ty of the last bond series issued under the indenttire. All First Collateral Trust Bonds have been issued under a new mortgage indenture that was established in April 1992 (the 1992 Indenture). The 1992 Indenture includes more flexible provisions and eliminates conventions such as mandatory sinking funds and formula-derived maintenance and replacement clauses.

Additional information relating to hem 2. PROPERTIES, is set forth in Note B, " Property, Plant and Equipment," of the consolidated financial statements for year ended December 31,1995, on page 46. The information is incorporated here by reference.

ITEM 3. LEGAL PROCEEDINGS.

Rate-Related legal Proceedings, Property, Plant and Equipment-Related Legal Proceedings and Environmental Legal Proceedings Eastlake Unit 5 In October 1995, CEI commenced an action (Action) in the Common Pleas Coun of Lake County, Ohio, seeking to enjoin Duquesne from seeking a partition of the Unit, through arbitration or otherwise, on the basis of a waiver ofpartition contained in the deed to the Unit. It is Duquesne's position that the deed covenant is unenforceable by CEI due to CEI's bad faith conduct toward Duquesne. Duquesne removed the Action to the United States INstrict Court for the Northern District of Ohio, where it is now pending, and then, brought a motion requesting that all claims in dispute between the parties (including its arbitration claims) be heard by the Court or, alternatively, that the Court stay the Action and compel arbitration of all claims and filed an answer and counterclaims. This motion and nine other motions are pending before the Coun. Until order of the federal court is issued on this issue, both the arbitration and the federal litigation are proceeding.

Proceedings involving Duquesne's rates are reponed in Item 1. BUSINESS

• Rate Matters."

Proceedings involving Property, Plant and Equipment are reported in item 1. BUSINESS " Property, Plant and Equipment." Proceedings involving environmental matters are reported in Item 1. BUSINESS

" Environmental Matters."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

PART II ITEM 5. MARKLT FOR REGISTRANT'S COMMON EQUITY AND RF1ATED SIIARE-IIOLDER MATTERS.

Duquesne's common stock is not publicly traded. Effective July 7,1989, Duquesne became a wholly owned subsidiary of DQE, the holding company formed as part of a shareholder-approved restructuring. As a result of the restructuring, Duquesne's shareholders received DQE common stock in exchange for their shares of Duquesne common stock, which were cancelled. DQE owns all of Duquesne's outstanding common stock,which consists of to shares. As such, this item is not applicable to Duquesne because all its common equity is held solely by DQE. During 1995 and 1994, Duquesne declared quarterly dividends on its com-mon stock totaling $144 million each year.

21

l ITEM 6. SELECTED FINANCIAL DATA.

Selected financial data for Duquesne for each year of the six-year period ended December 31,1995, are set forth on page 63. The financial data is incorporated here by reference.

)

l ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDI-1 TION AND RESULTS OF OPERATIONS.

Management's discussion and analysis of financial condition ar.d results of operations are set forth in Item 1. BUSINESS. The discussion and analysis are incorporated here by reference.

l l

ITEM 8. CONSOLIDATED FINANCIALSTATEMENTS AND SUPPLEMENTARY l

DATA.

l l

The Consolidated Balance Sheet of Duquesne Light Company and its Subsidiary as of December 31, 1995 and 1994, and the related Statements of Consolidated Income, Retaind Earnings and Cash Flows for cach of the three years in the period ended December 31,1995, together with the Independent Auditors' Report dated January 30,1996, are set forth in pages 38 to 62 of this Report. The consolidated financial statements and report are incorporated here by reference. Quarterly financial information is included on page 62 in Note O to Duquesne's consolidated financial statements and is incorporated here by reference.

i t

ITEM 9. CIIAEGES IN AND DISAG.REEMENTS WI'III ACCOUNTANTS ON 4CCOUNTING AND FINANCIAL DISCIDSURE.

l None.

PARTIII ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

l l

All directors of DQE are also directors of Duquesne. Information relating to DQE's and Duquesne's l

board of directors is set forth on page 20 of the 1995 DQE Annual Report to Shareholders filed here as part l

of this Report in Exhibit 99.2. The information is incorporated here ay reference. Information relating to the executive officers of the Registrant is set forth in Part I of this Report under the caption " Executive Officers of the Registrant."

ITEM 1I. EXECUTIVE COMPENSATION.

l The information relating to executive compensation is set forth in Exhibit 99.1, filed as part of this Report. The information is incorporated here by teference.

ITEM 12. SECURITY OWNERSIIIP OF CERTAIN BENEFICIAL OWNERS AND l

MANAGEMENT.

t DQE is the beneficial owner and holder of all shares of outstanding Common Stock, $1 par value, of Duquesne Light, consisting of 10 shares as of February 21,1996. Information relating to the ownership of equity securities of DQE and Duquesne Light by directors and executive officers of Duquesne Light is set forth in Exhibit 99.1, filed as part of this Report. The information is incorporated here by reference.

22

l i

ITEM 13. CERTAIN RELNTIONSIIIPS AND RELATED TRANSACTIONS.

None.

PARTIV ITEM I4. EXIIIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) The following information is set fonh here on pages 38 through 62:

Report ofIndependent Cenified Public Accountants.

Statement of Consolidated income for the Three Years Ended December 31,1995.

Consolidated Balance Sheet, December 31,1995 and 1994.

Statement of Consolidated Cash Flows for the Three Years Ended December 31,1995.

Statement of Consolidated Retained Earnings for the Three Years Ended December 31,1995.

Notes to Consolidated Financial Statements.

(a)(2) The following financial statement schedule and the related Repon ofIndependent Certified Public Accountants (See page 38.) are filed here as a pan of this Report:

Schedule for the Three Years Ended December 31,1995:

II Wluation and Qualifying Accounts.

The remaining schedules are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the financial statements or notes to the financial statements.

(a)(3) Exhibits are set forth in the Exhibit List on pages 24 through 34, and incorporated here by refer-ence. Documents other than those designated as being filed here are incorporated here by reference.

Previously filed documents incorporated by reference to a DQE Annual Report on Form 10-K, a Quarterly Report on Form 10-Qor a Current Report on Form 8-K are at Securities and Exchange Commission File No.

1-10290. Documents incorporated by reference to a Duquesne Light Company Annual Report on Form 10-K, Quanerly Report on Form 10-Qor a Current Report on Form 8-K are at Securities and Exchange Commission File No.1-956. The Exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by item 601(d)(10)(iii), of Regulation S-K.

(b) Reports or f orm 8-K filed during the twelve months ended December 31,1995:

(1)

May 22,1995 - Thefollowing event was wported:

Item 5. Federal Energy Regulatory Commission responded favorably to Section 211 applications filed by Duquesne Light Company for transmission service from the Pennsylvania-NewJersey-Maryland Power Pool and Allegheny Power System by issuing proposed orders requiring the provision of firm transmission service at comparable prices.

No financial statements were filed with this repon.

23

(2)

Daember 4,1995 - Thefollowing ewns was reported:

Item 5. On November 29,1995, Duquesne Light Company announced it will seek approval from the Pennsylvania Public Utility Coamission for a five-year freeze on base rates, the sale of Duquesne's interest in the 1 ort Martin Power Station, the accelerated depreciation of Duquesne's investment in its nuclear power plants and the return to service of three units at the Brunot Island Ibwer Station. In addition, Duquesne reiterated its proposal for the inclusion of all Pennsylvania electric utilities in a region wide independent transmission organization, and reaffirme/ :.4 commitment to the highest levels ofguaranteed customer service.

No financial statements were filed with this report.

EXHIBITS INDEX Exhibit 16thod of A

I h nson*

Fu:..

m.

3.1 Restated Articles of Duquesne Ugbr Company, as Exhibit 3.1 to the Form 10-K amended through December 19,1991 and as currendy Annual Report of Duquesne in effect.

Ught Company for the year ended December 31,1991.

3.2 By-Laws of Duquesne Ught Company, as amended Exhibit 3.2 to the Form 10-K

' through December 19,1991 and as currentiv < Tecc.

Annual Report of Duquesne Ught Company for the year ended December 31,1991.

4.1 Indenture dated March 1,1960, relating to Duquesne Exhibit 4.3 to the Form 10-K Ught Company's 5% Sinking Fund Debentures.

Annual Report of DQE for the '

year ended December 31,1989.

4.2 Indenture dated as of November 1,1989 retning to the Exhibit 4.4 to the Form 10-K issuanm of Duquesne Ught Company's unsecured Annual Report of DQE for the notes.

year ended December 31,1989.

4.3 Indenture of Mortgage and Deed ofTrust dated as of Exhibic 4.3 to Registration April 1,1992, securing Duquesne Ught Company's Statement (Form S-3)

First CollateralTrust Bonds.

No. 33-52782.

4.4 Supplemental Indentures supplementing the said Indenture of Mortgage and Deed ofTrust -

Supplemental Indenture No.1.

Exhibit 4.4 to Registration Statement (Form S-3)

No. 33-52782.

k Supplemental Indenture No. 2 through Supplemental

- Exhibit 4.4 to Registration Indenture No. 4.

Statement (Form S-3)

No. 33-63602.

Supplemental Indenture No. 5 through Supplemental Exhibit 4.6 to the Form 10-K j

Indenture No. 7.

' Annual Report of Duquesne Ught Company for the year ended December 31,1993.

24

l Exhibit Method of i

No.

Descrintion Filla.

SupplementalI, ture No. 8 and Supplemental Exhibit 4.6 to the Form 10-K Ir. denture No..

Annual Report of Duquesne Ught Company for the year ended Deumber 31,1994.

Supplemental Indenture No.10 through Supplemental Filed here.

Indenture No.12.

l I

Agreements relating tojoindy Owned Genenreing Units:

i l

10.1 Administration Agreement dated as of September 14 Exhibit 5.8 to Registration 1967.

Statement (Form S-7)

No. 2-43106.

i 10.2 Transmission Facilities Agreement dated as of September Exhibit 5.9 to Registration 14,1967.

Statement (Form S-7)

No. 2-43106.

10.3 Operating Agreement dated as of September 21,1972 Exhibit 5.1 to Registration for Eastlake Unic No. 5.

Statement (Form S-7)

No. 2-48164.

10.4 Memorandum of Agreement dated as ofJuly 1,1982 re Exhibit 10.14 to the Form 10-K reallocation of rights and liabilities of the companies Annual Repon of Duquesne under uranium supply contracts.

Ught Company for the year ended December 31,1987, 10.5 Operating Agreement dated August 5,1982 as of Exhibit 10.17 to the Form 10-K Septembs 1,1971 for Sammis Unit No. 7.

Annual Repon of Duquesne Ught Company for the year ended Deumber 31,1988.

10.6 Memorandum of Understanding dated as of March 31, Exhibit 10.19 to the Form 10 K 1985 re implementation of company-by-company Annual Repen of DQE for the management of uranium inventory and delivery.

year ended December 3!,1989.

10.7 Restated Operating Agreement for Beaver Valley Unit Exhibit 10.23 to the Form 10-K Nos. I and 2 dated September 15,1987.

Annual Report of Duquesne Ught Company for the year ended December 31,1987.

10.8 Operating Agreement for Perry Unit No. I dated Exhibit 10.24 to the Form 10.K March 10,1987.

Annual Report of Duquesne i

Ugl.t Company for the year l

ended December 31,1987.

I 10.9 Operating Agreement for Bruce Mansfield Units Nos.1.

Exhibit 10.25 to the Form 10-K 2 and 3 dated September 15,1987 as ofJune 1,1976.

Annual Repon of Duquesne Ught Company for the year ended ended December 31,1987.

25

i 4

l Exhibit

' Method of q

No.

Desc,Ian ta-Fai:.

10.10 Basic Operating Agreement, as amended January 1 Exhibit 10.10 to the Form 10-K 1993.

Annual Report of Duquesne Ught Company for the year ended December 31,1993.

1 i

10.11 Amendment No. I dated December 23,1993 to Exhibit 10.11 to the Form 10-K 4

Transmission Facilities Agreement (as ofJanuary 1, Annual Report of Duquesne Ught 1993).

Company for the year ended December 31,1993.

j 10.12 Microwave Sharing Agreement (as amended Exhibit 10.12 to the Form 10-K January 1,1993) dated Deamber 23,1993.

Annual Repon of Duquesne Ught Company for the year ended Decernber 31.1993.

1 10.13 Agreement (as of September 1,1980) dated Exhibit 10.13 to the Form 10-K l

December 23,1993 for termination or construction Annual Report of Duquesne Ught j

of cenain agreements.

Company for the year ended December 31,1993.

10.14 Fort Manin Construction and Operating Agreement Exhibit 10.14 to the Form 10-K dated April 30,1%5.

Annual Report of Duquesne Ught Company for the year ended December 31,1993.

10.15 -

Fon Manin Transmission Agreement dated Exhibit 10.15 to the Form 10-K March 15,1967.

Annual Report of Duquesne Ught Company for the year ended Deambor 31,1993.

10.16 Amendment ofJanuary 1,1988 to Fort Manin Exhibit 10.16 to the Form 10-K -

Transmission Agreement.

Annual Report of Duquesne Ught Company for the year ended Deanber 31,1993.

i 10.17 Fon Manin Power Station Asset Purchase Agreement Filed he e.

i dated as ofNovember 28,1995 i

l Agrrements nlating to theSaleandLeaseback ofBeaver Valley Uni No. 2:

10.18 Order of the Pennsylvania Public Utility Commission Exhibit 28.2 to the Form 10-Q dated September 25,1987 regarding the application

. Quanctly Report of Duquesne of the Duquesne Ught Company under Section 1102(a)(3)

Light Company for the quaner c,f the Public Utility Code for approval in connection with ended September 30,1987.

the sale and leaseback ofits interest in Beaver Valley Unit No.2.

