UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM IO-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____________ to ____________
Commission File Number
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l-10290
DQE, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1598483
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Cherrington Corporate Center, Suite 100
500 Cherrington Parkway, Coraopolis, Pennsylvania 15108-3184
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (412) 393-6000
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 of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past go days. Yes X No___
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
DQE Common Stock, no par value - 55,889,854 shares outstanding as of June 30,
2001 and 55,888,162 shares outstanding as of July 31, 2001.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DQE Condensed Statement of Consolidated Income (Unaudited)
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(Millions of Dollars, Except Per Share Amounts)
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Three Months Six Months
Ended June 30, Ended June 30,
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2001 2000 2001 2000
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Operating Revenues:
Electricity sales $ 255.4 $ 260.4 $ 492.0 $ 506.4
Water sales 26.3 25.6 52.0 51.5
Other 31.7 38.2 90.0 80.8
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Total Operating Revenues 313.4 324.2 634.0 638.7
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Operating Expenses:
Fuel and purchased power 104.1 92.7 197.6 143.3
Other operating 71.5 102.0 165.3 205.4
Maintenance 6.1 18.7 11.7 36.4
Impairment of long-lived assets 109.2 - 109.2 -
Depreciation and amortization 89.9 87.3 177.7 156.6
Taxes other than income taxes 15.9 20.8 31.2 44.2
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Total Operating Expenses 396.7 321.5 692.7 585.9
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Operating (Loss) Income (83.3) 2.7 (58.7) 52.8
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Other Income:
Investment income 8.2 37.4 31.6 70.8
Investment impairment (47.3) - (47.3) -
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Total Other Income (39.1) 37.4 (15.7) 70.8
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Interest and Other Charges 27.6 31.7 56.0 65.2
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(Loss) Income Before Income Taxes and Cumulative
Effect of a Change in Accounting Principle (150.0) 8.4 (130.4) 58.4
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Income Taxes (28.2) (2.0) (20.9) 5.1
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(Loss) Income Before Cumulative Effect
of a Change in Accounting Principle (121.8) 10.4 (109.5) 53.3
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Cumulative Effect of a Change in Accounting Principle - Net - - - 15.5
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Net (Loss) Income (121.8) 10.4 (109.5) 68.8
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Dividends on Preferred Stock 0.2 (1.0) 0.2 (0.5)
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Earnings Available for Common Stock $ (122.0) $ 11.4 $ (109.7) $ 69.3
==================================================================================================================================
Average Number of Common Shares
Outstanding (Millions of Shares) 55.9 67.1 55.9 69.0
==================================================================================================================================
Earnings Per Share of Common Stock:
Before cumulative effect of a change in accounting principle $ (2.18) $ 0.19 $ (1.96) $ 0.79
Cumulative effect of a change in accounting principle $ - $ - $ - $ 0.22
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Basic Earnings Per Share of Common Stock $ (2.18) $ 0.19 $ (1.96) $ 1.01
==================================================================================================================================
Diluted Earnings Per Share of Common Stock:
Before cumulative effect of a change in accounting principle $ (2.17) $ 0.18 $ (1.94) $ 0.77
Cumulative effect of a change in accounting principle $ - $ - $ - $ 0.21
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Diluted Earnings Per Share of Common Stock $ (2.17) $ 0.18 $ (1.94) $ 0.98
==================================================================================================================================
Dividends Declared Per Share of Common Stock $ 0.42 $ 0.40 $ 0.84 $ 0.80
==================================================================================================================================
See notes to condensed consolidated statements.
2
DQE Condensed Consolidated Balance Sheet (Unaudited)
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(Millions of Dollars)
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June 30, December 31,
ASSETS 2001 2000
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Current Assets:
Cash and temporary cash investments $ 4.9 $ 15.8
Receivables 222.0 236.4
Other current assets 238.9 136.6
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Total Current Assets 463.8 388.8
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Long-Term Investments 745.6 773.9
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Property, Plant and Equipment 2,447.9 2,396.3
Less: Accumulated depreciation (746.9) (702.4)
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Total Property, Plant and Equipment - Net 1,701.0 1,693.9
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Other Non-Current Assets:
Transition costs 266.9 396.4
Regulatory assets 327.2 326.6
Other 149.1 286.4
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Total Other Non-Current Assets 743.2 1,009.4
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Total Assets $ 3,653.6 $ 3,866.0
====================================================================================================================
CAPITALIZATION AND LIABILITIES
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Current Liabilities:
Notes payable and current debt maturities $ 96.2 $ 89.6
Other current liabilities 192.7 258.6
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Total Current Liabilities 288.9 348.2
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Non-Current Liabilities:
Deferred income taxes - net 876.4 852.7
Deferred income 110.7 116.8
Other non-current liabilities 165.7 171.4
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Total Non-Current Liabilities 1,152.8 1,140.9
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Commitments and Contingencies (Note E)
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Capitalization:
Long-Term Debt 1,349.9 1,351.7
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Preferred Stock:
DQE preferred stock 16.3 17.4
Preferred stock of subsidiaries 212.6 212.6
Preference stock of subsidiaries 12.7 11.4
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Total Preferred Stock 241.6 241.4
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Common Shareholders' Equity:
Common stock - no par value (authorized - 187,500,000
shares; issued - 109,679,154 shares) 994.8 994.8
Retained earnings 850.4 1,007.7
Treasury stock (at cost) (53,779,300 and 53,793,330 shares) (1,247.4) (1,247.2)
Accumulated other comprehensive income 22.6 28.5
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Total Common Shareholders' Equity 620.4 783.8
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Total Capitalization 2,211.9 2,376.9
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Total Liabilities and Capitalization $ 3,653.6 $ 3,866.0
====================================================================================================================
See notes to condensed consolidated financial statements.
3
DQE Condensed Statement of Consolidated Cash Flows (Unaudited)
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(Millions of Dollars)
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Six Months Ended June 30,
2001 2000
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Cash Flows From Operating Activities:
Operations $ 173.7 $ 185.1
Changes in working capital other than cash (55.5) (73.6)
Other (28.8) 18.8
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Net Cash Provided from Operating Activities 89.4 130.3
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Cash Flows From Investing Activities:
Capital expenditures 70.9 (76.8)
Long-term investments (8.7) (62.2)
Acquisitions (0.8) (32.0)
Capitalized divestiture costs - (89.6)
Sale of generation assets - 1,705.0
Proceeds from disposition of investments 26.7 49.4
Other (6.3) (2.2)
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Net Cash (Used in) Provided from Investing Activities (60.0) 1,491.6
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Cash Flows From Financing Activities:
Dividends on common and preferred stock (47.8) (53.4)
Reductions of long-term obligations - net (15.3) (749.2)
Repurchase of common stock - (344.6)
Issuance of debt - 149.7
Commercial paper activity 20.0 (342.8)
Other 2.8 (38.2)
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Net Cash Used in Financing Activities (40.3) (1,378.5)
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Net (decrease) increase in cash and temporary cash investments (10.9) 243.4
Cash and temporary cash investments at beginning of period 15.8 54.2
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Cash and temporary cash investments at end of period $ 4.9 $ 297.6
=================================================================================================================================
See notes to condensed consolidated financial statements.
DQE Condensed Statement of Consolidated Comprehensive Income (Unaudited)
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(Millions of Dollars)
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Three Months Six Months
Ended June 30, Ended June 30,
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2001 2000 2001 2000
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Net (loss) income $(121.8) $ 10.4 $(109.5) $ 68.8
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Other comprehensive income:
Unrealized holding gains (losses) arising during the period,
net of tax of $2.1, $(0.1), $(3.2) and $5.8 5.1 (0.3) (5.9) 8.1
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive (Loss) Income $(116.7) $ 10.1 $(115.4) $ 76.9
=================================================================================================================================
See notes to condensed consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements (Unaudited)
A. STRATEGIC REVIEW PROCESS
We have concluded our strategic review process, the goal of which was to
determine our long-term strategic direction in order to maximize value to
shareholders. Based upon the results of this review, our Board of Directors has
concluded that we should remain independent at this time, with a strategic focus
on our utility operations. In addition, we will continue to operate a more
streamlined water utility and certain of our existing complementary businesses,
including energy services and communications. Consistent with this strategy, we
will explore, in an orderly manner, opportunities to monetize a portion or all
of our remaining unregulated businesses.
B. ACCOUNTING POLICIES
Consolidation
DQE, Inc. delivers essential products and related services, including
electricity, water and communications, to more than one million customers
throughout the United States. Our core operating subsidiaries are Duquesne Light
Company; AquaSource, Inc.; DQE Energy Services, Inc.; and DQE Communications,
Inc. Our other subsidiaries are DQE Enterprises, Inc.; DQE Financial Corp.;
ProAm, Inc.; Cherrington Insurance, Ltd.; and DQE Capital Corporation.
Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the transmission and distribution of electric energy.
AquaSource is a water resource management company that acquires, develops and
manages water and waste-water systems.
DQE Energy Services is a facilities-management company offering a wide range
of energy outsourcing solutions for industrial, manufacturing, airport and
institutional markets including operation and maintenance of energy and
specialty fuel facilities.
DQE Communications is the developer and owner of the only open-access
metropolitan fiber optic network in southwestern Pennsylvania.
