| DUQUESNE LIGHT HOLDINGS INC Item 1A Risk Factors |
| We are subject to substantial governmental regulation |
| If we receive unfavorable regulatory treatment, our business could be negatively affected |
| Our transmission and distribution businesses are subject to regulation by various federal, state and local regulatory agencies that significantly affects our operations |
| The PUC regulates, among other things, the rates we can charge retail customers for the delivery of electricity |
| In addition, the FERC regulates, among other things, the rates that we can charge for electricity transmission |
| We cannot change transmission or delivery rates without approval by the applicable regulatory authority |
| While the approved transmission and delivery rates are intended to permit us to recover costs of service and earn a reasonable rate of return, there is no guarantee that the rates authorized by regulators will match our actual costs or provide a particular return on capital at any given time |
| Additionally, we initiated a dlra500 million to dlra550 million capital expenditure program for the years 2005 through 2007 |
| While we will attempt to recover a portion of our capital expenditures by passing these costs along to our customers, there is a risk that governmental regulation of the rates we may charge to customers will prevent, hinder or delay our recovery of these capital expenditures |
| The FERC also regulates the rates that other utilities charge to us for wholesale sales of electricity and can change the rates that other utilities charge for wholesale electricity sales |
| Since electric generation is now deregulated, we may not be able to recover increased costs associated with higher rates charged to us by electric generation suppliers |
| We also are required to have numerous permits, approvals and certificates from governmental agencies that regulate our business |
| We are unable to predict the impact of future regulatory activities of any of these agencies on our business |
| The Energy Policy Act of 2005 (the Energy Act) went into effect on August 8, 2005 |
| The Energy Act, among other things, repeals the Public Utility Holding Company Act of 1935 effective February 2006, amends certain provisions of the Federal Power Act and the Public Utility Regulatory Policies Act of 1978, and expands the FERC’s authority to review mergers and acquisitions |
| Changes in, or reinterpretations of, existing laws or regulations, or the imposition of new laws or regulations, may require us to change the way we conduct our operations or may result in substantial costs to us |
| Shifting federal and state regulatory policies impose risks on our operations |
| Our operations are subject to regulatory policies that are evolving as a result of various initiatives, including initiatives regarding the deregulation of the production and sale of electricity and changes in transmission regulation |
| Any new requirements arising from these actions could lead to increased operating expenses and capital expenditures, the amount of which cannot be predicted at this time |
| Delays, discontinuations or reversals of electricity market restructurings in the markets in which we operate, or may operate in the future, could have a material adverse effect on our results of operations and financial condition |
| For instance, at this time the PUC has delayed the enactment of final rules that will apply to the default generation service to be provided by Duquesne Light after the expiration of its POLR III arrangements, which currently expire December 31, 2007 |
| At a minimum, these types of actions raise uncertainty concerning the continued development of competitive power markets |
| 9 _________________________________________________________________ [71]Table of Contents Our financial obligations under the Seams Elimination Charge Adjustment remain uncertain |
| In addition to the regulatory risks described above, as a result of the FERC’s regulatory efforts to implement a new long-term rate design for public utilities in the Midwest and Mid-Atlantic regions, and specifically due to the FERC’s elimination of the regional through and out rates (RTOR) for certain transmission services between the Midwest Independent System Operator (MISO) and PJM, our transmission and distribution businesses may not fully recover their transmission costs and may have costs shifted to them from other transmission owners |
| A transitional pricing mechanism called the seams elimination charge adjustment (SECA) was put in place through March 2006 in order to compensate transmission owners for the estimated revenue lost as a result of the elimination of RTOR The allocation of SECA charges has not yet been resolved |
| Each PJM pricing zone, including the Duquesne Light zone, has been allocated a portion of the SECA based on transmission services provided to that zone in 2002 and 2003 |
| In February 2005, the FERC issued an order accepting certain compliance filings that implemented the SECA for other (ie, non-Duquesne Light) PJM pricing zones, subject to refund and surcharge, as appropriate, and set the case in its entirety for a formal hearing |
