<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
--------------
[ ] 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
----------------------
1-10290
DQE, Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1598483
------------ ----------
(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
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 262-4700
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 (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ___
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 - 77,360,380 shares outstanding as of March 31,
1997 and 77,386,852 shares outstanding as of April 30, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DQE
CONDENSED STATEMENT OF CONSOLIDATED INCOME
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Operating Revenues
Sales of Electricity:
Customers - net $264,018 $265,170
Utilities 8,731 15,965
-------- --------
Total Sales of Electricity 272,749 281,135
Other 29,335 19,383
-------- --------
Total Operating Revenues 302,084 300,518
-------- --------
Operating Expenses
Fuel and purchased power 51,654 59,165
Other operating 81,632 70,431
Maintenance 17,749 20,504
Depreciation and amortization 55,174 56,981
Taxes other than income taxes 20,558 22,121
-------- --------
Total Operating Expenses 226,767 229,202
-------- --------
OPERATING INCOME 75,317 71,316
-------- --------
OTHER INCOME 20,001 14,823
-------- --------
INTEREST AND OTHER CHARGES 28,680 25,703
-------- --------
INCOME BEFORE INCOME TAXES 66,638 60,436
INCOME TAXES 21,541 18,131
-------- --------
NET INCOME $ 45,097 $ 42,305
======== ========
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
(Thousands of Shares) 77,287 77,588
======== ========
EARNINGS PER SHARE OF
COMMON STOCK $0.58 $0.55
======== ========
DIVIDENDS DECLARED PER
SHARE OF COMMON STOCK $0.34 $0.32
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
DQE
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and temporary cash investments $ 386,857 $ 410,978
Receivables 128,785 130,125
Other current assets, principally
materials and supplies 79,322 81,125
----------- -----------
Total current assets 594,964 622,228
----------- -----------
Long-term investments 575,499 518,689
----------- -----------
Property, plant and equipment 4,799,655 4,787,470
Less: Accumulated depreciation and
amortization (2,018,710) (1,969,945)
----------- -----------
Property, plant and equipment -
net 2,780,945 2,817,525
----------- -----------
Other non-current assets:
Regulatory assets 625,226 636,816
Other 45,948 43,734
----------- -----------
Total other non-current assets 671,174 680,550
----------- -----------
TOTAL ASSETS $ 4,622,582 $ 4,638,992
=========== ===========
LIABILITIES AND CAPITALIZATION
Current liabilities:
Notes payable $ 930 $ 749
Current maturities and sinking fund
requirements 107,146 72,831
Accounts payable 80,626 96,230
Accrued liabilities 41,124 58,044
Dividends declared 28,709 28,633
Other 2,852 4,075
----------- -----------
Total current liabilities 261,387 260,562
----------- -----------
Deferred income taxes - net 768,258 759,089
----------- -----------
Deferred investment tax credits 104,096 106,201
----------- -----------
Capital lease obligations 24,150 28,407
----------- -----------
Deferred income 180,835 189,293
----------- -----------
Other 248,687 240,763
----------- -----------
Commitments and contingencies (Note 4)
Capitalization:
Long-term debt 1,402,286 1,439,746
----------- -----------
Preferred and preference stock of
subsidiaries:
Non-redeemable preferred stock 213,608 213,608
Non-redeemable preference stock,
Plan Series A 28,997 28,997
----------- -----------
Total preferred and preference
stock before deferred employee
stock ownership plan (ESOP)
benefit (involuntary liquidation
values of $242,467 exceed par by
$28,180 for each period presented) 242,605 242,605
Deferred ESOP benefit (18,931) (19,533)
----------- -----------
Total preferred and preference
stock of subsidiaries 223,674 223,072
----------- -----------
Common shareholders' equity:
Common stock - no par value
(authorized - 187,500,000 shares;
issued - 109,679,154 shares) 987,413 990,502
Retained earnings 796,429 777,607
Less treasury stock (at cost)
(32,318,774 and 32,406,135
shares, respectively) (374,633) (376,250)
----------- -----------
Total common shareholders' equity 1,409,209 1,391,859
----------- -----------
Total capitalization 3,035,169 3,054,677
----------- -----------
TOTAL LIABILITIES AND
CAPITALIZATION $ 4,622,582 $ 4,638,992
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DQE
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
--------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Operations $112,197 $ 96,706
Changes in working capital other than
cash (30,528) (7,226)
Other 11,274 (3,444)
-------- --------
Net Cash Provided By Operating
Activities 92,943 86,036
-------- --------
Cash Flows From Investing Activities
Capital expenditures (17,213) (18,539)
Long-term investments - net (68,337) 15,966
Other 2,238 (979)
-------- --------
Net Cash Used In Investing
Activities (83,312) (3,552)
-------- --------
Cash Flows From Financing Activities
Decrease in notes payable 181 (19,073)
Dividends on common stock (26,275) (24,835)
Reduction in long term debt (7,780) (4,495)
Other 122 (3,418)
-------- --------
Net Cash Used In Financing
Activities (33,752) (51,821)
-------- --------
Net (decrease) increase in cash and
temporary cash investments (24,121) 30,663
Cash and temporary cash investments at
beginning of period 410,978 24,767
-------- --------
Cash and temporary cash investments at
end of period $386,857 $ 55,430
======== ========
Non-Cash Investing Activities
Equity funding obligations recorded $ 2,888 -
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Except for historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements that involve
risks and uncertainties including, but not limited to, economic, competitive,
governmental and technological factors affecting DQE, Inc. and its subsidiaries'
(the Company's) operations, markets, products, services and prices, and other
factors discussed in the Company's filings with the Securities and Exchange
Commission (SEC).
1. CONSOLIDATION, RECLASSIFICATIONS AND ACCOUNTING POLICIES
DQE, Inc. (DQE), is an energy services holding company formed in 1989. Its
subsidiaries are Duquesne Light Company (Duquesne), Duquesne Enterprises, Inc.
(DE), DQE Energy Services, Inc. (DES), DQEnergy PARTNERS, Inc. (DQEnergy) and
Montauk, Inc. (Montauk). DQE and its subsidiaries are collectively referred to
as "the Company."
Duquesne is an electric utility engaged in the production, transmission,
distribution and sale of electric energy and is the largest of DQE's
subsidiaries. DE makes strategic investments beneficial to DQE's core energy
business. These investments enhance DQE's capabilities as an energy provider,
increase asset utilization, and act as a hedge against changing business
conditions. DES is a diversified energy services company offering a wide range
of energy solutions for industrial, utility and consumer markets worldwide. DES
initiatives include energy facility development and operation, domestic and
international independent power production, and the production and supply of
innovative fuels. DQEnergy was formed in December 1996 to align DQE with
strategic partners to capitalize on opportunities in the dynamic energy services
industry. These alliances enhance the utilization and value of DQE's strategic
investments and capabilities while establishing DQE as a total energy provider.
Montauk is a financial services company that makes long-term investments and
provides financing for the Company's other market-driven businesses and their
customers.
On April 7, 1997, the Company and Allegheny Power System, Inc. (APS),
announced a proposed tax-free, stock-for-stock merger. Upon consummation of the
merger, DQE will be a wholly owned subsidiary of APS, and the combined
company's name will be Allegheny Energy, Inc. Following the merger, Duquesne,
DE, DES, DQEnergy and Montauk will remain wholly owned subsidiaries of DQE. The
transaction is expected to close within 12 to 18 months, subject to approval of
the shareholders of both companies and applicable regulatory agencies. (See
"Subsequent Events," Note 5, on page 14.)
All material intercompany balances and transactions have been eliminated in
the preparation of the condensed consolidated financial statements.
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 are
normal, recurring adjustments. Prior-period financial statements were
reclassified to conform with the 1997 presentation.
These statements should be read with the financial statements and notes
included in the Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 1996. The results of operations for the three months ended March
31, 1997, are not necessarily indicative of the results that may be expected for
the full year. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions
5
<PAGE>
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may also
be affected by the estimates and assumptions management is required to make.
Actual results could differ from those estimates.
The Company is subject to the accounting and reporting requirements of the
SEC. In addition, the Company's electric utility operations are subject to
regulation by the Pennsylvania Public Utility Commission (PUC) and the Federal
Energy Regulatory Commission (FERC) under the Federal Power Act with respect to
rates for interstate sales, transmission of electric power, accounting and other
matters.
The Company's consolidated financial statements report regulatory assets
and liabilities in accordance with Statement of Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71),
and reflect the effects of the current ratemaking process. In accordance with
SFAS No. 71, the Company's consolidated financial statements reflect regulatory
assets and liabilities consistent with cost-based, pre-competition ratemaking
regulations. (See "Rate Matters", Note 3, on page 7.)
The Company's long-term investments include certain investments in
marketable securities. In accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, these investments are classified as available-for-sale and are
stated at market value. The amounts of unrealized holding losses on investments
at March 31, 1997, and December 31, 1996, are $8.5 million and $4.4 million,
respectively ($4.9 million and $2.6 million net of tax, respectively).
Through the Energy Cost Rate Adjustment Clause (ECR), the Company recovers
(to the extent that such amounts are not included in base rates) nuclear fuel,
fossil fuel and purchased power expenses and, also through the ECR, passes to
its customers the profits from short-term power sales to other utilities
(collectively, ECR energy costs). Under the Company's PUC-approved Mitigation
Plan, the level of energy cost recovery is capped at 1.47 cents per kilowatt-
hour (KWH) through May 2001. To the extent that projections do not support
recovery of previously deferred costs through this pricing mechanism, these
costs would become transition costs subject to recovery through a competitive
transition charge (CTC). (See "Customer Choice Act" and "Mitigation Plan"
discussions, Note 3, on pages 7 and 8.)
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS No. 128) has been issued for periods ending after December 15, 1997.
Earlier application is not permitted. The general requirements of SFAS No. 128
are designed to simplify the computation of earnings per share. The new
statement requires a calculation of basic and diluted earnings per share. The
adoption of this statement is not expected to have any effect on the Company's
calculation of earnings per share.
6
<PAGE>
2. RECEIVABLES
The components of receivables for the periods indicated are as follows:
<TABLE>
<CAPTION>
March 31, March 31, December 31,
1997 1996 1996
(Amounts in Thousands of Dollars)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric customer accounts receivable $ 97,655 $103,263 $ 92,475
Other utility receivables 16,534 16,258 22,402
Other receivables 34,465 31,004 33,936
Less: Allowance for uncollectible
accounts (19,869) (20,340) (18,688)
- -------------------------------------------------------------------------------------------
Total Receivables $128,785 $130,185 $130,125
===========================================================================================
</TABLE>
The Company and an unaffiliated corporation have an agreement that entitles
the Company to sell, and the corporation to purchase, on an ongoing basis, up to
$50.0 million of accounts receivable. At March 31, 1997, and December 31, 1996,
the Company had not sold any receivables to the unaffiliated corporation. The
accounts receivable sales agreement, which expires in June 1997, is one of many
sources of funds available to the Company. The Company has not determined, but
may attempt to extend the agreement or to replace the facility with a similar
arrangement or to eliminate it upon expiration.
3. RATE MATTERS
Customer Choice Act
Under the Electricity Generation Customer Choice and Competition Act
(Customer Choice Act), which went into effect on January 1, 1997, Pennsylvania
has become a leader in customer choice. The Customer Choice Act will enable
Pennsylvania's electric utility customers to purchase electricity at market
prices from a variety of electric generation suppliers (customer choice).
Electric utility restructuring will be accomplished through a two-stage process
consisting of a pilot period (running through 1998) and a phase-in period (1999
through 2001). Before the phase-in to customer choice begins in 1999, the PUC
expects utilities to take vigorous steps to mitigate transition costs as much as
possible without increasing the price they currently charge customers. The PUC
will determine what portion of a utility's remaining transition costs will be
recoverable from customers through a CTC. This charge will be paid by consumers
who choose alternative generation suppliers as well as customers who choose
their franchised utility. The CTC could last as long as 2005, providing a
utility a total of up to nine years to recover transition costs. An overall
four-and-one-half year price cap will be imposed on the transmission and
distribution charges of electric utility companies. Additionally, electric
utility companies may not increase the generation price component of prices as
long as transition costs are being recovered, with certain exceptions. If a
utility ultimately is unable to recover its transition costs within this pricing
structure and timeframe, the costs will be written off.
7
<PAGE>
Mitigation Plan
The Company has taken a number of steps to mitigate its potential
transition costs. In addition to the steps taken during the last 10 years to
prepare for competition, effective January 1, 1995, the Company accelerated its
rate of depreciation on its fixed nuclear assets without seeking a rate increase
to recover the additional costs. On October 31, 1996, the Company sold its 50
percent ownership interest in the Ft. Martin Power Station (Ft. Martin). Under
the PUC-approved plan, the Company will not increase its base rates for a period
of five years through May 2001. In addition, the Company recorded in October
1996 a one-time reduction of approximately $130 million in the book value of the
Company's nuclear plant investment. The proceeds from the sale are expected to
be used to fund reliability enhancements to the Brunot Island (BI) Unit 3
combustion turbine and to reduce the Company's capitalization. The approved plan
also provides for incremental increases of $25 million in depreciation and
amortization expense in 1997 and 1998 related to the Company's nuclear
investment, as well as additional annual contributions to its nuclear plant
decommissioning funds of $5 million, without any increase in existing electric
rates. Also, the Company will record an annual $5 million credit to the ECR
during the plan period to compensate the Company's electric utility customers
for lost profits from any short-term power sales foregone by the sale of its
ownership interest in Ft. Martin. In addition, the Company has capped energy
costs for the remainder of the plan period, at a historical five-year average of
1.47 cents per kilowatt hour (KWH). The Company's approved plan provides for
the amortization of the remaining deferred rate synchronization costs over a 10-
year period. At March 31, 1997, the unamortized portion of these costs totaled
$40.4 million, net of deferred fuel savings related to the two units. Finally,
the Company's approved plan also provides for annual assistance of $0.5 million
to low-income customers.
Regulatory Assets
As a result of the application of SFAS No. 71, the Company records
regulatory assets on its consolidated balance sheet. The regulatory assets
represent probable future revenue to the Company because provisions for these
costs are currently included, or are expected to be included, in charges to
electric utility customers through the ratemaking process.
A company's electric utility operations or a portion of such operations
could cease to meet the SFAS No. 71 criteria for various reasons, including a
change in the FERC regulations or the competition-related changes in the PUC
regulations. (See "Customer Choice Act" discussion on page 7.) The Company
currently believes its electricity generating assets and related regulatory
assets continue to satisfy these criteria in light of the transition to
competitive generation under the Customer Choice Act. Should any portion of the
Company's electric utility operations be deemed to no longer meet the SFAS No.
71 criteria, the Company may be required to write off any above-market cost
assets, the recovery of which is uncertain, and any regulatory assets or
liabilities for those operations that no longer meet these requirements.
8
<PAGE>
The components of regulatory assets for the periods presented are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Amounts in Thousands of Dollars)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Regulatory tax receivable $383,971 $394,131
Unamortized debt costs (a) 91,943 93,299
Deferred rate synchronization costs 40,392 41,446
Beaver Valley Unit 2 sale/leaseback premium (b) 29,682 30,059
Deferred employee costs (c) 27,964 29,589
Deferred nuclear maintenance outage costs 9,228 13,462
Deferred coal costs (see below) 12,894 12,191
DOE decontamination and decommissioning receivable 9,547 9,779
Other 19,605 12,860
- -------------------------------------------------------------------------------------------
Total Regulatory Assets $625,226 $636,816
===========================================================================================
</TABLE>
(a) The premiums paid to reacquire debt prior to scheduled maturity dates are
deferred for amortization over the life of the debt issued to finance the
reacquisitions.
(b) The premium paid to refinance the Beaver Valley Unit 2 lease was deferred
for amortization over the life of the lease.
(c) Includes amounts for recovery of accrued compensated absences and accrued
claims for workers' compensation.
Deferred Coal Costs
The PUC has established two market price coal cost standards for the
Company. One applies only to coal delivered at the Bruce Mansfield Power
Station (Bruce Mansfield). The other, the system-wide coal cost standard,
applies to coal delivered to the remainder of the Company's system. Both
standards are updated monthly to reflect prevailing market prices of similar
coal. The PUC has directed the Company to defer recovery of the delivered cost
of coal to the extent that such cost exceeds generally prevailing market prices
for similar coal, as determined by the PUC. The PUC allows deferred amounts to
be recovered from customers when the delivered costs of coal fall below such
PUC-determined prevailing market prices.
In 1990, the PUC approved a joint petition for settlement that clarified
certain aspects of the system-wide coal cost standard. The Company has
exercised options to extend the coal cost standard through March 2000. The
unrecovered cost of Bruce Mansfield coal was $10.3 million and $9.6 million, and
the unrecovered cost of the remainder of the system-wide coal was $2.6 million
at March 31, 1997 and December 31, 1996. The Company believes that all deferred
coal costs will be recovered.
Property Held for Future Use
In 1986, the PUC approved the Company's request to remove Phillips Power
Station (Phillips) and a portion of BI from service and from rate base. In
accordance with the Company's Mitigation Plan, 112 megawatts related to BI Units
2a and 2b were moved from property held for future use to electric plant in
service in 1996. The Company expects to recover its investment in BI Units 3 and
4, which remain in property held for future use through future electricity
sales. The Company believes its investment in BI will be necessary in order to
meet future business needs. A portion of the proceeds of the sale of Ft. Martin
is expected to be used to fund reliability enhancements to the BI Unit 3
combustion turbine. The reliability enhancements are contingent upon the
projects meeting a least-cost test versus other potential sources of
9
<PAGE>
peaking capacity. (See "Mitigation Plan" discussion on page 8.) The Company is
analyzing the effects of customer choice on its future generating requirements.
The Company is planning to seek recovery of its investment and associated costs
of Phillips through a CTC. In the event that market demand, transmission access
or rate recovery do not support the utilization of these plants, the Company may
have to write off part or all of these investments and associated costs. At
March 31, 1997, the Company's net of tax investment in Phillips and BI held for
future use was $51.6 million and $18.3 million.
