UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
May 29, 1998
DQE, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 1-10290 25-159843
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(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
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) 262-4700
N/A
(Former name or former address, if changed since last report.)
Items 1-4. Not applicable.
Item 5. Other Events.
On May 29, 1998, the Pennsylvania Public Utility Commission ("PUC") issued
final orders on the stand-alone restructuring plan ("Stand-Alone Plan") filed by
Duquesne Light Company ("Duquesne"), a wholly owned subsidiary of DQE, Inc.
("DQE"), and on the application for approval to merge and a restructuring
plan ("Restructuring Plan") filed by DQE and Allegheny Energy, Inc. ("AYE").
The restructuring plans were filed in compliance with the Pennsylvania
Electricity Generation Customer Choice and Competition Act ("Customer Choice
Act"), which permits retail electric customers a choice of generation supplier
and authorizes utilities to recover their known and measurable transition or
stranded costs. The PUC's final orders are described below.
Order on Duquesne's Stand-Alone Plan.
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The PUC ordered a phase-in of customer choice under the following
timetable: on January 1, 1999, 33% of the peak load of each customer class will
be eligible for direct access; on January 2, 1999, 66% of the peak load of each
customer class will be eligible for direct access; and on January 2, 2000, all
customers will be eligible for direct access.
With respect to stranded cost recovery, the PUC's order on Duquesne's
Stand-Alone Plan approved Duquesne's proposal to auction its generating assets
and use the proceeds to offset stranded costs. The remaining balance of such
costs (with certain exceptions described below) would be recovered from
ratepayers through a competitive transition charge ("CTC"). The order approves
the auction only in the context of Duquesne's Stand-Alone Plan, not the
Restructuring Plan associated with the merger with AYE (which is discussed
below).
By conducting the auction, Duquesne expects to recover (through the auction
proceeds or the CTC), or avoid the incurrence of, all its stranded generation
costs, with the exception being a $65 million disallowance (net present value,
after tax) related to Duquesne's cold reserved units at the Phillips Power
Station and Brunot Island Power Station. The PUC's final order also approves
recovery of $339 million of the $357 million in regulatory assets claimed by
Duquesne. The disallowed regulatory assets relate primarily to deferred coal
costs under previously applied coal caps and deferred caretaker costs associated
with the cold reserved units.
Duquesne will account for the impacts of the PUC order by taking a charge
to its earnings for the second quarter period ending June 30, 1998. This charge
will reflect the disallowance associated with the investments in cold reserved
units and the disallowance of a portion of the regulatory asset claim.
Order on Merger and Restructuring Plan Under the Merger.
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The PUC's final order on the merger proceeding allows the transaction to be
consummated but imposes certain conditions to be satisfied prior to closing. The
conditions relate to the mitigation of market power through membership in an
independent system operator ("ISO"), an entity that would operate the
transmission facilities of Duquesne, AYE and other utilities in the region. The
PUC order will allow DQE and AYE to satisfy this condition through their current
membership in the Midwest ISO, but the PUC held that the Midwest ISO must be
"fully functional" and it must satisfy seven criteria specified by the PUC
before the merger is consummated.
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DQE does not expect that these conditions can be satisfied within the time
periods specified in the Merger Agreement. The Merger Agreement provides that
either party may terminate the Agreement by October 5, 1998, if certain
conditions have not been satisfied by that date or, if that date has been
extended pursuant to the Agreement, closing has not occurred by April 5, 1999.
The Midwest ISO is not expected to be fully operational until June 30, 2000. In
addition, the Midwest ISO, as presently constituted and as proposed to the
Federal Energy Regulatory Commission, does not meet the seven criteria specified
by the PUC.
There can be no assurance that the foregoing conditions will be modified on
a timely basis. If the foregoing conditions are not removed, or alternative
conditions acceptable to DQE are not adopted, in a timely manner, the merger may
not be consummated.
The PUC's final orders also addressed the companies' Restructuring Plan for
the recovery of stranded costs by Duquesne and AYE's wholly owned utility
subsidiary West Penn Power Company ("West Penn") in the event the merger is
consummated. The order on the Restructuring Plan sets stranded costs using an
administrative forecast of generation market values and costs. Applied to
Duquesne, and compared to Duquesne's Stand-Alone Plan, this methodology results
in the disallowance of an additional $370 million in stranded costs (net present
value, pre-tax). The PUC order also reduces Duquesne's recoverable stranded
costs by $152 million for estimated generation-related merger synergies and
reduces distribution rates beginning January 1, 2000, by $15 million annually to
reflect estimated distribution-related merger synergies.
With respect to West Penn, the PUC's order disallows recovery of
approximately $1 billion of West Penn's stranded cost claim (net present value,
pre-tax). Of the disallowed amount, approximately $830 million relates to the
impact of the administrative determination of generation market value and costs.
The other disallowances relate to regulatory assets, non-utility generation and
other transition costs. In addition, the PUC order reduces West Penn's
recoverable stranded costs by $71 million for generation-related merger
synergies and reduces distribution rates beginning January 1, 2000, by $9
million for distribution-related merger synergies. AYE has indicated that it
will seek reconsideration and/or judicial review of the stranded cost
disallowances.
There can be no assurance that the disallowances associated with the merger
and the Restructuring Plan will be modified by the PUC or on appeal. If the
disallowances are not reversed on a timely basis, the merger may not be
consummated.
DQE presently is assessing the status of its proposed business combination
with AYE in light of the recent orders issued by the PUC. In the event that such
orders are not modified on a timely basis, DQE will determine whether, to the
extent all conditions necessary to consummate the merger are not satisfied, any
such conditions should be waived by DQE.
Items 6-9. Not applicable.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DQE, Inc.
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(Registrant)
Date June 12, 1998 /s/ Morgan K. O'Brien
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(Signature)
Morgan K. O'Brien
Vice President and Controller
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