| Also in February 2005, MISO filed with the FERC proposed allocations of the SECAs to be collected from other transmission owners in PJM (including Duquesne Light) |
| Total SECA charges for the Duquesne Light zone are currently expected to be approximately dlra39 million |
| In June 2005, the FERC accepted revised compliance filings implementing SECA charges among load-serving entities within the Duquesne Light zone |
| Under that filing, Duquesne Light was allocated approximately dlra11 million of the SECA charges |
| The other load-serving entities in the Duquesne Light zone were allocated the remainder of such charges |
| DLE’s allocation of SECA charges will depend on the amount of load it serves; based on the December 31, 2005 load, DLE’s allocation is expected to be approximately dlra1dtta8 million |
| The FERC is treating SECAs in the Duquesne Light zone in the same manner it has treated the earlier SECA filings, and has consolidated Duquesne Light’s filing with the on-going hearing for the other zones |
| While we anticipate that the case may take over a year to reach a final decision, we cannot predict when it might be fully resolved |
| The SECA charges must be paid by load-serving entities within the Duquesne Light zone on a current basis |
| In June 2005, Duquesne Light filed a request with the PUC for permission to pass SECA charges through to its POLR customers |
| This request was granted, subject to disposition of any complaints filed against the request, by the PUC in August 2005 |
| Duquesne Light put these charges into effect for service beginning August 26, 2005 |
| However, if the FERC ultimately adopts a SECA level and allocation method that differs from the proposed charges initially accepted by the FERC for billing purposes, refunds or surcharges will be used to compensate or charge the appropriate entity for the difference between the amounts initially accepted by the FERC and the amounts ultimately determined to be just and reasonable by the FERC The final amount of our SECA obligations therefore remains uncertain |
| We may be required to make additional state tax payments for adjustments proposed by the Pennsylvania Department of Revenue |
| Our state income tax returns are subject to review by the relevant state taxing jurisdictions, the Commonwealth of Pennsylvania being the most significant |
| The Pennsylvania Department of Revenue (the “Department”) has issued assessments of additional tax for 1999 through 2002 primarily to include income of an out-of-state subsidiary as Pennsylvania taxable income |
| If, as expected, the Department asserts the same positions for 2003 through 2005, our total exposure for all years, without interest or penalty, could approximate dlra78 million (net of associated federal benefit) |
| We do not agree with the Department on this matter, and have filed an appeal for the 1999 tax year with the Pennsylvania Commonwealth Court |
| The assessments for the 2000, 2001 and 2002 tax years have been appealed to various administrative levels within the Commonwealth of Pennsylvania |
| Ultimately, we expect all years involved to be appealed to and decided at the Pennsylvania Commonwealth Court |
| It is not possible to predict if, when or to what extent any state income tax adjustments ultimately proposed for the period 1999 through 2005 will be sustained |
| The ultimate resolution of these state tax issues, depending on the extent and timing thereof, could have a material adverse effect on cash flows for the period in which they are paid |
| We are subject to risks associated with our POLR III obligations |
| Duquesne Light’s residential and small commercial customers may choose to receive their electric energy from an alternative generation supplier |
| If such customers do not choose an alternative generation supplier, they will be served through Duquesne Light’s POLR, or provider of last resort, arrangements |
| Residential and small commercial customers who 10 _________________________________________________________________ [72]Table of Contents select an alternative generation supplier pay for generation charges set by that supplier, and pay Duquesne Light both transmission and distribution charges |
| In connection with these POLR III transactions, Duquesne Light retains the risk that such customers will not pay for the POLR generation supply |
| Duquesne Light procures the energy and capacity needed to serve these residential and small commercial customers under a full-requirements contract with Duquesne Power |
| Failure or delay by Duquesne Power to provide the energy and capacity anticipated in the contract could require Duquesne Light to incur additional expenses to meet the needs of its POLR III customers |
| We are subject to risks associated with procuring energy and capacity for Duquesne Light’s small customers and DLE’s customers |
| In addition to supplying the energy and capacity needs of Duquesne Light’s small customers, Duquesne Power also has a full-requirements contract with its affiliate DLE to provide all of its large commercial and industrial customers’ energy and capacity needs |