4. COMMITMENTS AND CONTINGENCIES
Construction
The Company estimates that it will spend, excluding the Allowance for Funds
Used During Construction and nuclear fuel, approximately $110 million for
electric utility construction during 1997. This estimate also excludes any
potential expenditures for reliability enhancements to the BI Unit 3 combustion
turbine. (See "Mitigation Plan" discussion, Note 3, on page 8.)
Nuclear-Related Matters
The Company has an ownership interest in three nuclear units, two of which
it operates. The operation of a nuclear facility involves special risks,
potential liabilities, and specific regulatory and safety requirements. Specific
information about risk management and potential liabilities is discussed below.
Nuclear Decommissioning. The PUC ruled that recovery of the
decommissioning costs for Beaver Valley Unit 1 (BV Unit 1) could begin in 1977,
and that recovery for Beaver Valley Unit 2 (BV Unit 2) and Perry Unit 1 could
begin in 1988. The Company expects to decommission BV Unit 1, BV Unit 2 and
Perry Unit 1 no earlier than the expiration of each plant's operating license in
2016, 2027 and 2026, respectively. At the end of its operating life, BV Unit 1
may be placed in safe storage until BV Unit 2 is ready to be decommissioned, at
which time the units may be decommissioned together.
Based on site-specific studies finalized in 1992 for BV Unit 2, and in 1994
for BV Unit 1 and Perry Unit 1, the Company's share of the total estimated
decommissioning costs, including removal and decontamination costs, currently
being used to determine the Company's cost of service, is $122 million for BV
Unit 1, $35 million for BV Unit 2, and $67 million for Perry Unit 1. A study
will be performed in 1997 to update the Company's estimated decommissioning
costs of BV Unit 1 and BV Unit 2.
On July 18, 1996, the PUC issued a Proposed Policy Statement Regarding
Nuclear Decommissioning Cost Estimation and Cost Recovery for the purpose of
obtaining comments from the public. The proposed policy includes guidelines for
a site-specific study to estimate the cost of decommissioning. Guidelines
require that studies be performed at least every five years, address
radiological and non-radiological costs, and include a contingency factor of not
more than 10 percent. Under the proposed policy, annual decommissioning funding
levels are based on an annuity calculation recognizing inflation in the cost
estimates and earnings on fund assets. With respect to the transition to a
competitive generation market, the Customer Choice Act requires that utilities
include a plan to mitigate any shortfall in decommissioning trust fund payments
for the life of the facility with any future decommissioning filings. Consistent
with this requirement, the Company has increased its nuclear decommissioning
funding by $5 million under the PUC-approved plan for the sale of the Company's
ownership interest in Ft. Martin. (See "Mitigation Plan" discussion, Note 3,
10
<PAGE>
on page 8.) These additional annual contributions bring the total annual funding
to approximately $9 million. Also, on October 17, 1996, the PUC adopted an
Accounting Order filed by the Company to recognize the increased funding as part
of the Company's cost of service. The Company has received approval from the
Internal Revenue Service for qualification of 100 percent of additional nuclear
decommissioning trust funding for BV Unit 2 and Perry Unit 1, and 69 percent for
BV Unit 1.
Funding for nuclear decommissioning costs is deposited in external,
segregated trust accounts and may be invested in a portfolio of corporate common
stock and debt securities, municipal bonds, certificates of deposit and United
States government securities. Trust fund earnings increase the fund balances and
the related recorded liability. The market value of the aggregate trust fund
balances at March 31, 1997 totaled approximately $36.4 million.
Nuclear Insurance. The Price-Anderson Amendments to the Atomic Energy
Act of 1954 limit public liability from a single incident at a nuclear plant to
$8.9 billion. The maximum available private primary insurance of $200 million
has been purchased by the Company. Additional protection of $8.7 billion would
be provided by an assessment of up to $79.3 million per incident on each nuclear
unit in the United States. The Company's maximum total possible assessment,
$59.4 million, which is based on its ownership or leasehold interests in three
nuclear generating units, would be limited to a maximum of $7.5 million per
incident per year. This assessment is subject to indexing for inflation and may
be subject to state premium taxes. If funds prove insufficient to pay claims,
the United States Congress could impose other revenue-raising measures on the
nuclear industry.
The Company's share of insurance coverage for property damage,
decommissioning and decontamination liability is $1.2 billion. The Company would
be responsible for its share of any damages in excess of insurance coverage. In
addition, if the property damage reserves of Nuclear Electric Insurance Limited
(NEIL), an industry mutual insurance company that provides a portion of this
coverage, are inadequate to cover claims arising from an incident at any United
States nuclear site covered by that insurer, the Company could be assessed
retrospective premiums totaling a maximum of $7.3 million.
In addition, the Company participates in a NEIL program that provides
insurance for the increased cost of generation and/or purchased power resulting
from an accidental outage of a nuclear unit. Subject to the policy limit, the
coverage provides for 100 percent of the estimated incremental costs per week
during the 52-week period starting 21 weeks after an accident and 80 percent of
such estimate per week for the following 104 weeks, with no coverage thereafter.
If NEIL's losses for this program ever exceed its reserves, the Company could be
assessed retrospective premiums totaling a maximum of $3.5 million.
Beaver Valley Power Station (BVPS) Steam Generators. BVPS's two units
are equipped with steam generators designed and built by Westinghouse Electric
Corporation (Westinghouse). Similar to other Westinghouse nuclear plants,
outside diameter stress corrosion cracking (ODSCC) has occurred in the steam
generator tubes of both units. BV Unit 1, which was placed in service in 1976,
has required removal of approximately 15 percent of its steam generator tubes
from service through a process called "plugging." However, BV Unit 1 continues
to have the capability to operate at 100 percent reactor power and has the
ability to return tubes to service by repairing them through a process called
"sleeving." To date, no tubes at either BV Unit 1 or BV Unit 2 have been
sleeved. BV Unit 2, which was placed in service in 1987, has not yet exhibited
the degree of ODSCC experienced at BV Unit 1. Approximately 2 percent of BV Unit
2's tubes are plugged; however, it is too early in the life of the unit to
determine the extent to which ODSCC may become a problem.
11
<PAGE>
The Company has undertaken certain measures, such as increased inspections,
water chemistry control and tube plugging, to minimize the operational impact of
and to reduce susceptibility to ODSCC. Although the Company has taken these
steps to allay the effects of ODSCC, the inherent potential for future ODSCC in
steam generator tubes of the Westinghouse design still exists. Material
acceleration in the rate of ODSCC could lead to a loss of plant efficiency,
significant repairs or the possible replacement of the BV Unit 1 steam
generators. The total replacement cost of the BV Unit 1 steam generators is
currently estimated at $125 million. The Company would be responsible for $59
million of this total, which includes the cost of equipment removal and
replacement steam generators but excludes replacement power costs. The earliest
that the BV Unit 1 steam generators could be replaced during a scheduled
refueling outage is the fall of 2000.
The Company continues to explore all viable means of managing ODSCC,
including new repair technologies, and plans to continue to perform 100 percent
tube inspections during future refueling outages, which are anticipated to begin
in September 1997 for BV Unit 1 and in March 1998 for BV Unit 2. The Company
will continue to monitor and evaluate the condition of the BVPS steam
generators.
Spent Nuclear Fuel Disposal. The Nuclear Waste Policy Act of 1982
established a policy for handling and disposing of spent nuclear fuel and a
policy requiring the establishment of a final repository to accept spent nuclear
fuel. Electric utility companies have entered into contracts with the U.S.
Department of Energy (DOE) for the permanent disposal of spent nuclear fuel and
other high-level radioactive waste in compliance with this legislation. The DOE
has indicated that its repository under these contracts will not be available
for acceptance of spent nuclear fuel before 2010. On July 23, 1996, the U.S.
Court of Appeals for the District of Columbia Circuit, in response to a suit
brought by 25 electric utilities and 18 states and state agencies, unanimously
ruled that the DOE has a legal obligation to begin taking spent nuclear fuel by
January 31, 1998. The DOE has not yet established an interim or permanent
storage facility, and has indicated that it will be unable to begin acceptance
of spent nuclear fuel for disposal by January 31, 1998. Further, Congress is
considering amendments to the Nuclear Waste Policy Act of 1982 that could give
the DOE authority to proceed with the development of a federal interim storage
facility. In the event the DOE does not begin accepting spent nuclear fuel,
existing on-site spent nuclear fuel storage capacities at BV Unit 1, BV Unit 2
and Perry Unit 1 are expected to be sufficient until 2016 (end of operating
license), 2013 and 2011, respectively.
On January 31, 1997, the Company joined 35 other electric utilities and 46
states, state agencies and regulatory commissions in filing a suit in the U.S.
Court of Appeals for the District of Columbia against the DOE. The suit requests
the court to suspend the utilities' payments into the Nuclear Waste Fund and to
place future payments into an escrow account until the DOE fulfills its
obligation to accept spent nuclear fuel. Significant additional expenditures for
the storage of spent nuclear fuel at BV Unit 2 and Perry Unit 1 could be
required if the DOE does not fulfill its obligation to accept spent nuclear
fuel.
Uranium Enrichment Decontamination and Decommissioning. Nuclear reactor
licensees in the United States are assessed annually for the decontamination and
decommissioning of DOE uranium enrichment facilities. Assessments are based on
the amount of uranium a utility had processed for enrichment prior to enactment
of the National Energy Policy Act of 1992 (NEPA) and are to be paid by such
utilities over a 15-year period. At March 31, 1997, the Company's liability for
contributions was approximately $9.3 million (subject to an inflation
adjustment). Contributions, when made, are currently recovered from electric
utility customers through the ECR.
12
<PAGE>
Fossil Decommissioning
In Pennsylvania, current ratemaking does not allow utilities to recover
future decommissioning costs through depreciation charges during the operating
life of fossil-fired generating stations. In 1996, the Financial Accounting
Standard Board issued an exposure draft, Accounting for Certain Liabilities
Related to Closure or Removal of Long-Lived Assets. The primary effect of this
exposure draft would be to change the way the Company accounts for nuclear and
fossil decommissioning costs. The exposure draft calls for recording the present
value of estimated future cash flows to decommission the Company's nuclear and
fossil power plants as an increase to asset balances and as a liability. This
amount is currently estimated to be $299.5 million. The Company will seek to
recover these costs through a CTC.
Guarantees
The Company and the other owners of Bruce Mansfield have guaranteed certain
debt and lease obligations related to a coal supply contract for Bruce
Mansfield. At March 31, 1997, the Company's share of these guarantees was $16.0
million. The prices paid for the coal by the companies under this contract are
expected to be sufficient to meet debt and lease obligations to be satisfied in
the year 2000. The minimum future payments to be made by the Company solely in
relation to these obligations are $16.0 million at March 31, 1997.
As part of the Company's investment portfolio in affordable housing, the
Company has 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 the underlying housing projects, the Company believes that such
deferrals are ample for this purpose.
Residual Waste Management Regulations
In 1992, the Pennsylvania Department of Environmental Protection (DEP)
issued Residual Waste Management Regulations governing the generation and
management of non-hazardous residual waste, such as coal ash. The Company is
assessing the sites it utilizes and has developed compliance strategies that are
currently under review by the DEP. Capital costs of $2.5 million were incurred
by the Company in 1996 to comply with these DEP regulations. Based on
information currently available, an additional $2.8 million will be spent in
1997. The additional capital cost of compliance through the year 2000 is
estimated, based on current information, to be $15 million. This estimate is
subject to the results of groundwater assessments and DEP final approval of
compliance plans.
Effective January 1, 1997, the Company adopted the provisions of Statement
of Position 96-1, Environmental Remediation Liabilities (SOP 96-1), which
provides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
The Company has recorded a regulatory asset and liability of $6.8 million at
March 31, 1997. Adoption of SOP 96-1 is not expected to have a materially
adverse effect on the Company's financial position, results of operations or
cash flows.
13
<PAGE>
Employees
In November 1996, the Company reached an agreement on a three-year contract
extension through September 30, 2001, with the International Brotherhood of
Electrical Workers, which represents approximately 2,000 of the Company's
employees.
Other
The Company is involved in various other legal proceedings and
environmental matters. The Company believes that such proceedings and matters,
in total, will not have a materially adverse effect on its financial position,
results of operations or cash flows.
5. SUBSEQUENT EVENTS
On April 7, 1997, the Company and APS, announced a proposed tax-free,
stock-for-stock merger. Upon consummation of the merger, DQE will be a wholly
owned subsidiary of APS, and the combined company's name will be Allegheny
Energy, Inc. Following the merger, Duquesne, DE, DES, DQEnergy and Montauk will
remain wholly owned subsidiaries of DQE. The transaction is intended to be
accounted for as a pooling of interests. Under the terms of the transaction,
the Company's shareholders will receive 1.12 shares of APS common stock for each
share of the Company's common stock, and APS's dividend in effect at the time of
the closing of the merger. The transaction is expected to close within 12 to 18
months, subject to approval of the shareholders of both companies and applicable
regulatory agencies, including the public utility commissions in Pennsylvania
and Maryland, the SEC, the FERC and the Nuclear Regulatory Commission. Further
details about the proposed merger are provided in the Company's report on Form
8-K, filed with the SEC on April 10, 1997. The Company and APS are preparing a
Joint Proxy Statement/Prospectus, which will be distributed to the Company's
shareholders in connection with the annual meeting to be held later in 1997.
Unless otherwise indicated, all information presented in this Form 10-Q relates
to the Company only and does not take into account the proposed merger between
the Company and APS.
On May 1, 1997 the Company completed the sale of Chester Engineers, a
wholly owned subsidiary of DE, in accordance with the terms of a sale agreement
entered into on March 18, 1997. Pursuant to this transaction, the Company
received 1,411,382 shares of common stock of United States Filter Corporation,
which were valued at approximately $44 million at the time of the sale.
14
<PAGE>
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 DQE, Inc. and its subsidiaries' (the Company's) Annual Report
on Form 10-K filed with the Securities and Exchange Commission (SEC) for the
year ended December 31, 1996 and the Company's condensed consolidated financial
statements, which are set forth on pages 2 through 14 in Part I, Item 1 of this
Report.
General
- --------------------------------------------------------------------------------
DQE, Inc. (DQE), is an energy services holding company formed in 1989. Its
subsidiaries are Duquesne Light Company (Duquesne), Duquesne Enterprises, Inc.
(DE), DQE Energy Services, Inc. (DES), DQEnergy PARTNERS, Inc. (DQEnergy) and
Montauk, Inc. (Montauk). DQE and its subsidiaries are collectively referred to
as "the Company."
Duquesne is an electric utility engaged in the production, transmission,
distribution and sale of electric energy and is the largest of DQE's
subsidiaries. DE makes strategic investments beneficial to DQE's core energy
business. These investments enhance DQE's capabilities as an energy provider,
increase asset utilization, and act as a hedge against changing business
conditions. DES is a diversified energy services company offering a wide range
of energy solutions for industrial, utility and consumer markets worldwide. DES
initiatives include energy facility development and operation, domestic and
international independent power production, and the production and supply of
innovative fuels. DQEnergy was formed in December 1996 to align DQE with
strategic partners to capitalize on opportunities in the dynamic energy services
industry. These alliances enhance the utilization and value of DQE's strategic
investments and capabilities while establishing DQE as a total energy provider.
Montauk is a financial services company that makes long-term investments and
provides financing for the Company's other market-driven businesses and their
customers.
On April 7, 1997, the Company and Allegheny Power System, Inc. (APS),
announced a proposed tax-free, stock-for-stock merger. Upon consummation of the
merger, the Company will be a wholly owned subsidiary of APS, and the combined
company's name will be changed to Allegheny Energy, Inc. Following the merger,
Duquesne, DE, DES, DQEnergy and Montauk will remain wholly owned subsidiaries of
the Company. The transaction is expected to close within 12 to 18 months,
subject to approval of the shareholders of both companies and applicable
regulatory agencies. (See "Proposed Merger" discussion on page 19.)
The Company's Electric Service Territory
The Company's utility operations provide electric service to customers in
Allegheny County, including the City of Pittsburgh, Beaver County and
Westmoreland County. This represents approximately 800 square miles in
southwestern Pennsylvania, located within a 500-mile radius of one-half of the
population of the United States and Canada. The population of the area served by
the Company's electric utility operations, based on 1990 census data, is
approximately 1,510,000, of whom 370,000 reside in the City of Pittsburgh. In
addition to serving approximately 580,000 direct customers, the Company's
utility operations also sell electricity to other utilities.
15
<PAGE>
Regulation
The Company is subject to the accounting and reporting requirements of the
SEC. In addition, the Company's electric utility operations are subject to
regulation by the Pennsylvania Public Utility Commission (PUC) and the Federal
Energy Regulatory Commission (FERC) under the Federal Power Act with respect to
rates for interstate sales, transmission of electric power, accounting and other
matters.
The Electricity Generation Customer Choice and Competition Act (Customer
Choice Act) went into effect in Pennsylvania on January 1, 1997. This
legislation provides for a gradual deregulation of the generation of
electricity, while maintaining regulation of the transmission and distribution
of electricity and related services to customers. (See "Competition" discussion
on page 20.)
The Company's electric utility operations are also subject to regulation by
the Nuclear Regulatory Commission (NRC) under the Atomic Energy Act of 1954, as
amended, with respect to the operation of its jointly owned/leased nuclear power
plants, Beaver Valley Unit 1 (BV Unit 1), Beaver Valley Unit 2 (BV Unit 2) and
Perry Unit 1.
The Company's consolidated financial statements report regulatory assets
and liabilities in accordance with Statement of Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71),
and reflect the effects of the current ratemaking process. In accordance with
SFAS No. 71, the Company's consolidated financial statements reflect regulatory
assets and liabilities consistent with cost-based, pre-competition ratemaking
regulations. The regulatory assets represent probable future revenue to the
Company because provisions for these costs are currently included, or are
expected to be included, in charges to electric utility customers through the
ratemaking process.
A company's electric utility operations or a portion of such operations
could cease to meet the SFAS No. 71 criteria for various reasons, including a
change in the FERC regulations or the competition-related changes in the PUC
regulations described above. (See "Competition" discussion on page 20.) The
Company currently believes its electricity generating assets and related
regulatory assets continue to satisfy these criteria in light of the transition
to competitive generation under the Customer Choice Act. Should any portion of
the Company's electric utility operations be deemed to no longer meet the SFAS
No. 71 criteria, the Company may be required to write off any above-market cost
assets, the recovery of which is uncertain, and any regulatory assets or
liabilities for those operations that no longer meet these requirements.