26

r Exhibit Method of No.

Descriada-Fili -

10.19 Order of the Pennsylvania Public Utility Commission Exhibit 10.28 to the Form 10-K dated October 15,1992 regarding the Securities Annual Report of Duquesne Certificate of Duquesne Ught Company for the Ught Company for the year assumption ofcontingent obligations under ended December 31,1992.

financing agirements in connection with the refunding of Collateralized lease Bonds.

x10.20 Facility lease dated as of September 15,1987 between Exhibit (4)(c) to Registration The First National Bank of Boston, as Owner Trustee Statement (Form S-3) under a Trust Agreement dated as of September 15,1987 No. 33-18144.

with the limited partnership Owner Participant named therein, lessor, and Duquesne Ught Company, lessee.

y10.21 Facility lease dated as of September 15,1987 between Exhibit (4)(d) to Registration The Fi.rst National Bank of Boston, as Owner Trustee Statement (Form S-3)

l under a Trust Agreement dated as of September 15.

No. 33-18144.

1987, with the corporate Owner Participant named therein, lessor, and Duquesne Ught Company, lessee.

x10.22 Amendment No. I dated as of December 1,1987 to Exhibit 10.30 to the Form 10-K Facility lease dated as of September 15.1987 between Annual Report of Duquesne The Fint National Bank of Boston, as Owner Trustee Ught Company for the year under a Trust Agreement dated as.of September 15, ended December 31,1987.

j 1987 with the limited partnership Owner Participant named therein, lessor, and Duquesne Ught Company, lessee.

y10.23 Amendment No. I dated as of December 1,1987 to Exhibit 10.31 to the Form 10-K Facility lease dated as of September 15,1987 between Annual Report of Duquesne The First National Bank of Boston, as Owner Trusiec Ught Company for the year under a Trust Agreement dated as of September 15, ended December 31.1987.

1987 with the corporate Owner Participant named therein, lessor, and Duquesne Ught Company, lessee.

i x10.24 Amendment No. 2 dated as of November 15,1992 to Exhibit 10.33 to the Form 10-K Facility lease dated as of September 15,1987 between Annual Report of Duquesne The First National Bank of Boston, as Owner Trustee Ught Company for the year under a Trust Agreement dated as ofSeptember 15, ended December 31,1992.

1987 with the limited partnership Owner Participant named therein, lessor, and Duquesne Ught Company, lessee.

y10.25 Amendment No. 2 dated as of November 15,1992 to Exhibit 10.34 to the Form 10-K Facility lease dated as of September 15,1987 between Annual Report of Duquesne The First National Bank of Boston, as Owner Trustee Ught Company for the year under a Trust Agreement dated as of September 15, ended December 31,1992.

1987 with the corporate Owner Participant named l

therein, lessor, and Duquesne Ught Company, lessee.

i i

l a

27

i l

l l

Exhibit Method of j

No.

Descriotion Fih.

x10.26 Amendment No. 3 dated as of October 13,1994 to Exhibit 10.25 to the Form 10.K Facility trase dated as of September 15,1987 between Annual Repon of Duquesne l

The First National Bank of Coston, as Owner Trustec Ught Company for the year under a Trust Agreement dated as of September 15,1987 ended December 31,1994.

l with the limited partnership Owner Panicipant named l

therein, lessor, and Duquesne Ught Company, irssee.

I 1

y10.27 Amendment No. 3 dated as of October 13,1994 to Exhibic 10.26 to the Form 10-K i

i l

Facility lease dated as of September 15,1987 between Annual Report of Duquesne The First National Bank of Boston, as Owner Trustee Ught Company for the year under a Trust Agreement dated as of September 15,1987 ended December 31,1994.

with the corporate Owner Panicipant named therein, i

l lessor, and Duquesne Ught Company, lessee.

Als.as Participation Agreement dated as of September 15, Exhibit (28)(a) to Registration 1987 among the limited partnership Owner Statement (Form S-3)

Participant named therein, the Original loan No. 33-18144.

Participants listed in Schedule I thereto, as Original loan Panicipants, DQU Funding Corporation, as Funding l

Corp, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Duquesne Light Company, as lessee.

I yl0.29 Participation Agreement dated as of September 15, Exhibit (28)(b) to Registration 1987 among the corporate Owner Participant named Statement (Form S-3) therein, the Original loan Participants listed in No. 33-18144.

Schedule 1 thereto, as Originalloan Panicipants, DQU Funding Corporation, as Funding Corp, The First Nacional Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Duquesne Ught Company, as lessee.

x10.30 Amendment No.1 dated as of December 1,1987 to Exhibit 10.34 to the Form 10-K Participation Agreement dated as of September 15.

Annual Report of Duquesne 1

1987 among the limited partnership Owner Participant Ught Company for the year named therein, the Original loan Panicipants listed ended December 31,1987.

therein, as Original loan Participants, DQU Funding Corporation, as Funding Corp, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Duquesne Ught Company, as lessee.

j l

)

y10.31 Amendment No. I dated as of December 1,1987 to Exhibit 10.35 to the Form 10-K Participation Agreement dated as of September 15, Annual Report of Duquesne 1987 among the corporate Owner Panicipant named Ught Company for the year i

j therein, the Original loan Participants listed therein, ended December 31,1987.

l as Original loan Participants, DQU Funding Corporation, as Funding Corp, The First National Bank of Boston, as owner Trustee. Irving Trust Company, as Indenture Trustee and Duquesne Ught Company, as Irssee.

28

i 1

1 l

l Exhibit Method of No..

Dennianian Filla.

x1032 Amendment No. 2 dated as of March 1,1988 to Exhibit (28)(c)(3) to Panidpation Agreement dated as of September 15, Registration Statement 1987 among the limited pannership Owner Participant (Form S-3) No. 33-54648.

named therein, DQU Funding Corporation, as Funding Corp, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and i

Duquesne Ught Company, as lessee.

y1033 Amendment No. 2 dated as of March 1,1988 to Exhibit (28)(c)(4) to l.

Panicipation Agreement dated as of September 15, Registration Statement 1987 among the corporate Owner Panicipant named (Form S-3) No. 33-54648.

therein, DQU Funding Corporation, as Funding Corp, j

. The First National Bank of Boston, as Owner Truseee, Irving Trust Company, as Indenture Trustee and Duquesne Ught Company, a lessee.

I l

x1034 Amendment No. 3 deced as of November 15,1992 to Exhibit 10.41 to the Form 10-K i

l Participation Agreement dated as of September 15, Annual Report of Duquesne i

1987 among the limited pannership Owner Participant Ught Company for the year named therein, DQU Funding Corporation, as Funding ended December 31,1992.

Corp, DQU 11 Funding Corporation, as New Funding l

Corp, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Duquesne Ught Company, as lessee.

I y1035 Amendment No. 3 dated as of November 15,1992 to Exhibit 10.42 to the Form 10-K Participation Agreement dated as of September 15, Annual Report of Duquesne 1987 among the corporate Owner Panicipant named Ught Company for the year therein, DQU Funding Corporation, as Funding Corp, ended December 31,1992.

DQU 11 Funding Corporation, as New Funding Corp, The First National Bank of Boston, as Owner Trustee The Bank of New York, as Indenture Trustee and Duquesne Ught l

Company, as lessee.

x1036 Amendment No. 4 dated as of October 13,1994 to Exhibit 1035 to the Form 10-K j

Participation Agreement dated as of September 15,1987 Annual Repo<t of Duquesne i

among the limited pannership Owner Panicipant named Ught Company for the year

]

L therein, DQU Funding Corporation, a Funding Corp, ended December 31,1994.

DQU !! Funding Corporation, as New Funding Corp, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Duquesne Ught Company, as lessee.

l y1037 Amendment No. 4 dated as of October 13,1994 to Exhibit 1036 to the Form 10 K Participation Agreement dated as of September 15,1987 Annual Report of Duquesne among the corporate Owner Participant named therein, Ught Company for the year DQU Funding Corporation, as Funding Corp, DQU Il ended December 31,1994.

j Funding Corporation, as New Funding Corp, The First j

National Bank of Boston, as Owner Trustee, The Bank of j

New York, as Indenture Trustee and Duquesne Ught j

Company, as lessee.

j i

29

~ - _.. -.. -..

Exhibit Method of No.

Descrintion Filia.

zl0.38 Ground lease and Easement Agreement dated as of Exhibit (28)(c) to Registration

' September 15,1987 between Duquesne Ught Company, Statement (Form S-3)

Ground lessor and Grantor, and The First National Bank No. 33-18144.

of Boston, as Owner Trustee under a Trust Agreement dated as ofSeptember 15,1987 with the limited partnership Owner Puticipant named therein, Tenant and Grantee.

z10.39 Assignment, Assumption and Further Agreement dated as Exhibit (28)(f) to Registration of September 15,1987 among The First National Bank of Statement (Form S-3)

Boston, as Owner Trustee under a Trust Agreement dated No. 33-18144.

as of September 15,1987 with the limited pannership Owner Participant named therein, He Cleveland Electric illuminating Company, Duquesne Ught Company, Ohio Edison Company, Pennsylvania Ibwer Company and The Toledo Edison Company.

zl0.40 Additional Support Agreemint dated as of September 15, Exhibit (28)(g) to Registration 1987 between The First National Bank of Boston, as Statement (Form S-3)

Owner Trustee under a Trust Agreement dated as of No. 33-18144.

September 15,1987 with the limited partnership Owner Partidpant named therein, and Duquesne Ught Company.

210.41 Indenture, Bill of Sale, Instrument of Transfer and Exhibit (28)(h) to Registration Severance Agrwment dated as of October 2,1987 Statement (Form S-3) between Duquesne Ught Company, Seller, and The No. 33-18144.

First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15,1987 with the limited partnership Owner Participant named therein, Buyer.

z10.42 Tax Indemnification Agreement dated as of September 15, Exhibit 28.1 to the Form 8-K 1987 between the Owner Participant named therein and Current Report of Duquesne Duquesne Ught Company, as lessee.

Ught Company dated i

November 20,1987.

l z10.43 Amendment No. I dated as of November 15,1992 to Exhibit 10.48 to the Form 10 K Tax Indemnification Agreement dated as of September 15, Annual Report of Duquesne l

1987 between the Owner Participant named therein and Ught Company for the year Duquesne Ught Company, as Irssee.

ended December 31,1992.

z10.44 Amendment No. 2 dated as of October 13,1994 to Tax Exhibit 10.43 to the Form 10-K Indemnification Agreement dated as ofSeptember 15, Annual Report of Duquesne i

1987 between the Owner Participant named therein and Ught Company for the year j

Duquesne Ught Company, as lessee.

ended December 31,1994.

i zl0.45 Extension Ixtrer dated December 8,1992 from Exhibit 10.49 to the Form 10-K Duquesne Ught Company,each Owner Participant The Annual Report of Duquesne First National Bank of Boston, the lease Indenture Ught Company for the year

{

Trustee, DQU Funding Corporation ar d DQU 11 ended December 31,1992.

Funding Corporation addressed to the New Collateral

" rust Trustec extending their respective representations I

and warranties and covenants set forth in each of the Participation Agreements.

30

Exhibit Method cf No.

Description

Filin, x10.46 Trust Indenture, Mongage, Security Agreement and Exhibit (4)(g) to Registration Assignment of Facility lease dated as of September 15.

Statement (Form S-3) 1987 between The First National Bank of Boston, as No. 33-18144.

Owner Trustee under a Trust Agreement dated as of September 15,1987 with the limited partnership Owner Participant named therein, and Irving Trust Company, as Indenture Trustee.

y10.47 Trust Indenture, Mortgage, Security Agreement and Exhibit (4)(h) to Registration Assignment of Facility lease dated as of September 15, Statement (Form S-3) 1987 between The First National Bank of Boston, as No. 33-18144.

Owner Trustee under a Trust Agreement dated as of September 15,1987 with the corporate Owner Panicipant named therein, and Irving Trust Company, as Indenture Trustee.

x10.48 Supplemental Indenture No. I dated as of December 1, Exhibit 10.45 to the Form 10-K 1987 to Trust Indenture, Mortgage, Security Agreement Annual Report of Duquesne and Assignment of Facility lease dated as of September 15, Ught Company for the year 1987 between The First National Bank of Boston, as Owner ended December 31,1987.

Trustee under a Trust Agreement dated as of September 15, 1987 with the limited partnership Owner Participant named therein, and Irving Trust Company, as Indenture Trustee.

y10.49 Supplemental Indenture No. I dated as of December 1, Exhibit 10.46 to the Form 10-K 1987 to Trust Indenture, Mortgage. Security Agreement Annual Report of Duquesne and Assignment of Facility lease dated as of September 15, Ught Company for the year 1987 between The First National Bank of Boston, as ended December 31,1987.

Owner Trustee under a Trust Agreement dated as of September 15,1987 with the corporate Owner Panicipant named therein, and Irving Trust Company, as Indenture Trustee.

x10.50 Supplemental Indenture No. 2 dated as of November 15.

Exhibit 10.54 to the Form 10-K 1992 to Trust Indenture, Mortgage, Security Agreement Annual Report of Duquesne and Assignment of Facility lease dated as of September 15, Ught Company for the year 1987 between The First National Bank of Boston, as ended December 31,1992.