DQE Enterprises manages investments in electronic commerce, energy services
and technologies, and communications businesses.
DQE Financial is an investment and portfolio management organization focusing
its financial expertise in structured finance and alternative-energy markets.
ProAm is a propane retail distribution company serving more than 70,000
customers in seven states.
DQE Capital and Cherrington Insurance provide financing and insurance services
for DQE and various affiliates.
All material intercompany balances and transactions have been eliminated in
the preparation of the consolidated financial statements.
Basis of Accounting
DQE and Duquesne Light are subject to the accounting and reporting
requirements of the Securities and Exchange Commission (SEC). Duquesne Light's
electricity delivery business is also subject to regulation by the Pennsylvania
Public Utility Commission (PUC) and the Federal Energy Regulatory Commission
(FERC) with respect to rates for delivery of electric power, accounting and
other matters. Additionally, AquaSource's water utility operations are regulated
by various authorities within the states where they operate as to rates,
accounting and other matters.
In the opinion of management, the unaudited condensed consolidated financial
statements included in this report reflect all adjustments that are necessary
for a fair presentation of the results of interim periods and the adjustments
are normal, recurring adjustments. Prior periods have been reclassified to
conform with current accounting presentations. In addition, the 2000 results of
operations by business segment have been revised to conform with our current
accounting presentations as a result of the PUC's final accounting order issued
in January 2001 regarding the proceeds of our generation asset sale.
These statements should be read with the financial statements and notes
included in our Annual Report on Form 10-K for the year ended December 31, 2000
filed with the SEC. The results of operations for the three and six months ended
June 30, 2001, are not necessarily indicative of the results that may be
expected for the full year. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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 also may be affected by the
estimates and assumptions management is required to make. Actual results could
differ from those estimates.
5
Impairment Charges
In connection with the focus on our core utility operations, we have
determined that certain of our assets lie outside the scope of our future plans.
Our water distribution business was formed in mid-1997 to aggregate the
operations of small to mid-sized water systems throughout the United States.
AquaSource acquired more than 130 water utilities, service companies, and
construction companies, with annual aggregate revenues in excess of $100
million.
In 2000, AquaSource suspended major acquisitions when forecasted returns did
not materialize. AquaSource turned its focus to better integrating operations to
achieve efficiencies through higher resource utilization, cost reductions and a
more standard operational approach. Operating under a new management team,
AquaSource has made substantive progress to date in implementing strategies that
will enable the company to reach its full potential. AquaSource earned an
operating profit for the first time, after taking into consideration prior
period acquisition adjustments, during the first six months of 2001.
While the regulated utility business continues to show promise, the contract
operations business and the construction business have failed to achieve
originally projected operating margins. Competition and price pressures have
reduced the outlook for margins in these businesses. Furthermore, given
AquaSource's broad geographic diversity, there are selective areas of operation
that are not capable of achieving the integration synergies needed to realize
desired levels of performance.
Evaluating AquaSource's future direction was a major focus of the strategic
review process. The new management team has assessed the capabilities of the
operating platforms. This realistic outlook of the company's potential future
performance results in lower returns than originally anticipated.
In recognition of this assessment and resulting outlook, AquaSource recorded a
second quarter pretax impairment charge of $109.2 million, or $99.7 million
after tax, to write down various aspects of its business, primarily related
to contract operations and construction. Our remaining investment in AquaSource
excluding working capital after the impairment charge is approximately $280
million as of June 30, 2001.
Going forward, AquaSource remains committed to the water distribution
business, anchored by its regulated utility business. Efforts to improve the
profitability and quality of service of this business segment will continue. In
addition, AquaSource views contract operations and construction as important
complementary businesses while it works to complete the transition to a fully
integrated operation with enhanced profitability.
We determined the value of the impairment by projecting the undiscounted
future cash flows generated by the specific assets over the assets' expected
lives. To the extent that the undiscounted future cash flows did not exceed the
book carrying value of the assets, the future cash flows were discounted back at
our cost of borrowing to determine the carrying value of the assets. The
impairment charge recorded is the difference between the previous book carrying
value and the carrying value determined by this process.
The assets determined to be impaired consisted of $79.4 million of goodwill,
$26.4 million of property, plant and equipment, and $3.4 million of other
assets.
As a further result of our strategic review process, we formalized plans for
an orderly divestiture of our DQE Enterprises business during the next few
quarters as opportunities present themselves. This business is not consistent
with our focus on our core regulated utility businesses and opportunities
related to these investments have not developed as expected, due to market
conditions. During the second quarter of 2001, Enterprises sold two investments
and recognized an impairment charge to write off all or parts of seven
investments, resulting in a non-cash pre-tax charge of $47.3 million, or $27.7
million after tax.
We determined the value of the impairment of each of these investments by
analyzing the business prospects for each platform company. This analysis
included an evaluation of the business' cash on-hand, its fundraising abilities,
its number of customers and contracts, and its overall ability to continue as a
going concern. In addition, we obtained independent external valuation for
certain of the businesses.
Earnings Per Share
We no longer report comprehensive income or comprehensive earnings per share
on the income statement, due to our decision to monetize DQE Enterprises'
investments.
Basic earnings per share are computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share are computed on
the basis of the weighted average number of common shares outstanding, plus the
effect of the outstanding Employee Stock Ownership Plan shares, DQE preferred
stock and stock options, unless a net loss occurs as the inclusion of these
shares would be anti-dilutive. The treasury stock method is used in computing
the dilutive effect of stock options. This method assumes any proceeds obtained
upon the exercise of options would be used to purchase common stock at the
average market price during the period. The following table presents the
numerators and denominators used in computing the diluted basic earnings per
share for the three and six months ended June 30, 2001 and June 30,
2000.
6
Diluted Earnings Per Share
for the Three Months Ended June 30,
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(Millions of Dollars) 2001 2000
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Earnings for common $ (122.0) $ 11.4
Dilutive effect of:
ESOP dividends 0.4 0.4
Preferred stock dividends 0.2 0.9
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Diluted Earnings for Common S (121.4) $ 12.7
================================================================================
(Millions of Shares)
Basic average shares 55.9 69.0
Dilutive effect of:
ESOP shares - 0.9
DQE preferred stock - 1.0
Stock options - -
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Diluted average shares 55.9 70.9
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Diluted Earnings Per Share $ (2.17) $ 0.18
================================================================================
Diluted Earnings Per Share
for the Six Months Ended June 30,
- --------------------------------------------------------------------------------
(Millions of Dollars) 2001 2000
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Income before accounting change $ (109.7) $ 53.8
Cumulative effect of
accounting change - net - 15.5
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Earnings for common (109.7) 69.3
Dilutive effect of:
ESOP dividends 0.9 (0.5)
Preferred stock dividends 0.2 0.8
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Diluted Earnings for Common $ (108.6) $ 69.6
================================================================================
(Millions of Shares)
Basic average shares 55.9 69.0
Dilutive effect of:
ESOP shares - 0.9
DQE preferred stock - 1.0
Stock options - -
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Diluted average shares 55.9 70.9
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Diluted earnings per share:
Before accounting change $ (1.94) $ 0.77
Accounting change $ - $ 0.21
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Diluted Earnings Per Share $ (1.94) $ 0.98
================================================================================
Recent Accounting Pronouncements
On July 20, 2001 the Financial Accounting Standards Board issued two new
accounting standards, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangibles."
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations with limited exceptions for combinations initiated prior
to July 1, 2001. We do not believe the adoption of this statement will have a
significant impact on our financial statements.
SFAS No. 142, which becomes effective January 1, 2002, discontinues the
requirement for amortization of goodwill and indefinite-lived intangible assets,
and instead requires an annual review for the impairment of those assets.
Impairment is to be examined more frequently if certain indicators appear.
Intangible assets with a determinable life will continue to be amortized. We are
currently evaluating, but have yet to determine, the impact that the adoption of
this statement will have on our financial statements.
C. RATE MATTERS
Competition and the Customer Choice Act
The Pennsylvania Electricity Generation Customer Choice and Competition Act
(Customer Choice Act) enables Pennsylvania's electric utility customers to
purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). As of July 31, 2001, approximately 14 percent of
Duquesne Light's customers had chosen alternative generation suppliers measured
on both a kilowatt-hour (KWH) basis and a non-coincident peak load basis. The
remaining customers are provided with electricity through our provider of last
resort service arrangement with Orion Power Midwest. L.P. (discussed on page 8).
As alternative generation suppliers enter and exit the retail supply business,
the number of customers participating in our provider of last resort service
will fluctuate.
Customers who select an alternative generation supplier pay for generation
charges set competitively by that supplier, and pay Duquesne Light for a
competitive transition charge (discussed below) and transmission and
distribution charges. Electricity delivery (including transmission, distribution
and customer service) remains regulated in substantially the same manner as
under historical regulation.
Regional Transmission Organization
FERC Order No. 2000 calls on transmission-owning utilities such as Duquesne
Light to voluntarily join regional transmission organizations (RTOs). Duquesne
Light is committed to reducing customer costs while ensuring a stable, plentiful
supply of electricity for its customers. Toward that end Duquesne concluded, as
part of the strategic review, that it will join the Pennsylvania-New Jersey-
Maryland interconnection to establish the PJM West RTO. Duquesne's inclusion in
this RTO will put the region's transmission facilities under common control to
reduce long-term energy costs and enhance reliability to customers.