Effective January 1, 1997, the Company adopted the provisions of Statement
of Position 96-1, Environmental Remediation Liabilities (SOP 96-1), which
provides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
The Company has recorded a regulatory asset and liability of $6.8 million at
March 31, 1997. Adoption of SOP 96-1 is not expected to have a materially
adverse effect on the Company's financial position, results of operations or
cash flows.
16
<PAGE>
Results of Operations
- --------------------------------------------------------------------------------
Sales of Electricity to Customers
The increase in the first quarter of 1997 total operating revenues was $1.6
million, as compared to the first quarter of 1996. Operating revenues are
primarily derived from the Company's sales of electricity. The PUC authorizes
rates for electricity sales which are cost-based and are designed to recover the
Company's operating expenses and investment in electric utility assets and to
provide a return on the investment. (See "Regulation" and "Competition"
discussions on pages 16 and 20.)
Sales to residential and commercial customers are strongly influenced by
weather conditions. Warmer summer and colder winter seasons lead to increased
customer use of electricity for cooling and heating. Commercial sales are also
affected by regional economic development. Sales to industrial customers are
influenced by national and global economic conditions. Customer revenues
fluctuate as a result of changes in sales volume and changes in fuel and other
energy costs.
Net Customer Revenues
Net customer revenues, reflected on the statement of consolidated income,
decreased $1.2 million or 0.4 percent in the first quarter of 1997, as compared
to the same period in 1996. The variance can be attributed primarily to
decreased residential customer kilowatt-hour (KWH) sales of 2.4 percent due to
mild 1997 winter temperatures, as compared to 1996, resulting in decreased
revenues of $1.0 million. Higher sales to several of the Company's largest
industrial customers resulted in a 1.7 percent increase in industrial sales.
These customers experienced an increase in their level of business, causing the
increase in electric usage.
Sales to Other Utilities
Short-term sales to other utilities are regulated by the FERC and are made at
market rates. Fluctuations in electricity sales to other utilities are related
to the Company's customer energy requirements, the energy market and
transmission conditions, and the availability of the Company's generating
stations. The Company's electricity sales to other utilities in the first
quarter of 1997 were $7.2 million less than the first quarter of 1996 due to a
decline in demand from other utilities and reduced availability as a result of
the sale of the Company's 50 percent interest in the Ft. Martin Power Station
(Ft. Martin). Future levels of short-term sales to other utilities will be
affected by the possible sale of other generating stations, market rates, and by
the outcome of the Company's FERC filings requesting firm transmission access.
(See "Outlook" discussion on page 19.)
Other Operating Revenues
Other operating revenues include the Company's non-KWH utility revenues and
revenues from market-based operating activities. The increase of $10.0 million
in other operating revenues when comparing the first quarter of 1997 and 1996 is
primarily due to revenues of a Montauk investment made in the fourth quarter of
1996 and increased revenues at Chester Engineers, Inc. (Chester), a wholly owned
subsidiary of DE. The Company sold Chester in May 1997. (See "Investing"
discussion on page 19.)
17
<PAGE>
Operating Expenses
Fluctuations in fuel and purchased power expense generally result from changes
in the cost of fuel, the mix between coal and nuclear generation, the total KWHs
sold, and generating station availability. Because of the Energy Cost Rate
Adjustment Clause (ECR), changes in fuel and purchased power costs did not
impact earnings in the first quarter of 1997 and 1996.
Fuel and purchased power expense decreased $7.5 million in the first quarter
of 1997, as compared to the first quarter of 1996, as a result of decreases in
purchased power and fossil fuel volume. These decreases were partially offset
by increased fuel prices and purchased power prices.
Other operating expense increased $11.2 million when comparing the first
quarter of 1997 and 1996. The increase was primarily the result of operating
costs associated with a Montauk investment made in the fourth quarter of 1996
and Chester, as well as increased costs due to forced outages at both BV Unit 1
and BV Unit 2 during the first quarter of 1997. (See "Investing" discussion on
page 19.)
During the first quarter of 1997, maintenance expense decreased $2.8 million
as compared to the first quarter of 1996, due to costs savings attributable the
Company's electric utility operations and the sale of Ft. Martin.
Other Income
Comparing the first quarter of 1997 and the first quarter of 1996, an increase
of $5.2 million in other income was the result of additional interest income
recognized from a higher level of short-term investments and long-term
investment income. These increases were partially offset by the 1996 gain on
disposition of investments.
Interest and Other Charges
The $3.0 million increase in interest and other charges in the first quarter
of 1997, as compared to the first quarter of 1996, was the result of paying $3.1
million in dividends related to preferred securities issued in May 1996.
Income Taxes
Income taxes increased by $3.4 million in the first quarter of 1997 as
compared to the first quarter of 1996 primarily due to increased taxable income.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Financing
The Company expects to meet its current obligations and debt maturities
through the year 2001 with funds generated from operations and through new
financings. At March 31, 1997, the Company was in compliance with all of its
debt covenants.
18
<PAGE>
$50 million and $35 million of mortgage bonds will mature in November 1997
and February 1998, respectively. The Company expects to retire these bonds with
available cash or to refinance the bonds.
Investing
- --------------------------------------------------------------------------------
The Company has made market-driven long-term investments in the following
areas: leases; affordable housing; gas reserves; real estate; energy facility
development, operation and maintenance; and engineering services. Investing
activities during the first quarter of 1997 included approximately $53.5 million
in lease investments, $10.9 million in affordable housing investments, and the
remaining $3.9 million in other investments. During the first quarter of 1996,
the Company invested approximately $1.4 million in various investments and had
long-term sales primarily of lease and leasehold investments totaling $17.4
million.
During the first quarter of 1997, the Company entered into an agreement
with Heinz U.S.A. (Heinz) to provide energy services to the Heinz factory
complex in Pittsburgh. The Company will own, operate and maintain the
Pittsburgh complex's energy facility, producing electricity, steam and
compressed air services for Heinz.
On May 1, 1997, the Company completed the sale of Chester in accordance
with the terms of a sale agreement entered into on March 18, 1997. Pursuant to
this transaction, the Company received 1,411,382 shares of common stock of
United States Filter Corporation, which was valued at approximately $44 million
at the time of the sale.
Outlook
- --------------------------------------------------------------------------------
Proposed Merger
On April 7, 1997, the Company and APS announced a proposed tax-free, stock-
for-stock merger. Upon consummation of the merger, DQE will be a wholly owned
subsidiary of APS, and the combined company's name will be changed to Allegheny
Energy, Inc. Following the merger, Duquesne, DE, DES, DQEnergy and Montauk will
remain wholly owned subsidiaries of DQE. The transaction is intended to be
accounted for as a pooling of interests. Under the terms of the transaction,
the Company's shareholders will receive 1.12 shares of APS common stock for each
share of the Company's common stock, and APS's dividend in effect at the time of
the closing of the merger. The transaction is expected to close within 12 to 18
months, subject to approval of the shareholders of both companies and applicable
regulatory agencies, including the public utility commissions in Pennsylvania
and Maryland, the SEC, the FERC and the NRC. Further details about the proposed
merger are provided in the Company's report on Form 8-K, filed with the SEC on
April 10, 1997. The Company and APS are preparing a Joint Proxy
Statement/Prospectus, which will be distributed to the Company's shareholders in
connection with the annual meeting to be held later in 1997. Unless otherwise
indicated, all information presented in this Form 10-Q relates to the Company
only and does not take into account the proposed merger between the Company and
APS.
19
<PAGE>
Competition
The electric utility industry continues to undergo fundamental change in
response to open transmission access and increased availability of energy
alternatives. Under historical PUC ratemaking, regulated electric utilities were
granted exclusive geographic franchises to sell electricity in exchange for
making investments and incurring obligations to serve customers under the then-
existing regulatory framework. Through the ratemaking process, those prudently
incurred costs were recovered from customers, along with a return on the
investment. Additionally, certain operating costs were approved for deferral for
future recovery from customers. As a result of this historical ratemaking
process, utilities have assets recorded on their balance sheets at above-market
costs and have commitments to purchase power at above-market prices (transition
costs).
Under the Customer Choice Act, which went into effect on January 1, 1997,
Pennsylvania has become a leader in customer choice. The Customer Choice Act
will enable Pennsylvania's electric utility customers to purchase electricity at
market prices from a variety of electric generation suppliers (customer choice).
Electric utility restructuring will be accomplished through a two-stage process
consisting of a pilot period (running through 1998) and a phase-in period (1999
through 2001). The pilot period will give utilities an opportunity to examine a
wide range of technical and administrative details related to competitive
markets, including metering, billing, and cost and design of unbundled electric
services. Duquesne filed a pilot program with the PUC on February 27, 1997,
which proposes unbundling transmission, distribution, electricity and
competitive transition charges and offers participating customers the same
options that will be available in a competitive generation market. The pilot
program is designed to comprise approximately 5 percent of Duquesne's
residential, commercial and industrial demand. Customers participating in the
pilot will have two basic options. First, customers can choose to continue
taking bundled service from Duquesne under approved tariffs. Second, customers
can choose unbundled service with their electricity provided by an alternative
electric generation supplier. All customers that choose unbundled electric
service will be subject to unbundled distribution charges approved by the PUC
and unbundled transmission charges pursuant to Duquesne's FERC-approved tariff.
Each customer that elects unbundled service also will be required to pay a non-
bypassable access fee (competitive transition charge or CTC) that provides
Duquesne with a reasonable opportunity to recover transition costs. On May 9,
1997, the PUC issued a Preliminary Opinion and Order approving the Company's
filing in part, and requiring certain revisions. The Company has until May 22,
1997, to submit comments on the PUC's preliminary order. The PUC anticipates
issuing a final order in July 1997, and a revised pilot program must be filed
within 30 days of such order. The PUC further anticipates the revised pilot
program could begin in October 1997.
The Company must file a restructuring plan with the PUC by August 1, 1997,
setting forth its proposals for the transition to customer choice and the
recovery of transition costs. The phase-in to competition begins on January 1,
1999, when 33 percent of consumers will have customer choice (including
consumers covered by the pilot program); 66 percent of consumers will have
customer choice by January 1, 2000; and all consumers will have customer choice
by January 1, 2001. Although the Customer Choice Act will give customers their
choice of electric generation suppliers, delivery of the electricity from the
generation supplier to the customer will remain the responsibility of the
existing franchised utility. Delivery of electricity (including transmission,
distribution and customer service) will continue to be regulated in
substantially the current manner. Before the phase-in to customer choice begins
in 1999, the PUC expects utilities to take vigorous steps to mitigate transition
costs as much as possible without increasing the price they currently charge
customers. The PUC will determine what portion of a utility's remaining
transition costs will be recoverable from customers through a CTC. This charge
will be paid by consumers who choose alternative generation suppliers as well as
customers who choose their franchised utility. The CTC could last as long as
2005, providing a utility a total of up to nine years to recover transition
costs.
20
<PAGE>
An overall four-and-one-half year price cap will be imposed on the transmission
and distribution charges of electric utility companies. Additionally, electric
utility companies may not increase the generation price component of prices as
long as transition costs are being recovered, with certain exceptions. If a
utility ultimately is unable to recover its transition costs within this pricing
structure and timeframe, the costs will be written off.
The Company has already been effective in mitigating its exposure to
transition costs. Generating plant, decommissioning and related regulatory asset
costs have been reduced by approximately $400 million during the past two years.
These reductions have resulted from a variety of strategies, such as selling
generating assets, accelerating recovery of fixed costs, increasing nuclear
decommissioning charges and reducing capitalized costs. Effective January 1,
1995, the Company accelerated its rate of depreciation on its fixed nuclear
assets without seeking a rate increase to recover the additional costs. On
October 31, 1996, the Company sold its ownership interest in Ft. Martin. Under
the PUC-approved plan, the Company will not increase its base rates for a period
of five years through May 2001. In addition, the Company recorded in October
1996 a one-time reduction of approximately $130 million in the book value of the
Company's nuclear plant investment. The proceeds from the sale are expected to
be used to fund reliability enhancements to the BI Unit 3 combustion turbine and
to reduce the Company's capitalization. The approved plan also provides for
incremental increases of $25 million in depreciation and amortization expense in
1997 and 1998 related to the Company's nuclear investment, as well as additional
annual contributions to its nuclear plant decommissioning funds of $5 million,
without any increase in existing electric rates. Also, the Company will record
an annual $5 million credit to the ECR during the plan period to compensate the
Company's electric utility customers for lost profits from any short-term power
sales foregone by the sale of its ownership interest in Ft. Martin. In addition,
the Company has capped energy costs through the remainder of the plan period at
a historical five-year average of 1.47 cents per KWH. The Company's approved
plan provides for the amortization of the remaining deferred rate
synchronization costs over a 10-year period. At March 31, 1997, the unamortized
portion of these costs totaled $40.4 million, net of deferred fuel savings
related to the two units. Finally, the Company's approved plan also provides for
annual assistance of $0.5 million to low-income customers. The Company expects
to continue these steps to address its remaining transition costs. The Customer
Choice Act provides another option to mitigate transition costs. With PUC
approval, utilities are permitted to issue transition bonds with a maturity of
10 years or less. Proceeds can be used to reduce transition costs. The Company
is currently reviewing this alternative as well as others to further mitigate
its transition costs.
As part of its transition filing, the Company is proposing to make a long-
term sale of electricity during the transition period to determine the market
rate for power. In addition to market-related impacts, any estimate of the
ultimate level of transition costs also depends on, among other things, the
extent to which such costs are deemed recoverable by the PUC, the ongoing level
of Duquesne's costs of operations, regional and national economic conditions,
and growth of Duquesne's sales. Duquesne anticipates making its transition
filing, including the identification of potential transition costs, as required
by the PUC on August 1, 1997. The PUC is expected to rule on the Company's
ability to recover these costs through a CTC by May 1, 1998. The Company
believes, based upon prior rulings of the PUC, that it is entitled to recover
substantially all of its transition costs, but cannot predict the outcome of
this regulatory process. In the event that the PUC rules that any or all of
these transition costs cannot be recovered through a CTC mechanism or the
Company fails to satisfy the requirements of SFAS No. 71, these costs will be
written off. As the Company has substantial exposure to transition costs
relative to its size, significant transition cost write-offs could have a
materially adverse effect on the Company's financial position, results of
operations and cash flows. Various financial covenants and restrictions could be
violated if substantial write-off of assets or recognition of liabilities
occurs.
21
<PAGE>
In addition to the mitigation of transition costs, the Company has been
preparing for competition in a variety of ways. In 1989, a holding company
structure was formed to add flexibility to the Company's strategy for managing
assets. With this structure the Company has been able to pursue new business
opportunities that have capitalized on the Company's leadership in engineering,
energy production and the application of technology. The Company's market-driven
businesses have grown in a manner that complements its core business. The
Company has also been building its financial strength through the retirement and
refinancing of long-term debt and the repurchase of stock. In 1995, the
Company's restrictive first mortgage bond indenture was replaced with a new
indenture with more flexible provisions and the Company completed a 3-for-2
stock split. In 1996, the Company issued MIPS to further add to its financial
flexibility and creditworthiness.
Meanwhile, the Company has also better positioned its electric utility
business for competition through improving operations and enhancing customer
relations. In recognition of impending industry competition and in an effort to
optimize its generation resources, in 1989 the Company signed a contract with
Delmarva Power for a bulk power sale for a period of 20 years. This initiative
would have resulted in the refurbishment and return to service of the Company's
cold-reserved generating stations. Following the plan's failure to receive
regulatory approval, in 1990 the Company announced a second long-term power sale
initiative to restart these power plants. This plan would have provided
significant impetus to economic development in Pennsylvania as well as providing
the Company's customers with substantial benefits in the form of lower rates.
The Company's efforts to upgrade and maintain the cold-reserved units have
enabled the Company to utilize the BI units to meet peak demand during periods
of extreme weather in recent years and have enabled the BI units to more quickly
return to service as part of the Ft. Martin sale. In 1991, Duquesne reorganized
into strategic business units along market lines and instituted cost reduction
targets for capital, operation and maintenance, and inventory expenditures. As
part of this process, workforce reductions were achieved primarily through
attrition; since 1989 Duquesne has reduced its number of employees by 25
percent. Recently, Duquesne signed a three-year contract extension with its
bargaining unit employees through September 2001. Throughout the period,
Duquesne has been aggressively reducing its fuel costs, achieving a 13 percent
reduction in the unit cost of fuel since 1990. These measures have enabled
Duquesne to reduce its rates by nearly 36 percent, in real terms, since 1990.
When considering the price freeze component of Duquesne's Mitigation Plan,
prices will have declined by nearly 50 percent in real terms during the decade
of the 1990s. From a customer relations standpoint, Duquesne negotiated long-
term contracts with more than 30 key industrial and commercial customers and was
recognized in 1996 for its economic development efforts in attracting major new
industrial expansions. In 1995, Duquesne became one of the first electric
utilities in the country to offer a full customer service guarantee and also
guaranteed to match any competing electricity supplier's price for new
businesses or for the expansion of existing businesses. Duquesne also is
offering to customers increased bill-paying options, including an advanced
technology service that enables customers to electronically receive and pay
their electric bills. This service assists major customers just as its earlier
Electricheck option helped smaller commercial and residential customers.
Additionally, Duquesne will be positioned to offer customers a wide range of new
services with the Customer Advanced Reliability System (CARS). Utility customers
will be linked to CARS by encoder receiver transmitters contained in new or
retrofitted electric meters. Data communications offered by this technology are
expected to result in improved reliability, security, and customer satisfaction.
The proposed merger with APS, the complementary nature of the two companies'
peak usage times and customer bases, and the elimination of duplicate activities
should create a more efficient and cost-effective combined entity. In addition,
the larger, combined company should be able to take advantage of economies of
scale, and will have a wide range of products and services to offer to a larger
market.