Owner Trustee under a Trust Agreement dated as of September 15,1987 with the limited partnership owner Panicipant named therein, and The Bank of New York, as Indenture Trustee.

y10.51 Supplememal Indenture No. 2 dated as of November 15, Exhibit 10.55 to the Form 10-K 1992 to Trust Indenture, Mortgage, Security Agreement Annual Report of Duquesne and Assignment of Facility Irase dated as of September 15, Ught Company for the year 1987 between The First National Bank of Boston, as ended December 31,1992.

Owner Trustee under a Trust Agreement dated as of September 15,1987 with the corporate Owner Participant named therein, and The Bank of New York, as Indenture Trustee, 31

l i

Exhibit Method of No.

Descrintion FL g

10.52 Reimbunement Agreement dated as of Oceober 1,1994 Exhibit 10.51 to the Form 10-K among Duquesne Ught Company, Swiss Bank Annual Repon of Duquesne Corporation, New York Branch, as LOC Bank, Union Ught Company for the year Bank, as Administrating Bank, Swiss Bank ended December 31,1994.

Corporation, New York Branch, as Administrating Bank and The Panicipating Banks Named Therein.

10.53 Collateral Trust Indenture dated as of November 15.

Exhibit 10.58 to the Form 10-K 1992 among DQU 11 Funding Corporation, Duquesne Annual Report of Duquesne Ught Company and The Bank of New York, as Trustee, Ught Company for the year ended December 31,1992.

10.54 First Supplemental Indenture dated as of November 15.

Exhibit 10.59 to the Form 10-K 1992 to Collateral Trust Indentuie dated as of Annual Repon of Duquesne November 15,1992 among DQU 11 Funding Corporation, Ught Company for the year Duquesne Ught Company and The Bank of New York, as ended December 31,1992.

Trustee.

l x10.55 Refinancing Agreement dated as of November 15,1992 Exhibit 10.60 to the Form 10-K l

among the limited parmership Owner Participant Annual Repon of Duquesne named therein, as Owner Participant, DQU Fuading Ught Company for the year

)

Corporation, as Funding Corp, DQU II Funding ended December 31,1992.

Corporation, as New Funding Corp,The First National Bank of Boston, as Owner Trustee The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, i

l as New Collateral Trust Trustee, and Duquesne Ught Company, as Irssee.

i f

ylo.56 Refinancing Agreement dated as of November 15,1992 Exhibit 10.61 to the Form 10-K among the corporate Owner Participant named Annual Repon of Duquesne therein, as Owner Partidpant, DQU Funding Ught Company for the year l

Corporation, as Funding Corp, DQU 11 Funding ended December 31,1992.

l Corporation, as New Funding Corp, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee, and Duquesne Ught Company, as Irssee.

x10.57 Addendum dated December 8,1992 to Refinancing Exhibit 10.62 to the Form 10-K Agreement dated as of November 15,1992 among the Annual Report of Duquesne limited partnership Owner Panicipant named therein, Ught Company for the year as Owner Panicipant, DQU Funding Corporation, as ended December 31,1992.

Funding Corp, DQU 11 Funding Corporation, as New Funding Corp, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank ofNew York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee, and Duquesne Ught Company, as i

kmc 32 I

l

,o Exhibit Method of

]

No.

Ihcr6aba F26.

j y10.58 Addendum dated December 8,1992 to Refinancing Exhibit 10.63 to the Form 10-K Agreement dated as of November 15,1992 among the Annual Report of Duquesne corporate Owner Participant named therein, as Ught Company for the year

- Ow -- Participant, DQU Funding Corporation, as ended December 31,1992.

Funding Corp, DQU 11 Funding Corporation, as New Funding Corp,The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture i

Trusece, The Bank of New York, as Collateral Trust j

Trustec The Bank of New York, as New Collateral Trust Trustee, and Duquesne Ught Company, as lessee.

OtherAgnemente

• 10.59 Deferred Compensation Plan for the Directors of Exhibit 10.1 to the Form 10-K Duquesne Ught Compar7, as amended to date.

Annual Report of DQE for the year ended December 31,1992.

• 10.60 Incentive Compensation Program for Certain Executive Exhibit 10.2 to the Form 10-K Officers of Duquesne Ught Company, as amended to Annual Report of DQE for the j

date.

year ended December 31,1992.

• 10.61 Description of Duquesne Ught Company Pension Exhibit 10.3 to the Form 10-K Service Supplement Program.

Annual Report of DQE for the year ended December 31,1992.

.j

• 10.62 Duquesne Ught Company Outside Directors' Filed here.

Retirement Plan, as amended to date.

• 10.63 Employment Agreement dated as of December 15.

Exhibit 10.5 to the Form 10-K 1992 between DQE, Duquesne Ught Company and Annual Report of DQE for the Wesley W. von Schack.

year ended December 31,1992.

• 10.64 Duquesne Ught/DQE Charitable Giving Program.

Exhibit 10.6 to the Form 10-K Annual Report of DQE for the year ended December 31,1992.

• 10.65 Duquesne Ught Company Performance Incentive Exhibit 10.7 to the Form 10-K Program.

Annual Report of DQE for the year ended December 31,1994.

• 10.66.

First Amendment dated as of October 25,1994 to Exhibit 10.8 to the Form 10-K Employment Agreement dated as of December 15, Annual Report of DQE for the 1992 between DQE, Duquesne Ught Company and year ended December 31,1994.

Wesley W. von Schack.

• 10.67 Employment Agreement dated as ofAugust 30,1994 Exhibit 10.9 to the Form 10-K between DQE, Duquesne Ught Company and Annual Report of DQE for the David D. Marshall, year ended December 31,1994.

• 10.68 First Amendment dated as ofJune 27,1995 to Filed here.

Employment Agreement dated as of August 30,1994 between DQE, Duquesne Ught Company and David D. Marshall.

33

f

]

l l

j I

I Exhibit Method of No.

Descrintion Filin.

• 10.69 Employment Agreement dated as of August 30,1994 Duquesne Light Company between DQE, Duquesne Light Company and Exhibit 10.10 to the Form 10.K l

Gary L Schwass.

Annual Report of DQE for the

)

year ended December 31,1994.

• 10.70 Employment Agreement dated as ofAugust 30,1994 Exhibit 10.68 to the Form 10-K between Duquesne Light Company and Dianna L Annual Report of DQE for the Green.

year ended December 31,1994.

• 10.71 First Amendment dated as ofJune 27,1995 to Filed here.

Employment Agreement dated as ofAugust 30,1994 l

between Duquesne Light Company and Dianna L.

Green.

12.1 Calculation of Ratio of Earnings to Fixed Charges.

Filed here.

21.1 Subsidiaries of registrant:

Duquesne has no significant subsidiaries.

l 23.1 Independent Auditors' Consent.

Filed here.

27.1 Financial Data Schedule.

Filed here.

l 99.1 Executive Compensation of Duquesne Light Company Filed here.

Executive Officers for 1995 and Security Ownership of Duquesne Light Company Directors and i

Executive Officers as of February 21,1996.

99.2 Directors of DQE and Duquesne Light Company, Filed here.

Page 20,1995 DQE Annual Report to Shareholders.

i An additional document, substantially identical in all material respects to this Exhibit, has been entered i

x into relating to one additional limited partnership Owner Participant. Although the additional document

)

may differ in some respects (such as name of the Owner Participant, dollar amounts and percentages),

there are no material details in which the document differs from this Exhibit.

I I

y Additional documents, substantially identicalin all material respects to this Exhibit, have been entered into j

relating to fot r additional corporate Owner Participants. Although the additional documents may differ in some respects (such as names of the Owner Participants, dollar amounts and percentages), there are no material details in which the documents differ from this Exhibit.

Additional documents, substantially identical in all material respects to this Exhibit, have been entered into l

z relating to six additional Ovmer Participants. Although the additional documents may differ in some respects (such as names of the Owner Participants, dollar amounts and percentages), there are no material details in which the documents differ from this Exhibit.

This document is required to be filed as an exhibit to this form under item 14(c).

Copies of the exhibits listed above will be furnished, upon request, to holders or beneficial owners of any l

class of Duquesne's stock as of February 21,1996, subject to payment in advance of the cost of reproducing the exhibits requested.

34

SCIIEDULE II SCIIEDULE II - VALUATION AND QUALIIYING ACCOUNTS For the Years Ended December 31,1995,1994 and 1993 (Thousands of Dollars)

Column A Column B Column C Column D Column E Column F Additions Balance at Charged to Charged to Balance Beginning Costs and Other at End Description ofYear haenses Accounts Deductions ofYear Year Ended December 31,1995 Reserve Deducted from the Asset to which it applies:

Allowance for uncollectible accounts

$15.021

$13.430

$3.567 (A) $14.099 (B) 117.919 Year Ended December 31,1994 Reserve Deducted from the Asset to which it applies:

Allowance for uncollectible accounts

$13.282

$11.890

$3.837 (A) $13.988 (B)

$15.021 i

i Year Ended December 31,1993 i

Resene Deducted from the Asset.

to which it applies:

Allowance for uncollectible accouncs

$7.707

$17.093

$2S25 (A) $14.443(B)

$13.282 Notes: (A) Recovery of accounts previously written off.

(B) Accounts receivable written off.

l 35 l

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

i l-j SIGNATURES Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DUQUESNE LIGHT COMPANY (Registrant)

Date: March 26,1996 By: /s/ Weslev W. von Schack (Signature).

Wesley W. von Schack i

Chairman of the Board and Chief Executive Officer i

Pursuant to the :equirements of the Securities Exchange Act of1934, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.

\\

Signatuse Inis Dats l

l l

/s/ Wesl^y W. von Schack Chairman of the Board, Chief Executive March 26,1996 l

WesLy W. von Schack Officer and Director

/s/ David D. Marshall President and Chief Operating Officer and March 26,1996 David D. Marshall-Director 4

/s/ Gary L Schwass Senior Vice President and Chief Financial March 26,1996 j

Gary L Schwass Officer l

/s/ Morgan K. O'Brien Controller and Principal March 26,1996 l

Morgan K. O'Brien Accounting Officer l

- /s/ Daniel Bere Director March 26,1996 Daniel Berg

/s/ Doreen E. Bovce Director March 26,1996 j

Doreen E. Boyce Director March 26,1996 Robert P. Bozzone

/s/ Sigo Falk Director March 26,1996 Sigo Falk

/s/ William H. Knoell Director March 26,1996 William H. Knoell

' hl Robert Mehrabian Director March 26,1996 Robert Mehrabiaa

/s/ Thomas 1. Murrin Director March 26,1996 Thomas J. Murrin

/s/ Robert R. Pease Director March 26,1996 Robert B. Pease Director March 26,1996 Eric W. Springer 36 1

1 6

O Following are explanations of certain financial and operating terms used in this Report and unique in the utility business.

Glossary of 7e.rms Allowance [or Funds UsedDuring demand of.1 KW and, if burned continuously, Construction (AIC) will consume 1 KWH in ten hours. One thou-AFC is an amount recorded on the books of a sand KWs is a megawatt (MW). One thousand utility during the period ofconstruction of utili.

KWHs is a megawatt hour (MWH).

ty assets. The amount represents the estimated Nuclear Decomminioning Costs cost of both debt and equity used to finance the construction.

. Decomm..issiomng costs are expenses to be mcurred m connection with the entombment, Baseload decontamination, dismantlement, removal and The amount of electric power delivered or disposal of the structures, systems and compo-needed at the lowest point ofdemand during the nents of a nuclear power plant that has perma-day.

nently ceased the production of electric energy.

Construction Work In 1%greu (CWIP)

Peak Demand i

This amount represents assets in the process of Peak demand is the amount of electricity construction but not yet placed in service. The required during periods of highest usage. Peak l

amount is shown on the consolidated Penods fluctuate by season and generally occur m the momin hours in winter and in late after-balance sheet as a component of property, plant noon during tge summer.

and ec uipment.

i DefemdEnergy Costs nfsonnia Public Utility Comminion In conjunction with the Energy Cost Rate l

esne records deferred The Pennsylvam.a governmental body that reg-I Adjustment Clause, Duherences between actual ulates all utihues (electnc, gas, telephone, water, energy costs to offset dif energy costs and the level of energy costs current-etc.), which is made up of five members nomi-ly recovered from electric utility customers.

nated by the governor and confirmed by the sen-ate.

Demand RegulatoryAnet i

l The amount of electncity deh.vered to con-sumers at any instant or averaged over a period of Costs that Duquesne would otherw.ise have time.

charged to expense which are capitalized or deferred because these costs are currently being j

Energy Cost Rate Adjustment Clause (ECR) recovered or because it is probable that the PUC Duquesne recovers through the ECR, to the and the FERC will allow recovery of these costs extent that such amounts are not included in through the ratemaking process.

base rates, the cost of nuclear fuel, fossil fuel and p,,,ilor Wholesa[# Acce#

purchased power costs and passes to its cus-The abih.ty of customers to contract for electn-tomers the profits from short-term power sales to other utilines.

cal energy from competing generating supphers.

j Stranded Cost FederalEnergy Regulatory Comminion (FERC)

Stranded costs include any prudent utility The FERC is an independent five-member investment, commitments or expenses not yet commission within the United States recovered, made during a period when there was Department of Energy. Among its many respon, an obhganon or authon,zanon to provide service sibilities, the FERC sets rates and charges for the at a regulated pnce, that are no longer necessary wholesale transportation and sale of natural gas or economical due to a change in statute or regu-and electricity, and licenses hydroelectric power latory policy which allows others to compete for projects.

the utility's customers. For example, Duquesne recently refinanced its long-term debt.