7
Competitive Transition Charge
In its final restructuring order issued in the second quarter of 1998, the PUC
determined that Duquesne Light should recover most of the above-market costs of
its generation assets, including plant and regulatory assets, through the
collection of the competitive transition charge (CTC) from electric utility
customers. On January 18, 2001, the PUC issued an order approving our final
accounting for the proceeds of our April 2000 generation asset sale, including
the net recovery of $276 million of sale-related transaction costs. Applying the
net generation asset sale proceeds to reduce transition costs, we now anticipate
termination of the CTC collection period in early 2002 for most major rate
classes. Rates are then expected to decrease 18 percent for an average
residential customer who takes provider of last resort service from Duquesne
Light pursuant to the second agreement with Orion discussed below. This rate
decrease reflects the additional cost of electric capacity required by RTO
membership. (See "Regional Transmission Organization" discussion on page 7.) The
transition costs, as reflected on the consolidated balance sheet, are being
amortized over the same period that the CTC revenues are being recognized. For
regulatory purposes, the unrecovered balance of transition costs that remain
following the generation asset sale was approximately $277.2 million ($169.1
million net of tax) at June 30, 2001, on which Duquesne Light is allowed to earn
an 11 percent pre-tax return. A slightly lower amount is shown on the balance
sheet due to the accounting for unbilled revenues adopted during 2000.
Provider of Last Resort
Although no longer a generation supplier, as the provider of last resort for
all customers in its service territory, Duquesne Light must provide electricity
for any customer who does not choose an alternative generation supplier, or
whose supplier fails to deliver. As part of the generation asset sale, Orion
agreed to supply Duquesne Light with all of the electric energy necessary to
satisfy Duquesne Light's provider of last resort obligations during the CTC
collection period. On December 20, 2000, the PUC approved a second agreement
that extends Orion's provider of last resort arrangement (and the PUC-approved
rates for the supply of electricity) beyond the final CTC collection through
2004 (POLR II). The agreement also permits Duquesne Light, following the CTC
collection, an average margin of 0.5 cents per KWH supplied through this
arrangement. Except for this margin, these agreements, in general, effectively
transfer to Orion the financial risks and rewards associated with Duquesne
Light's provider of last resort obligations. While we retain the collection risk
for the electricity sales, a component of our regulated delivery rates is
designed to cover the cost of a normal level of uncollectible accounts.
Rate Freeze
An overall four-and-one-half-year rate cap from January 1, 1997, was
originally imposed on the transmission and distribution charges of Pennsylvania
electric utility companies under the Customer Choice Act. As part of a
settlement regarding recovery of deferred fuel costs, Duquesne Light agreed to
extend this rate cap for an additional six months through the end of 2001.
Subsequently, in connection with the POLR II agreement described above, Duquesne
Light negotiated a rate freeze for generation, transmission and distribution
rates. The rate freeze fixes new generation rates for retail customers who take
electricity under the extended provider of last resort arrangement, and
continues the transmission and distribution rates for all customers at current
levels through at least 2003. Under certain circumstances, affected interests
may file a complaint alleging that, under these frozen rates, Duquesne Light has
exceeded reasonable earnings, in which case the PUC could make adjustments to
rectify such earnings.
AquaSource Rate Applications
AquaSource has filed consolidated, statewide water and sewer rate change
applications with the Texas Natural Resource Conservation Commission (TNRCC) and
17 municipalities. The requested rate increases were provisionally phased in
over twelve months, becoming effective on July 17, 2000 and 2001. If this
request is approved, annual water and sewer revenues in Texas will increase by
approximately $7 million after the phase-in period is completed.
The proposed rates are being charged (subject to refund with interest) pending
the final order on each application by the regulatory authority having
jurisdiction. Included in 2001 revenues is approximately $1.7 million related to
this rate increase.
Thirteen of the municipalities have either approved the requested rate
increase or failed to act on a timely basis, and therefore the increase is
deemed approved in those locations. However, three municipalities have denied
the proposed increase outright, and a fourth has established rates significantly
lower than requested. AquaSource has appealed these municipal rate orders to the
TNRCC. It is customary for the TNRCC to consolidate all municipal appeals with
the general rate case and to issue one uniform rate order affecting all service
areas. Hearings are next scheduled for September 2001. While there is no
statutory deadline for a decision, AquaSource expects the TNRCC's final order to
be issued by early 2002.
8
On March 31, 2001, AquaSource also filed a rate increase petition with the
Indiana Utility Regulatory Commission (IURC) regarding its water and sewer rates
in Indiana. We currently anticipate a final order from the IURC in early 2002.
If this request is approved, annual water and sewer revenues in Indiana will
increase by approximately $2.7 million.
D. RECEIVABLES
The components of receivables for the periods indicated are as follows:
(Millions of Dollars)
-----------------------------------
June 30, June 30. December 31,
2001 2000 2000
- -------------------------------------------------------------------
Electric customers $ 94.9 $ 101.8 $ 87.0
Unbilled revenue
accrual 46.4 50.0 47.2
Water customers 15.7 32.7 17.3
Other utility 13.1 11.6 16.6
Other 61.0 40.3 80.2
Less: (Allowances for
uncollectible
accounts) (11.1) (12.0) (11.9)
- ---------------------------------------------------------------
Total $ 220.0 $ 224.4 $ 236.4
===============================================================
E. COMMITMENTS AND CONTINGENCIES
Construction
We estimate that in 2001 we will spend, excluding the allowance for funds
used during construction, approximately $60 million for electric utility
construction; $50 million (including $30 million for environmental compliance)
for water utility construction; $40 million for construction at our landfill gas
sites; and $10 million for construction by our other business lines.
Guarantees
As part of our investment portfolio in affordable housing, we have received
fees in exchange for guaranteeing a minimum defined yield to third-party
investors. A portion of the fees received has been deferred to absorb any
required payments with respect to these transactions. Based on an evaluation of
and recent experience with the underlying housing projects, we believe that such
deferrals are sufficient for this purpose.
In connection with DQE Energy Services' sale, through a subsidiary, of its
alternative fuel facilities, DQE agreed to guarantee the subsidiary's obligation
under the sales agreement to indemnify the purchaser against breach of
warranties, representations or covenants. We do not believe this guarantee will
have any material impact on our results of operations, financial position or
cash flows.
Other
In February 2001, 39 former and current employees of AquaSource, all minority
investors in AquaSource, commenced an action against DQE, AquaSource and others
in the District Court of Harris County, Texas. The complaint alleges that the
defendants fraudulently induced the plaintiffs to agree to sell their AquaSource
stock back to AquaSource, and that defendants took actions intended to decrease
the value of the stock. Plaintiffs seek, among other things, an award of actual
damages not to exceed $100 million and exemplary damages not to exceed $400
million.
Although we cannot predict the ultimate outcome of the case or estimate the
range of any potential loss that may be incurred in the litigation, we believe
the lawsuit is frivolous and without merit, strenuously deny all allegations of
wrongdoing asserted by plaintiffs, and believe we have meritorious defenses to
plaintiffs' claims. We intend to vigorously defend the lawsuit.
We are involved in various other legal proceedings and environmental matters.
We believe that the resolution of such proceedings and matters, in total, will
not have a materially adverse effect on our financial position, results of
operations or cash flows.
F. SUBSEQUENT EVENT
On July 16, 2001, the Allegheny County Airport Authority purchased the
Pittsburgh International Airport energy facility from a DQE Enterprises
subsidiary, and entered into an operations and maintenance agreement regarding
the facility with DQE Energy Services. The transaction resulted in an
approximate gain of $8.2 million after tax ($0.15 per share).
9
G. BUSINESS SEGMENTS AND RELATED INFORMATION
With a more concentrated focus on our core utility businesses, we formalized
plans to divest our DQE Enterprises business. (See "Impairment Charges"
discussion, Note B, on page 6.) During the second quarter of 2001, Enterprises
recorded a pretax $47.3 million ($27.7 million after tax) one-time non-cash
charge for the sale of two investments and the write-off of all or parts of
seven other investments, which had a significant effect on our earnings. As a
result, Enterprises' operations meet the criteria for separate disclosure as a
business segment according to SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Historically, they had been included in the
"all other" category.
We report the results of our business segments, determined by products,
services and regulatory environment as follows: (1) the transmission and
distribution of electricity by Duquesne Light (electricity delivery business
segment), (2) the supply of electricity by Duquesne Light (electricity supply
business segment), (3) the management of water systems by AquaSource (water
distribution business segment), and (4) the management of electronic commerce,
energy services and technologies, and communications investment portfolios by
DQE Enterprises (Enterprises business segment). With the completion of our
generation asset sale in April 2000, the electricity supply business segment is
now comprised solely of provider of last resort service. We also report an "all
other" category, to include our other subsidiaries below the quantitative
threshold for disclosure and corporate administrative functions, financing, and
insurance services for our various affiliates.