22
<PAGE>
In March 1997, a suit was filed in Pennsylvania's Commonwealth Court seeking
to overturn the Customer Choice Act, contending that the process by which the
state legislature considered and approved the act violated the Pennsylvania
state constitution. While there can be no assurance as to the ultimate outcome
of this suit, similar challenges to other legislation in Pennsylvania have been
unsuccessful.
At the national level, in 1996 the FERC issued two related final rules that
address the terms on which electric utilities will be required to provide
wholesale suppliers of electric energy with non-discriminatory access to the
utility's wholesale transmission system. The first rule, Order No. 888, requires
each public utility that owns, controls or operates interstate transmission
facilities to file a tariff offering unbundled transmission services containing
non-rate terms that conform to the FERC's pro forma tariff. Order No. 888 also
allows full recovery of prudently incurred costs from departing customers. FERC
deferred to state regulators with respect to retail access, recovery of retail
transition costs and the scope of state regulatory jurisdiction. The second
rule, Order No. 889, prohibits transmission owners and their affiliates from
gaining preferential access to information concerning transmission and
establishes a code of conduct to ensure the complete separation of a utility's
wholesale power marketing and transmission operation functions.
Finally, the FERC simultaneously issued a new Notice of Proposed Rulemaking
(NOPR) on Capacity Reservation Open Access Transmission Tariffs (CRT), which
would require all market participants to reserve firm capacity rights between
designated receipt and delivery points. If adopted, the CRT would replace the
open access pro forma tariff implemented in Order No. 888.
The Company is aware of the foregoing state and federal regulatory and
business uncertainties and is attempting to position itself to effectively
operate in a more competitive environment.
Beaver Valley Power Station (BVPS) Steam Generators
BVPS's two units are equipped with steam generators designed and built by
Westinghouse Electric Corporation (Westinghouse). Similar to other Westinghouse
nuclear plants, outside diameter stress corrosion cracking (ODSCC) has occurred
in the steam generator tubes of both units. The units continue to have the
capability to operate at 100 percent reactor power although 15 percent of BV
Unit 1 and 2 percent of BV Unit 2 steam generator tubes have been removed from
service. Material acceleration in the rate of ODSCC could lead to a loss in
plant efficiency and significant repairs or replacement of BV Unit 1 steam
generators. The total replacement cost of the BV Unit 1 steam generators is
estimated at $125 million, $59 million of which would be the Company's
responsibility. The earliest that the BV Unit 1 steam generators could be
replaced during a scheduled refueling outage is the fall of 2000.
______________________________
Except for historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements that involve
risks and uncertainties including, but not limited to, economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the SEC.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In September 1995, the Company commenced arbitration against Cleveland
Electric Illuminating Company (CEI), seeking damages, termination of the
Operating Agreement for Eastlake Unit 5 (Eastlake) and partition of the parties'
interests in Eastlake through a sale and division of the proceeds. The
arbitration demand alleged, among other things, the improper allocation by CEI
of fuel and related costs; the mismanagement of the administration of the
Saginaw coal contract in connection with the closing of the Saginaw mine, which
historically supplied coal to Eastlake, and the concealment by CEI of material
information. In October 1995, CEI commenced an action against the Company in
the Court of Common Pleas, Lake County, Ohio seeking to enjoin the Company from
taking any action to effect a partition on the basis of a waiver of partition
covenant contained in the deed to the land underlying Eastlake. CEI also seeks
monetary damages from the Company for alleged unpaid joint costs in connection
with the operation of Eastlake. The Company removed the action to the United
States District Court for the Northern District of Ohio, Eastern Division, where
it is now pending. Currently, the parties are engaged in settlement
discussions.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
EXHIBIT 2.1- Agreement and Plan of Merger dated as of April 5, 1997, among the
Company, APS and AYP Sub, Inc. (included as Exhibit 2(a) to the
Company's Current Report on Form 8-K filed with the SEC on April
10, 1997 (the "Form 8-K") and incorporated herein by reference).
EXHIBIT 2.2 - Stock Option Agreement dated as of April 5, 1997, between the
Company and APS (filed as Exhibit 2(b) to the Form 8-K and
incorporated herein by reference).
EXHIBIT 2.3 - Letter Agreement dated as of April 5, 1997, between the Company
and APS (filed as Exhibit 2(c) to the Form 8-K and incorporated
herein by reference).
EXHIBIT 10.1 - Severance Agreement dated April 4, 1997, between the Company and
David D. Marshall, together with a schedule describing
substantially identical agreements with Gary L. Schwass, Victor
A. Roque, James E. Cross and James D. Mitchell.
EXHIBIT 10.2 - Stock Purchase Agreement among Duquesne Enterprises, Inc.,
Chester Engineers, Inc., and Chester Acquisition Corporation,
dated March 17, 1997, as amended April 30, 1997.
EXHIBIT 27.1 - Financial Data Schedule
A Report on Form 8-K was filed on April 10, 1997, with respect to the execution
and delivery of an Agreement and plan of Merger among the Company, APS and AYP
Sub, Inc. No financial statements were filed with this report.
______________________________
24
<PAGE>
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 May 14, 1997 /s/ Gary L. Schwass
------------ -------------------
(Signature)
Gary L. Schwass
Executive Vice President
and Chief Financial Officer
Date May 14, 1997 /s/ Morgan K. O'Brien
------------ ---------------------
(Signature)
Morgan K. O'Brien
Controller and
Principal Accounting Officer
25
<PAGE>
Exhibit 10.1
SEVERANCE AGREEMENT
BETWEEN
DQE, INC.
AND
DAVID D. MARSHALL
THIS AGREEMENT, is by and between DQE, Inc., a Pennsylvania corporation
(the "Company") and David D. Marshall (the "Executive") and is effective on the
date established pursuant to Section 16.
W I T N E S S E T H:
WHEREAS, the Executive is a valuable employee of the Company, an integral
part of its management, and a key participant in the decision-making process
relative to short-term and long-term planning and policy for the Company; and
WHEREAS, the Company wishes to encourage the Executive to continue his
career and services with the Company for the period during and after an actual
or threatened Change in Control; and
WHEREAS, the Board of Directors of the Company, at its meeting on April
4, 1997, determined that it would be in the best interests of the Company and
its shareholders to assure continuity in the management of the Company's
administration and operations in the event of a Change in Control by entering
into this Agreement with the Executive;
NOW THEREFORE, it is hereby agreed by and between the parties hereto as
follows:
1. Definitions.
a. "Board" shall mean the Board of Directors of the Company.
b. "Cause" shall mean the Executive's fraud or dishonesty which
has resulted or is likely to result in material economic damage to the Company
or Duquesne Light Company ("Duquesne") or their affiliates, as determined in
good faith by a vote of at least two-thirds of the non-employee directors of the
Company at a meeting of the Board at which the Executive is provided an
opportunity to be heard.
c. "Change in Control" shall mean:
1
<PAGE>
(i) any person (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Act"), excluding a corporation at least
80% of the ownership of which after acquiring its interest is owned directly by
the holder of common stock of the Company immediately prior to such acquisition
("Person")), is the beneficial owner, directly or indirectly, of 20% or more of
the outstanding stock of the Company requiring the filing of a report with the
Securities and Exchange Commission under Section 13(d) of the 1934 Act;
(ii) a purchase by any Person of shares pursuant to a tender or
exchange offer to acquire any stock of the Company (or securities convertible
into stock) for cash, securities or any other consideration provided that, after
closing of the offer, such Person is the beneficial owner (as defined in Rule
13d-3 under the 1934 Act), directly or indirectly, of 20% or more of the
outstanding stock of the Company (calculated as provided in Paragraph (d) of
Rule 13d-3 under the 1934 Act in the case of rights to acquire stock);
(iii) public announcement of a transaction approved by the Board
which involves (a) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of stock of the Company would be converted into cash, securities or other
property, other than a consolidation or merger of the Company in which holders
of its stock immediately prior to the consolidation or merger own at least 80%
of the common stock of the surviving corporation immediately after the
consolidation or merger, or (b) any consolidation or merger in which the Company
is the continuing or surviving corporation but in which the common shareholders
of the Company immediately prior to the consolidation or merger do not hold at
least 80% of the outstanding common stock of the continuing or surviving
corporation (except where such holders of common stock hold at least 80% of the
common stock of the corporation which owns all of the common stock of the
Company), or (c) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all or substantially all the assets of
the Company (except to an entity 80% of the common stock of which is owned by
the holders of the common stock of the Company immediately prior to such
transaction or by an entity 80% of which is owned directly or indirectly by the
Company), or (d) any merger or consolidation of the Company where, after the
merger or consolidation, one Person owns 100% of the shares of stock of the
Company (except where the common holders of the Company's stock immediately
prior to such merger or consolidation own at least 80% of the outstanding stock
of such Person immediately after such merger or consolidation); or
(iv) a change in the majority of the members of the Board within
a 24-month period unless the election or nomination for
2
<PAGE>
election by the Company's shareholders of each new director was approved by the
vote of at least two-thirds of the directors then still in office who were in
office at the beginning of the 24-month period.
With respect to subparagraph 1c(iii) of this Paragraph 1, upon the Board's
determination that the transaction subject to the public announcement thereunder
will not be closed, a Change in Control shall not be deemed to have occurred
from such date forward and this Agreement shall continue in effect as if no
Change in Control had occurred except to the extent termination requiring
payments under Paragraph 3 hereof occurs prior to such Board's determination.
d. "Compensation" shall mean the sum of (i) the Executive's annual
rate of base salary on the last day the Executive was an employee of the Company
(or if higher, the annual rate in effect on the date of the Change in Control),
including any elective contributions made by the Company on behalf of the
Executive that are not includible in the gross income of the Executive under
Section 125 or 402(a)(8) of the Internal Revenue Code of 1986, as amended (the
"Code") or any successor provision thereto, and (ii) the maximum bonus
opportunity of the Executive for the calendar year preceding employment
termination (or, if higher, the Executive's maximum bonus opportunity for the
year of termination of employment).
e. "Competing Business" shall mean any person, corporation or other
entity which develops, produces, markets, sells or services (1) any energy
product or service, including but not limited to gas or electric products or
services, and/or (2) any product or service which is the same as or similar to
products or services which the Company developed, produced, marketed, or sold,
including but not limited to energy products and services, within the last year
prior to termination of Executive's employment hereunder.
f. "Confidential Information" shall mean all information disclosed
to Executive or known by Executive as a consequence of or through Executive's
employment, which is not generally known in the industry in which the Company
and/or an affiliate is or may become engaged, about the Company's or an
affiliates' business, products, processes, and services, including but not
limited to information relating to research, development, inventions, computer
program designs, flow charts, source and object codes, products and services
under development, pricing and pricing strategies, marketing and selling
strategies, power generating, servicing, purchasing, accounting, engineering,
costs and costing strategies, sources of supply, customer lists, customer
requirements, business methods or practices, training and training programs, and
the documentation thereof. It includes, but is not limited to, proprietary
information and trade secrets of the Company and its affiliates. It will be
3
<PAGE>
presumed that information supplied to the Company and its affiliates from
outside sources is Confidential Information unless and until it is designated
otherwise.
g. "Constructive Discharge" shall mean any of the following:
(i) if the Change in Control is a public announcement pursuant to
subparagraph 1(c)(iii), then for the period, and only for such period, from such
public announcement until the date which is the earlier of
(A) the date of the closing of the transaction so announced, or
(B) the date of the Board's determination that such transaction
will not be closed,
a material decrease in the level of the Executive's positions or titles with the
Company or Duquesne as in effect the day prior to a Change in Control, or any
action by the Company or Duquesne which results in a material diminution in
authority, duties or responsibilities, excluding for this purpose, changes to
the individuals, groups, positions or divisions which report to the Executive or
the person or position to whom the Executive reports;
(ii) If the Change in Control is any event described in
Paragraph 1c, then for the entire Coverage Period
(A) any material failure by the Company or Duquesne to comply
with any of the provisions of this Agreement, other than any such failure not
occurring in bad faith and which is remedied by the Company or Duquesne as
appropriate, promptly after receipt of written notice thereof given to the
Company or Duquesne as the case may be;
(B) the Company, Duquesne or parent of either requiring the
Executive to be based at any office or location more than 50 miles from
Pittsburgh, Pennsylvania other than to a location which is within 35 miles of
the principal executive office of the Company and Duquesne, or the parent
thereof;
(C) a reduction in the Executive's base pay or maximum bonus
opportunity which is more than de minimis (except if such reduction is a part of
-- -------
a reduction for all executive officers of the Company, Duquesne and any parent
company thereof);
(D) a reduction which is more than de minimis in the number of
-- -------
options granted under the Company's annual
4
<PAGE>
option program based on the grant made in 1997 or in the number of options
granted pursuant to any future three year cycle under the Company's Long Term
Incentive Plan from the grant made for the three year cycle which began prior to
the Change in Control (except to the extent that options are replaced by another
equity incentive program and the Executive receives awards thereunder of
substantially equivalent or greater value as determined in good faith by the
Board's Compensation Committee);
For purposes of computing the reduction in the number of options granted under
the Company's annual option program necessary to constitute a Constructive
Discharge under subsection (D) of this section, the number of options granted in
the most recent year will be determined using the same methodology as was used
for determining the 1997 annual stock option awards under the Company's Long
Term Incentive Plan.
(E) a reduction which is more than de minimis in the combined
-- -------
annual benefit accrual rate under the SERP and the Company's qualified defined
benefit pension plans as in effect immediately prior to the Change in Control;
or
(F) a reduction which is more than de minimis in the long term
-- -------
disability and life insurance coverage provided to the Executive under the
Company's life insurance and long term disability plans as in effect immediately
prior to the Change in Control.
No such event described hereunder shall constitute Constructive Discharge unless
the Executive has given written notice to the Company specifying the event
relied upon for such termination within one year after the occurrence of such
event and the Company or Duquesne, as the case may be, has not remedied such
within 30 days of receipt of such notice.
The Company and Executive, upon mutual written agreement, may waive any of the
foregoing provisions which would otherwise constitute a Constructive Discharge.
h. "Coverage Period" shall begin on the Starting Date and end on the
Ending Date.
i. "Disability" shall mean an injury or illness which permanently
prevents the Executive from performing services to the Company or Duquesne and
which qualifies the Executive for payments under the Company's long term
disability plan.
j. "Ending Date" shall be the earlier of (i) the date on which a
public announcement is made by the Company of its intention to
5
<PAGE>
abandon a Change in Control transaction, or (ii) the date which is 36 full
calendar months following the date on which a Change in Control occurs. If the
Change in Control was a public announcement pursuant to subparagraph 1c(iii),
and the transaction is not abandoned, the Ending Date shall be the date which is
36 full calendar months following the date of the consummation of the
transaction which was the subject of such public announcement.
k. "Invention" shall mean discoveries, concepts, and ideas, whether
patentable or not, including, but not limited to apparatus, processes, methods,
techniques, and formulae, as well as improvements thereof or know-how related
thereto, relating to any present or prospective activities of the Company and
its affiliates.
l. "SERP" shall mean the Pension Service Supplement Plan for DQE,
Inc. and Affiliates or other special pension benefit arrangements.
m. "Starting Date" shall be the date on which a Change in Control
occurs.
n. "Works" shall mean all material and information created by
Executive in the course of or as a result of Executive's employment by the
Company which is fixed in a tangible medium of expression, including, but not
limited to, notes, drawings, memoranda, correspondence, documents, records,
notebooks, flow charts, computer programs and source and object codes,
regardless of the medium in which they are fixed.
2. Term.
This Agreement shall be effective as of the date above written and shall
continue thereafter until 36 full calendar months following the date of an
occurrence of a Change in Control or, if the Change in Control event is a public
announcement under subparagraph 1c(iii), 36 full calendar months following the
date of the closing of the transaction which was the subject of the shareholder
approval. Provided, however, Paragraph 11 shall continue in effect beyond the
term of this Agreement and shall continue in effect beyond the Executive's
termination of employment with the Company.
3. Severance Benefit.
a. If the Executive's employment hereunder is terminated by the
Company for any reason other than Cause, death or Disability, or by the
Executive in the event of a Constructive Discharge, at any time during the
Coverage Period, then, within five business days after such termination, the
Company shall pay to the Executive (if the Executive dies after termination of
employment but before receiving
6
<PAGE>
all payments to which he has become entitled hereunder, to the estate of the
Executive) (i) accrued but unpaid salary and accrued but unused vacation; (ii)
severance pay in a lump sum cash amount equal to three times the Executive's
Compensation; (iii) a lump sum payment equal to $309,077.00; (iv) a lump sum
payment equal to $383,250.00; (v) if the Executive's employment termination date
is prior to June 30, 1999, an amount equal to $142,000; and (vi) the amount, if
any, the Executive forfeited of the Company contribution account under the
Company's 401(k) plan. To the extent not paid or payable under such plans, the
Company shall pay to the Executive (y) the present value of the benefits
(calculated assuming the Executive will begin receiving benefits at the earliest
retirement date under such plans, or if later, at the end of the three year
period following termination of employment, based on the actuarial assumptions
used for purposes of the qualified defined benefit plan) that would have
accrued, but did not accrue, under the qualified defined benefit retirement
plans and the SERP (with any payments being made hereunder with respect to the
qualified defined benefit retirement plans being considered for purposes of
determining the amount payable with respect to the SERP under this sentence) in
place and operational on the date of termination as if, for vesting and benefit
accrual purposes, the Executive had continued to be employed and participated in
such plans for the three year period following employment termination, less (z)
the payments which are made (or could be made without reduction for early
payment) under the Company's qualified and non-qualified defined benefit
retirement plans and SERP during the three year period which begins on the date
of employment termination; it being understood by all parties hereto that
payments made under this Agreement and the deemed three year period shall not be
considered for purposes of determining the actual benefit payable under the
terms of the SERP or the qualified defined benefit plan and are not considered
part of the relevant payroll records for purposes of the SERP or the qualified
defined benefit plan. The Board's Compensation Committee has determined that any
termination which entitles the Executive to benefits under this subparagraph 3a
will be an approved termination for purposes of the Company's Long Term
Incentive Plan. The Executive's termination of employment with the Company to
become an employee of a corporation which owns 100% of the Company (or any
direct or indirect 80% owned subsidiary thereof) shall not be considered a
termination of employment for purposes of this Agreement. The subsequent
termination of Executive's employment from such corporation (other than to
become an employee of a company described in the sentence above) shall be
considered a termination of employment for purposes of this Agreement.
b. For a period commencing with the month in which termination of
employment as described in Paragraph 3a above shall have occurred, and ending 36
months thereafter, the Executive shall be entitled to all benefits under the
Company's welfare benefit plans
7
<PAGE>
(within the meaning of Section 3(1) of the Employee Retirement Income Security
Act of 1974, as amended), as if the Executive were still employed during such
period, at the same level of benefits and at the same dollar cost to the
Executive as is available to all of the Company's senior executives generally.