Interruptible Customer Refinancing costs will be recovered and amor-Interruptible customers receive a discount in tized for accounting purposes over the term of i

exchange for allowing temporary interruptions in the debt, unless regulatory changes prevent l

their service during Duquesne's peak load periods future recovery, and result in " stranded costs."

or during emergency conditions.

pg,,fj,g Kilowatt (KW)

An electric operation wherein transmission A kilowatt is a unit of power or capacity. A facilities ofone system are used to transmit 1

l kilowatt hour (KWH) is a umt of energy or kik>-

power of another system.

watts times the length of time the kilowatts are used. For example, a 100-watt bulb has a 37 i

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS I

l To the Directors and Stockholder of Duquesne Light Company:

l We have audited the accompanying consolidated balance sheet of Duquesne Light Company and its subsidiary (Duquesne) as of December 31,1995 and 1994, and the related consolidated statements ofincome, retained earnings, and cash flows for each of the three years in the period ended December 31,1995. Our audits also included the financial statement schedule listed in item 14. Hese financial statements and financial state-ment schedule are the responsibility of Duquesne's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit indudes 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 financial statements present fairly, in all material respects, the finan-cial position of Duquesne as of December 31,1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the informa-tion set forth therein.

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

/s/ Deloitte & Touche LLP DELOITlE & TOUCHE LLP Pittsburgh, Pennsylvania January 30,1996 38

1 4

5

' DUQUESNEIlC1ITCOMPANY (173ousands ofDollars)

STATEMENT OF CONSO11 DATED INCOME Year Ended Decemher 31.

1995 1994 1993 Operating Rewnues:

Sales of Electricity:

Customers - net

$1,088,737

$1,109,752

$1,175,287 Phase-in deferrals (28,810)

(100,315)

Net customer rewnucs 1,088,737 1,080,942 1,074,972 Urilities 55,963 58.295 50,669 Total Sales of Electricity 1,144,700 1,139,237 1,125,641 Other 35,084 29,387 35,044 TotalOpmsangResewaw 1,179,784 1,168,624 1,160,685 Operating Expenses:

Fuel 208,546 222,420 223,699 Purdiased power 23,422 21,715 14,032 Other operating 260,541 268,303 287,166 Maintenana 81,516 79,488 80,292 Depredation and amortnanon 189,146 163,219 150,925 Taxes other than inmme taxes 86,349 85,839 70,404 Income taxes 88,665 90,740 96,270 Torn /0)wnsangEspensa 938,185 931,724 922,788 Operating Inmme 241,599 236,900 237,897

- Other Inmene and (Deductions):

Allowana for ajuity funds used during mnstruction 721 1,295 869 long-term power sale write +ff (15,225)

Carrying diarges on defened rewnues 30 1,801 Inmme taxes (4,229) 6,549 19,033

[

Other-net 10,205 3,729 10,552 TeslOderhenmarased(P '-

_:)

6,697 11,603 17,030 Inmme Before Interest Charges 248,296 248,503 254,927 Interest Charges:

Interest on long-term debt 95,391 101,027 108,479 Other interest 2,599 1,095 2,387 Allowance for borrowed funds used during mnstruction (764)

(1,068)

(726)

Totalbssmst 06npr 97,226 101,054 110,140 Income Before Cumulatiw Efrect on Prior Years of Changes in Accounting Principles 151,070 147,449 144,787 Adoption of SFASNo.109-Income Taxes 8,000 Accounting for maintenance cosa - net (5,425)

Net Inmme 151,070 147,449 147,362 Dividends on Prderred and Preferena Stodc 5,320 6,046 9,188 Fermingsfpr COMMON Stock

$145,750

$141,403

$138,174 See notes to consolidatedfnancialstatements.

39

DUQUESNE 11GIIT COMPANY (Thousands ofDollars)

CONSOllDATED RAIANCE SIIFFT As ofDecember 3L ASSETS 1995 1994 Property, Ibat and Equipment:

Electric plant in servia

$4,262,670

$4,196,690 Construction work in progress 38,133 43,763 Pmperty held under capitalleases 133,381 161,775 Property held for future use 216,633 216,206 Other 1,193 532 Tord 4,652,010 4,618,966 less accumulated depreciation and amortization (1,673,107)

(1.550,447) 1hpavp1hstmedE,- ; r-Net 2,978,903 3,068,519 Imag-Term Innstments:

Inwsunent in DQE Common Seock 66,757 43,057 Other investments 102,648 31,212 TotalLaag-Ta,n Imarmena 169,405 74,269 Current Assets:

Cash and temporary cash investments (at cost which appronmates market) 2,490 15.904 Remivables:

Electric customer accoums reeivable 103,821 96,157 Other utility reaivables 22,441 26,008 Other receivables 11,842 25,171 less: Allowance for uncollectible acrounts (17,920)

(15,021)

Rewivables less allowana for uncollectible accounts 120,184 132,315 Irss: Reeivables sold (7,000)

TotalRecrimmer 113,184 132315 Materials and supplies (generally at awrage cost):

Coal 25,454 30,484 Operating and construction 53,298 58.262 Other current assets 7,955 15,795 TordCamistAnar 202,381 252,760 Other Non-Current Assets:

Regulatory assets 671,928 710,763 Other 45,048 43,556 TetdOderNon-CmnntAmra 716,976 754,319 TotdAare

$4,067,665

$4,149,867 See notes to consolidatedfnancialstatements.

40

DUQUESNE IJGHT COMPANY (7housandr ofDollan)

CONSOLIDATED BAIANCE SilEET As ofDecember 3 A CAPITAllZAHON AND llABIIIITES 1995 1994 Capitalizatiom Common stock (authorized - 90,000,000 shara, issued and outstanding - 10 shares)

Capital surplus 837,265 823,193 Itermined earnings 294,069 292,319 Tesalcommen ssoc&lder's apiry 1,131,334 1,115,512 Non-redamabl preferred stock 63,608 90,340 Non-red mahle preferena stodc 29,615 29,857 Total prefened and preferene stock before defened ESOP benefit (involuntary liquidation valucs of $93,086 and $120,060 exaed par by $28,781 and $43,882, respectively) 93,223 120,197 Deferred employee stock ownership plan (ESOP) benefit (22,257)

(24,852)

Total preferred and preferena stock 70,966 95,345 long-term debt 1,322,531 1,368,930 TerafCF '

2,524,831 2,579,787 Obligations Under Capitalleases 34,546 41,106 Current Ilabilitien Current maturities and sinking fund requirements 71,051 85,691 Acmunts payaW 76,435 60,654 Accrued liabilities 53,930 81,035 Dividends dedared 37,015 35,469 Other 9,191 5,722 i

TotalCsent rMMr=

247,622 268,571 Non-Current Ilabilitien Deferred inmme taxes-net 805,996 991,149 Defened investment tax credits 115,760 123.591 Deferredinmme 162,916 Other 175,994 145,663 i

i TorafN-Csentfin6 &sia 1,260,666 1,260,403 Commitments and Contingendes Totalep-medise6 &an

$4,067,665

$4,149,867 41

DUQUESNE LIGIIT COMPANY (Thousands ofDollars)

STATEMENT OF CONSOLIDATED CASII FLOWS Year EndedDecember 3L 1995 1994 1993 Cash Hows From Operating Aaivities:

l Net income

$151,070

$147.449

$147,362 Prindpal non-cash charges (credits) to net income:

Depredation and amortiration 189,146 156,519 150,125 l

Capital lease, nudear fuel and other amortization 32,670 36,940 32,428 j

Defened income taxes and investment tax credits - net (41,411)

(29,705)

(44,420) l Allowanw for equity funds used during construction 9 21)

(1,295)

(869)

Phase-in plan revenues and sclared carrymg charges 28,621 99375 Changes in working capital other than cash 30,656 (36,884)

(96,799)

Odn-net 36,004 49,499 19,505 NrrGuhPhmdadfam Openam*ssgAammer 397,414 351.144 306,707 I

Cash Hows Used By Inwaring Aaivitiesa l

Construaion expenditures 9 8,656)

(94315)

(100,628) long-term investments (62,854)

(5317)

Allowance for borrowd funds used during construction 964)

(1,068) 9 26)

Other-net (3,770) 3,145 (12317)

Nsr Ced,Iked&yAssaangAassina (146,044)

(97.555)

(113,671) j Cash Hows Used In Enandag Activities:

l Sale ofbonds 114,110 740,500 (Decrease)inaeasein notes payable (10,990) 10,990 Dividends on capitalstodc (150,059)

(151,059)

(154,204)

Re:luctions oflong-term obligations:

Prefened and preferena stock (29,732)

(39,958)

(187) long-term debt (56,114)

(114,835) 935,048)

Other obligations (26,373)

(33,522)

(27,751)

P cmium on staaluired debt (1,731)

(5,033)

(31,702)

Other-net 975) 3,602 (1,790) l NetCash thedAsfiinssangAaisson (264,784)

(237,685)

(199,192)

I Net (deocase) increase in cash and temporary cash inwstments (13,414) 15,904 (6.156)

Cash and temporary cash investments at beginning ofyear 15,904 6,156 l

Cash and temporary cash innstmenta at end ofpar 5 2,490

$ 15,904 5

SUPPLEMENTAL CASil FLOWINFORMATION Cash paid during the year fors l

Intenst (net ofamount capitalized)

$ 95,521

$102,944

$124,692 Income taxes

$115,504

$111,614

$133303 En-cash inwsting and fmandng aaivities:

Capitallease obligations rea>rded

$ 14,961

$ 16,909

$ 11,811 1

Contribution of DQE Common Stock from parent company 5

$ 19,531 Prefened stock issued in conjunction with long-erm investmen'.s

$ 3,000 See notes to consolidatedfnancialstatements.

42 l

DUQUESNE LIGIIT COMPANY (Thousandr ofDollars)

STATEMENT OF CONSOr InATED RETAINED EARNINGS Year EndedDecember 3L 1995 1994 1993 Balanoe, January 1

$292,319

$294,916

$300,742 Net Income for the Year 151,070 147,449 147,362 Total 443,389 442,365 448,104 Cash dividends declared:

Prefened stock 3,870 4.592 4,740 Preference stock (net of tax benefit of ESOP dividend) 1,450 1,454 4.448 Common stock 144,000 144,000 144,000 TotalCash Dividends Dedared 149,320 150.046 153,188 Balance, December 31

$294,069

$292,319

$294,916 '

See notes to consolidatedfnancialstatemenn.

NOTES TO CONSOllDATED FINANCIAL STATEMENTS A. Summaryof Consolidation h*

Duquesne Light Company (Duquesne) is a wholly owned subsidiary of DQE, an energy ser.

8 Policies vices holding company formed in 1989. Duquesne is engaged in the production, transmission, distri-bution and sale of electric energy. Duquesne was formed under the laws of Pennsylvania by the consolidation and merger in 1912 of three constituent companies. Duquesne has one wholly owned subsidiary, Monongahela Light and Power, also a Pennsylvania corporation, which makes long-term investments.

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

Basis ofAccounting Duquesne is subject to the accounting and reponing requirements of the Securities and Exchange Commission (SEC). In addition, Duquesne's operations are subject to the regulation of the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FERC). As a result, the consolidated financial statements contain regulatory assets and liabilities in accordance with Statement ofFinancial Accouating Standards No. 71 Accountingfor the Efats of Certain Types ofRegulation (SFAS No. 71)1nd retlect the efTects of the ratemaking process. Such effects concern mainly the time at which various items enter into the determination of net income in accordance with the principle of matching costs and revenues. (See " Rate Matters," Note F, on page 48.)

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may also be affected by the estimates and assumptions management is required to make. Actual results could dif-fer from those estimates.

Revenues Meters are read monthly and customers are billed on the same basis. Revenues are recorded in the accounting periods for which they are billed, with the exception of energy cost recovery revenues.

Deferred revenues are associated with Duquesne's 1987 rate case. (See " Energy Cost Rate Adjustment Clause (ECR)" discussion on page 44 and "1987 Rate Case" discussion, Note F, on page 47).

43

l l

1 l

Duquesne's Electric Service Territsry

\\

l Duquesne provides electric service to customers in Allegheny County, including the City of Pittsburgh, and Beaver County. This represents a service territory of approximately 800 square miles in southwestern Pennsylvania. The population of the area served by Duquesne, based on 1990 census data, is approximately 1,510,000, ofwhom 370,000 reside in the City of Pittsburgh. In addition to serving approximately 580,000 customers within this service area, Duquesne also sells electricity to other utilities beyond its service territory.

l Net Customer Revenuesfor the Year ended December 31 1995 1994 1993 (Amounnin Thousands ofDollan)

Sales of Electricity:

Customers

$1,102,167

$1,121,642

$ 1,192,381 Provision for doubtful accounts (13,430)

(11,890)

(17,094)

Customers - ner 1,088,737 1,109,752 1,175,287 Phase-in deferm/s (28,810)

(100,315)

Net CustomerResenues

$1,088,737

$1,080,942

$ 1,074,972 Energy Cost Rate Adjustment Clause (ECR)

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

fuel oi! used in the generation ofelectricity.