10
Business Segments for the Three Months Ended:
- --------------------------------------------------------------------------------
(Millions of Dollars)
--------------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Enterprises Other tions dated
--------------------------------------------------------------------------------------------------
June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 80.6 $ 108.8 $ 73.9 $ 26.4 $ 4.9 $ 21.8 $ (3.0) $ 313.4
Operating expenses 38.2 108.8 3.4 20.7 3.9 26.1 (3.5) 197.6
Depreciation and
amortization expense 14.9 -- 65.1 4.9 0.7 4.3 -- 89.9
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 27.5 -- 5.4 0.8 0.3 (8.6) 0.5 25.9
Investment income (2) 11.4 -- -- 0.7 1.8 6.8 (12.5) 8.2
Investment impairment -- -- -- -- (47.3) -- -- (47.3)
Interest and other charges (2) 20.2 -- -- 0.3 -- 18.6 (11.5) 27.6
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 18.7 -- 5.4 1.2 (45.2) (20.4) (0.5) (40.8)
Income taxes 7.7 -- 1.9 0.8 (19.2) (9.9) -- (18.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
impairment charge 11.0 -- 3.5 0.4 (26.0) (10.5) (0.5) (22.1)
Impairment charge - net of tax -- -- -- (99.7) -- -- -- (99.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 11.0 $ -- $ 3.5 $ (99.3) $ (26.0) $ (10.5) $ (0.5) $ (121.8)
====================================================================================================================================
Assets $ 1,961.3 $ -- $ 266.9 $ 348.6 $ 109.2 $ 967.6 $ -- $3,653.6
====================================================================================================================================
Capital expenditures $ 15.4 $ -- $ -- $ 8.8 $ -- $ 21.1 $ -- $ 45.3
====================================================================================================================================
(Millions of Dollars)
---------------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Enterprises Other tions dated
---------------------------------------------------------------------------------------------------
June 30, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 75.5 $ 114.3 $ 83.1 $ 25.6 $ 5.7 $ 23.2 $ (3.2) $ 324.2
Operating expenses 42.4 122.8 3.6 28.8 4.6 42.6 (10.6) 234.2
Depreciation and
amortization expense 14.1 0.5 63.6 4.2 0.9 4.0 -- 87.3
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 19.0 (9.0) 15.9 (7.4) 0.2 (23.4) 7.4 2.7
Other income (2) 9.6 (0.7) -- 1.4 8.1 31.4 (12.4) 37.4
Interest and other charges (2) 18.5 5.2 -- 0.3 0.2 12.0 (4.5) 31.7
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 10.1 (14.9) 15.9 (6.3) 8.1 (4.0) (0.5) 8.4
Income taxes 1.8 1.1 5.5 (1.8) 3.2 (11.8) -- (2.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8.3 $ (16.0) $ 10.4 $ (4.5) $ 4.9 $ 7.8 $ (0.5) $ 10.4
====================================================================================================================================
Assets (1) $1,892.5 $ -- $ 396.4 $ 466.8 $ 163.6 $ 946.7 $ -- $3,866.0
====================================================================================================================================
Capital expenditures $ 22.1 $ 4.7 $ -- $ 15.2 $ 0.2 $ 5.1 $ -- $ 47.3
====================================================================================================================================
(1) Asset balance as of December 31, 2000.
(2) Excludes intercompany interest charges.
11
Business Segments for the Six Months Ended:
- --------------------------------------------------------------------------------
(Millions of Dollars)
---------------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Enterprises Other tions dated
---------------------------------------------------------------------------------------------------
June 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 154.4 $ 206.4 $ 148.0 $ 52.0 $ 10.9 $ 68.4 $ (6.1) $ 634.0
Operating expenses 79.2 206.4 6.6 42.8 9.4 70.3 (8.9) 405.8
Depreciation and
amortization expense 29.6 - 129.5 9.4 1.6 7.6 - 177.7
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 45.6 - 11.9 (0.2) (0.1) (9.5) 2.8 (50.5)
Investment income (2) 21.7 - - 2.2 2.8 24.1 (19.2) 31.6
Investment impairment - - - - (47.3) - - (47.3)
Interest and other charges (2) 40.4 - - 0.5 0.1 30.4 (15.4) 56.0
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 26.9 - 11.9 1.5 (44.7) (15.8) (1.0) (21.2)
Income taxes 11.0 - 4.2 1.2 (19.4) (8.4) - (11.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
impairment charge 15.9 - 7.7 0.3 (25.3) (7.4) (1.0) (9.8)
Impairment charge - net of tax - - - (99.7) - - - (99.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 15.9 $ - $ 7.7 $ (99.4) $ (25.3) $ (7.4) $ (1.0) $ (109.5)
===================================================================================================================================
Assets $1,961.3 $ - $ 266.9 $ 348.6 $ 109.2 $ 967.6 $ - $ 3,653.6
===================================================================================================================================
Capital expenditures $ 26.3 $ - $ - $ 18.0 $ - $ 26.6 $ - $ 70.9
===================================================================================================================================
(Millions of Dollars)
---------------------------------------------------------------------------------------------------
Electricity Electricity Water All Elimina- Consoli-
Delivery Supply CTC Distribution Enterprises Other tions dated
---------------------------------------------------------------------------------------------------
June 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 151.5 $ 209.9 $ 169.5 $ 51.5 $ 10.7 $ 52.0 $ (6.4) $ 638.7
Operating expenses 95.2 204.2 7.4 53.7 9.5 80.4 (21.1) 429.3
Depreciation and
amortization expense 28.0 2.2 108.5 8.0 1.7 8.2 - 156.6
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 28.3 3.5 53.6 (10.2) (0.5) (36.6) 14.7 52.8
Other income (2) 16.5 2.8 - 2.7 10.0 60.0 (21.2) 70.8
Interest and other charges (2) 27.5 21.2 - 0.5 0.4 21.0 (5.4) 65.2
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 17.3 (14.9) 53.6 (8.0) 9.1 2.4 (1.1) 58.4
Income taxes 4.6 (6.8) 18.8 (3.6) 3.6 (11.5) - 5.1
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
cumulative effect $ 12.7 $ (8.1) $ 34.8 $ (4.4) $ 5.5 $ 13.9 $ (1.1) $ (53.3)
===================================================================================================================================
Assets(1) $1,892.5 $ - $ 396.4 $ 466.8 $ 163.6 $ 946.7 $ - $ 3,866.0
===================================================================================================================================
Capital expenditures $ 33.5 $ 4.7 $ - $ 28.9 $ 0.4 $ 9.3 $ - $ 76.8
===================================================================================================================================
(1) Asset balance as of December 31, 2000.
(2) Excludes intercompany interest charges.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Part I, Item 2 of this Quarterly Report on Form 10-Q should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31,
2000 filed with the Securities and Exchange Commission (SEC), and the condensed
consolidated financial statements, which are set forth on pages 2 through 12 in
Part I, Item I of this Report.
DQE, Inc. delivers essential products and related services, including
electricity, water and communications, to more than one million customers
throughout the United States. Our core operating subsidiaries are Duquesne Light
Company; AquaSource, Inc.; DQE Energy Services, Inc.; and DQE Communications,
Inc. Our other subsidiaries are DQE Enterprises, Inc.; DQE Financial Corp.;
ProAm, Inc.; Cherrington Insurance, Ltd.; and DQE Capital Corporation.
Duquesne Light, our largest operating subsidiary, is an electric utility
engaged in the transmission and distribution of electric energy.
AquaSource is a water resource management company that acquires, develops and
manages water and waste-water systems and complementary businesses.
DQE Energy Services is a facilities-management company offering a wide range
of energy outsourcing solutions for industrial, manufacturing, airport and
institutional markets including operation and maintenance of energy and
specialty fuel facilities.
DQE Communications is the developer and owner of the only open-access
metropolitan fiber optic network in southwestern Pennsylvania.
DQE Enterprises manages investments in electronic commerce, energy services
and technologies, and communications businesses.
DQE Financial is an investment and portfolio management organization focusing
its financial expertise in structured finance and alternative-energy markets.
ProAm is a propane retail distribution company serving more than 70,000
customers in seven states.
DQE Capital and Cherrington Insurance provide financing and insurance services
for DQE and various affiliates.
See Note G to our condensed consolidated financial statements on page 9 for
information on our business segments.
Strategic Review Process
We have concluded our strategic review process, the goal of which was to
determine our long-term strategic direction in order to maximize value to
shareholders. Based upon the results of this review, our Board of Directors has
concluded that we should remain independent at this time, with a strategic focus
on our utility operations. In addition, we will continue to operate a more
streamlined water utility and certain of our existing complementary businesses,
including energy services and communications. Consistent with this strategy, we
will explore, in an orderly manner, opportunities to monetize a portion or all
of our remaining unregulated businesses.
Service Areas
Duquesne Light's electric utility operations provide service to approximately
580,000 direct customers in southwestern Pennsylvania (including in the City of
Pittsburgh), a territory of approximately 800 square miles. Before completing
the generation asset sale, we historically sold electricity to other utilities.
(See "Competitive Transition Charge" discussion on page 18.)
AquaSource's water utility operations currently provide service to more than
400,000 water and wastewater customer connections in 20 states.
ProAm, our propane delivery business, provides service to over 70,000
customers in seven states.
Our other business lines have operations and investments in several states and
Canada.