If and to the extent that equivalent benefits shall not be payable or provided
under any such plan, the Company shall pay or provide equivalent benefits on an
individual basis. The benefits provided in accordance with this Paragraph 3b
shall be secondary to any comparable benefits provided by another employer.
c. The Executive may voluntarily terminate his employment for any
reason (other than to avoid a termination for Cause) in the thirteenth calendar
month which begins after the date of the Change in Control, or if the Change in
Control is a public announcement pursuant to subparagraph 1c(iii) in, and only
in, the thirteenth calendar month which begins after the date the Change in
Control transaction is closed, and the Company shall pay to the Executive (or
the Executive's estate upon death) the amounts determined under Paragraph 3a and
provide the benefits under Paragraph 3b; provided, however, the lump sum amounts
calculated under subparagraphs 3a(ii), (iii), (iv) and (v) shall be multiplied
by 2/3 and, all other portions of Paragraph 3a two shall be substituted for
three and 24 months shall be substituted for 36 months, as the case may be.
d. (i) If Independent Tax Counsel shall determine that the
aggregate payments made, and benefits provided, to the Executive pursuant to
this Agreement and any other payments, and benefits provided, to the Executive
from the Company, its affiliates and plans, which constitute "parachute
payments" as defined in Section 280G of the Code (or any successor provision
thereto) ("Parachute Payments") would be subject to the excise tax imposed by
Section 4999 of the Code (the "Excise Tax") and if the amount of the Parachute
Payments in excess of 300% of the "base amount" (as defined in Section 280G of
the Code, the "Base Amount") is greater than 10% of the total value of the
Parachute Payments, then the Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount (determined by
Independent Tax Counsel) such that after payment by the Executive of all taxes
(including any Excise Tax) imposed upon the Gross-Up Payment and any interest or
penalties imposed with respect to such taxes, the Executive retains from the
Gross-Up Payment an amount equal to the Excise Tax imposed upon the payments.
For purposes of this Paragraph 3d, "Independent Tax Counsel" shall mean a
lawyer, a certified public accountant with a nationally recognized accounting
firm, or a compensation consultant with a nationally recognized actuarial and
benefits consulting firm with expertise in the area of executive compensation
tax law, who shall be selected by the Company and shall be reasonably acceptable
to the Executive, and whose fees and disbursements shall be paid by the Company.
Notwithstanding the
8
<PAGE>
provisions hereof to the contrary, if the Executive is entitled to severance
payments and benefits under Paragraph 3c, the Executive shall not be entitled to
Gross-up Payments under this subparagraph 3d(i) and the Parachute Payments shall
be reduced, if necessary, in accordance with the procedures of subparagraph
3(d)(v).
(ii) If Independent Tax Counsel shall determine that no Excise Tax
is payable by the Executive, it shall furnish the Executive with a written
opinion that the Executive has substantial authority not to report any Excise
Tax on the Executive's Federal income tax return. If the Executive is
subsequently required to make a payment of any Excise Tax, then the Independent
Tax Counsel shall determine the amount of such additional payment ("Gross-Up
Underpayment"), and any such Gross-Up Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. The fees and disbursements of
the Independent Tax Counsel shall be paid by the Company.
(iii) The Executive shall notify the Company in writing within 15
days of any claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of a Gross-Up Payment. If the Company
notifies the Executive in writing that it desires to contest such claim and that
it will bear the costs and provide the indemnification as required by this
sentence, the Executive shall:
(A) give the Company any information reasonably requested by
the Company relating to such claim,
(B) take such action in connection with contesting such
claim as the Compan shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(C) cooperate with the Company in good faith in order to
effectively contest such claim, and
(D) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income tax,
including interest and penalties with respect thereto, imposed as a result of
such representation and payment of costs and expenses. The Company shall control
all proceedings taken in connection with such contest; provided, however, that
if the Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount
9
<PAGE>
of such payment to the Executive, on an interest-free basis and shall indemnify
and hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to
such advance.
(iv) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Paragraph 3d(iii), the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall, within 10
days, pay to the Company the amount of such refund, together with any interest
paid or credited thereon after taxes applicable thereto.
(v) If Independent Tax Counsel shall make a determination that
Parachute Payments would be subject to the Excise Tax, but the amount of
Parachute Payments in excess of 300% of the Base Amount is not greater than 10%
of the total value of the Parachute Payments, then such Parachute Payments shall
be reduced (but not below zero) but only to the extent the Independent Tax
Counsel shall determine is necessary that no portion thereof shall be subject to
the Excise Tax. The determination of Independent Tax Counsel under this
subparagraph (v) shall be final and binding on all parties hereto. No
additional payments by the Company or return of payments by the Executive shall
be required or made if a later determination which based on case law, an IRS
holding or otherwise would result in a recalculation of the Excise Tax
implications. Unless the Executive gives prior written notice specifying a
different order to the Company to effectuate the limitations described above,
the Company shall reduce or eliminate the Parachute Payments by first reducing
or eliminating those payments or benefits which are not payable in cash and then
by reducing or eliminating other Parachute Payments, in each case in reverse
order beginning with payments or benefits which are to be paid the farthest in
time from the employment termination date. Any notice given by the Executive
pursuant to the preceding sentence shall take precedence over the provisions of
any other plan, arrangement of agreement governing your rights and entitlements
to any benefits or compensation.
(vi) Notwithstanding any provision herein to the contrary, if
payments and/or benefits are due under this Agreement pursuant to Paragraph C of
this Section, if Independent Tax Counsel shall determine that the Parachute
Payments to the Executive would be subject to the Excise Tax, then such
Parachute Payments shall be reduced (but not below zero) but only to the extent
necessary that no portion thereof shall be subject to the Excise Tax. The
determination of Independent Tax Counsel under this subparagraph (vi) shall be
final and binding on all parties hereto. No additional payments by the Company
or return of payments by the Executive shall be required or made if a late
determination which based on case law, an IRS holding
10
<PAGE>
or otherwise would result in a recalculation of the Excise Tax implications.
Unless the Executive gives prior written notice specifying a different order to
the Company to effectuate the limitations described above, the Company shall
reduce or eliminate the Parachute Payments by first reducing or eliminating
those payments or benefits which are not payable in cash and then by reducing or
eliminating other Parachute Payments, in each case in reverse order beginning
with payments or benefits which are to be paid the farthest in time from the
employment termination date. Any notice given by the Executive pursuant to the
preceding sentence shall take precedence over the provisions of any other plan,
arrangement of agreement governing your rights and entitlements to any benefits
or compensation.
e. In the event of any termination of the Executive's employment
described in Paragraph 3a or Paragraph 3c, the Executive shall be under no
obligation to seek other employment, and there shall be no offset against
amounts due the Executive under this Agreement on account of any remuneration
attributable to any subsequent employment; provided, however, that to the extent
the Executive receives medical and health benefits from a subsequent employer,
medical and health benefits under Paragraph 3b shall be secondary to those
received from the subsequent employer.
f. The Executive is a party to an employment agreement dated August
30, 1994, amended June 27, 1995, (the "Employment Agreement"). In consideration
of this Agreement and other good and valuable consideration, the Executive and
the Company agree that on the date of a Change in Control, the Employment
Agreement shall terminate and the provisions thereof no longer in effect;
provided, however, if (i) the Change of Control is a public announcement
pursuant to subparagraph 1c(iii), (ii) the Board determines the transaction
subject to the public announcement thereof will not close, and (iii) the
Executive is an employee of the Company or an affiliate thereof on the date the
Board so determines, then on such date the Employment Agreement shall be
reinstated in all respects with the Employment Agreement's remaining term being
the same as the remaining term of the Employment Agreement on the date of the
Change of Control. In addition, it is intended that the termination provisions
herein are in lieu of, and not in addition to, termination or severance payments
and benefits provided under the Company's other termination or severance plans
or agreements ("Other Termination Benefits"). Other Termination Benefits the
Executive receives, or is entitled to receive in the future, shall reduce
payments and benefits provided hereunder.
g. Notwithstanding any provision herein to the contrary, the Company
shall not have any obligation to pay any amount or provide any benefit, as the
case may be, under this Agreement, unless and until the Executive executes (i) a
release of the Company, its affiliates and related parties, in such form as the
Company may reasonably request, of all claims against the Company, its
11
<PAGE>
affiliates and related parties relating to the Executive's employment and
termination thereof and (ii) an agreement to continue to comply with, and be
bound by, the provisions of Paragraph 11 hereof.
4. Source of Payments.
All payments provided for in Paragraph 3 above shall be paid in cash from the
general funds of the Company; provided, however, that such payments shall be
reduced by the amount of any payments made to the Executive or his dependents,
beneficiaries or estate from any trust or special or separate fund established
by the Company to assure such payments. The Company shall not be required to
establish a special or separate fund or other segregation of assets to assure
such payments, and, if the Company shall make any investments to aid it in
meeting its obligations hereunder, the Executive shall have no right, title or
interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its provisions, shall create or be construed to create a trust of any kind or
a fiduciary relationship between the Company and the Executive or any other
person. To the extent that any person acquires a right to receive payments from
the Company such right shall be no greater than the right of an unsecured
creditor of the Company.
5. Litigation Expenses: Arbitration.
a. Full Settlement, Litigation Expenses; Arbitration. The Company's
-------------------------------------------------
obligation to make the payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which the
Company may have against the Executive or others. The Company agrees to pay,
upon written demand therefor by the Executive, all legal fees and expenses the
Executive reasonably incurs as a result of any dispute or contest (regardless of
the outcome thereof) by or with the Company or others regarding the validity or
enforceability of, or liability under, any provision of this Agreement, plus in
each case, interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Code. The Executive agrees to repay to the Company any such
fees and expenses paid or advanced by the Company if and to the extent that the
Company or such others obtains a judgment or determination that the Executive's
claim was frivolous or was without merit from the arbitrator or a court of
competent jurisdiction from which no appeal may be taken, whether because the
time to do so has expired or otherwise. Notwithstanding any provision hereof or
any other agreement, the Company may offset any other obligation it has to the
Executive by the amount of such
12
<PAGE>
repayment. In any such action brought by the Executive for damages or to enforce
any provisions of this Agreement, he shall be entitled to seek both legal and
equitable relief and remedies, including, without limitation, specific
performance of the Company's obligations hereunder, in his sole discretion. The
obligation of the Company and the Executive under this Paragraph 5 shall survive
the termination for any reason of this Agreement (whether such termination is by
the Company, by the Executive, upon the expiration of this Agreement or
otherwise).
b. In the event of any dispute or difference between the Company and
the Executive with respect to the subject matter of this Agreement and the
enforcement of rights hereunder, either the Executive or the Company may, by
written notice to the other, require such dispute or difference to be submitted
to arbitration. The arbitrator or arbitrators shall be selected by agreement of
the parties or, if they cannot agree on an arbitrator or arbitrators within 30
days after the Executive has notified the Company of his desire to have the
question settled by arbitration, then the arbitrator or arbitrators shall be
selected by the American Arbitration Association (the "AAA") in Pittsburgh,
Pennsylvania, upon the application of the Executive. The determination reached
in such arbitration shall be final and binding on both parties without any right
of appeal or further dispute. Execution of the determination by such arbitrator
may be sought in any court of competent jurisdiction. The arbitrators shall not
be bound by judicial formalities and may abstain from following the strict rules
of evidence and shall interpret this Agreement as an honorable engagement and
not merely as a legal obligation. Unless otherwise agreed by the parties, any
such arbitration shall take place in Pittsburgh, Pennsylvania, and shall be
conducted in accordance with the Rules of the AAA. The Executive's expenses for
such proceeding shall be paid, or repaid to the Company, as the case may be as
provided in Paragraph a of this Section.
6. Income Tax Withholding.
The Company may withhold from any payments made under this Agreement all
federal, state or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
7. Entire Understanding.
This Agreement contains the entire understanding between the Company and the
Executive with respect to the subject matter hereof and supersedes any prior
severance or termination agreement between the Company and the Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to the Executive of any kind elsewhere provided and not
expressly dealt with in this Agreement.
13
<PAGE>
8. Severability.
If, for any reason, any one or more of the provisions or part of a provision
contained in this Agreement shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision or part of a provision of this Agreement
not held so invalid, illegal or unenforceable, and each other provision or part
of a provision shall to the full extent consistent with law continue in full
force and effect.
9. Consolidation, Merger, or Sale of Assets.
If the Company consolidates or merges into or with, or transfers all or
substantially all of its assets to, another entity the term "the Company" as
used herein shall mean such other entity and this Agreement shall continue in
full force and effect.
10. Notices.
All notices, requests, demands and other communications required or permitted
hereunder shall be given in writing and shall be deemed to have been duly given
if delivered or mailed, postage prepaid, first class as follows:
a. to the Company:
DQE, Inc.
Cherrington Corporate Center
Suite 100
500 Cherrington Parkway
Coraopolis, Pennsylvania 15108-3184
Attention: Vice President and General Counsel
b. to Duquesne:
Duquesne Light Company
411 Seventh Avenue
Pittsburgh, Pennsylvania 15219
Attention: Vice President and General Counsel
c. to the Executive:
David D. Marshall
10476 Olde Villa Drive
Gibsonia, Pennsylvania 15044
14
<PAGE>
or to such other address as either party shall have previously specified in
writing to the other.
11. Confidentiality, Inventions, Works, Noncompete, Nonsolicitation, etc.
The Executive acknowledges that the additional severance benefits provided
hereunder are substantial and are good and adequate consideration for the
purposes of the covenants, promises and agreements of this Paragraph 11 and all
other provisions of this Agreement.
a. The Executive acknowledges that all Confidential Information shall
at all times remain the property of the Company and its affiliates (i.e., the
parent of the Company, if any, or another company the majority interest of which
is owned by the Company or by a parent or subsidiary of the Company). The
Executive will safeguard and maintain on the premises of the Company, to the
extent possible in the performance of the Executive's work for the Company or an
affiliate, all documents and things that contain or embody Confidential
Information. Except as required as part of the Executive's duties to the
Company, the Executive will not, during his employment by the Company, or
thereafter, directly or indirectly use, divulge, disseminate, disclose, lecture
upon, or publish any Confidential Information without having first obtained
written permission from the Company to do so.
b. (i) All Inventions made or conceived by the Executive, either
solely or jointly with others, (i) during the Executive' employment by the
Company and (ii) without one (1) year after termination of such employment,
whether or not such Inventions are made or conceived during the hours of the
Executive's employment or with the use of the Company's or an affiliates'
facilities, materials, or personnel, will be the property of the Company or its
nominees.
(ii) The Executive will, without royalty or any other additional
consideration:
(A) inform the Company promptly and fully of such Inventions
by written report, setting forth in detail a description, the operation and the
results achieved;
(B) assign to the Company all the Executive's right, title,
and interest in and to such Inventions, any applications for United States and
foreign Letters Patent, any continuations, divisions, continuations-in-part,
reissues, extensions or additions thereof filed for upon such Inventions and any
United States and foreign Letters Patent;
15
<PAGE>
(C) assist the Company or its nominees, at the expense of the
Company, to obtain, maintain and enforce such United States and foreign Letters
Patent for such Inventions as the Company may elect; and
(D) execute, acknowledge, and deliver to the Company at its
expense such written documents and instruments, and do such other acts, such as
giving testimony in support of the Executive's inventorship and invention, as
may be necessary in the opinion of the Company to obtain, maintain or enforce
the United States and foreign Letters Patent upon such Inventions and to vest
the entire right and title thereto in the Company and to confirm the complete
ownership by the Company of such Inventions.
c. All Works created by the Executive during his employment by the
Company will be and remain exclusively the property of the Company. Each such
Work is a "work for hire" and the Company may file applications to register
copyright as author thereof. The Executive will take whatever steps and do
whatever acts the Company requests, including, but not limited to, placement of
the Company's proper copyright notice on such Works to secure or aid in securing
copyright protection and will assist the Company or its nominees in filing
applications to register claims of copyright in such works. The Executive will
not reproduce, distribute, display publicly, or perform publicly, alone or in
combination with any data processing or network system, any Works of the Company
without the written permission from the Company.
d. The Executive covenants and agrees that during the period of the
Executive's employment hereunder and for a period of one (1) year following the
termination of the Executive's employment for any reason, including without
limitation termination by the Company for cause or without cause, the Executive
shall not engage, directly or indirectly, whether as principal or as agent,
officer, director, employee, consultant, shareholder, or otherwise, alone or in
association with any other person, corporation or other entity, in any Competing
Business located in the states of Pennsylvania, Ohio, West Virginia, Maryland,
New York, New Jersey or Virginia. The Executive recognizes that the Company and
its affiliates conduct or intend to conduct business within the geographic area
set forth herein, and therefore, the Executive agrees that this restriction is
reasonable and necessary to protect the Company's and its affiliates' business.
e. The Executive agrees that for a period of two (2) years following
the termination of the Executive's employment with the Company for any reason,
whether terminated for Cause or without cause, the Executive shall not, directly
or indirectly, solicit the business of, or do business with, any customer,
supplier, or prospective customer or supplier of the Company or an affiliate of
the Company
16
<PAGE>
with whom the Executive had direct or indirect contact or about whom the
Executive may have acquired any knowledge while employed by the Company.
f. The Executive agrees that, during the Executive's employment with
the Company and for a period of two (2) years following termination of the
Executive's employment with the Company, whether terminated with cause or
without cause, the Executive shall not, directly or indirectly, solicit or
induce, or attempt to solicit or induce, any employee of the Company or an
affiliate of the Company to leave the Company or an affiliate for any reason
whatsoever, or hire or solicit the services of any employee of the Company or an
affiliate.
g. The Executive understands and agrees that any violation of this
Agreement shall be deemed material to continuing employment and could result in
disciplinary action up to and including termination. The Executive acknowledges
that the legal remedy available to the Company and its affiliates for any breach
of covenants on the part of the Executive will be inadequate, and, therefore, in
the event of any threatened or actual breach of this Agreement, the Company or
an affiliate shall be entitled to specific enforcement of this Agreement through
injunctive or other equitable relief in a court with appropriate jurisdiction.