| During 2004 and 2005, Duquesne Power entered into wholesale power purchase contracts that have been structured primarily to begin and end during the POLR III time period |
| The net result of these transactions is that, as of December 31, 2005, Duquesne Power has secured a substantial portion of the combined expected load obligation for its full-requirements contracts with Duquesne Light and DLE through 2007 |
| Actual load may differ from expected load due to weather, customer switching, economic and other factors |
| If Duquesne Power did not have sufficient supplies, Duquesne Power would be required to procure the requirements in the energy markets |
| If market prices were higher than the rates to be paid by Duquesne Light and DLE to Duquesne Power under the full-requirements contracts, Duquesne Power could potentially be acquiring the energy or capacity at a loss, and any such losses could have a material adverse effect on our consolidated results of operations and financial condition |
| Likewise, if Duquesne Power has contracted for supplies in excess of its needs, Duquesne Power could potentially be selling energy or capacity at a loss, and any such losses could have a material adverse effect on our consolidated results of operations and financial condition |
| Duquesne Power’s energy commodity contracts contain provisions designed to mitigate potential losses by requiring that Duquesne Power post collateral depending on changes in energy or capacity prices |
| Because Holdings guarantees these contracts, any such collateral postings would reduce cash and/or the availability under Holdings’ credit facility |
| The pending acquisition of ownership interests in the Keystone and Conemaugh generation stations will subject us to risks that we do not currently face |
| The acquisition and ownership of an interest in a generation station involves numerous risks, including: • the plants’ ability to operate at expected capacity factors; • unforeseen operating problems and capital and other expenditures, including unforeseen environmental compliance costs; • equipment failures; • the ability to comply with applicable regulations; • unanticipated cost increases; • labor force matters; • weather-related incidents; • the impact of changes in environmental laws and regulations; and • the ability to finance the acquisition |
| Any of these factors could give rise to lost revenues and/or increased expenses and/or capital expenditures |
| In addition, the performance of an investment in the Keystone and Conemaugh generation stations will depend on: • cost and availability of fuel; and • changes in market prices of power |
| Events or circumstances that adversely affect our financial position could result in defaults under our credit agreements |
| Holdings and Duquesne Light are subject to financial covenants contained in their respective credit agreements |
| For instance, our credit agreement requires us to maintain at all times a ratio of consolidated debt to consolidated capital of not more than 0dtta65 to 1dtta0 and an interest coverage ratio, with respect to each twelve-month period ending on the last day of each fiscal quarter, of at least 2dtta0 to 1dtta0 |
| Duquesne Light’s credit agreement requires Duquesne Light to maintain at all times a ratio of indebtedness to total capitalization of not more than 0dtta65 to 1dtta0 |
| As of December 31, 2005 we were in compliance with those covenants |
| However, any events or circumstances (including any charges to earnings) which have an effect, directly or indirectly, of reducing our common equity, increasing our indebtedness or reducing interest coverage, in relative terms, could result in non-compliance with these covenants |
| If we default under our credit agreements, our lenders could elect to declare all amounts borrowed to be immediately due and payable, together with accrued and unpaid interest; and/or terminate their commitments, if any, to make further extensions of credit |
| Both credit agreements include cross-default provisions that would be triggered if the borrower or any of its subsidiaries 11 _________________________________________________________________ [73]Table of Contents defaults on any payment due under any indebtedness exceeding dlra50 million |
| The cost of compliance with environmental laws is significant |
| The costs of compliance with new environmental laws and the incurrence of environmental liabilities could adversely affect our cash flow and profitability |
| The operations of our subsidiaries are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources, site remediation, and health and safety |
| These statutes, rules and regulations require us to commit significant resources and funds to, among other things, conduct site remediation and perform environmental monitoring |
| We also may be required to pay significant remediation costs with respect to third party sites in connection with previously divested assets |