Regulation
DQE and Duquesne Light are subject to the accounting and reporting
requirements of the SEC. Duquesne Light's electricity delivery business is also
subject to regulation by the Pennsylvania Public Utility Commission (PUC) and
the Federal Energy Regulatory Commission (FERC) with respect to rates for
delivery of electric power, accounting and other matters. Additionally,
AquaSource's water utility operations are subject to regulation by various
authorities within the states where they operate as to rates, accounting and
other matters. (See "AquaSource Rate Applications" discussion on page 19.)
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2001 and June 30, 2000
We reported $0.30 per share of net income (excluding $2.48 per share of one-
time non-cash charges) for the second quarter of 2001, compared to $0.29 per
share of net income in the second quarter of 2000 (excluding $0.10 per share of
one-time charges). The increase resulted from improved performance at our energy
services business as well as higher gas prices and production at our landfill
gas sites. This increase was accomplished despite a $0.10 per share decrease in
earn-
13
ings on our CTC. Also benefiting the quarter were cost reduction initiatives at
DQE and Duquesne Light.
In addition to these earnings, we recorded one-time, non-cash charges of
$2.48 per share during the second quarter of 2001 and $0.10 per share during the
second quarter of 2000. During 2001, we recorded a $27.3 million or $0.49 per
share after tax charge for the sale of two investments and impairment of all or
part of seven other DQE Enterprises investments, and a $99.7 million or $1.78
per share after tax charge for the impairment of certain assets held by
AquaSource. (See "Impairment Charges" discussion, Note B, on page 6.) Also,
during 2001 we recorded an additional $0.21 per share charge related to the sale
of our bottled water business, which was sold in May 2001, and the costs
associated with the strategic review process. During 2000, we recorded a charge
of $7.0 million related to the termination of a coal-bed methane project. In
total, these events resulted in a net loss of $121.8 million, or $2.18 per share
for the second quarter of 2001, compared to $10.4 million, or $0.19 per share of
net income in the second quarter of 2000. The average shares outstanding
declined by 11 million or 17 percent. The lower average shares outstanding
reflect approximately 16 million shares repurchased in 2000 as part of our
recapitalization program, done in conjunction with the sale of our generation
assets. We temporarily suspended repurchases of shares during the strategic
review process, but we may resume such repurchases in the future.
Revenues
- -------------------------------------------------------------------------
Revenues
---------------------------------
(In Millions)
---------------------------------
Second Quarter 2001 2000 Change
- -------------------------------------------------------------------------
Electricity Delivery $ 80.6 $ 75.5 $ 5.1
Electricity Supply 108.8 114.3 (5.5)
CTC 73.9 83.1 (9.2)
Water Distribution 26.4 25.6 0.8
DQE Enterprises 4.9 5.7 (0.8)
All Other 21.8 23.2 (1.4)
Intercompany Eliminations (3.0) (3.3) 0.2
- -------------------------------------------------------------------------
Total $ 313.4 $ 324.2 $ (10.8)
=========================================================================
Revenues for the second quarter of 2001 decreased $10.8 million or 3.3
percent compared to the second quarter of 2000. The electricity supply and CTC
business segments experienced $5.5 million and $9.2 million decreases,
respectively, due to a 7.4 percent decrease in total KWH sales, including sales
to other utilities. This decrease in sales is primarily due to the generation
asset sale in April 2000. Offsetting these decreases was a $5.1 million increase
in sales in the electricity delivery business segment, primarily due to a
favorable sales mix between residential, commercial and industrial customers.
Although the overall level of electricity sales decreased, electricity delivery
sales to residential and commercial customers increased, resulting in higher
revenues for the electricity delivery segment. Sales to industrial customers,
who are charged the lowest delivery rate of customer classes, decreased 9
percent for the second quarter and 9.5 percent year-to-date compared to the same
periods during 2000. The following table shows the change during the second
quarter in our provider of last resort KWH load retention by customer class,
comparing the final month of the second quarter to the final month of the first
quarter.
- -------------------------------------------------------------------------
K W H
(In Millions)
---------------------------------
June March
2001 2000 Change
- -------------------------------------------------------------------------
Residential 169 192 (12)%
Commercial 476 385 24%
Industrial 274 255 7%
Lighting 5 5 0%
- -----------------------------------------------------------
Total 924 837 10%
=========================================================================
In addition, the "all other" category experienced a $1.4 million decrease in
revenues, primarily due to the bottled water sale in May 2001.
Operating Expenses
- -------------------------------------------------------------------------
Operating Expenses
---------------------------------
(In Millions)
---------------------------------
Second Quarter 2001 2000 Change
- -------------------------------------------------------------------------
Electricity Delivery $ 38.2 $ 42.4 $ (4.2)
Electricity Supply 108.8 122.8 (14.0)
CTC 3.4 3.6 (0.2)
Water Distribution 20.7 28.8 (8.1)
DQE Enterprises 3.9 4.6 (0.7)
All Other 26.1 42.6 (16.5)
Intercompany Eliminations (3.5) (10.6) 7.1
- -------------------------------------------------------------------------
Operating Expenses 197.6 234.2 (36.6)
Impairment Charge 109.2 - 109.2
- -------------------------------------------------------------------------
Total $ 306.8 $ 234.2 $ 72.6
=========================================================================
Operating expenses, excluding the impairment charge, decreased $36.6 million
or 15.6 percent compared to the second quarter of 2000.
Fuel and purchased power costs increased $11.4 million or 12.3 percent
compared to the second quarter of 2000. The increased purchased power costs are
due to the generation asset sale in April 2000. Subsequent to the sale, these
costs are related to the energy purchased from Orion to fulfill our provider of
last resort obligation. The increased cost has no impact on income, as a
component of customer rates is designed to collect these costs and associated
gross receipts tax.
Other operating and maintenance expense decreased $43.1 million, or 35.7
percent compared to the second quarter of 2000. Operating expenses in the
electricity delivery business segment decreased $5.6 million as a
14
result of Duquesne Light's Best-in-Class cost reduction initiative and $10.7
million related to cost reductions from our corporate excellence initiative
which benefitted all of the segments. Also benefitting Duquesne Light's
operations was a $20.5 million reduction in operation and maintenance expense at
the electricity supply business segment due to the generation asset sale in
April 2000. In addition, there was a reduction in operating expenses related to
operating efficiencies in the water distribution segment, and an $8.7 million
decrease related to the sale of certain non-strategic assets in the second half
of 2000.
During the second quarter of 2001, we recorded a $109.2 million charge for
the impairment of certain assets within our water distribution business. These
assets were recorded on our books at levels that were not expected to be
recoverable. This charge appears on the income statement as "Impairment of long-
lived assets." Taxes other than income taxes decreased $4.9 million or 23.6
percent primarily due to our smaller size following the generation asset sale.
Depreciation and Amortization
Depreciation and amortization expenses increased $2.6 million or 3.0 percent
compared to the second quarter of 2000, primarily due to the acceleration of CTC
amortization subsequent to the generation asset sale. With the successful
completion of the sale, we recovered approximately $1.0 billion of our PUC-
approved transition costs. Applying the proceeds to reduce transition costs, we
now anticipate termination of the CTC collection period in early 2002 for most
major rate classes.
Other Income
- -------------------------------------------------------------------------
Other Income
---------------------------------
(In Millions)
---------------------------------
Second Quarter 2001 2000 Change
- -------------------------------------------------------------------------
Electricity Delivery $ 11.4 $ 9.6 $ 1.8
Electricity Supply -- (0.7) 0.7
CTC -- -- --
Water Distribution 0.7 1.4 (0.7)
DQE Enterprises 1.8 8.1 (6.3)
All Other 12.9 38.3 (25.4)
Intercompany Eliminations (18.6) (19.3) 0.7
- -------------------------------------------------------------------------
Investment Income 8.2 37.4 (29.2)
Investment Impairment (47.3) -- (47.3)
- -------------------------------------------------------------------------
Total $ (39.1) $ 37.4 $ (76.5)
==========================================================================
Other income, excluding the one-time charges for investment impairment,
decreased $29.2 million compared to the second quarter of 2000. The "all other"
category had a $25.4 million decrease in other income consisting of an
additional $7.8 million charge for a loss on the sale of our bottled water
business, a $5.9 million reduction related to our leasing investments, and a
$5.2 million reduction in interest income. In addition, DQE Enterprises recorded
a $47.3 million charge for the impairment and write-off of certain investments
in its portfolio. (See "Impairment Charges" discussion, Note B, on page 6.)
Included in the second quarter of 2000 was a $4.0 million gain on the sale of
certain non-strategic investments and a $7.5 million gain for the exchange of
warrant rights in certain DQE Enterprises investments.
Interest and Other Charges
Interest and other charges include interest on long-term debt, other
interest, and preferred stock dividends of Duquesne Light. Interest expense
decreased $4.1 million or 12.9 percent compared to the second quarter of 2000 as
a result of our recapitalization program implemented subsequent to the
generation asset sale.
Income Taxes
Income tax expense decreased $26.2 million compared to the second quarter of
2000, due to the tax benefit on the net loss during the second quarter of 2001.