On Duquesne's statement of consolidated income, these energy cost recovery revenues are included as a component of operatingrevenues. For ECR purposes, Duquesne defers fuel and other energy expenses for recovery, or refunding, in subsequent years. The deferrals reflect the difference between the amount that Duquesne is currently collecting fro.n cus-tomers and its actual ECR energy costs. The PUC annually reviews Duquesne's ECR energy i

costs for the fiscal year April through March, compares them to previously projected ECR l

energy costs and adjusts the ECR for over-or under-recoveries and for two PUC-established i

coal cost standards. (See " Deferred Coal Costs" and "Warwick Mine Costs" discussions, Note F, on pages 49 and 50, respectively.)

i Over-or under-recoveries from customers are recorded in the consolidated balance sheet as paya' !e to, or receivable from, customers. At December 31,1995, $5.8 million was i

o payable to customers and shown as other currentliabilities. At December 31,1994, $5.9 mil-tion was receivable from customers and shown as other current assets.

Maintenance l

Incremental maintenanceexpense incurred for refueling outages at Duquesne's nuclear units is deferred for amortization over the period between refueling outages (generally 18 l

months). Duquesne changed, as ofJanuary 1,1993, its method of accounting for mainte-l nance costs during scheduled major fossil generating station outages. Prior to that time, maintenance costs incurred for scheduled major outages at fossil generating stations were charged to expense as these costs were incurred. Under the new accounting policy, Duquesne accrues, over the periods between outages, anticipated expenses for scheduled major fossil gen-erating station outages. Maintenance costs incurred for non-major scheduled outages and for forced outages are charged to expense as such costs are incurred. This method was adopted to match more accurately the maintenance costs and the revenue produced during the periods between scheduled major fossil generating station outages.

44

l The cumulative effect (approximately $5.4 million, net ofincome taxes of approxi-mately $3.9 million) of the change on prior years was included in net income in 1993. The effcct of the change in 1993 was to reduce income, before the cumulative efect ofchanges in accountingprinciples, by approximately $2.4 million, and to reduce net income, after the cumulative effect ofchanges in accounting principles, by approximately $7.8 million.

Depreciation andAmortization Depreciation of ivperty plant andcyuipment, including plant-related intangibles, is f

recorded on a straight-line basis over the esumated remaining useful lives of properties.

Amortization of other intangibles is recorded on a straight-line basis over a five-year period.

Depreciation andamortization of other properties are calculated on various bases.

Duquesne records decommissioning costs under the category of depreciation andamor-tization expense and accrues a liability, equal to that amount, for nuclear decommissioning expense. Such nuclear decommissioning funds are deposited in external, segregated trust accounts. The funds are invested in a portfolio of municipal bonds, certificates of deposit and United States government securities. Trust fund earnings increase the fund balance and the recorded liability. The market value of the aggregate trust fund balances at December 31, 1995, totaled approximately $28.5 million. On Duquesne's consolidated balance sheet, the decommissioning trusts have been reflected in otherinvestmenu, and the related liability has been recorded as other non-current liabilities. (See " Nuclear Decommissioning" discussion, Note N, on page 59.)

Depreciation andamortization expense increased $25.9 million primarily due to the change in Duquesne's composite depreciation rate from 3.0 percent to 3.5 percent effective January 1,1995.

Income Taxes i

on January 1,1993, Duquesne adopted Statement ofFinancialAccountingStandards No.109, AccountingforIncome lixxes (SFASNo.109). Implementation ofSFASNo.109 involved a change in accounting principle. 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 differences between book and tax ba.es of assets. These book / tax differences occur when events and transactions recognized for financial reporting purposes are not recognized in the same period for tax purposes. SFASNo.109 also requires that a deferred tax liability or asset be adjusted in the period of enactment for the effect of changes in tax laws or rates.

During 1994, the statutory Pennsylvania income tax rate was reduced from 12.25 percent to 9.99 percent. This resulted in a net decrease of $80.5 million in deferred tax liabilities and a corresponding reduction in the regulatory receivable.

Duquesne recognizes a irgulatory asset for the deferred tax liabilities that are expected to be recovered from customers through rates. (See " Rate Matters," Note F, ar.d " Income Taxes," Note K, on pages 48 and 54, respectively.)

With respect to the financial statement presentation of SFASNo.109, Duquesne reflects the amortization of the regulatory tax receivable resulting from reversals of deferred taxes as depreciation andamortization expense. Reversals of accumulated deferredincome uxes are included in income tar expense.

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

45

_~

Pwperty, Plant and Equipment The asset values of Duquesne's properties are stated at original construction cost, which includes related payroll taxes, pensions and other fringe benefits, as well as administra-tive and general costs. 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 finance construction. The amount of AFC that is capitalized will vary according to changes in the cost ofcapital and in the level of construction work in progress (CWIP). On a current basis, Duquesne does not realize cash from the AFC. Duquesne does realize cash, during the service life of the plant, through increased revenues reflecting a higher rate base (upon which a return is earned) and increased depreciation. The AFC rates applied to CWIP were 8.7 percent in 1995,9.0 percent in 1994 and 9.6 percent in 1993.

i 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 accumulateddepreciation andamortization.

Substantially all of Duquesne's properties are subject to a first mortgage lien.

Other Current Assets and Long-Term Investmena Duquesne's other cunent assets and long-term investments include certain investments in marketable securities. In accordance with Statement ofFinancialAccounting Standardr No.

115, Aucuntingfor Certain Investmenu in Debt and Equity Securities (SFAS No.115), these j

investments are classified as available-for-sale and are stated at market value.

i FinancialAccounting Pmnouncement The Financial Accounting Standards Board issued Statement offinancia/ Accounting i

Standards No.121, Axountingfor the impairment ofLong-Lived Assen andfor Long-Lived Assets to be Disposed Of(SFAS No.121)in March 1995. This statement is effective for years i

l beginning after December 15,1995. Duquesne anticipates adopting this standard on January i

1,1996, and does not expect that it will have a material impact on its financial position or results of operations, based on the current regulatory structure in which it operates. As com-petitive factors influence pricing in the utility industry, this opinion may change in the future. The general requirements of SFASNo.121 apply to non-current assets and require impairment to be considered whenever evidence suggests that it is no longer probable that future cash flows in an amount at least equal to the asset will result.

l l

Temporary CashInvestmenu Temporary cash investments are short-tern. highly liquid investments with original maturities of three or fewer months. They are st# at market, which approximates cost.

l Duquesne considers temporary cash investmene be cash equivalents.

l l

Reclassi$ cations The 1994 and 1993 consolidated financial statements h ve been reclassified to con-form with accounting presentations adopted during 1995.

l B. Pro [ Equipment in addition to its wholly owned genetating units, Duqi.esne, together with other elec-rty, Plant tric utilities, ha an ownership or leasehold interest in certain jointiv ouned units. Duquesne an is required to pay its share of the construction and operating costs of the units. Duquesne's share of the operating expenses of the units is included in the statement ofconsolidated income.

46

Generating Units at December 31,1995 Net Utility Fud Unit Megawatts Ihat Source Summer Winser (Mdlions ofDollan)

Cheswick 562 570

$ 118.7 Coal Etrama (a) 474 487 98.1 Coal Fr. Martin Unit I (b) 276 276 36.4 Coal Eastlake Unit 5 186 186 42.7 Coal Sammis Unit 7 187 187 53.1 Coal Bruce Mansfield Unit 1 (a) 228 228 66.2 Coal Bruce Mansfield Unit 2 (a) 62 62 19.1 Coal Bruce Mansfield Unit 3 (2) 110 110 52.1 Coal Beaver Valley Unit 1 (c) 385 385 234.0 Nuclear Beaver Valley Unit 2 (d)(e) 113 113 14.4 Nudear BeaverValley Common Facilities 159.4 Perry Unit 1 (f) 161 164 565.5 Nudear Brunot Island 54 66 7.1 FuelOil Total 2,798 2,834 1,466.8 Property held for future use:

Brunot Island (g) 204 240 44.9 FuelOil Phillips (a) 300 310 77.4 Coal TotalGenensting Unia 3,302 3,384

$1,589.1 (a) The unit is equipped with flue pas desulfurization equipment.

(b) See " Sale of Ft. Martin" discusson below.

(c) The Nudear Regulatory Commission (NRC) has granted a license to operate through January 2016.

(d) On October 2,1987. Duquesne sold its 13.74 percent interest in Beawr Valley Unit 2 (BV Unit 2) and leased it back; the sale was exclusive of transmission and common facilities.

Amounts shown represent facilities not sold and s uent leasehold improvements.

(e) The NRC has granted a license to operate through Ma 2027.

(f) The NRC has granted a license to operate through Ma h 2026.

(g) Combustion turbine capacity hcid for future use representing 135 megawatts summer and 168 megawa.ts winter may be returned to service pending outcome of the sale of Ft. Martin. (See " Sale of Ft. Martin" discussion below.)

Sale ofFt. Martin In December 1995, Duquesne filed a Petition for Declaratory Order with the PUC requesting approval for the sale ofits ownership interest in the Ft. Martin I ower Station and for a six-point plan to be financed in part by the proceeds of the Ft. Martin transaction.

Under the plan, Duquesne offers to freeze its base rates for a period of five years. In addition, Duquesne proposes to record a one-time reduction of approximately $130 million in the value of Duquesnis nuc!:ar plant investment. Duquesne also proposes to use the proceeds from the sale to finance reliability enhancements to the simple cycle units located at Brunot Island (BI), to retire debt and to reduce equity. The plan also proposes an annual increase of

$25 million for three years in depreciation andamorrization expense to Duquesnis nuclear investment, as well as additional annual contributions to its nuclear plant decommissioning funds of $5 million for five years, without any increase in existing electrie rates. Lasdy, Duquesne proposes a five-year annual $5 million credit to the ECR to compensate 1

Duquesnis customers for the lost profits from any reduced short-term power sales foregone j

by the sale ofits ownership interest in the Ft. Martin Power Station. (See " Energy Cost Rate Adjustment Clause (ECR)* discussion, Note A, on page 44.) The PUC is currently review-ing Duquesnis petit:on.

C. Imag-Term At December 31,1995 and 1994, the fair market value of Duquesnis investment in Investments DQE common stock was $66.8 million and $43.1 million, respectively. At December 31, 1995 and 1994, the cost of Duquesnis investment in DQE common stock was $43.9 mil-j lion and $45.9 million, respectively.

47

Duquesne makes equity investments in affordable housing. At December 31,1995, Duquesne had investments in seven affordable housing funds.

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

Duquesne's other investments are primarily in assets of nuclear decommissioning

rusts and marketable securities. In accordance with SFAS No.115, these investments are classified as available-for-sale and are stated at market value. The amount of unrealized hold-ing gains related to marketable securities at December 31,1995, is $22.8 million ($13A mil-tion net of tax). There were no material unrealized gains or losses on investments at December 31.1994.

D. Receivables Duquesne and an unaffiliated corporation have an agreement that entitles Duquesne to sell, and the corporation to purchase, on an ongoing basis, up to $50 million of accounts receivable. At December 31,1995, Duquesne had sold $7 million of receivables to the unaffili-ated corporation. Duquesne had no receivables sold at December 31,1994. The accounts receivable sales agreement, which expires in June 1996, is one of many sources of funds avail-able to Duquesne. Duquesne may attempt to extend the agreement, or to replace the facility with a similar one or to climinate it upon expiration.

E. Changes in Changes in Working Capital Other than Cash Working ital 1995 1994 1993 Ca$ctthan Ot (Amounnin ThousandsofDollars)

Cash p,yj,3f,s

$19,131 5 6,708

$(87,671)

Materialsandsupplies 9,994 2,932 13,635 Other euruntarsen 7,840 (6,929) 3,636 Accounnpayab/c 15,781 (23,816)

(6,022)

Othereuruntliabilities (22,090)

(15,779)

(20,377) foral

$30,656

$(36,884)

$(96,799)

E Rate Matters 1987 Rete Case In March 1988, the PUC adopted a rate order that increased Duquesne's revenues by

$232 million annually. This rate increase was phased-in from April 1988 through April 1994. Deficiencies in current revenues which resulted from the phase-in plan were included in the consolidated statement ofincome as phase-in deferrals. Phase-in deferrals were recorded on the consolidated balance sheet as a regulatory asset. As customers were billed for deficien-cies related to prior periods, this ugulatory assetwas reduced.

At this time, Duquesne has no pending base rate case and has no immediate plans to file a base rate case. In Duquesne's petition currently before the PUC for the sale ofits own-ership interest in the Ft. Martin Power Station, Duquesne proposes to freeze its base rates for a five-year period. (See " Sale of Ft. Martin" discussion, Note B, on page 47.)

RegulatoryAssets As a result of the application of SFASNo. 71 Duquesne records regulatory assetson its consolidated balance sheet. The ugulatory assets represent probable future revenue to Duquesne because provisions for thes costs are currently included, or are expected to be included, in charges to customers through the ratemaking process.

48

Duquesne's operations currently satisfy the SFAS No. 71 criteria. However, a compa-ny's electric utility operations or a portion ofsuch operations could cease to meet these crite-ria for various reasons, including a change in the PUC or the FERC regulations. Should Duquesne's operations cease to meet the SFASNo. 71 criteria, Duquesne would be required to write off any regulatory assets or liabilities for those operations that no longer meet these requirements. Management will continue to evaluate significant changes in the regulatory and competitive environment in order to assess Duquesne's overall consiste icy with the crite.

ria oiSFASNa 71.