The existence of any claim or cause of action by the Executive or other against
the Company or an affiliate, whether predicated on this Agreement or otherwise,
shall not constitute a defense to enforcement by the Company or an affiliate of
this Agreement.
h. Termination of the Executive's employment, whether voluntary or
involuntary, whether for cause or without cause, shall not impair or relieve the
Executive of any the Executive's obligations hereunder. Upon termination of the
Executive's employment, for whatever reason, or upon request by the Company, the
Executive will deliver to the Company the originals and all copies of notes,
sketches, drawings, specifications, memoranda, correspondence, documents,
records, notebooks, computer disks and computer tapes and other repositories of
Confidential Information and inventions then in the Executive' possession or
under Executive's control, whether prepared by the Executive or by others. Upon
termination of the Executive's employment, for whatever reason, or upon request
by the Company, the Executive will deliver to the Company the originals and all
copies of Works, then in the Executive's possession or under the Executive's
control.
12. No Attachment.
Except as required by law, no right to receive payments under this Agreement
shall be subject to anticipation, commutation,
17
<PAGE>
alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to
execution, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
13. Binding Agreement.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Executive and the Company and their respective permitted successors and assigns.
14. Modification and Waiver.
Prior to the date of a Change in Control, this Agreement may be terminated,
modified or amended by action of a majority of the members of the Board. After
a Change in Control, this Agreement may not be terminated, modified or amended
except by an instrument in writing signed by the parties hereto. No term or
condition of this Agreement shall be deemed to have been waived, nor shall there
be any estoppel against the enforcement of any provision of this Agreement,
except by written instrument signed by the party charged with such waiver or
estoppel. No such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any act other than that specifically
waived.
15. Headings of No Effect.
The paragraph headings contained in this Agreement are included solely for
convenience of reference and shall not in any way affect the meaning or
interpretation of any of the provisions of this Agreement.
16. Revocation, Executive Acknowledgments, and Effective Date.
This Agreement shall become effective on the date executed. The Executive
shall have seven (7) calendar days after signing the Agreement to revoke it.
Such revocation shall be in writing to the Company at the address set forth in
Paragraph 10. The Executive acknowledges that he has read and understands the
provisions of this Agreement. The Executive further acknowledges that he has
been given an opportunity for his legal counsel to review this Agreement (or is
given the opportunity to do so prior to the end of the revocation period
hereunder) and that the provisions of this Agreement are reasonable and that he
has received a copy of this Agreement.
17. Not Compensation for Other Plans.
18
<PAGE>
It is understood by all parties hereto that amounts paid and benefits provided
hereunder are not to be considered compensation, earnings or wages for purpose
of any employee benefit plan of the Company or its affiliates, including, but
not limited to, the SERP and the qualified retirement plans.
18. Governing Law.
This Agreement and its validity, interpretation, performance, and enforcement
shall be governed by the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Company through its officers duly authorized, and the
Executive both intending to be legally bound have duly executed and delivered
this Agreement, to be effective as of the date set forth in Paragraph 16.
DQE, INC.
Date: 4/4/97 By: /s/Victor A. Roque
------------------ --------------------------
Its Vice President
EXECUTIVE
Date: 4/4/97 /s/David D. Marshall
------------------ --------------------------
David D. Marshall
19
<PAGE>
Schedule to Exhibit 10.1
Severance Agreements which were substantially identical to that filed as Exhibit
10.1 were entered into with the following parties, materially differing only as
follows:
Other Party Material Differences
- ----------- --------------------
Gary L. Schwass "Severance Benefit" under Section 3a: aggregate lump
sum payment of $579,024; no additional lump sum amount
payable if terminated prior to June 30, 1999.
James E. Cross "Severance Benefit" under Section 3a: aggregate lump
sum payment of $481,903.
Victor A. Roque "Severance Benefit" under Section 3a: aggregate lump
sum payment of $296,714; no additional lump sum amount
payable if terminated prior to June 30, 1999.
James D. Mitchell "Severance Benefit" under Section 3a: aggregate lump
sum payment of $262,647; no additional lump sum amount
payable if terminated prior to June 30, 1999.
20
<PAGE>
Exhibit 10.2
STOCK PURCHASE AGREEMENT
AMONG
DUQUESNE ENTERPRISES, INC.,
CHESTER ENGINEERS, INC.
AND
CHESTER ACQUISITION CORPORATION
March 17, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
Article I - The Transaction
---------------------------
Section Page
- ------- ----
1.01 Purchase of Shares........................................ 1
1.02 Purchase Price; USF Shares; USF Shares Average Price...... 1
1.03 Anti-Dilution............................................. 1
1.04 Payment of Purchase Price................................. 1
1.05 Closing................................................... 2
1.06 Deliveries and Proceedings at Closing..................... 2
Article II - Representations and Warranties of DEI and the Company
------------------------------------------------------------------
2.01 Title to Chester Shares..................................... 4
2.02 Securities.................................................. 4
2.03 Organization and Qualification.............................. 4
2.04 Shares; Capitalization...................................... 5
2.05 Subsidiaries................................................ 5
2.06 Authorization and Enforceability............................ 6
2.07 No Violation of Laws or Agreements.......................... 6
2.08 Financial Statements; Minimum Equity........................ 7
2.09 Undisclosed Liabilities..................................... 7
2.10 No Changes.................................................. 7
2.11 Tax Matters................................................. 8
2.12 [not used].................................................. 9
2.13 Receivables; Retentions..................................... 9
2.14 Business; Discontinued Operations........................... 10
2.15 No Pending Litigation or Proceedings........................ 10
2.16 Contracts; Compliance....................................... 11
2.17 Permits..................................................... 12
2.18 Compliance with Laws........................................ 12
2.19 Real Property............................................... 12
2.20 Transactions with Related Parties........................... 12
2.21 Insurance................................................... 13
2.22 Liability for Services Provided............................. 14
2.23 Labor Relations............................................. 14
2.24 Patents and Intellectual Property Rights.................... 14
2.25 Benefit Plans............................................... 15
2.26 Customer/Supplier Relations................................. 17
2.27 Finder's Fees............................................... 17
2.28 Confidentiality Agreements.................................. 17
2.29 Compliance with Environmental Laws.......................... 17
<PAGE>
2.30 Disclosure.................................................. 18
Article III- Representations and Warranties of Acquisition
----------------------------------------------------------
3.01 Title to USF Shares........................................ 18
3.02 Securities................................................. 18
3.03 Organization and Qualification............................. 19
3.04 Shares; Capitalization..................................... 19
3.05 Authorization and Enforceability........................... 19
3.06 No Violation of Laws or Agreements......................... 19
3.07 SEC Reports................................................ 20
3.08 Finder's Fees.............................................. 20
3.09 No Agreements with Management.............................. 20
3.10 Disclosure................................................. 20
Article IV - Covenants of DEI and the Company
---------------------------------------------
4.01 Conduct of Business Pending Closing........................ 20
4.02 Access, Information and Documents.......................... 22
4.03 Preserve Accuracy of Representations and Warranties........ 22
4.04 Filings and Authorizations................................. 23
4.05 Notice of Changes.......................................... 23
4.06 Section 338(h)(10) Election; Certain Tax Returns........... 23
4.07 Certain Additional Tax Matters............................. 23
4.08 Lease with PVL............................................. 24
4.09 Acquisition Proposals...................................... 25
4.10 Assurances................................................. 25
4.11 Accounts Receivable........................................ 26
4.12 Employee/Employee Benefits Matters......................... 26
4.13 Resale of USF Shares....................................... 26
Article V - Covenants of Acquisition
------------------------------------
5.01 Filings and Authorizations.................................. 26
5.2 Notice of Changes........................................... 26
5.3 Merger...................................................... 26
Article VI - Conditions to Closing
----------------------------------
6.01 Mutual Conditions Precedent................................. 27
6.02 Conditions Precedent to Obligations of Acquisition.......... 27
6.03 Conditions Precedent to Obligations of DEI.................. 29
-ii-
<PAGE>
Article VII - Certain Additional Covenants and Agreements
---------------------------------------------------------
7.01 Costs and Expenses.......................................... 29
7.02 Confidentiality............................................. 29
7.03 Publicity................................................... 30
7.04 Further Assurances.......................................... 30
7.05 Termination................................................. 30
Article VIII - Survival of Representations; Indemnification
-----------------------------------------------------------
8.01 Survival of Representations................................. 31
8.02 Indemnification by DEI...................................... 31
8.03 Indemnification by Acquisition.............................. 32
8.04 Notice of Claims............................................ 32
8.05 Third Party Claims.......................................... 33
8.06 Limitation on Damages, Insurance; Etc....................... 33
8.07 Additional Remedies......................................... 34
8.08 Good Faith Effort to Settle Disputes........................ 34
Article IX - Miscellaneous
--------------------------
9.01 Construction................................................ 34
9.02 Notices..................................................... 35
9.03 Successors and Assigns...................................... 35
9.04 Governing Law............................................... 35
9.05 No Assignment............................................... 35
9.06 Amendment and Waiver; Cumulative Effect..................... 36
9.07 Entire Agreement............................................ 36
9.08 Severability................................................ 36
9.09 No Third Party Beneficiaries................................ 36
9.10 Counterparts................................................ 36
Exhibits
--------
Exhibit A Form of Opinion of Counsel to DEI
Exhibit B Form of Opinion of Counsel to USF
Exhibit C Affiliate's Letter
Schedules
---------
Schedule 1.06(a) Exceptions to Releases
- ----------------
-iii-
<PAGE>
Schedule 2.03 Foreign Qualifications
- -------------
Schedule 2.04 Securities Rights
- -------------
Schedule 2.05 Subsidiaries
- -------------
Schedule 2.07 Consents
- -------------
Schedule 2.09 Other Liabilities
- -------------
Schedule 2.11 Tax Matters
- -------------
Schedule 2.12 Litigation
- -------------
Schedule 2.13 Receivables
- -------------
Schedule 2.14 Assets; Business
- -------------
Schedule 2.15 Litigation
- -------------
Schedule 2.16 Contracts
- -------------
Schedule 2.19 Real Property
- -------------
Schedule 2.20 Transactions with Related Parties
- -------------
Schedule 2.21 Insurance
- -------------
Schedule 2.22 Liabilities for Services
- -------------
Schedule 2.24 Intellectual Property
- -------------
Schedule 2.25 Benefit Plans
- -------------
Schedule 2.26 Customer/Supplier Relations
- -------------
Schedule 2.28 Confidentiality Agreements
- -------------
Schedule 2.29 Environmental Matters
- -------------
Schedule 4.06 Allocation Under Section 338(h)(10)
- -------------
Schedule 6.02(i) Certain Debt
- ----------------
-iv-
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT (this "Agreement") entered as of the
17/th/ day of March, 1997 by and among Duquesne Enterprises, Inc., a
Pennsylvania corporation ("DEI"), Chester Engineers, Inc., a Pennsylvania
corporation (the "Company"), and Chester Acquisition Corporation, a Delaware
corporation ("Acquisition");
WITNESSETH:
WHEREAS, DEI owns 4,000,000 shares of common stock of the Company, par
value $1.00 per share ("Chester Common Stock"), which shares represent 100% of
the issued and outstanding shares of capital stock of the Company (the "Chester
Shares"); and
WHEREAS, Acquisition desires to acquire from DEI, and DEI desires to
sell to Acquisition, the Chester Shares in consideration for a certain number of
shares of the common stock of United States Filter Corporation, a Delaware
corporation ("USF"), valued at $43,400,000 and cash in the amount of $400,000,
all under and subject to the terms and conditions set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties hereto agree as follows:
ARTICLE I
THE TRANSACTION
---------------
1.01 Purchase of Shares. Subject to the terms and conditions of this
------------------
Agreement, DEI shall sell, assign, transfer and deliver to Acquisition at the
Closing (as defined in Section 1.05 below), and Acquisition shall purchase from
------------
DEI at the Closing, the Chester Shares in exchange for the Purchase Price (as
defined in Section 1.02 below).
------------
1.02 Purchase Price; USF Shares; USF Shares Average Price. As used
----------------------------------------------------
herein, "Purchase Price" means (i) the USF Shares plus (ii) $400,000 in cash;
"USF Shares" means that number of shares of common stock of USF, par value $0.01
per share, equal to the result obtained by dividing $43,400,000 by the USF
Shares Average Price; and "USF Shares Average Price" means the average (rounded
to the nearest eighth of a point) of the closing prices for shares of common
stock of USF as reported by the New York Stock Exchange for the 20 consecutive
trading days ending on the fifth trading day immediately preceding the Closing
Date.
1.03 Anti-Dilution. If between the date hereof and Closing the
-------------
issued and
<PAGE>
outstanding USF Shares shall have been changed into a different number of shares
as a result of a stock split, reverse stock split, stock dividend,
recapitalization, reclassification or other similar transaction with a record or
effective date within such period, the provisions of Section 1.02 and the
------------
computations of USF Shares Average Price shall be adjusted proportionately.
1.04 Payment of Purchase Price. Acquisition shall deliver to DEI on
-------------------------
the Closing Date a certificate representing the USF Shares prepared by USF's
transfer agent and $400,000 in cash by wire transfer of federal funds in
accordance with written wire transfer instructions delivered to Acquisition by
DEI at least three business days prior to the Closing Date. Upon such
deliveries, the Purchase Price shall be paid in full.
1.05 Closing. The closing hereunder (the "Closing") shall take place
-------
at the offices of Kirkpatrick & Lockhart LLP, 1500 Oliver Building, Pittsburgh,
Pennsylvania 15222 on May 1, 1997, effective at the close of business on April
30, 1997, except that if all of the conditions to closing under Article VI shall
----------
not have been satisfied on or before May 1, 1997, then closing shall take place
within six business days after all of the conditions to Closing under Article VI
----------
shall have been satisfied or waived in writing, but in no event after May 30,
1997, at 1:00 p.m. local time or at such other time, date or place as the
parties hereto agree (the date of the Closing is sometimes referred to herein as
the "Closing Date").
1.06 Deliveries and Proceedings at Closing.
-------------------------------------
(a) Deliveries by DEI. DEI shall deliver or cause to be
-----------------
delivered to Acquisition at the Closing:
(i) Certificates representing the Chester Shares duly endorsed
or with stock powers duly executed in blank with all transfer taxes, if
any, paid in full;
(ii) Duly executed copies of such other documents and
agreements provided for herein;
(iii) Good Standing certificates of the Company, DEI and each
Subsidiary (as defined in Section 2.05) issued by the Secretary of State
------------
for the respective states of formation issued within 20 days prior to
Closing and good standing certificates of the Company and the Subsidiaries
issued within 20 days prior to Closing in those states where they are
qualified to transact business as a foreign corporation;
(iv) An incumbency and specimen signature certificate signed by
the officers of the Company and DEI and certified by the Secretary of each;
(v) A true and correct copy of the Articles of Incorporation
(and all amendments thereto) of the Company, DEI and each Subsidiary in
effect as of the
-2-
<PAGE>
Closing Date and a complete charter history of the Company and each
Subsidiary, each certified by the Secretary of State for the respective
states of formation, and the Amended By-Laws of the Company and the By-Laws
of each Subsidiary and DEI (together with all amendments thereto) certified
by the Secretary of each;
(vi) Resolutions of the Board of Directors of the Company and
DEI authorizing the execution and delivery of this Agreement and each Other
Agreement to which it is a party and the performance by the Company and DEI
of the transactions contemplated hereby and thereby, certified by the
Secretary of each;
(vii) A certificate dated the Closing Date certifying to the
fulfillment of the conditions set forth in Section 6.02 hereof;
------------
(viii) An opinion of outside legal counsel to DEI in the form
attached hereto as Exhibit A;
---------
(ix) General releases by DEI (on behalf of its other
Affiliates) of all Liability (as defined in Section 2.09) of the Company
------------
and any Subsidiary to them and of any claim that they or any of them may
have against the Company, except with respect to the lease between the
Company and Property Ventures, Ltd., a Pennsylvania corporation ("PVL"),
and subject to the other arrangements identified on Schedule 1.06(a);
----------------
(x) The minute books, stock ledgers and corporate seal of the
Company and each Subsidiary and all share certificates of each Subsidiary
representing shares of capital stock of such Subsidiary owned by the
Company to the extent that such share certificates are in DEI's possession;
(xi) Resignations of all of the directors of the Company and
each Subsidiary; and
(xii) The PVL Mortgage and the PVL Guaranty (as defined in
Section 4.10); and
------------
(xiii) Such other agreements and documents as Acquisition may
reasonably request.
(b) Deliveries by Acquisition. Acquisition shall deliver or
-------------------------
cause to be delivered to DEI at the Closing:
(i) A certificate representing the USF Shares registered in
the name of "Duquesne Enterprises, Inc." using its address set forth in
Section 9.02 as its registered office for purposes of USF's stock transfer
------------
records and using its taxpayer identification
-3-
<PAGE>
number of 25-1541872;
(ii) Duly executed copies of such other documents and
agreements provided for herein;
(iii) A good Standing Certificate of Acquisition issued within
20 days prior to Closing certified by the Secretary of State of the State
of Delaware;
(iv) An incumbency and specimen signature certificate signed by
the officers of Acquisition and certified by the Secretary of Acquisition;
(v) A true and correct copy of the Certificate of
Incorporation (and all amendments thereto) of Acquisition in effect as of
the Closing Date certified by the Secretary of State of the State of
Delaware and bylaws of Acquisition (together with all amendments thereto)
certified by the Secretary of Acquisition;
(vi) Resolutions of the Board of Directors of Acquisition
authorizing the execution and delivery of this Agreement and the
performance of the transactions contemplated hereby, certified by the
Secretary of Acquisition;
(vii) A certificate dated the Closing Date of an officer of
Acquisition certifying to the fulfillment of the conditions set forth in
Section 6.03;
------------
(viii) The opinion of the General Counsel to USF in the form
attached as Exhibit B;
---------
(ix) An amount equal to the good faith estimate by the parties
hereto of the Tax Reimbursement Amount (as defined in Section 4.07(b)); and
---------------
(x) Such other agreements and documents that DEI may
reasonably request.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF DEI AND THE COMPANY
-----------------------
DEI and the Company jointly and severally represent and warrant to
Acquisition as set forth in this Article II. All references in Sections 2.08
-------------
through and including Section 2.30 to "Company" shall be deemed to include
------------
references to each Subsidiary.