| If we fail to comply with applicable environmental statutes, rules and regulations, even if caused by factors beyond our control, such failure could result in the assessment of civil or criminal penalties and liabilities and the need to expend significant sums to come into compliance |
| Alleged violations of environmental laws and regulations may require us to expend significant resources defending ourselves against these claims |
| New environmental statutes, rules and regulations, or amendments to or new interpretations of existing statutes, rules and regulations, could impose additional or more stringent limitations on our operations or require us to incur significant additional costs |
| Our current compliance strategy may not successfully address the relevant standards and interpretations of the future |
| Our operating results fluctuate on a seasonal basis and can be adversely affected by changes in weather |
| Our electric utility business is sensitive to variations in weather conditions and significant variations from normal weather patterns can have a material impact on our operating performance |
| Historically, demand for electricity is generally greater in the summer months associated with cooling compared to other times of the year |
| Accordingly, we have generated less revenues and income when weather conditions are cooler than usual in the summer |
| Severe weather, such as tornadoes, hurricanes, storms, ice and droughts, may cause outages and property damage which may require us to incur additional costs that may not be insured and that may not be recoverable from customers |
| Also, while Duquesne Light’s margin on residential and small commercial customers was previously a fixed dollar amount per megawatt-hour (MWh), beginning in 2005, the margin has an element of seasonality |
| Revenues per MWh, while fixed on an annual basis through 2007, are lowest in the first and fourth quarters reflecting the discount rate offered to electric heating customers in the November through April heating season |
| The revenues per MWh are then higher in the remaining months |
| Similarly, costs per MWh are expected to have a seasonal element, being higher in the first and third quarters reflecting the peak energy consumption in the heating and cooling seasons |
| We may be adversely affected by economic conditions |
| Periods of slowed economic activity generally result in decreased demand for power, particularly as industrial customers reduce production during such economic downturns, resulting in less consumption of electricity |
| Additionally, a general downturn in overall economic conditions may result in an increased number of bankruptcy filings by our customers, which would restrict our ability to collect revenue from these customers |
| As a consequence, recessions or other downturns in the economy may result in decreased revenues and cash flows for us |
| Our insurance coverage may not be sufficient to cover all casualty losses that we might incur |
| We currently have insurance coverage for our facilities and operations in amounts and with deductibles that we consider appropriate |
| However, there is no assurance that such insurance coverage will be available in the future on commercially reasonable terms |
| In addition, some risks, such as weather-related casualties, may not be insurable |
| In the case of loss or damage to property, plant or equipment, there is no assurance that the insurance proceeds, if any, received by us will be sufficient to cover the entire cost of replacement or repair |
| Our transmission facilities are interconnected with the facilities of other transmission facility owners whose actions may have a negative impact on our operations |
| Our transmission facilities are directly interconnected with the transmission facilities of contiguous utilities and as such are part of an interstate power transmission grid |
| The FERC has approved certain Regional Transmission Organizations (RTOs) that coordinate and have operational control of portions of the interstate transmission grid |
| PJM and the other regional transmission operators have established sophisticated systems that are designed to ensure the 12 _________________________________________________________________ [74]Table of Contents reliability of the operation of transmission facilities and prevent the operations of one utility from having an adverse impact on the operations of the other utilities |
| The systems put in place by PJM and the other RTOs may not, however, always be adequate to prevent problems at other utilities from causing service interruptions in our transmission facilities |
| If we were to suffer such a service interruption due to an unexpected or uncontrollable event occurring on the system of another utility, it could have a negative impact on our business |
| Additionally, any changes in PJM policies or market rules, including changes that may be under consideration by the FERC, could adversely affect our business, financial condition or results of operations |
| Physical limitations in the electricity transmission system may give rise to increases in electric transmission congestion charges |