Regulatory Assets at December 31 1995 1994 (Amounts in Thousands ofDollars)

Regulatory tax receivable (Note K) 5414,543 5428,043 Unamortized debt costs (Note I)(a) 98,776 103,454 Deferred rate synchronization costs (below) 51,149 51,149 Beaver Valley Unit 2 (BV Unit 2) sale / leaseback premium (Note L)(b) 31,564 33,414 Deferred employee costs (c) 31,218 31,012 Extraordinary property loss (below) 8,300 22,394 Deferred nucleu maintenance outage costs (Note A) 6,776 11,406 DOE demntamination and decommissioning receivable (Note N) 10,687 10,932 Deferred coal costs (below) 12,753 10,677 Other 6,162 8,282 TotalRegulatoryAssetr

$671,928

$710,763 (a) Le premiums paid to reacquire debt prior to scheduled maturity dates are defened for amortization over the life ofthe debt issued to finance the reacquisitions.

(b) He premium paid to refinance the BV Unit 2 lease was defened for amortization over the life of the lease.

(c) includes amounts for recovery of accrued compensated absences and accrued daims for workers' compensanon.

Deferred Rate Syncinonization Costs In 1987, the PUC approved Duquesne's petition to defer initial operating and other costs of Perry Unit I and BV Unit 2. Duquesne deferred the costs incurred from November 17,1987, when the units went into commercial operation, until March 25,1988, when a rate order was issued. In its order, the PUC postponed ruling on whether these costs would be recoverable from Duquesne's customers. Duquesne is not earning a return on the deferred costs. Duquesne believes that these deferred costs are recoverable. In 1990 and 1995, the PUC permitted other Pennsylvania electric utilities rate recovery ofsuch costs.

Ertraordinary Property Loss Duquesne abandoned its interest in the partially constructed Perry Unit 2 in 1986 and subsequently disposed ofits interest in 1992. In the 1987 rate case, the PUC approved recov-ery, over a 10-year period, of Duquesne's original $155 million investment in Perry Unit 2.

Duquesne is not earning a return on the as-yet-unrecovered portion ofits investment in the unit.

Defernd CoalCosts The PUC has established two market price coal cost standards. One applies only to coal delivered at the Bruce Mansfield Power Station (Bruce Mansfield). The other, the system-wide coal cost standard, applies to coal delivered to the remainder of Duquesne's system.

Both standards are updated monthly to reflect prevailing market prices for similar coal. The 49 l

1

\\

PUC has directed Duquesne to defer recovery of the delivered cost of coal to the extent that such cost exceeds generally prevailing market prices for similar coal, as determined by the PUC. The PUC allows deferred amounts to be recovered from customers when the delivered costs of coal 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 stan-dard through March 2000. In December 1991, Duquesne exercised the first of two options that extended the standard through March 1996. In December 1995, Duquesne exercised -

the second option to extend the standard through March 2000. The unrecovered cost of coal used at Bruce Mansfield amounted to $8.4 million and $7.3 million and the unrecovered cost of coal used throughout the system amounted to $4.4 million and $3.4 million at December 31,1995 and 1994, respectively. Duquesne believes that all deferred coal costs will be recovered.

WarwickMine Casst The 1990 joint petition for settlement (See preceding discussion on " Deferred Coal Costs.") also recognized costs at Duquesnis Warwick Mine, which had been on standby since 1988, and allowed for recovery ofsuch costs, including the costs of ultimately closing the mine. In 1990, Duquesne entered into an agreement under which an unaffiliated compa- -

ny will operate the mine until March 2000 and sell the coal produced. Production began in late 1990. The mine reached a full production rate in early 1991. The Warwick Mine coal reserves include both high and low sulfur coal: Duquesne's contract is for medium to high sul-fur (1.3 percent to 2.5 percent) coal. More than 60 percent of the coal mined at Warwick Mine currently is used by Duquesne. Duquesne receives a royalty on sales of Warwick coal in the open market. These royalties are credited to Duquesnis ECR. In the past year, the Warwick Mine supplied slightly less than one-fifth of the coal used in the production of elec-tricity at Duquesnis wholly owned and jointly owned plants.

Costs at the Warwick Mine and Duquesnis investment in the mine are expected to be recovered through the cost of coal in the ECR. Recovery is subject to the system-wide coal cost standard. Duquesne also has an opportunity to earn a return on its investment in the mine through the cost of coal during the period of the system-wide coal cost standard includ-ing extensions. At December 31,1995, Duquesnis net investment in the mine was $14.9 million. The current estimated liability, including final site reclamation, mine water treat-ment and certain labor liabilities, for mine closing is $34.1 million and Duquesne has record-ed a liability on the consolidated balance sheet of approximately $15.9 million toward these costs.

1%perj Heldfor Futurr Use In 1986, the PUC approved Duquesne's request to remove the Phillips Pbwer Station (Phillips) and a portion of BI from service and from race base. Duquesne expects to recover its net investment in these plants through future electricity sales. Duquesne believes its investment in these plants will be necessary in order to meet future business needs outlined in Duquesne's plans for optimizing generation resources. 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. A portion of the B1 combus-tion turbine capacity currently held for future use may be returned to service pending the outcome of the sale of Duquesnis ownership interest in Ft. Martin. (See " Sale of Ft. Martin" discussion, Note B, on page 47.) At December 31,1995, Duquesne's net investment in Phillips and BI held for future use was $77.4 million and $44.9 million, respectively.

50

G. Common Stock Common Stuk and CapitalSurplue Capital Surplus 1995 1994 1993 Year Ended December 31, (Amountsin Thousands ofDollm)

Capital Surplus Premium on common stock 837,539 823,886 807,593 Capital stock expense (274)

(693)

(1,838)

TosalCapisalSurpIns

$837,265

$823,193

$805.755 In July 1989, Duquesne became a wholly owned subsidiary of DQE, the holding com-pany formed as part of a shareholder-approved restructuring. As a result of the restructuring, DQE common stock replaced all outstanding shares of Duquesne common stock, except for ten shues which DQE holds.

DQE or its predecessor, Duquesne, has continuously paid dividends on common stock since 1953. Dividends may be paid on DQE common stock to the extent permitted bylaw and as declared by its board of directors. However, in Duquesnis ResteredArticles ofincorporation, provisions relating to pnfenrdnadpnferrnce stock may restrict the payment of Duquesnis com-mon dividends. No dividends or distributions may be made on Duquesne's common stockif 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 distri-butions may not exceed certain percentages of netincomeif the ratio of common svockholders ryuity to totalcapitaliserion 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 ntainedrarnings of Duquesne was restricted at December 31,1995.

H. Pafermd and Holders of Duquesnis preferred stock are entitled to cumulative quarterly dividends.

Pmfenace if four quaterly dividends on any series of preferred stock are in arrears, holders of the pre-Stock ferred stock are entided to elect a majority of Duquesnis boud of directors until all divi-dends have been paid. At December 31,1995, Duquesne had made all preferred stock dividend payments.

Holders of Duquesnis preference stock are entitled to receive cumulative quarterly dividends ifdividends on all series of preferred stock are paid. If six quaterly dividends on any series ofpreference stock are in urears, holders of the preference stock are entitled to elect two of Duquesnis directors until all dividends have been paid. At December 31,1995, Duquesne had made all dividend payments.1hfenrdendpnferrnce dindendr were $5.3 mil-lion, $6.0 million and $9.2 million in 1995,1994 and 1993, respectively.

In December 1991, Duquerne established an Employee Stock Ownership Plan (ESOP) to provide matching contributions for a 401(k) Retirement Savings Plan for Management Employees. (See " Employee Benefits," Note M, on page 56.) Duquesne issued and sold 845,070 shares of preference stock, plan series A to the trustee of the ESOP As con-sideration for the stock, Duquesne received a note valued at $30 million from the trustee.

The reference stock has an annual dividend rate of $2.80 per shue, and each share of the

pref,

,ce stock is exchangeable for one and one half shares of DQE common stock. At December 31,1995, $22.3 million of preference stock issued in connection with the estab-lishment 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 contributions from Duquesne are used to repay the ESOP note. Duquesne made cash contributions of approxi-mately $2.1 million for 1995, $2.3 million for 1994 and $2.1 million for 1993.These cash contributions were the difference between the ESOP debt service and the amount of divi-dends on ESOP shares (approximately $2.3 million in 1995, $2.4 million in 1994 and $2.3 million in 1993). As shares ofpreference stock are allocated to the accounts ofparticipants in 51

i i

the ESOP, Duquesne recognizes compensation cxpense, and the amount of the deferred com-pensation benefit is amortized. Duquesne recognized compensation expense related to the 401(k) plans of $2.3 million in 1995, $1.8 million in 1994 and $1.7 million in 1993.

Outstanding prrferudandpreference stock is generally callable, on notice of not less j

than thhy days, at stated prices plus accrued dividends. On September 1,1995, Duquesne called for redemption of all ofits outstanding shares of $7.20 preferred stock. On January 14, 1994, Duquesne called for redemption of all ofits outstanding shares of $2.10 and $7.50 preference stock. None of the remaining Duquesne preferred or preference stock issues has mandatory purchase requirements.

[hfened and Pr,rference Stock at Decensber 31 (Shams andAmounn in Thousands)

]

1995 1994 1993 Call Prie PerShare Shares Amount Shares Amount Shares Amount Ihferred Stock Seriem 4.75% (a)(b)(c)

$51.00 148

$ 7,407 148 $ 7,407 148$ 7,407 4.00% (a)(b)(c) 51.50 550 27,486 550 27,486 550 27,486 4.10%(a)(b)(c) 51.73 120 6,012 120 6,012 120 6,012 4.15%(a)(b)(c) 51.73 132 6,643 132 6,643 132 6,643 4.20% (a)(b)(c) 51.71 100 5,021 100 5,021 100 5,021

$2.10 (a)(b)(c) 51.84 159 8,039 159 8,039 159 8.039

$7.20(a)(c)(d) 298 29,732 319 31,915 9.00% (e) 3,000 TotalPirfradStock 1,209 63,608 1,507 90,340 1,528 92,523 Preference Stock Series: (f)

$2.10 (c)(g)

- 1.175 29,383

$7.50(d)(h) 84 8,392 Plan Serics A (c)(i) 37.18 834 29,615 841 29,857 844 29.956 Totall',f.. aStock E34 29,615 841 29,857 2,103 67,731 Deferred ESOP benefit (22,257)

(24.852)

(27,126) l Tota ((rF[FTFed And[hffence Stecie

$70,966

$95',5 5

$133,128 (a) Preferred stock: 4,000,000 authorized shares; (f) Preference stock: 8,000,000 authorird i

550 par value; cumulatiw shares; 51 par value; cumulative j

(b) 553 per share involuntary liquidacion value (g) 525 per share involuntaryliquidation (c) Non-redeemable value (d) 5100 per share involuntary liquidation value (h) Redeemable (c) 500 authorized shares; 10 issued $300,000 par (i) 535.50 per share involuntaryliquidation value; involuntary hquidation value 5300,000 value per share; redeemable beginning / yst 2000 I. Ieng-Term Duquesne's 1947 first mortgage bond indenture was retired in the derd quarter of 1995 Debt following the maturity of the last bond series issued under the indenture. All of Duquesne's First Collateral Trust Bonds have been issued under a new mortgage indenture that was established in April 1992 (the 1992 Indenture). All First Collateral Trust Bonds became first j

mortgage bonds when the 1947 mortgage indenture was retired. The 1992 Indenture includes more flexible provisions and eliminues conventions such as mandatory sinking funds and formula-derived maintenance and replacement clauses.

The pollution control notes arise from the sale of bonds by public authorities for the 4

purposes of finan:ing construction of pollution control facilities at Duquesne's plants or refunding previously issued bonds. Duquesne is obligated to pay the principal and interest on these bonds. For certain of the pollution control notes, there is an annual commitment fee 52

for an irrevocabic letter of credit. Undes cenain circumstances, the letter of credit is available for the payment ofinterest on, or redemption of, all or a portion of the notes. In late 1994, pollution control notes totaling $114.1 million with an average interest rate of 10.34 percent wm refmanced at lower adjustable interest rates.

Long-Term Debt at December 31 Principal Outstanding 1nterest (Amounnin ThousandsofDollan)

Rate Maturity 1995 1994 First Collateral Trust Bonds /

first mongage bonds 4.75 % 8.75 % 1996-2025 $ 903,000 (a) $ 950,400 (b)

Ibtlution control notes (c)

(d) 2003-2030 417,985 417,051 Sinking fund debentures 5%

2010 5,703 5,817 Miscellaneous 152 Less unamonized debt discount and premium -net (4,157)

(4,490)

Totalleng-Term Debt

$1,322,531

$1,368.930 (a) Excludes $50.0 million in 1995 related to a cunent maturity on May 15,1996.

(b) Exdudes $9.6 million in 1994 related to sinking fund requirements on the underlying fira mortgage bonds and $49.0 million related to the maturity on June 1,1995, ofthe las first mortgage bonds issued under the 1947 indenture.

(c) Excludes 50.9 million in 1994 rdated to sinking fund requirements on the undedying first mortgage bonds.

(d) The pouution control notes haw adjunable interest rates. 'Ihe interen rates at year-end averaged 3.9 percent in 1995 and 4.3 percent in 1994.

At De. ember 31,1995, sinking fund requirements (related solely to the sinking fund debentures) and maturities oflong-term debt outstanding for the next five years were: $50.4 million in 1996; $50.7 million in 1997, $75.7 million in 1998, $75.8 million in 1999 and

$100.8 million in 2000.

Total interest costs incurred were $103.3 million in 1995, $107.7 million in 1994 and

$117.0 million in 1993. Interest costs attributable to long-term debt and other interest were

$98.0 million, $102.1 million and $110.9 million in 1995,1994 and 1993, respectively.