Comparison of Six Months Ended June 30, 2001 and June 30, 2000
We report earnings of $0.52 per share, excluding the one-time charges
discussed previously, in the first six months of 2001, compared to $0.89 per
share in 2000, excluding $0.22 per share for the accounting for unbilled
revenues and $0.10 per share of one-time charges for the termination of a coal-
bed methane investment. The $0.37 per share decrease resulted primarily from
$0.38 per share of lower earnings related to CTC collection subsequent to the
generation asset sale. Partially offsetting this decrease were improved
performance at our energy services business, and higher gas prices and
production at our landfill gas sites. The cost reduction initiatives at Duquesne
Light and DQE were an additional benefit. In total, these events resulted in a
net loss of $109.5 million, or $1.96 per share during the first six months of
2001, compared to $68.8 million, or $1.01 per share of net income in the first
six months of 2000. The average shares outstanding declined by 13 million or 19
percent. The lower average shares outstanding reflect approximately 16 million
shares repurchased in 2000 as part of our recapitalization program.
15
Revenues
- ------------------------------------------------------------------------------
Revenues
------------------------------------
(In Millions)
------------------------------------
First Six Months 2001 2000 Charge
- ------------------------------------------------------------------------------
Electricity Delivery $ 154.4 $151.5 $ 2.9
Electricity Supply 206.4 209.9 (3.5)
CTC 148.0 169.5 (21.5)
Water Distribution 52.0 51.5 0.5
DQE Enterprises 10.9 10.7 0.2
All Other 68.4 52.0 16.4
Intercompany Eliminations (6.1) (6.4) 0.3
- ------------------------------------------------------------------------------
Total $ 634.0 $638.7 $ (4.7)
==============================================================================
Revenues for the first six months of 2001 decreased $4.7 million or 0.7
percent compared to the first six months of 2000. The electricity supply and CTC
business segments experienced $3.5 million and $21.5 million decreases,
respectively, as a result of a 9 percent decrease in total KWH sales, primarily
due to the generation asset sale in April 2000. Partially offsetting these
decreases at Duquesne Light was a $2.9 million increase in revenues, primarily
related to the favorable sales mix for electric utility customers discussed
previously. The following table shows the change during the first six months of
2001 in our provider of last resort KWH load retention by customer class,
comparing the final month of the second quarter of 2001 with the final month of
2000.
- -------------------------------------------------------------------------------
KWH
----------------------------------
(In Millions)
----------------------------------
June December
2001 2000 Change
- ------------------------------------------------------------------------------
Residential 169 210 (20)%
Commercial 476 297 60%
Industrial 274 245 12%
Lighting 5 2 150%
- ------------------------------------------------------------------
Total 924 754 23%
===============================================================================
Also offsetting these decreases was a $16.4 million increase in revenues from
the "all other" category consisting of a $3.4 million increase from
telecommunications leases, a $7.1 million increase in landfill gas sales, and an
$8.4 million increase in propane sales. Offsetting these increases was a $2.5
million decrease related to the bottled water sale.
Operating Expenses
- ---------------------------------------------------------------------------
Operating Expenses
----------------------------------
(In Millions)
----------------------------------
First Six Months 2001 2000 Change
- ---------------------------------------------------------------------------
Electricity Delivery $ 79.2 $ 95.2 $(16.0)
Electricity Supply 206.4 204.2 2.2
CTC 6.6 7.4 (0.8)
Water Distribution 42.8 53.7 (10.9)
DQE Enterprises 9.4 9.5 (0.1)
All Other 70.3 80.4 (10.1)
Intercompany Eliminations (8.9) (21.1) 12.2
- ---------------------------------------------------------------------------
Operation Expenses 405.8 429.3 (23.5)
Impairment Charge 109.2 - 109.2
- ---------------------------------------------------------------------------
Total $ 515.0 $ 429.3 $ 85.7
===========================================================================
Operating expenses, excluding the impairment charge discussed previously,
decreased $23.5 million or 5.5 percent in the first six months of 2001 compared
to 2000.
Fuel and purchased power costs increased $54.3 million or 37.9 percent
compared to the first six months of 2000. The increased purchased power costs
are due to the generation asset sale in April 2000. Subsequent to the sale,
these costs are related to the energy purchased from Orion to fulfill our
provider of last resort obligation. The increased cost has no impact on income,
as a component of customer rates is designed to collect these costs and
associated gross receipts tax.
Other operating and maintenance expense decreased $64.8 million, or 26.8
percent compared to the first six months of 2000. The electricity delivery
business segment experienced a $7.0 million reduction related to increased
operating efficiencies from Duquesne Light's Best-in-Class cost reduction
initiative. In addition, a $16.7 million reduction related to our corporate
excellence initiative benefited all of the business segments. There was a $17.4
million decrease in other operating and maintenance costs in the electricity
supply business segment due to the generation asset sale in April 2000. In
addition, there was a $13.8 million decrease in other operating costs due to the
sale of our bottled water business in May 2001 and the sale of our alternative
energy facilities in September 2000, which affected the "all other" category.
During the second quarter of 2001, we recorded a $109.2 million charge for the
impairment of certain assets within our water distribution business. These
assets were recorded on our books at levels that were not expected to be
recoverable. This charge appears on the income statement as "Impairment of long-
lived assets."
16
Taxes other than income taxes decreased $13.0 million or 29.4 percent
primarily due to our smaller size following the generation asset sale.
Depreciation and Amortization
Depreciation and amortization expenses increased $21.1 million or 13.5 percent
compared to the first six months of 2000, primarily due to the acceleration of
CTC amortization subsequent to the generation asset sale. With the successful
completion of the sale, we recovered approximately $1.0 billion of our PUC-
approved transition costs. Applying the proceeds to reduce transition costs, we
now anticipate termination of the CTC collection period in early 2002 for most
major rate classes.
Other Income
- --------------------------------------------------------------------------------
Other Income
-------------------------------------
(In Millions)
-------------------------------------
First Six Months 2001 2000 Change
- --------------------------------------------------------------------------------
Electricity Delivery $ 21.7 $ 16.5 $ 5.2
Electricity Supply - 2.8 (2.8)
CTC - - -
Water Distribution 2.2 2.7 (0.5)
DQE Enterprises 2.8 10.0 (7.2)
All Other 43.5 74.4 (30.9)
Intercompany Eliminations (38.6) (35.6) (3.0)
- --------------------------------------------------------------------------------
Investment Income 31.6 70.8 (39.2)
Investment Impairment (47.3) - (47.3)
- --------------------------------------------------------------------------------
Total $(15.7) $ 70.8 $ (86.5)
================================================================================
Other income, excluding the one-time charges for investment impairment,
decreased $39.2 million compared to the first six months of 2000. The
electricity delivery business segment had an increase of $5.2 million, primarily
the result of increased interest earnings and no other income allocated to the
electricity supply business segment subsequent to the generation asset sale. The
"all other" category recorded a $30.9 million reduction in other income
consisting of an additional $7.8 million loss on the sale of our bottled water
business, a $6.5 million reduction in interest income, a $7.9 million reduction
in lease investment income, and a $5.2 million reduction for income earning
assets that were sold. In addition, DQE Enterprises recorded $47.3 million of
charges for the impairment and write-down of certain investments. (See
"Impairment Charges" discussion, Note B, on page 6.) Absent these one-time
charges, Enterprises' investment income decreased $7.3 million, primarily the
result of a $7.5 million gain for the exchange of warrant rights in certain
investments in 2000.
Interest and Other Charges
Interest and other charges include interest on long-term debt, other interest
and preferred stock dividends of Duquesne Light. Interest expense decreased $9.2
million or 14.1 percent compared to the first six months of 2000 as a result of
our recapitalization program implemented subsequent to the generation asset
sale.
Income Taxes
Income tax expense decreased $26.0 million compared to the first six months of
2000 due to the tax benefit on the net loss during 2001.
LIQUIDITY AND CAPITAL RESOURCES
We estimate that during 2001 we will spend, excluding the allowance for funds
used during construction, approximately $60 million for electric utility
construction; $50 million (including $30 million for environmental compliance)
for water utility construction; $40 million for construction at our landfill gas
sites; and $10 million for construction by our other business lines. During the
first six months of 2001, we have spent approximately $70.9 million on capital
expenditures, consisting of approximately $26.3 million at Duquesne Light, $18.0
million at AquaSource, $20.3 million at DQE Financial and the remaining $6.3
million on other capital projects.
Acquisitions and Dispositions
As part of our strategic review process, AquaSource sold its bottled water
assets on May 15, 2001. The sale resulted in an after tax loss of $15.0 million,
of which $10.0 million had been recorded in December 2000. We also received
approximately $4.3 million for the sale of other non-strategic assets. Also
during the first six months of 2001, AquaSource acquired three water companies
for approximately $0.8 million.
On July 16, 2001, the Allegheny County Airport Authority purchased the
Pittsburgh International Airport energy facility from a DQE Enterprises
subsidiary, and entered into an operations and maintenance agreement regarding
the facility with DQE Energy Services. The transaction resulted in an
approximate $8.2 million after tax gain, or $0.15 per
share.
In the first six months of 2000, Duquesne Light completed the sale of our
generation assets to Orion for approximately $1.7 billion. Duquesne Light also
purchased from Itron, Inc. the Customer Advanced Reliability System, the
automated electronic meter reading system developed by Itron for use with our
electric utility customers. We had previously leased these assets.
We also disposed of various non-strategic investments, including affordable
housing investments, in the first six months of 2000 for $49.4 million,
resulting in a $4.0 million after tax gain.