| Energy pricing within PJM includes the costs or benefits of transmission congestion experienced at each location within the region |
| This is known as locational marginal pricing (LMP) |
| LMP recognizes that the marginal price of electricity may be different at varying locations on the system and at different times |
| Differences in prices between two locations in the region at the same time reflect physical limitations in the transmission lines used to move power across the system |
| These physical limitations may give rise to increases in electric transmission congestion charges |
| We are dependent on our ability to cost-effectively access capital markets |
| Our inability to obtain capital on acceptable terms may adversely affect our business |
| A reduction in our credit ratings could increase our borrowing costs |
| We rely on access to both short-term debt markets and longer-term capital markets as a source of liquidity and to satisfy our capital requirements in excess of cash flow from our operations |
| Any inability to maintain our current credit ratings could affect, especially during times of uncertainty in the capital markets, our ability to raise capital on favorable terms that, in turn, could impact our ability to manage our business |
| Moody’s Investors Service, Inc, Standard & Poor’s Ratings Services, and Fitch Ratings periodically assign credit ratings on our debt and preferred securities |
| We raise capital primarily by issuing senior-unsecured debt (currently rated Baa3, BBB- and BBB-, respectively) and bank borrowings |
| Duquesne Light raises capital primarily by issuing first mortgage bonds (currently rated Baa1, BBB+ and BBB, respectively), preferred stock (currently rated Ba1, BB+ and BBB-, respectively), senior-unsecured debt (currently rated Baa2, BBB- and BBB-, respectively) and bank borrowings |
| Any downgrades in these ratings could have a negative impact on our liquidity, our access to capital markets, our costs of financing and could increase the amount of collateral required by energy-contract counterparties |
| Capital market disruptions could also adversely affect our ability to access one or more financial markets |
| Moody’s Investors Service has also stated that our rating could be impacted negatively if we diverge from our current strategy of repositioning our business around our core regulated utility and make investments in higher risk unregulated businesses that would increase overall business risk |
| Additionally, Moody’s Investors Service has noted that a rating downgrade could also occur if there is a sustained deterioration in our cash flows or an increase in leverage resulting in weaker credit metrics that would include the ratio of funds from operations to consolidated debt being in the low teens or below |
| A rating is not a recommendation to buy, sell or hold the notes, inasmuch as such rating does not comment as to market price or suitability for a particular investor |
| The ratings assigned to the notes address the likelihood of payment of principal and interest on the notes pursuant to their terms |
| A rating may be subject to revision or withdrawal at any time by the assigning rating agency |
| Each rating should be evaluated independently of any other rating that may be assigned to our securities |
| We may have difficulty retaining our aging utility workforce or finding skilled personnel to replace them |
| Workforce demographic issues are a national phenomenon that is of particular concern to the electric utility industry |
| The median age of utility workers is significantly higher than the national average |
| Currently, nearly one-half of the utility workforce is age 45 or higher |
| As of December 31, 2005, the median age of utility workers at Duquesne Light was 51dtta37 |
| Consequently, the utility industry generally faces, and we specifically face, the difficult challenge of finding ways to retain our aging skilled workforce while recruiting new talent in the hopes of decreasing losses in critical knowledge and skills due to retirements |
| Mitigating these risks may require additional financial commitments |
| Labor disputes may have a material adverse effect on our operations and profitability |
| As of December 31, 2005, we, together with our various subsidiaries, had approximately 1cmam600 employees |
| Of this total, approximately 1cmam400 were employed by Duquesne Light |
| We collectively bargain with a labor union that represents approximately 71prca of these Duquesne Light employees |
| When the current collective bargaining agreement expires September 30, 13 _________________________________________________________________ [75]Table of Contents 2010, failure to reach an agreement could result in strikes or other labor protests that could disrupt our operations |
| If we were to experience a strike or work stoppage, it would be difficult for us to find a sufficient number of employees with the necessary skills to replace these employees |
| We cannot assure you that we will reach any such agreement or that we will not encounter strikes or other types of conflicts with the labor union of our personnel |