Interest costs incurred also include $5.3 million, $5.6 million and $6.1 million attributable to capital leases in 1995,1994 and 1993, respectively. Of these amounts, $1.8 million in 1995, $2.0 million in 1994 and $2.0 million in 1993 were capitalized as AFC. Debt discount or premium and related issuance expenses are amonized over the lives of the applicable issues.

p During 1994 Duquesne's BV Unit 2 lease arrangement was amended to reflect an increase in federal income tax rates. At the same time, the associated letter of credit securing the lessor's equity interest in the unit was increased from $188 million to $194 million and the term of the letter of credit was extended to 1999. If certain specitied events occur, the let-ter of credit could be drawn down by the owners, the leases could terminate and collateralized lease bonds ($409 million at December 31,1995) would become direct obligations of Duquesne.

At December 31,1995 and 1994, Duquesne was in compliance with all ofits debt covenants. At December 31,1995, the fair value of Duquesne's long-term debt, including current maturities and sinking fund requirements, estimated on the basis of quoted market prices for the same or similar issues or currei : rates offered to Duque:ne for debt of the same rema' ming maturitics, was $1.401.4 million. The principal amount ;nduded in Duquesne's consolidated balance sheet is $1,376.7 million.

53

1 1

l l

l J. Short-Term At December 31,1995, Duquesne had an extendible revolving credit agreement with Borrowing and a group of banks totaling $150 million. This facility expires in October 1996. Interest rates Revolvmg on this credit agreement vary. Commitment fees are based on the unborrowed amount of the Credit commitments. The credit fac;lity contains a two-year repayment period for any amount out-Arrangements standing at the expiration of the revolving credit penod. At December 31,1995 and 1994, there were no short-term borrowings outstanding.

K. Income Taxes Dugn.:sne's federal income tax returns have been audited by the Internal Revenue Service (IRS) for the tax years through 1989. The tax years 1990 through 1995 remain sub-i ject to IRS review. Duquesne does not believe that final settlement of the federal income tax returns for these years will have a materially adverse effect on its financial position or results of

)

operations. The effects of the 1993 adoption of SFAS No.109 are discussed in " Income Taxes," Note A, on page 45. Implementation of the standard involved a change in account-

)

ing principle. The cumulative effect of $8 million on prior years was reported in 1993 as an increase in net income. The SFAS No.109 impact on 1993 income before cumulatiw efect of changes in accountingprinciplesis immaterial.

Deferred Tax Liabilities 1995 1994 (Amounain ThousandsofDollars)

At December 31, deferred tax assets (liabilities) w:re:

Investment tax credits unamortized 48,033 51,282 Gain on sale / leaseback of BV Unit 2 64,124 67,120 Tax benefit-long-term investments 164,582 Other 41,509 52,037 Deferred tax assets 318,248 170,439 l

Property depreciation (871,539)

(880,342)

Regulatory asset (172,008)

(177,610) l Loss on reacquired debt unarrortized (35,340)

(38,066) l Other (45,357)

(65,570)

Deferred tax liabilities (1,124,244)

(1,161,588) j MtDrferred TarLiabilisies

$ (805,996) $ (991,149) i Income Taxes 1995 1994 1993 (Amounnin Thousands ofDollan) included in operating expenses:

Curren ly payable:

Federal

$100,491

$90,335 $100,521 State 29,585 33,071 37,718 l

Deferred - net:

Federal (28,381)

(20,058)

(28,129) i State (5,778)

(7,232)

(8,441) l Investment tax credits deferred - net (7,252)

(5.376)

(5,399) l_

TotalIncludedin OperweingErpenses 88,665 90,740 96,270 l

Included in other income and deductions:

j Currently payable:

Federal 4,979 (6.139)

(17,557)

State (751) 335 (1,220) i Deferred - net:

Federal 442 (99) 251 i

State 137 (39) 100 Investment tax credits (578)

(607)

(607)

TotalIncluded in orher Income aed Deductions 4,229 (6.549)

(19.033)

)

TotalIncess Tar Expense

$ 92,894 584,191 5 77,237

Total income taxes differ from the amount computed by applying the statutory federal income tax rate to income before income taxes and before the cumulative effect of changes in account-ing principles.

luceme Tax Erpense Remnciliation 1995 1994 1993 (Amountrin TinusandtofDollan)

Computed federal income tax at statutory rate

$ 85,301

$81,074 $ 77,708 Increase (dec; ease) in taxes resulting from:

Tax audit settlement (15,000)

State income taxes, net of federal income tax benefit 15,076 16,988 18,302 Amortization ofdeferred investment tax credits (7,831)

(5,983)

(6,006)

Revenue requirement adjustment to regulatory taxes (12,178)

Other - net 348 4,290 2,233 Tota / Income Tar Erpense

$ 92,894

$84,191 $ 77,237 L. leases Duquesne leases nuclear fuel, a portion of a nuclear generating plant, certain office buildings, computer equipment and other property and equipment.

CapitalIsases at December 31 1995 1994 (Amountsin Thowands ofDollars)

Nudear fuel

$112,573

$139,763 Electric plant 20,808 22,012 Tesal 133,381 161,775 Less accumulated amortization (74,8 8)

(91,376) j Property Held Under Capital 12ases - Net (a)

$ 58,507

$ 70,399 (a) Indudes 52,910 in 1995 and 53,201 in 1994 ofcapital leases with associated obligations reired.

l In 1987, Duquesne sold and leased back its 13.74 percent interest in BV Unit 2; the i

sale was exclusive of transmission and common facilities. The total sales price of $537.9 mil-lion was the appraised value of Duquesne's interest in the property. Duquesne leased back its interest in the unit for a term of 29.5 years. The lease provides for semiannual payments and is accounted for as an operating lease. 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 ofcollateralized lease bonds to take advantage oflower interest rates and reduce the annual lease payments. The bonds were originally issued in 1987 for the purpose of partially financ-ing the lease of BV Unit 2. In accordance with the BV Unit 2 lease agreement, Duquesne paid the premiums of approximately $36.4 million as a supplemental rent payment to the tessors. This amount was deferred and is being amortized over the remaining lease term. At i

December 31,1995, the deferred balance was approximately $31.6 million.

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

i j

55 i

Summary ofRentalPaynsents 1995 1994 1993 (Amountsin Thousaruls ofDollan)

Operating leases

$57,617

$56,437 557,398 Amatization ofcapitalleases 26,705 33,596 28,758 Interest on capitalleases 4,332 4,996 5,382 TotalRentalfayment 588,654 595,029

$91,538 Future minimum lease payments for capitalleases are related principally to the esti-mated use of nuclear fuel fmanced through leasing arrangements and building leases.

Minimum payments for operating lea 2s are related principally to BV Unit 2 and certain of the corporate offices. Future payments due to Duquesne, as of December 31,1995, under subleases ofcertain corporate office space are approximately $4.4 million in 1996, $4.5 mil-tion in 1997 and $23.1 million thereafter.

Future Minimum Lease Payments Operating Leases Capitalleases Year Ended December 31, (Amounnin Thousands ofDollan) 1996 5 58,095

$ 24,392 1997 57,870 13,862 1998 57,621 8,801 1999 57,206 5,130 2000 57,164 3,705 2001 and thereafter 902,097 20,946 TotalMinimum LeasePayments

$ l,190,053 76,836 less amount representinginterest (21,239)

Present value of minimum lease payments for capital leaes

$ 55,597 (a) 1 (a) Indudes cunent obligations of $21.1 million at December 31,1995.

M. Employee Retirement Plans l

Benefits Duquesne maintains retirement plans to provide pensions for all full-time employees.

l Upon retirement, an employee receives a monthly pension based on his or her length ofser.

l vice and compensation. The cost of funding the pension plan is determined by the unit cred-it actuarial cost method. Duquesne'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 Retirrment Income Security Act of1.974 (ERISA) but not to exceed the suaxi-mum tax deductible amount for the year. Pension costs charged to expense or construction were $6.1 million for 1995, $8.9 million for 1994 and $9.8 million for 1993.

i i

5 1

56 i

Funded Status ofthe Retirement Plans and Amounts Recognized on the Consolidated Balance Sheet at Decender31 1995 1994 (Amounts in Thouutnds ofDollan)

Actuarial present value of benefits rendered to date:

Vested benefits

$378,344

$314,933 Non-vested benefits 19,110 17,282 Accumulated benefits obligations based on compensation to date 397,454 332,215 Additional benefits based on estimated future salary levels 53,757 59,318 Projected bendits obligation 451,211 391,533 Fair market value of plan assets 490,870 412,724 Projected benefits obligation under plan assets

$ 39,659

$ 21,191 Unrecognized net gain

$124,794 5 95,691 Unrecognized prior service cost (37,535)

(30,365)

Unrecngnized net transition liability (15,665)

(17,477)

Net pension liability per consolidated balance sheet (31,935)

(26,658)

Total

$ 39,659

$ 21,191 Assumed rate of return on plan assets 8.00 %

8.00 %

Discount rate used to determine projected benefits obligation 7.00 %

8.00 %

Assumed change in compensation levels 5.00 %

5.50 %

Pension assets consist primarily of common stocks, United States obligations and corpo.

rate debt securities.

Components ofNet Pension Cost 1995 1994 1993 (Amounu in Thousands ofDol'an)

Service cost (benefits carned during the year)

$ 9,953

$ 12,482 $ 11,657 Interest on projected her.dits obligation 30,063 28,221 27,423 l

Return on plan assets (99,246) 1,967 (41,725) l Net amortization and deferrals 65,316 (33,783) 12,454 I

NrtIbnsien Gst S 6,086

$ 8,887 $ 9,809 1

l l

Retirement Savings Plan and Other Benept Options l

Duquesne sponsors separate 401(k) retirement plans for its management and bargain-ing unit employees.

De 401(k) Retirement Savings Plan for Management Employees provides that Duquesne will match employee contributions to a 401(k) account up to a maximum ofsix percent of an employce's eligible salary. Duquesne's match consists of a $.25 base match per 4

eligible contribution dollar and an additional $.25 incentive match per eligible contribution dollar, if Board-approved targets are achieved. The 1995 incentive target for management was accomplished. Duquesne is funding its matching contributions to the 401(k) Retirement Savings Plan for Management Employees with payments to an ESOP established in December 1991. (See

• Prefer ed and Preference Stock." Note H. on page 51.)

The 401(k) Retirement Sa ings Plan for IBEW Represented Employees provides that beginning in 1995. Duquesne will match employee cc.ntributions to a 401(k) account up to a maximum of four percent of an employce's eligible salary. Duquesne's match consists of a 5.25 base match per eligible contribution dollar and an additional 5.25 incentive match per cli-57 1

.__ _ _. ~ - -... _ _. _ _

l gible contribution dollar, ifcenain non-occupational illness and injury targets are met. In

)

1995, these incentive targets were not met by Duquesne's union-represented employees.

I DQE's shareholders have approved a long-term incentive plan thiough which Duquesne may grant management employees options to purchase, during the years 1987 through 2003, up to a total of 6.9 million shares of DQE's common stock at prices equal to 1

the fair market value of such stock on the dates the options were granted. At December 31, 1995, approximately 2.6 million of these shares were available for future grants.

j On April 19,1995, DQE's board ofdirectors declared a three-for-two stock split for

}

shareholders of record on May 1,1995. One additional share of common stock was issued for f

every two shares outstanding as of the record date.

The following information is restated to reflect the 1995 stock split. As of December 31,1995,1994 and 1993, respectively, active grants totaled 2,159,000; 2,118,000; and 1,763,000 shares. Exercise prices of these options ranged from $8.2084 to $27.625 at December 31,1995, and from $8.2084 to hs.0833 at December 31.1994 and December 31,1993. Expiration dates of these grants ranged from 1997 to 2005 at December 31,1995; from 1997 to 2004 at December 31,1994; and from 1997 to 2003 at December 31,1993.

i As of December 31,1995,1994 and 1993, respectively, stock appreciation rights (SARs) had been granted in connection with 1,202,000; 1,190,000 and 1,193,000 of the options nut.-

standing. During 1995,367,000 SARs were exercised; 133,000 options were exercised at l

prices ranging from $8.2084 to $21.6667 and 28,000 options were cancelled. During 1994, 1,254,000 SARs were exercised; 339,000 options were exercised at prices ranging from l

$8.2084 to $18.9167; and 80,000 options were cancelled. During 1993,1,122,000 SARs were exercised; 227,000 options were exercised at prices ranging from $8.2084 to $18.9167; and 78,000 options were cancelled. Of the active grants at December 31,1995,1994 and 1993, respectively,929,000; 918,000; and 867,000 were not exercisable.

OtherAwarctiressentRemafstr In addition to pension benefits, Duquesne provides certain health care benefits and I

life insurance for some retired employees. Substantially all of Duquesne'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 contribu-tions, 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. Duquesne funds actual expenditures for obligations under the plans on a

• pay-as-you-go" basis.

Duquesne has the right to modify or terminate the plans.