17
Financing
At June 30, 2001, we had $20 million of commercial paper borrowings
outstanding, and $76 million of current debt maturities. During the quarter, the
maximum amount of bank loans and commercial paper borrowings outstanding was $52
million, the amount of average daily borrowings was $14 million, and the
weighted average daily interest rate was 5.1 percent.
Future Capital Requirements and Availability
We have $75 million of term notes maturing during the remainder of 2001. We
maintain two separate revolving credit agreements, one for $245 million and one
for $225 million, both expiring in September 2001. We have the option to extend
these facilities, or to convert each revolver into a term loan facility for a
period of one or two years, respectively, for any amounts then outstanding upon
expiration of the revolving credit period. Interest rates can, in accordance
with the option selected at the time of the borrowing, be based on one of
several indicators, including prime, Eurodollar, or certificate of deposit
rates. Facility fees are based on the unborrowed amount of the commitment. At
June 30, 2001, no borrowings were outstanding. Related to these and other credit
facilities, we are subject to financial covenants requiring certain cash
coverage and debt-to-capital ratios. At June 30, 2001, we were in compliance
with all of our financial covenants.
With customer choice fully in effect, and our generation asset divestiture
complete, all of our electric utility customers are now buying their generation
directly from alternative suppliers or indirectly from Orion through the
Duquesne Light provider of last resort service arrangement. Customer revenues on
the income statement include revenues from provider of last resort customers.
Although we collect these revenues, we pass them on (net of gross receipts tax)
to Orion. In addition, rates for an average residential customer who takes
provider of last resort service from Duquesne Light are expected to drop by 18
percent with the final CTC collection. This rate decrease reflects the
additional cost of electric capacity required by regional transmission
organization (RTO) membership. Duquesne Light also agreed to freeze its
generation rates through 2004 and its transmission and distribution rates
through 2003. However, Duquesne Light expects to realize incremental margin
through its extended provider of last resort arrangement. (See "Regional
Transmission Organization," "Provider of Last Resort," and "Rate Freeze"
discussions below.) We expect future cash flows to continue to be strong
enabling us to meet capital expenditure and dividend cash requirements through
funds generated from operations. We also anticipate repurchasing shares of our
common stock on the open market as market conditions permit.
RATE MATTERS
Competition and the Customer Choice Act
The Customer Choice Act enables Pennsylvania's electric utility customers to
purchase electricity at market prices from a variety of electric generation
suppliers (customer choice). As of July 31, 2001, approximately 14 percent of
Duquesne Light's customers had chosen alternative generation suppliers measured
on both a KWH basis and a non-coincident peak load basis. The remaining
customers are provided with electricity through our provider of last resort
service arrangement with Orion (discussed below). As alternative generation
suppliers enter and exit the retail supply business, the number of customers
participating in our provider of last resort service will fluctuate.
Customers who select an alternative generation supplier pay for generation
charges set competitively by that supplier, and pay Duquesne Light a competitive
transition charge (discussed below) and transmission and distribution charges.
Electricity delivery (including transmission, distribution and customer service)
remains regulated in substantially the same manner as under historical
regulation.
Regional Transmission Organization
FERC Order No. 2000 calls on transmission-owning utilities such as Duquesne
Light to voluntarily join regional transmission organizations (RTOs). Duquesne
Light is committed to reducing customer costs while ensuring a stable, plentiful
supply of electricity for its customers. Toward that end Duquesne concluded, as
part of the strategic review, that it will join the Pennsylvania-New Jersey-
Maryland interconnection to establish the PJM West RTO. Duquesne's inclusion in
this RTO will put the region's transmission facilities under common control to
reduce long-term energy costs and enhance reliability to customers.
Competitive Transition Charge
In its final restructuring order issued in the second quarter of 1998, the
PUC determined that Duquesne Light should recover most of the above-market costs
of its generation assets, including plant and regulatory assets, through the
collection of the competitive transition charge (CTC) from electric utility
customers. On January 18, 2001, the PUC issued an order approving our final
accounting for the proceeds of our April 2000 generation asset sale, including
the net recovery of $276 million of sale-related transaction costs. Applying the
net generation asset sale proceeds to reduce transition costs, we now anticipate
termination of the CTC collection period in early 2002 for most major rate
classes. Rates are then expected to decrease 18 percent for an average
residential customer who takes provider of last resort service from Duquesne
Light pursuant to the second agreement with Orion discussed below. This rate
decrease
18
reflects the additional cost of electric capacity required by RTO membership.
(See "Regional Transmission Organization" discussion on page 18.) The transition
costs, as reflected on the consolidated balance sheet, are being amortized over
the same period that the CTC revenues are being recognized. For regulatory
purposes, the unrecovered balance of transition costs that remain following the
generation asset sale was approximately $277.2 million ($169.1 million net of
tax) at June 30, 2001, on which Duquesne Light is allowed to earn an 11 percent
pretax return. A slightly lower amount is shown on the balance sheet due to the
accounting for unbilled revenues adopted during 2000.
Provider of Last Resort
Although no longer a generation supplier, as the provider of last resort for
all customers in its service territory, Duquesne Light must provide electricity
for any customer who does not choose an alternative generation supplier, or
whose supplier fails to deliver. As part of the generation asset sale, Orion
agreed to supply Duquesne Light with all of the electric energy necessary to
satisfy Duquesne Light's provider of last resort obligations during the CTC
collection period. On December 20, 2000, the PUC approved a second agreement
that extends Orion's provider of last resort arrangement (and the PUC-approved
rates for the supply of electricity) beyond the final CTC collection through
2004 (POLR II). The agreement also permits Duquesne Light, following CTC
collection, an average margin of 0.5 cents per KWH supplied through this
arrangement. Except for this margin, these agreements, in general, effectively
transfer to Orion the financial risks and rewards associated with Duquesne
Light's provider of last resort obligations. While we retain the collection risk
for the electricity sales, a component of our regulated delivery rates is
designed to cover the cost of a normal level of uncollectible accounts.
Rate Freeze
An overall four-and-one-half-year rate cap from January 1, 1997, was
originally imposed on the transmission and distribution charges of Pennsylvania
electric utility companies under the Customer Choice Act. As part of a
settlement regarding recovery of deferred fuel costs, Duquesne Light agreed to
extend this rate cap for an additional six months through the end of 2001.
Subsequently, in connection with the POLR II agreement described above, Duquesne
Light negotiated a rate freeze for generation, transmission and distribution
rates. The rate freeze fixes new generation rates for retail customers who take
electricity under the extended provider of last resort arrangement, and
continues the transmission and distribution rates for all customers at current
levels through at least 2003. Under certain circumstances, affected interests
may file a complaint alleging that, under these frozen rates, Duquesne Light has
exceeded reasonable earnings, in which case the PUC could make adjustments to
rectify such earnings.
AquaSource Rate Applications
AquaSource has filed consolidated, statewide water and sewer rate change
applications with the Texas Natural Resource Conservation Commission (TNRCC) and
17 municipalities. The requested rate increases were provisionally phased in
over twelve months, becoming effective on July 17, 2000 and 2001. If this
request is approved, annual water and sewer revenues in Texas will increase by
approximately $7 million after the phase-in period is completed.
The proposed rates are being charged (subject to refund with interest)
pending the final order on each application by the regulatory authority having
jurisdiction. Included in 2001 revenues is approximately $1.7 million related to
this rate increase.
Thirteen of the municipalities have either approved the requested rate
increase or failed to act on a timely basis, and therefore the increase is
deemed approved in those locations. However, three municipalities have denied
the proposed increase outright, and a fourth has established rates significantly
lower than requested. AquaSource has appealed these municipal rate orders to the
TNRCC. It is customary for the TNRCC to consolidate all municipal appeals with
the general rate case and to issue one uniform rate order affecting all service
areas. Hearings are next scheduled for September 2001. While there is no
statutory deadline for a decision, AquaSource expects the TNRCC's final order to
be issued by early 2002.
On March 31, 2001, AquaSource also filed a rate increase petition with the
Indiana Utility Regulatory Commission (IURC) regarding its water and sewer rates
in Indiana. We currently anticipate a final order from the IURC in early 2002.
If this request is approved, annual water and sewer revenues in Indiana will
increase by approximately $2.7 million.
Outlook
With the conclusion of the strategic review process, our Board of Directors
has determined that DQE should remain independent at this time, with a strategic
focus on our utility operations. In addition, we will continue to operate a more
streamlined water utility and certain of our existing complementary businesses,
including energy services and communications. Consistent with our strategy, we
will explore, in an orderly manner, opportunities to monetize a portion or all
of our remaining unregulated businesses.
Duquesne Light is committed to reducing customer costs while ensuring a
stable, plentiful supply of electricity for its customers. Toward that end
Duquesne concluded, as part of the strategic review, that it will join the PJM
interconnection to establish the PJM West RTO.