2.01 Title to Chester Shares. DEI has legal, valid, beneficial and
-----------------------
exclusive title to the Chester Shares free of all liens, claims, charges,
security interests, restrictions,
-4-
<PAGE>
burdens, pledges, Liabilities, defects in title, options and encumbrances of any
kind or nature whatsoever (all of the foregoing collectively, "Encumbrances"),
and upon delivery of the Chester Shares at Closing against receipt of the
Purchase Price, Acquisition shall acquire legal and valid title to the Chester
Shares free of any Encumbrances.
2.02 Securities. DEI is an "accredited investor" as such term is
----------
defined in Rule 501 of Regulation D of the U.S. Securities Act of 1933, as
amended ("Securities Act"). DEI is acquiring the USF Shares for investment only
and not with a view toward or in connection with any resale or distribution of
such shares, except for any resale or distribution of such shares in compliance
with the registration statements contemplated by Section 4.13.
------------
2.03 Organization and Qualification. Each of DEI and the Company is
------------------------------
a corporation duly organized, validly existing and in good standing under the
laws of the Commonwealth of Pennsylvania. Each of DEI and the Company has all
requisite corporate power and authority to (i) own, lease, operate and use its
properties and assets as now owned, leased, operated and used and (ii) make,
execute and deliver this Agreement and the Other Agreements to which it is a
party and perform its obligations hereunder and thereunder without the need for
the consent of any other Person. The Company has all requisite corporate power
and authority to conduct the Business (as defined in Section 2.14) as now
-------------
conducted. As used herein, the term "Person" means any person, corporation,
association, partnership, limited liability company, trust, business trust,
joint venture, unincorporated organization or any other legal entity and the
term "Other Agreement" with respect to any party shall mean the other agreements
and documents contemplated hereby to be executed and delivered by such party or
any Affiliate thereof on or before the Closing (which shall include, without
limitation, that certain letter agreement between USF and DEI of same date
herewith (the "Letter Agreement")). Copies of the charter documents and bylaws
of DEI, the Company and each Subsidiary in effect on the date hereof and minute
books and stock transfer records of the Company and each Subsidiary previously
delivered to Acquisition, are correct and complete and are in full force and
effect. Except as set forth in Schedule 2.03, the Company and each Subsidiary
-------------
is duly qualified or licensed to transact business and is in good standing as a
foreign corporation in those jurisdictions set forth on Schedule 2.03, which are
-------------
the only jurisdictions wherein the character of the properties owned or leased
by it or the nature of activities conducted by it make such qualification or
licenses necessary. Schedule 2.03 separately identifies each country in which
-------------
the Company or any Subsidiary has an office or employee on permanent assignment
and the extent to which the Company or any Subsidiary has any material assets
located in each such country.
2.04 Shares; Capitalization. The authorized capital stock of the
----------------------
Company consists solely of 10,000,000 shares of Common Stock, $1.00 par value
per share, of which 4,000,000 shares are issued and outstanding. Except as set
forth in Schedule 2.04, there are no Securities Rights with respect to the
-------------
Chester Shares nor are there any securities convertible into or exchangeable for
any Chester Common Stock or any other Security Rights with respect to any
unissued Chester Common Stock. "Security Right" means any option, warrant,
subscription
-5-
<PAGE>
right, preemptive right, other right, proxy, put, call, demand, plan,
commitment, agreement, understanding or arrangement of any kind relating to the
Chester Shares, whether issued or unissued, or any other security convertible
into or exchangeable for the Chester Shares. "Security Right" includes any right
relating to issuance, sale, assignment, transfer, purchase, redemption,
conversion, exchange, registration or voting and includes rights conferred by
statute, by the Company's Governing Documents or by agreement. All rights and
powers to vote the Chester Shares are held exclusively by DEI. All of the
Chester Shares are validly issued, fully paid and nonassessable, were not issued
in violation of the terms of any agreement or other understanding, and were
issued in compliance with all applicable federal and state securities or "blue-
sky" laws and regulations.
2.05 Subsidiaries. Except as set forth on Schedule 2.05, the Company
------------ -------------
does not own any equity interest in any Person. Schedule 2.05 discloses with
-------------
respect to each such Person, (i) its name, (ii) the jurisdiction of its
organization, (iii) the number of its authorized shares or other equity
interests, (iv) the number of its outstanding shares or other equity interests
of each class or series, and (v) the name of the owner and the number and
percentage of outstanding shares or other equity interests of each class or
series of such Person owned of record and, if different, owned beneficially by
the Company, DEI and any other Person. Schedule 2.05 also identifies each
-------------
Subsidiary that no longer conducts any business and that contains no assets
(each, an "Inactive Subsidiary") and describes the business in which each
Inactive Subsidiary was engaged prior to becoming inactive. No Inactive
Subsidiary has or has had since January 1, 1997 any material assets. Schedule
--------
2.05 also describes the business in which each Subsidiary is engaged. Each
- ----
Person identified on Schedule 2.05 is sometimes referred to herein as a
-------------
"Subsidiary"; provided, however, that, except for the immediately preceding
-------- -------
sentence, the term "Subsidiary" as used herein shall not include any Inactive
Subsidiary. All of the outstanding capital stock and other equity interests of
each Subsidiary is validly issued, fully paid and nonassessable and was issued
in compliance with all applicable federal and state securities or "blue sky"
laws and regulations. There are no Security Rights relating to any shares of
capital stock, other equity interests or other securities of any Subsidiary.
The Company and each Subsidiary have good, marketable and exclusive title to the
shares or other equity interests disclosed on Schedule 2.05 as being owned by
-------------
each of them, free and clear of all Encumbrances. All rights and powers to vote
such shares or other equity interests are held exclusively by the Company,
directly or indirectly through one or more of such Subsidiaries, as the case may
be. Each Subsidiary is duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization, and has the power and
authority to own or lease its properties and to carry on its Business as now
conducted. Neither Chester Environmental Ohio, Inc. nor Chester Engineers of
Michigan, Inc. has any material net book value. Except as set forth in Schedule
--------
2.05, none of the joint ventures identified in Schedule 2.05 or 2.16 may
- ---- ------------- ----
obligate the Company to make a capital investment in or loan to such joint
ventures or create any other obligation of the Company to such joint ventures
without the prior consent of the Company. The Company's obligations under item
no. 3 on Schedule 2.05 shall not exceed $25,000.
-------------
-6-
<PAGE>
2.06 Authorization and Enforceability. The execution, delivery and
--------------------------------
performance by each of DEI and the Company of this Agreement have been duly
authorized by all necessary action on their part. This Agreement has been duly
executed and delivered by DEI and constitutes, and each Other Agreement which is
to be executed and delivered by DEI, when executed and delivered by DEI, shall
constitute, the legal, valid and binding obligation of DEI. This Agreement has
been duly executed and delivered by the Company and constitutes, and each Other
Agreement which is to be executed and delivered by the Company, when executed
and delivered by the Company, shall constitute, the legal, valid and binding
obligation of the Company.
2.07 No Violation of Laws or Agreements. Except as set forth on
----------------------------------
Schedule 2.07, none of the execution and delivery of this Agreement or any Other
- -------------
Agreement, the consummation of the transactions contemplated hereby or thereby
or the compliance with or fulfillment of the terms, conditions and provisions
hereof or thereof by DEI or the Company will: (i) contravene any provision of
the charter or bylaws of DEI, the Company or any Subsidiary, (ii) conflict with,
result in a breach of or constitute a default or an event of default (or an
event which would, with the passage of time or the giving of notice or both,
constitute a default) under any term, condition or provision of, or results in
the termination or loss of any right (or give others the right to cause such a
termination or loss) under, any license, franchise, indenture, mortgage or any
other Contract, agreement or instrument to which DEI, the Company or any
Subsidiary is a party or by which any of them or any of their assets may be
bound or affected, (iii) violate any Law (as defined in Section 2.18) or violate
------------
any judgment or order of any court, government, department, commission, board,
bureau, agency, official or other regulatory, administrative or governmental
authority or instrumentality, whether federal, state, local or foreign
("Governmental Body") to which DEI, the Company or any Subsidiary or any of
their Affiliates are subject, (iv) result in the creation or imposition of any
Encumbrance upon the Chester Common Stock or the assets of the Company or any
Subsidiary or gives to others any interests or rights therein, or (v) result in
the creation, maturation or acceleration of any Liability or obligation of DEI,
the Company or any Subsidiary (or gives others the right to cause such a
creation, maturation or acceleration). Without limiting the foregoing, the
claim by TRC Companies, Inc. ("TRC") briefly summarized on Schedule 2.07 against
-------------
DEI and the Company has been fully and completely settled with no continuing
Liability of the Company or DEI to any Person, except as set forth in Schedule
--------
2.07. Except as may be required by the U.S. Hart-Scott-Rodino Anti-Trust
- ----
Improvements Act of 1976, as amended (the "HSR Act"), and except as provided in
Schedule 2.07 (collectively, the "Consents"), no consent, approval, declaration
- -------------
or authorization of, or registration or filing with, any Person (including any
Governmental Body) is required in connection with the execution and delivery by
DEI or the Company of this Agreement or the Other Agreements to which they are a
party and the consummation of the transactions contemplated hereby and thereby
by DEI or the Company.
2.08 Financial Statements; Minimum Equity. DEI has previously
------------------------------------
delivered to Acquisition the audited consolidated balance sheet, income
statement and statement of cash
-7-
<PAGE>
flows for the Company, together with the accompanying footnotes, for the twelve
month periods ending December 31, 1993, December 31, 1994, and December 31,
1995, and December 31, 1996 (such balance sheet is sometimes referred to herein
as the "12-31-96 Balance Sheet") (all of the foregoing referred to herein
collectively as the "Company Financial Statements"). The Company Financial
Statements have been prepared in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP") on a consistent basis throughout the indicated
periods. Without limiting the foregoing, the 12-31-96 Balance Sheet reflects the
Financial Accounting Standards Board's SFAS No. 121. The Company Financial
Statements fairly present the consolidated financial condition, assets and
Liabilities (as defined in Section 2.09) and results of operations and cash
------------
flows of the Company in accordance with GAAP at the dates and for the years
indicated. On the Closing Date, the Company shall have stockholders equity of at
least $11,300,000, (i) without taking into account any Liabilities of any kind
of the Company to any Related Party, (ii) without taking into consideration any
liabilities of the Company for borrowed money to any other Person, (iii)
accounting for Taxes in accordance with Sections 4.06 and 4.07 and without
------------- ----
taking into account the adjustments for stock options as contemplated by
Section 7.07; such stockholders equity to be determined exclusively in
- ------------
accordance with GAAP on a basis consistent with the principles of GAAP used in
the 12-31-96 Balance Sheet.
2.09 Undisclosed Liabilities. Except as disclosed in the Company
-----------------------
Financial Statements and as otherwise disclosed in Schedule 2.09 hereto, the
-------------
Company has no liabilities of any nature whatsoever (whether absolute, fixed,
contingent or otherwise) whether due or to become due, including any unasserted
claim, whether incurred directly or by any predecessor, and whether arising out
of any act, omission, transaction, circumstance, sale of goods or services,
state of facts or other condition ("Liabilities"), except for Liabilities that
have arisen in the ordinary course of business of the Company after December 31,
1996 through the date hereof, all of which have been consistent in amount and
character with past practice and experience, and none of which, individually or
in the aggregate, has had or will have an adverse effect on the Business,
financial condition or prospects of the Company and none of which is a Liability
for breach of contract or warranty or has arisen out of tort, infringement of
any intellectual property rights, or violation of Law or is claimed in any
pending or threatened legal proceeding. Without limiting the foregoing, on the
Closing Date, the Company shall have no outstanding Liabilities of any kind or
nature to DEI or any other Affiliate of the Company and, except as disclosed on
Schedule 2.09, the Company shall have no outstanding Liabilities to any Person
- -------------
for borrowed money. As used herein, "Affiliate" means, with respect to any
Person, any other Person that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with such
Person. Schedule 2.09 identifies all outstanding bonds or other assurances
-------------
securing or attributable to the Company's activities (including the Contracts)
and further identifies any Affiliate of the Company that may be primarily or
contingently liable for any such bonds or assurances or has otherwise guaranteed
any obligation of the Company.
2.10 No Changes. Since December 31, 1996, the Company has conducted
----------
its business only in the ordinary course. Without limiting the generality of
the foregoing sentence,
-8-
<PAGE>
since December 31, 1996, there has not been any (i) material adverse change in
the financial condition, assets, Liabilities, net worth, Business or, to the
knowledge of DEI and the Company, prospects of the Company; (ii) declaration or
payment of any dividend or other distribution on or with respect to or
redemption or purchase by the Company of any shares of capital stock of the
Company, including any of the Shares; (iii) change in any method of accounting;
(iv) payment, prepayment or discharge of any Liability other than in the
ordinary course of business or any failure to pay any Liability when due; (v)
write-offs or write-downs of any assets of the Company in excess of $50,000 in
the aggregate; (vi) termination or waiver of any material right under, any
agreement of the Company; or (vii) agreement or commitment to do any of the
foregoing. During the one-year period ending on the date hereof, except as set
forth in Schedule 2.10, there has been no (a) damage or destruction to any
-------------
material asset of the Company, whether or not covered by insurance; (b) strike
or other labor trouble at the Company; (c) increase in the salary, wage or bonus
of any employee of the Company; (d) asset acquisition or expenditure, including
capital expenditure, in excess of $50,000 individually or $250,000 in the
aggregate; (e) change in any Company Plan; (f) payment to or transaction with
any Related Party, which payment or transaction is not specifically disclosed on
Schedule 2.20; (g) disposition of any asset for more than $50,000 or for less
- -------------
than fair market value; (h) material change in the manner in which the Company
conducts its Business; (i) exercise of any options or other Security Rights with
respect to Company capital stock; or (j) agreement or commitment to do any of
the foregoing.
2.11 Tax Matters.
-----------
(a) All federal, state, local and other income or franchise taxes,
gross receipts, payroll, withholding and capital stock taxes and any interest
and penalties related thereto (collectively, "Taxes") that were or are required
under Law to be paid by the Company (or by any Company Affiliate in respect of
the Company) have been paid, except for accrued Taxes that are not yet due in
the ordinary course of business and adequately reserved for on the 12-31-96
Balance Sheet, none of which are overdue, or subsequently arising Taxes. There
are no Tax liens upon any property or assets of the Company, except liens for
current Taxes not yet due that are fully reserved on the Balance Sheet of the
Company. Except as set forth in Schedule 2.11, the Company is not currently the
-------------
beneficiary of any extension of time within which to file any Tax Return.
Except as set forth in Schedule 2.11, no claim has been made by a taxing
-------------
authority of a jurisdiction where the Company does not file Tax Returns that it
is or may be subject to taxation in that jurisdiction. All Taxes that the
Company (or any Company Affiliate in respect of the Company) was required by Law
to withhold or collect, have been and are being withheld or collected by it and
have been and are being timely paid over to the proper Governmental Body or are
being held by it for such payment.
(b) All Tax Returns that are required to be filed by the Company (or
by any Company Affiliate in respect of the Company) prior to or on the Closing
Date, pursuant to the Law of each governmental authority with taxing power over
it have been filed or caused to be filed on a timely basis, or will be filed or
cause to be
-9-
<PAGE>
filed on a timely basis. All such Tax Returns were or will be, as the case may
be, correct and complete. All such Taxes that have become due as shown on such
Tax Returns or pursuant to any assessment received as an adjustment to such Tax
Returns have been paid. Each Tax Return of the Company which has been audited by
the relevant authorities and all deficiencies or proposed deficiencies resulting
from such audit have been paid or are adequately provided for in the Company
Financial Statements.
(c) Except for the Company's federal income tax returns for the
taxable years ended December 31, 1993, December 31, 1994 and December 31, 1995,
and as otherwise provided in Schedule 2.11, no audit or examination of any Taxes
-------------
is now pending or currently in progress with respect to the Company, the Company
has not received from the Internal Revenue Service or from any other tax
authority from any state, foreign, county, local or other jurisdiction a notice
of underpayment of Taxes, a proposed assessment of Tax, a proposed adjustment to
any Tax return filed or other deficiency that has not been paid. Except as set
forth in Schedule 2.11, there is no pending, or threatened or anticipated,
-------------
assessment of any additional Tax against any member of the Selling Group (as
defined below) for any taxable period during which the Company or any
predecessor company was a member of the Selling Group. No member of the Selling
Group has waived any statute of limitations in respect of any Taxes or agreed to
any extension of time with respect to a Tax assessment or deficiency for any
taxable period during which the Company was a member of the Selling Group.
(d) Neither the Company nor any Affiliate of the Company has waived
restrictions on assessment or collection of Taxes or executed a waiver or
consented to the extension of any statute of limitations for federal income or
other Tax Liability that remains outstanding. Except as set forth on Schedule
--------
2.11, neither the Company nor any Company Affiliate in respect of the Company
- ----
has made any payments, is obligated to make any payments, or is a party to any
agreement that under any circumstances could obligate it to make any payments
that will not be deductible under Code Section 280G or 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code").
(e) Except as disclosed on Schedule 2.11, DQE, Inc., a Pennsylvania
-------------
corporation ("DQE"), DEI, each Subsidiary and the Company constitute an
affiliated group of corporations within the meaning of Section 1504 of the Code
and have joined in the filing of consolidated federal income Tax returns for the
taxable year beginning on September 1, 1995 and for each taxable year
thereafter. For purposes of this Agreement, "Selling Group" means a member,
whether past or present, of DEI's affiliated group of corporations within the
meaning of Code Section 1504(a).