As ofJanuary 1,1993, Duquesne adopted Statement ofFinancial Accounting Standards No 106, Employers'AccountingforPastretirement Benefts Other Than lensions, which requires the actuarially determined costs of the aforementioned postretirement benefits to be accrued over the period from the date of hire until the date the employee becomes fully eligible for j

benefits. Duquesne ha adopted this standard prospectively and has elected to amortize the j

transition liability over 20 years.

i Composanss ofAwarvrirement Cast 1995 1994 (Amounts in Thousands ofDollan)

Service cost (benefits camed during the penod)

$1,315 51,631 heerest cost on accumulated benefit obligatkm 2,340 2,294 Amortization of the transition obligarkm over twmty years 1,700 1,700 Other (582)

TotalPlestresiremrst Cast

$4,773 55,625 58

Funded Status ofPostretimnent Plan and Amounts Recognized on the Consolidated Balance Sheet at December 31 1995 1994 (Amounts in Thousands ofDollars)

Aauarial present value ofbenefits:

Retirees

$ 7,359 $ 6,292 Fully eligible active plan participants 3,187 3,074 1

Other naive plan participants 21,935 20,543 Accumulated postretirement benefit obligation 32,481 29,909 Fair market value of plan assets Accumulated benefit obligation in excess of plan assets

$(32,481) $(29,909)

Unrecognized net aauarial gains

$ 8,427 $ 9,481 Unrecognized net transition liability (28,898) (30,598)

Ibstretirement liability per consolidated balance sheet (12,010)

(8,792)

Total

$(32,481) $(29,909)

]

Dismunt rate used to determine projeaed benefit obligation 7.00 %

8.00 %

Health care cost trend rates:

For year beginningJanuary 1 8.80 %

8.60 %

Ultimate rate 5.50 %

6.50 %

Year ultimate rate is reached 2000 1999 Effect of a one percent increase in health care cost trend rates:

On accumulated projeacd benefit obligation

$ 3,228 5 3,137 On aggregate of annual service and interest costs 435 $

465 1

The accumulated postretirement benefit obligation comprises the present value of the estimated future benefits payable to current retirees and a pro rata portion of estimated bene-fits payable to active employees after retirement.

N. Commitments Constweien and Duquesne estimates that it will spend, excluding AFC and nuclear fuel, approximately Contingeno,es

$90 million, $90 million and $100 million on cous ruction during 1996,1997 and 1998, respeaively. Approximately $5 million of capital es.:nditures for the reliability enhancements to the simple cycle units located at BI contemplated in Duquesne's petition before the PUC are excluded from these estimates. (See " Sale of St. Martin" discussion, Note B, on page 47.)

1 Nuclear-RelatedMatters Duquesne operates two nuclear units and has an ownership interest in a third. 'Ihe opera-tioa of a nuclear facility involves special risks, potential liabilities and specific regulatory and safety requirements. Specific information about risk management and potential liabilities is dis-cussed below.

NuclearDecommissioning. The PUC ruled that recovery of the decommissioning costs for Beaver Valley Unit 1 (BV Unit 1) could begin in 1977, and that reco"ery for BV Unit 2 and Perry Unit I could begin in 1988. Duquesne expects to decommission BV Unit 1, BV Unit 2 and Perry Unit I no earlier than the expiration of each plant's operating license, 2016,2027 and 2026, respeaively. BV Unit I will be placed in safe storage until the expira-tion of the BV Unit 2 operating license, at which time the units may be decommissioned together.

1 1

59

Based on site-specific studies finalized in 1992 for BV Unit 2, and in 1994 for BV Unit I and Perry Unit 1, Duquesne's share of the total estimated decommissioning costs, including removal and decontamination costs, currently being used to determine Duquesne's cost of service, are $122 million for BV Unit 1, $35 million for BV Unit 2, and $67 million for Perry Unit 1.

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

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

NuclearInsurance. All of the companies with an interest in BV Unit 1. BV Unit 2 and Perry Unit I maintain nuclear property insurance, which provides coverage for property damage, decommissioning and decontamination liabilities. Duquesne's share of this program provides for $1.2 billion ofinsurance coverage for its net investment of$407.8 million in the Beaver Valley Power Station (BVPS) and $$65.5 million in Perry Unit 1, plus its interest in BV Unit 2 with lease commitments of $405.2 million, at December 31,1995. The lease com-mitments of $405.2 million represent the net present value of future lease payments discount-ed at 10.94 percent, the return currently authorized Duquesne by the PUC. Duquesne would be responsible for its share of any damages in excess ofinsurance coverage. In addition, if the l

property damage reserves of Nuclear Electric Insurance Limited (NEIL), an industry mutual insurance company, are inadequate to cover claims arising from an incident at any United States nuclear site covered by that insurer, Duquesne could be assessed retrospective premiums totaling a maximum of $10.9 million.

The Price-Anderson Amendmenn to the Atomic Eragy Act ofL954 limit public liability l

from a single incident at a nuclear plant to $8.9 billion. Duquesne has purchased $200 million ofinsurance, the maximum amount available, which provides the first level of financial pro-teClion.

Additional protection of $8.3 billion would be provided by an assessment of up to $75.5 4

million per incident on each nuclear unit in the United States. Duquesne's maximum total assessment, $56.6 million, which is based on its ownership or leasehold interests ir three nuclear generating unirs, 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 ureder the assessment program. Additionally, a state premium tax may be charged on the auessment and surcharge. Finally, the United States Cimgress could impose other revenue-raising measures on the nuclear industry if funds prove insuffi.

cient to pay claims.

60

/

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

Beaver Valley 1%eerStation Satam Generaten. BVPS' units are equipped with steam generators designed and built by Westinghouse Electric Corporation (Westinghouse).

Similar to other Westinghouse nuclear plants, stress corrosion cracking (SCC) has occurred in the steam generator tubes of BV Unit 1. BV Unit 2, which was placed in service eleven years after BV Unit 1, has not yet exhibited the degree of steam generator tube SCC experienced at BV Unit 1. It is, however, too early in the life of BV Unit 2 to determine the extent to which steam generator tube SCC may become a prob'em.

Duquesne has undertaken certain measures, such as increared inspections and tube plugging, to minimize the operational impact and to reduce susceptibility to steam generator tube SCC. Ahhough Duquesne has taken these steps to allay the effects ofsteam generator tube SCC, the inherent potential for future SCC in steam generator tubes of the Westinghouse design still exists. Material acceleration in SCC could lead to loss of plant effi-ciency, significant repairs or possible replacement of BV Unit l *s steam generators. Total replacement cost of BV Unit I steam generators is currently estimated at approximately $125 million. Duquesne would be responsible for $59 million of this total, which indudes the cost of equipment removal and replacement, but exdudes replacement power costs. The earliest that BV Unit l's steam generators could be replaced is 1999.

t Duquesne continues to explore all viable means of mitigating steam generator tube l

SCC, induding new repair technologies. Both units will undergo 100 percent tube inspec-i tion during scheduled refueling outzges in 1996. Duquesne will continue to monitor and evaluate the condition of the BVPS steam generators.

l Spent Nuclear FuelDisposal. The Nuclear %ste Policy Act of1982 established a l

policy for handling and disposing ofspent nuclear fuel and a policy requiring the established I

final repository to accept spent fuel. Electric utility companies have entered into contracts with the DOE for the permanent disposal of spent nuclear fuel and high-level radioactive waste in compliance with this legislation. He DOE has indicated that its repository under these contracts will not be available for acceptance ofspent fuel before 2010 at the earliest.

Existing on-site spent fuel storage capacities at BV Unit 1. BV Unit 2 and Perry Unit 1 are expected to be sufficient until 2016,2010 and 2011, respectively.

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Uranium Enrichment Decontamination and Decommissioning Fund. Nuclear reactor licensees in the United States are assessed annually for the decontamination and decommissioning of DOE uranium enrichment facilities. Assessments are based on the amount of uranium a utility had processed for enrichment prior to enactment of the National Energy Policy A.-r afl992 (NEPA) and are to be paid by such utilities over a 15-year period.

,1 At December 31,1995, Duquesne's liability for contributions is approximately 59.9 million (subject to an inflation adjustment). Contributions, when made, are recovered from cus-j tomers through the ECR.

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Guarantees Duquesne and the owners of Bruce Mansfield have guaranteed certain debt and lease obligations related to a coal supply contract for the Bruce Mansfield plant. At December 31, 1995, Duquesne's share of these guarantees was $25.4 million. The prices paid for the coal by the companies under this contract are expected to be sufficient to meet debt and lease obliga-tions to be satisfied in the year 2000. (See " Deferred Coal Costs" discussion, Note F, on page 49.) The minimum future payments to be made by Duquesne solely in relation to these obli-gations are $6.2 million in 1996, $5.9 million in 1997, $5.6 million in 1998, $5.3 million in 1999 and $4.2 million in 2000. Duquesne's tctal payments for coal purchased under the con-tract were $28.9 million in 1995, $23.3 million in 1994 and $26.5 million in 1993.

Residual Waste Management Regulations In 1992, the Pennsylvania Department of Em-ironmental Protection (DEP) issued Residual Waste Management Regulations governing the generation and management of non-hazardous residual waste, such as coal ash. Duquesne is assessing the sites which it utilizes and has developed compliance strategies under review by the DEP. Capital compliance costs of $3.0 million were incurred by Duquesne in 1995 to comply with these DEP regulations; on the basis ofinformation currently available, an additional $2.5 million will be incurred in 1996.

The expected additional capital cost of compliance through the year 2000 is estimated, based on current information, to be approximately $25 million. This estimate is subject to the results of ground water assessments and DEP final approval of compliance plans.

Other Duquesne is involved in various other legal proceedings and environmental matters.

Duquesne believes that such proceedings and matters, in total, will not have a materially adverse effect on its financial position or results of operations.

O, Quasse Summary ofSelected Quartedy FinancialData (Tho~2 ofDollan)

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9" ** ** ****" ' 'Y I

rmation (Unaudited) 1995 First Quarter Second Quarter Third Quarter Fourth Quarter ting Revenues (a)

$286,616

$274,669

$337,156

$281,343 l

ting Income (a) 57,542 55,705 76,001 52,351 Income 33,371 32,441 52,787 32,471 i

1994 rating Revenues (a)

$293,145

$281,054

$319,781

$274,644 ratmg Income (a) 60,345 54,373 71,670 50,512 Income 35,492 30,556 44,876 36.525 (a) Restated to amform with presentations adopted during 1995.

l Exceptfor historicalinformation contained herein, the matters discuurdin this AnnualReport on Form 10-IC areforward-loo'eing stasements that inw/w risks and uncertainties induding, but not limitedto, economic, competitiw, gowrnmentaland technologicalfacton afecting Duquesnr1 i

operations, markets, products, services andprices, andotherfactors discussedin Duquemesfilings wirh the Securities and Exchange Commission.

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SELECIID FINANCIAL DATA Amounts in Thousands of Dollars 1995 1994 1993 1992 1991 1990 j

INCOME STMEMENTITFMS I

Total operating revenues

$1,179,784 $1,168,624 $1,160,685 $1,150,380 $1,173,105 $1,115,360 Operating income

$ 241,599 $ 236,900 $ 237,897 $ 257.119 $ 268,666 $ 269396 Net income

$ 151,070 $ 147.449 $ 147,362 $ 149,768 $ 143,133 $ 135,456 Earnings for common stock

$ 145,750 $ 141,403 $ 138,174 $ 140357 $ 132,332 $ 121,410 BALANCE SHEETITEMS Property, plant and equipment-net

$2,978,903 $3,068,519 $3,123,948 $3,018,641 $3,037,454 $3,042,920 Total assets

$4,067,665 $4,149,867 $4,388,103 $3,718,092 $3,802,626 $3,794313 Capitalization:

Common stockholder's equity

$1,131,334 $1,115,512 $1,100,671 $1,107,609 $1,064,104 $1,035,059 Non-redcemable preferred and preference stock 70,966 95,345 124,736 123,430 121,906 151346 Redeemable preferred and preference stock 8392 8,579 15,437 37,747 Long-term debt 1,322,531 1,368,930 1,416,705 1,413,001 1,420,726 1,501,295 Total capitalization

$2,524,831 $2,579,787 $2,650,504 $2,652,619 $2,622,173 $2,725,447 l

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Duquesne light Company and Subsidiary Calculation ofRatio ofEarnings to Fixed Charges (Thousands of Dollars)

Year Ended Dece mber 31, 1225 1994 1993

_J992 1991 FIXED CHARGES:

Interest on long-term debt

$ 89,139

$94,646

$102,938

$119,179

$127,606 Other interest 2,599 1,095 2,387 1,749 1,773 Amortization ofdebt discount, premium and expense-net 6,252 6,381 5,541 4,223 3,892 lbrtion oflease payments representing an interest factor

_ 44386 44.839 45.925 60.721 64.189 Total Fixed Charges

$142376 1146.961

$156.7c1

$185.872

$197.460 EARNINGS:

Income from continuing operations

$151,070

$147,449

$144,7E 7

$149,768

$143,133 Income taxes 92,894*

84,191*

77,227 110,993 104,067 Fixed charges as above 112376 146.961 156.7c1 185.872 197.460 Total Earnings

$386340

$378.601

$378.815

$446.633

$444.660 RATIO OF EARNINGS TO FIXED CIIARGES 221 2.58 M2 2dQ 2.25 Duquesne's share of the fixed charges of an unaffiliated coal supplier, which amounted to approximately $3.4 million for the twelve months ended December 31,1995, has been excluded from the ratio.

• Earnings related to income taxes reflect a $13.5 million decrease for the twelve months ended December 31,1995, and December 31,1994, due to a financial statement reclassification related to SFAS 109. The Ratio of Earnings to Fixed Charges absent this reclassification equals 2.81 and 2.67 for the twelve months ended December 31,1995 and December 31,1994, respectively.

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O DUQUESNE IJGHT COMPANY EXHIBIT 23.1 1

INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33 52782,3343602,33-53563 and 33-53563-01 of Duquesne Light Company on Form S-3 ofour report dated January 30,1996, appearing in the Annual Report on Form 10-K of Duquesne Light Compmy for the year ended December 31,1995.

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/s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania March 29, t996 V

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