Duquesne Light's restructuring related to implementation of the Customer
Choice Act will have a major benefi-
19
cial impact on customers early next year. As a result of the success of its
generation sale, Duquesne anticipates recovering its competitive transition
costs in early 2002 for most major classes of customers -- seven years earlier
than any other major Pennsylvania utility. At that time, our customers would
have been subject to market prices for the supply of electricity. However,
Duquesne will continue to provide capped prices for electricity to its provider
of last resort customers through 2004 as part of POLR II. The rates capped under
this plan will not only provide price certainty for our customers, but when
combined with the impact of eliminating the CTC, will reduce the total charge
for electricity to an average residential customer by 18 percent. That rate
decrease reflects the additional cost of electric capacity required by PJM
membership.
With this plan in place, Duquesne is focusing its attention on additional
opportunities beyond the 2004 period. Given current volatile electricity market
conditions, support exists for Duquesne to further extend its capped rate plan.
Duquesne currently is evaluating various energy supply alternatives to meet this
opportunity. Duquesne anticipates finalizing its specific plan to provide these
valuable services to its customers by year-end.
A redirected, operationally focused AquaSource is another part of our
business strategy. Our water distribution business was formed in mid-1997 to
aggregate the operations of small to mid-sized water systems throughout the
United States. AquaSource acquired more than 130 water utilities, service
companies, and construction companies, with annual aggregate revenues in excess
of $100 million.
In 2000, AquaSource suspended major acquisitions when forecasted returns did
not materialize. AquaSource turned its focus to better integrating operations to
achieve efficiencies through higher resource utilization, cost reductions and a
more standard operational approach. Operating under a new management team,
AquaSource has made substantive progress to date in implementing strategies that
will enable it to reach its full potential. AquaSource earned an operating
profit for the first time, after taking into consideration prior period
acquisition adjustments, during the first six months of 2001.
While the regulated utility business continues to show promise, the contract
operations business and the construction business have failed to achieve
originally projected operating margins. Competition and price pressures have
reduced the outlook for margins in these businesses. Furthermore, given
AquaSource's broad geographic diversity, there are selective areas of operation
that are not capable of achieving the integration synergies needed to realize
desired levels of performance.
Evaluating AquaSource's future direction was a major focus of the strategic
review process. The new management team has assessed the capabilities of the
operating platforms. This realistic outlook of the company's potential future
performance results in lower returns than originally anticipated.
In recognition of this assessment and resulting outlook, AquaSource is taking
a second quarter impairment charge of approximately $100 million, after tax, to
write down various aspects of its business, primarily related to contract
operations and construction.
Going forward, AquaSource remains committed to the water distribution
business, anchored by its regulated utility business. Efforts to improve the
profitability and quality of service of this business segment will continue. In
addition, AquaSource views contract operations and construction as important
complementary businesses while it works to complete the transition to a fully
integrated operation with enhanced profitability.
DQE Energy Services' contract to provide operations and maintenance services
to the energy facility at the Pittsburgh International Airport has been extended
through 2016 as part of negotiations that resulted in the monetization of our
investment in that facility. We will recognize a 15 cents per share after tax
gain during the third quarter from the sale of the energy facility.
DQE Communications continues to experience a high level of demand, and
additional fiber opportunities are under review.
We have a successful portfolio of investments, including approximately $200
million of financial assets, approximately $65 million of propane systems and 12
investments in energy technology and electronic commerce companies totaling
approximately $70 million.
As a further result of our strategic review process, we formalized plans for
an orderly divestiture of our DQE Enterprises business during the next few
quarters as opportunities present themselves. This business is not consistent
with our focus on our core regulated utility businesses, and opportunities
related to these investments have not developed as expected, due to market
conditions.
Given our strategy, the remaining profitable portfolio of financial and
propane investments are not core to the ongoing regulated business. As a result,
we may also monetize certain of these investments in an orderly manner.
As a result of the recent and planned divestitures, we expect to record an
additional charge by year-end of approximately 10 to 20 cents per share for
organizational restructuring. We are currently reviewing further streamlining
and integration of operating units in order to simplify our corporate structure.
This may result in staff reductions of approximately 5 percent of the current
workforce. As stated at the beginning of the strategic review process, we are
committed to continued fair treatment of our employees. We anticipate that at
the end of this process we will employ approximately 1,500 workers in the
Pittsburgh area.
With the completion of our strategic review, and with our core utility
businesses performing well, we continue to expect 2001 earnings, excluding the
one-time, non-cash charges of $2.48 per share taken during the second quarter of
2001 and the additional $0.10 to $0.20 per share charge related to
restructuring, to be $1.25 to $1.35 per share.
20
We estimate 2002 earnings per share in the $1.65 to $1.75 range, with an
earnings growth goal to average 10 percent per year through 2004. Cash flow is
expected to continue to be strong throughout the period. We recently reaffirmed
our quarterly dividend of 42 cents per share and expect to be able to meet our
capital expenditure and dividend requirements during the period through funds
generated from operations.
The foregoing paragraphs contain forward-looking statements, the results of
which may materially differ from those implied due to known and unknown risks
and uncertainties. These statements, and certain of the risks and uncertainties
that may affect the results, are discussed below. Projected DQE cash flow,
earnings and earnings growth will depend on the performance of our subsidiaries
and on the effectiveness of our divestiture of non-core businesses. Demand for
utility services, and the availability of appropriate investment opportunities
in those industries, as well as changing market conditions and weather
conditions, could affect the projected returns on investment and projected
earnings levels at DQE and each subsidiary. Demand for propane services will
affect our ability to monetize our ProAm investments. The financial benefits of
Duquesne Light's POLR II agreement (and any potential extension) will depend on
the number of customers choosing Orion as their generation supplier, and on
customer demand for electricity. The outcome of AquaSource's rate filings, which
will depend on the determinations made by the appropriate public utility
commissions, will also affect performance. Stock market volatility and business
conditions with respect to energy technology and electronic commerce will affect
our ability to monetize DQE Enterprises' portfolio. Market conditions will
affect our ability to monetize our financial investments. Overall performance by
DQE and its affiliates could be affected by economic, competitive, regulatory,
governmental and technological factors affecting operations, markets, products,
services and prices, as well as the factors discussed in our SEC filings made to
date.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of financial loss that may impact our
consolidated financial position, results of operations or cash flows due to
adverse changes in market prices and rates.
We manage our interest rate risk by balancing our exposure between fixed and
variable rates while attempting to minimize our interest costs. Currently, our
variable interest rate debt is approximately $568 million or 40 percent of long-
term borrowings. Most of this variable rate debt is low-cost, tax-exempt debt.
We also manage our interest rate risk by retiring and issuing debt from time to
time and by maintaining a balance of short-term, medium-term and long-term debt.
A 10 percent increase in interest rates would have affected our variable rate
debt obligations by increasing interest expense by approximately $1.0 million
for the six months ended June 30, 2001 and $1.3 million for the six months ended
June 30, 2000. A 10 percent reduction in interest rates would have increased the
market value of our fixed rate debt by approximately $54.9 million and $25.7
million as of June 30, 2001 and June 30, 2000. Such changes would not have had a
significant near-term effect on our future earnings or cash flows.
_______________________
Except for historical information contained herein, the matters discussed in
this annual report are forward-looking statements that involve risks and
uncertainties including, but not limited to: economic and business conditions
with respect to electronic commerce and energy technology companies; the outcome
of AquaSource's rate applications and shareholder litigation; economic,
competitive, governmental and technological factors affecting operations,
markets, products, services and prices; and other risks discussed in "Outlook"
above and our filings with the Securities and Exchange Commission.
21
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
In February 2001, 39 former and current employees of AquaSource, all minority
investors in AquaSource, commenced an action against DQE, AquaSource and others
in the District Court of Harris County, Texas. The complaint alleges that the
defendants fraudulently induced the plaintiffs to agree to sell their AquaSource
stock back to AquaSource, and that defendants took actions intended to decrease
the value of the stock. Plaintiffs seek, among other things, an award of actual
damages not to exceed $100 million and exemplary damages not to exceed $400
million.
Although we cannot predict the ultimate outcome of the case or estimate the
range of any potential loss that may be incurred in the litigation, we believe
the lawsuit is frivolous and without merit, strenuously deny all allegations of
wrongdoing asserted by plaintiffs, and believe we have meritorious defenses to
plaintiffs' claims. We intend to vigorously defend the lawsuit.
Item 5. Other Information.
We anticipate holding our 200l Annual Meeting of Stockholders at 10:00 a.m.
on December 20, 2001. The record date will be October 9, 2001. Proposals of the
stockholders intended to be presented at the 2001 Annual Meeting, whether for
inclusion in our Proxy Statement or to be raised pursuant to an independent
solicitation, must be received by DQE on or before September 13, 2001. Such
proposals and notices should be in writing and directed to DQE, 400 Fairway
Drive, Moon Township, PA 15108, Attn: Secretary.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
EXHIBIT 12.1 - Calculation of Ratio of Earnings to Fixed Charges and
Preferred and Preference Stock Dividend Requirements.
b. We filed no reports on Form 8-K during the quarter ended June 30, 2001.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant identified below has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DQE, Inc.
-----------------------------
(Registrant)
Date August 14, 2001 /s/ Morgan K. O'Brien
----------------- -----------------------------
(Signature)
Morgan K. O'Brien
Chief Operating Officer
(Principal Financial Officer)
Date August 14, 2001 /s/ James E. Wilson
----------------- -----------------------------
(Signature)
James E. Wilson
Vice President and Controller
(Principal Accounting Officer)
23