| Such labor disputes could have an adverse effect on our business, financial condition or results of operations, could cause us to lose revenues and customers and might have permanent effects on our business |
| Our revenues and results of operations are subject to other risks beyond our control, including, but not limited to, accidents, storms, natural catastrophes and terrorism |
| The lost revenues and cost of repairing damage to our facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events may exceed reserves and/or insurance coverage established for repairs necessitated by such events, which may adversely impact our results of operations and financial condition |
| We cannot assure you that our facilities will not face damage or disruptions from these or other events |
| In addition, in the current geopolitical climate, enhanced concern regarding the risks of terrorism throughout the economy may impact our operations in unpredictable ways |
| Insurance coverage may not cover risks of this nature adequately or at all |
| Changes in financial or regulatory accounting principles or policies could affect our future earnings or cash flows |
| See Item 1, “Proposed Accounting Standards,” for further discussion |
| We may experience a significant reduction in our earnings as a result of the December 31, 2007 expiration or the earlier phase-out of certain tax credits related to our synthetic fuel and landfill gas projects |
| In addition to operating five of the six synthetic fuel plants owned by an unrelated third party, we also hold a limited partnership interest in an entity that owns and operates plants that produce and sell synthetic fuel |
| These synthetic fuel projects are important contributors to our earnings |
| We also produce Section 29 tax credits from some of our landfill gas operations |
| Section 29 tax credits are set to expire on December 31, 2007 |
| Once such tax credits expire we do not believe that there will be a market for the sale of the synthetic-fuel |
| We cannot guarantee that we will be able to bridge the 2008 earnings gap that will result from the loss of earnings from our synthetic-fuel and landfill-gas projects following the expiration of the tax credits |
| Section 29 tax credits are subject to a phase-out provision that could reduce or eliminate the tax credits if the average annual wellhead price per barrel of domestic crude oil increases into an inflation-adjusted phase-out range |
| The IRS publishes the phase-out range in April for the previous year |
| We estimate that for 2005 the tax credits would have begun to phase out when the annual average wellhead price of domestic crude oil exceeded dlra53 per barrel and would have completely phased out if that price exceeded approximately dlra66 per barrel |
| For 2005, the estimated average wellhead price was approximately dlra50 per barrel |
| The wellhead price per barrel of domestic crude oil in recent years has averaged approximately 90prca of the New York Mercantile Exchange price per barrel of domestic crude oil |
| We cannot predict the phase-out range for future years |
| If domestic crude oil prices stay at a high level in 2006 and/or 2007, the estimated annual tax credits to be generated from DQE Financial’s landfill gas operations and its investment in a synthetic fuel partnership of approximately dlra18 million, as well as DES’ estimated annual after-tax earnings of approximately dlra20 million from its synthetic fuel facilities management contract, may be substantially reduced or eliminated |
| Based upon our evaluation, we have thus far determined not to enter into hedging arrangements to reduce this potential exposure |
| Natural gas prices are volatile, and a decline in natural gas prices would significantly affect our landfill gas business’ financial results and impede its growth |
| Our landfill gas-related revenue, profitability and cash flow depend upon the prices and demand for natural gas |
| Prices for natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as: • weather conditions; • technological advances affecting energy consumption; • governmental regulations; • proximity and capacity of pipelines and other transportation facilities; and • the price and availability of alternative fuels |
| Our significant indebtedness could adversely affect our business |
| At December 31, 2005, Holdings had total indebtedness of approximately dlra999 million (including approximately dlra638 million at Duquesne Light), which 14 _________________________________________________________________ [76]Table of Contents could have important consequences |
| For example, it could: • make it more difficult for us to satisfy our obligations related to any such indebtedness; • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes; • limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; • place us at a disadvantage compared to competitors that have less debt; and • limit our ability to borrow additional funds or refinance existing debt |
| Any of these consequences could have a material adverse effect on our ability to satisfy our indebtedness |
| The indenture under which Duquesne Light’s first mortgage bonds are issued permits Duquesne Light to issue additional first mortgage bonds from time to time if certain financial requirements are satisfied |
| The terms of our credit agreements also do not prohibit us or our subsidiaries from incurring additional indebtedness |
| As of December 31, 2005, approximately dlra180 million of unused commitments remain under Holdings’ credit agreements (including approximately dlra92 million at Duquesne Light), and our credit agreements would permit additional borrowings |
| If new debt is added to our and our subsidiaries’ current debt levels, the leverage-related risks described above could intensify |
| Our ability to pay dividends or service indebtedness is largely dependent upon the earnings of our subsidiaries and the distribution of such earnings to us |
| We are a holding company, and substantially all of the assets shown on our consolidated balance sheets are held by subsidiaries |
| Our operating cash flow and our ability to service our indebtedness depend on the operating cash flow of our subsidiaries and the payment of funds by them to us in the form of dividends or advances |
| Our indebtedness is not guaranteed by our subsidiaries and our subsidiaries are separate and distinct legal entities |
| We hold no assets and have no sources of revenue other than the ownership interests in our subsidiaries and the right to any dividends thereon and the right to receive payments on any existing or future loans made to our subsidiaries |
| Our subsidiaries are separate and distinct legal entities and have no obligation to make payments on their common stock, or to make any funds available for such payment |
| Our subsidiaries’ ability to make dividend payments or other distributions to us may be restricted by their obligations to holders of their outstanding debt, their other creditors and holders of their preferred and preference stock, and the availability of earnings and the needs of their businesses |
| For instance, no dividends or distributions may be made on Duquesne Light’s common stock if it has not paid dividends on its preferred or preference stock |
| Dividends on Duquesne Light stock may also be effectively limited by the terms of certain financing arrangements |
| Further, under Duquesne Light’s articles of incorporation, the aggregate amount of common stock dividend payments or distributions may not exceed certain percentages of net income, if the ratio of total common shareholder’s equity to total capitalization is less than specified percentages |
| No part of Duquesne Light’s retained earnings was restricted at December 31, 2005 |
| In addition, as discussed above, Duquesne Light is regulated by the PUC, which generally possesses broad powers to ensure that the needs of the utility customers are being met |
| To the extent that the PUC attempts to impose restrictions on the ability of Duquesne Light to pay dividends to us, it could adversely affect our ability to make payments on our indebtedness or otherwise meet our financial obligations |
| In the event of a bankruptcy, liquidation, winding-up, dissolution, receivership, insolvency, reorganization, administration or similar proceeding relating to one of our subsidiaries, holders of such subsidiaries’ indebtedness, trade creditors of such subsidiaries and holders of such subsidiaries’ preferred and/or preference stock will generally be entitled to payment of their claim from the assets of those subsidiaries before assets are made available for distribution to us |
| We cannot assure investors that future dividend payments will be made, or if made, in what amounts they may be paid |
| Our Board of Directors regularly evaluates our common stock dividend policy and sets the amount each quarter |
| The level of dividends will continue to be influenced by many factors, including, among other things, our earnings, financial condition and cash flows from subsidiaries, as well as general economic and competitive conditions |
| We cannot assure investors that dividends will be paid in the future, or that, if paid, dividends will be at the same amount or with the same frequency as in the past |
| 15 _________________________________________________________________ [77]Table of Contents Because Duquesne Light is a wholly owned subsidiary of Holdings, Holdings can exercise substantial control over its dividend policy and business and operations |
| All of the members of Duquesne Light’s board of directors and its executive officers are also officers of Holdings |
| Among other decisions, the Duquesne Light board is responsible for decisions regarding financing and capital raising activities, and acquisition and disposition of assets |
| Within the limitations of applicable law, Duquesne Light’s articles of incorporation and subject to the covenants under its outstanding debt instruments, the Duquesne Light board of directors will base its business decisions on its earnings, cash flow and capital structure, but may also take into account the business plans and financial requirements of Holdings and its other subsidiaries |