2.12 [not used]
2.13 Receivables; Retentions. Schedule 2.13 discloses all trade and other
----------------------- -------------
-10-
<PAGE>
accounts receivable of the Company ("Receivables") outstanding as of January
31, 1997 presented on an aged basis and separately identifies the name of each
account debtor and the total amount of each related Receivable. All
Receivables, whether reflected on the 12-31-96 Balance Sheet, disclosed on
Schedule 2.13 or created after January 31, 1997, arose from bona fide sale
- -------------
transactions of the Company, and except as disclosed on Schedule 2.13, no
-------------
portion of any Receivable is subject to counterclaim, defense or set-off or is
otherwise in dispute. Except to the extent of the recorded reserve for doubtful
accounts specified on the 12-31-96 Balance Sheet, and the Receivables subject to
counterclaim, defense or set-off or otherwise in dispute disclosed on Schedule
--------
2.13, all of the Receivables are collectible in the ordinary course of business
- ----
and will be fully collected within 120 days after having been created using
commercially reasonable efforts with payments by each debtor being applied first
to accounts as specified by such debtor and, if no account is specified, to
accounts of such debtor first created. The Company's outstanding contract
retentions at January 31, 1997 were equal to $1,195,753.
2.14 Business; Assets; Discontinued Operations.
-----------------------------------------
(a) Business; Assets. The Company is engaged in the business of
----------------
providing fee-for-service engineering for water and waste water systems,
designing and building waste water systems and designing, building, owning and
operating waste water systems and the other businesses identified on Schedule
--------
2.14 (collectively, the "Business") and no other businesses. Except as set
- ----
forth in the Company's 1997 capital budget, the Company's equipment having a net
book value in excess of $25,000 individually and the Company's buildings,
fixtures, improvements, machinery, equipment, tools, furniture, improvements and
tangible personal property, including those reflected on the 12-31-96 Balance
Sheet, having a net book value in excess of $250,000 in the aggregate are in
good operating condition and repair and are suitable for the purposes for which
they are used in the Business. The Company has good, marketable, legal,
beneficial and exclusive title to all of its assets; all of such assets are
reflected on the 12-31-96 Balance Sheet or, under GAAP, are not required to be
reflected thereon; and none of such assets is subject to any Encumbrance or
impairment, whether due to its condition, utility, collectability or otherwise,
except Permitted Encumbrances. As used herein, the term "Permitted
Encumbrances" means liens for governmental charges that are not yet due and
payable, and liens identified in Schedule 2.14. Schedule 2.14 identifies any
------------- -------------
material asset of the Company that is not located on property owned or leased by
the Company and that is not otherwise disclosed in Schedule 2.20 and other than
-------------
vehicles owned or leased by the Company. Except as disclosed in Schedule 2.16,
-------------
the Company owns no material property in the United States.
(b) Discontinued Operations. Schedule 2.14 identifies each of the
----------------------- -----
businesses, divisions and segments of the Company that were sold, discontinued
or otherwise disposed of since August 18, 1993 (the "Discontinued Operations").
For purposes herein, the term "Discontinued Operations" shall include all
obligations under that certain Stock Purchase Agreement dated August 31, 1995
(as amended, if ever) between Mestek, Inc. and the Company,
-11-
<PAGE>
that certain Asset Purchase Agreement dated July 29, 1993 among the Company, DEI
and Mestek, Inc. and all assignment and related documents identified on
Schedule 1.06(a) and the other matters identified in the Schedules as being part
- ----------------
of the Discontinued Operations. Schedule 2.16 identifies each contract effecting
-------------
each sale or transfer of the Discontinued Operations, and, except as provided on
Schedule 2.16, none of the Company's rights under such contracts have been
- -------------
assigned or transferred to any Person.
2.15 No Pending Litigation or Proceedings. Except as set forth on
------------------------------------
Schedule 2.15 there are no actions, suits, investigations, claims or proceedings
- -------------
of any nature or kind whatsoever ("Litigation") pending or threatened against or
affecting the Company, its assets, the Business, the Chester Shares or the
transactions contemplated by this Agreement or any Other Agreement, at Law or in
equity, by or before any Governmental Body. There are no outstanding judgments,
decrees or orders of any Governmental Body against or affecting the Company, the
Chester Shares, the Business or the Company's assets. The Company has not
commenced and does not have pending any action, suit or proceeding against any
third party, except as set forth on Schedule 2.15. Except as set forth in
-------------
Schedule 2.15, the Company has not been a party to any other Litigation during
- -------------
the past three years. Schedule 2.15 separately identifies each Litigation
-------------
matter arising out of the Discontinued Operations.
-12-
<PAGE>
2.16 Contracts; Compliance.
---------------------
(a) Disclosed on Schedule 2.16 is a brief description of each
--------------
contract, lease, indenture, mortgage, instrument, commitment or other agreement,
arrangement or understanding, oral or written, formal or informal, to which the
Company is a party or by which it or its assets may be affected with respect to
which the Company has continuing Liability and that (i) involves the purchase,
sale or lease of any asset, materials, supplies, inventory or services in excess
of $250,000 per year, (ii) has an unexpired term of more than twelve months from
the date hereof, taking into account the effect of any renewal options
(excluding contracts that are terminable with no continuing Liability by the
Company on thirty (30) days (or less) written notice), (iii) relates to the
borrowing or lending of any money or guarantee of any obligation, (iv) limits
the right of the Company to compete in any line of business or otherwise
restricts any right the Company may have (excluding contracts that are
terminable with no continuing Liability by the Company on thirty (30) days (or
less) written notice), (v) is an employment or consulting contract involving
payment of compensation and benefits in excess of $45,000 per year or is not
terminable at will by the Company, (vi) involves the pending or former purchase
or sale of any business; (vii) is with any Related Party; (viii) is a fixed
price contract, or (ix) was not entered into in the ordinary course (each, a
"Contract" and collectively, the "Contracts"). Schedule 2.16 separately
-------------
identifies all active design/build, own/operate contracts (all of the foregoing
contracts being included within the definition of "Contracts" herein). Schedule
--------
2.16 discloses any outstanding stand-by letters of credit issued for the account
- ----
of the Company (the "Letters of Credit"). Schedule 2.16 also separately
-------------
identifies each Contract that relates to or arose out of the Discontinued
Operations.
(b) Each Contract is a legal, valid and binding obligation of the
Company and is in full force and effect. Except as disclosed on Schedule 2.16,
-------------
the Company and each other party to each Contract has performed all obligations
required to be performed by it thereunder and is not in breach or default, and
is not alleged to be in breach or default, in any respect thereunder, and no
event has occurred and no condition or state of facts exists (or would exist
upon the giving of notice or the lapse of time or both) that would become or
cause a breach, default or event of default thereunder, would give to any Person
the right to cause such a termination or would cause an acceleration of any
obligation thereunder. Except as disclosed on Schedule 2.16, the Company is not
-------------
currently renegotiating any Contract nor has the Company received any notice of
non-renewal or price increase or sales or production allocation with respect to
any Contract. Without limiting the foregoing, except as disclosed on Schedule
--------
2.16, the Company has no borrowings outstanding under its credit facility with
- ----
PNC Bank, National Association and is in compliance with its loan covenants set
forth in such facility.
(c) All of the Company's fixed price contracts are accounted for in
the Company Financial Statements using the percentage-of-completion method of
accounting which takes into account the cost, estimated earnings and revenue to
date on contracts not yet completed. The percentage-of-completion revenues and
costs for each of the Company's fixed-price contracts
-13-
<PAGE>
accounted for in the Financial Statements are fully recognized and accrued based
on sound engineering estimates of contract work performed through December 31,
1996. All construction Contracts with durations of less than 12 months are
accounted for in the Company Financial Statements on the basis of costs
incurred. All foreseeable losses on all Contracts are fully recognized or
accrued in the Company Financial Statements in accordance with GAAP. All
foreseeable costs, including all estimated cost overruns, on all long-term
construction Contracts are fully recognized or accrued in the Company Financial
Statements in accordance with GAAP. There has been no adverse change to any
long-term construction Contract since December 31, 1996. Total Contract backlog,
based upon Company practice as discussed orally with Acquisition, was
$67,119,000 as of January 31, 1997.
2.17 Permits. The Company and its engineers hold and are in
-------
compliance in all material respects with all permits, certificates, licenses,
franchises, privileges, approvals, registrations and authorizations required
under all Laws, rules and regulations or advisable in connection with the
operation of the Company's assets and the Business (collectively, the "Permits")
and all of such Permits are in full force and effect. No notice of cancellation
of or default, dispute or complaint concerning any Permit, or of any event,
condition or state of facts described in the preceding sentence, has been
received by the Company or any of its engineers.
2.18 Compliance with Laws. The Company is not, and has received no
--------------------
notice that it is, in violation in any material respect of any applicable
federal, state, municipal, local or foreign statutes, laws, ordinances, rules or
regulations (collectively, "Laws"), and no event has occurred or condition or
state of facts exists that could give rise to any such violation. Without
limiting the foregoing, the Company and its engineers are in compliance in all
material respects with all applicable engineering licensure laws and related
requirements in each state or foreign jurisdiction where the Company conducts
business.
2.19 Real Property. Schedule 2.19 sets forth a correct list and
------------- -------------
summary descriptions (showing the record title holder, location, uses being made
thereof and indebtedness secured by a mortgage or other Encumbrance thereon) of
all real properties currently used or leased by the Company or in which the
Company has an interest (including options) (collectively, the "Real Property").
The Company owns no real property. Schedule 2.19 also identifies all real
-------------
estate previously owned by the Company, and any other real estate with respect
to which the Company may be liable for violations of Environmental Laws under
theories of successor Liability, since August 18, 1993 and for the ten-year
period beginning on August 18, 1983. Schedule 2.19 separately identifies the
-------------
location of each design/build, own/operate water treatment facility owned,
leased or licensed by the Company and identifies whether such property is owned,
leased or licensed by the Company, and if leased or licensed, identifies the
agreement giving rise to such rights of lease or license. Except as described
in Schedule 2.19, there are no leases, subleases, tenancies or other rights of
-------------
occupancy affecting all or any part of the Real Property owned by the Company,
and the Company has not granted any options to purchase or otherwise acquire,
and there are no outstanding offers to purchase all or any part of
-14-
<PAGE>
the Real Property owned by the Company. The Company has the right to quiet
enjoyment of all Real Property in which it holds a leasehold interest for the
full term, including all renewal rights, of the lease or similar agreement
relating thereto. The Company has not received any written or oral notice of
assessments for public improvements or condemnation against any Real Property.
2.20 Transactions With Related Parties. Except for employment
---------------------------------
relationships and salaries disclosed in Schedule 2.20 or as otherwise disclosed
-------------
on Schedule 2.20, no Related Party (as hereafter defined) has directly or
-------------
indirectly:
(a) Any Liability to or any right to receive property from the
Company;
(b) Any contractual or other claim against the Company or any
obligation under any contractual or other claim to or from the Company;
(c) Any interest in any property or assets used or owned by the
Company or necessary for use in the Business or used any of the assets of the
Company (other than directly in connection with the Business);
(d) Any agreement or plan providing payment or vesting (or
acceleration of either) of property, severance benefits or other benefits that
are contingent on the transactions contemplated by this Agreement or conditioned
upon a change of control after the termination of employment of such employee
regardless of the reason for such termination of employment or the value of any
of the benefits which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
(e) An agreement relating to the Company providing any term of
employment that is not terminable at will;
(f) Is a party to any Contract or has any agreement or
understanding of any nature with any party to any Contract; or
(g) Has any other agreement or understanding or is engaged in
any other transaction of any nature with the Company, its officers or directors
(relating to the Company), its suppliers, vendors or customers.
As used herein, the term "Related Party" means (i) DEI, DQE and PVL, (ii) any
Affiliate of DEI, DQE, PVL or the Company, (iii) any officer or director or the
Company and any Person identified in clauses (i) and (ii) preceding, and (iv)
any spouse, sibling, ancestor or lineal descendant of any natural person
identified in preceding clauses. Without limiting the foregoing, (A) all
amounts owing by the Company to or receivable by the Company from any Related
Party on the 12-31-96 Balance Sheet are identified on Schedule 2.20, and all
-------------
services (such as, without limitation, general ledger, other accounting,
insurance, management, legal, tax, banking and
-15-
<PAGE>
other financial services, if any) provided to or on behalf of the Company by any
Related Party are identified on Schedule 2.20; (B) Schedule 2.20 identifies any
------------- -------------
assets, arrangements or services to which the Company is a party or with respect
to which the Company benefits that will have to be replaced or would be
materially adversely affected after Closing because the Company will after
Closing no longer be owned directly by DEI or indirectly by any Affiliates of
DEI; (C) Schedule 2.20 identifies any asset, trade name, other Intellectual
-------------
Property and other rights, if any, that are currently shared by the Company and
its Affiliates; and (D) Schedule 2.20 identifies any and all assets (including
-------------
insurance claims files, legal files, accounting information, tax returns, etc.)
of the Company in the possession of DEI or any Affiliate of DEI. DEI has been
given assurance by DQE that DQE has no intention, before or after Closing, of
making any public announcement or public disclosure of the transactions
contemplated or consummated hereby which would name USF or any of its Affiliates
as purchaser.
2.21 Insurance. Schedule 2.21 sets forth a complete list of all
--------- -------------
policies of insurance (collectively, the "Insurance Policies") of which the
Company is the owner, insured or beneficiary or programs of self insurance and
identifies whether such policies are claims made or occurrence policies. Except
as set forth on Schedule 2.21, all premiums under the Insurance Policies have
-------------
been paid in accordance with the terms of the policies. There have been no
defaults with respect to any provision contained in any such Insurance Policies,
nor has there been any failure to give any notice or present any claim under any
such policies in a timely fashion or in the manner or detail required by the
Insurance Policies. No notice of cancellation or non-renewal with respect to,
or disallowance of any claim under, or increase of the premium for any such
insurance policy has been received by DEI or the Company except in the ordinary
course of business. Schedule 2.21 describes in detail any program of self-
-------------
insurance maintained by the Company or by any Affiliate of the Company for or on
behalf of the Company. Schedule 2.21 identifies a five year history of claims
-------------
in excess of $10,000 against the Company (whether covered by insurance or
falling under any program of self insurance) relating to or arising out of
services provided or warranties granted by the Company. All of the Company's
environmental pollution insurance coverage policies are identified on Schedule
--------
2.21.
- ----
2.22 Liability for Services Provided. Except as otherwise provided on
-------------------------------
Schedule 2.22, (i) there exists no pending suit, inquiry, proceeding or
- -------------
investigation by or before any court or governmental or regulatory or
administrative agency or commission relating to any services and alleged to have
been provided in a negligent manner or otherwise in breach of any applicable
contract provisions, standards, representations or warranties ("Liability for
Services") provided to others by the Company, (ii) there exist no pending or
threatened claims against the Company for Liability for Services, and (iii)
there are no existing facts or circumstances that could reasonably lead to any
item described in clauses (i) or (ii) preceding. The Company shall have no
Liability after the Closing Date not fully covered by insurance relating to any
design made by the Company or for Liability for Services prior to the Closing
Date, other than as fully reserved in the warranty reserve on the 12-31-96
Balance Sheet.
-16-
<PAGE>
2.23 Labor Relations. No employee of the Company is represented by
---------------
any union or other labor organization. Except as set forth in Schedule 2.23, no
-------------
representation election, arbitration proceeding, grievance, labor strike,
dispute, slowdown, stoppage or other labor trouble is pending or threatened
against, involving, affecting or potentially affecting the Company. No
complaint against the Company is pending or threatened before the National Labor
Relations Board, the Equal Employment Opportunity Commission or any similar
state or local agency, by or on behalf of any employee of the Company. The
Company has no contingent Liability for sick leave, vacation time, severance pay
or any similar item not fully reserved on the 12-31-96 Balance Sheet. The
Company has no contingent Liability for any occupational disease of any of its
employees, former employees or others. Neither the execution and delivery of
this Agreement, the performance of the provisions hereof nor the consummation of
the transactions contemplated hereby will trigger any severance pay obligation
under any contract to which the Company or any Affiliate of the Company is a
party or under any Law.
2.24 Patents and Intellectual Property Rights.
----------------------------------------
(a) Schedule 2.24 contains a complete list of all trademark
-------------
rights, trademark applications, trademark registrations, service marks, trade
names and brand names, copyright registrations and copyright applications,
letters patent, patent applications, logos and licenses (except for licenses
whereby the Company licenses software not material to the Business from third
parties or the amount of the obligation for such license is less than $20,000 in
any one year) used in the Business including the expiration dates, if any, of
each such intellectual property right.
(b) The intellectual property rights identified pursuant to
subparagraph (a) above, any other processes, know-how and related know-how,
formulae, trade secrets, inventions, discoveries, improvements, blueprints,
specifications, drawings, designs, shop and royalty rights and other similar
types of proprietary intellectual property, including those with respect to zero
discharge/recycle systems, DENSE Sludge technology, ColOX(TM) advanced
biotechnology, absorption technology, TOXNOT sludge chemical complexation
technology, membrane separation technologies, hybrid dual-stage biooxidation
technology, selective ion exchange technology, biological metals absorption
process and microwave separation of oil-water sludges technology (collectively,
"Intellectual Property Rights") used in or applicable to the Business are not
the subject of any interference, opposition, reexamination or cancellation
proceeding. Schedule 2.24 identifies any Intellectual Property Right which is
-------------
used by the Company but not owned by the Company. The Company is not infringing
on any intellectual property rights of any other Person.
2.25 Benefit Plans.
-------------
(a) Benefit Plans; Company Plans. Schedule 2.25 discloses all
---------------------------- -------------
written and unwritten "employee benefit plans" within the meaning of Section
3(3) of the U.S. Employee
-17-
<PAGE>
Retirement Income Security Act of 1974, as amended, and the applicable rulings
and regulations thereunder ("ERISA"), and any other written and unwritten profit
sharing, pension, savings, deferred compensation, fringe benefit, insurance,
medical, medical reimbursement, life, disability, accident, post-retirement
health or welfare benefit, stock option, stock purchase, sick pay, vacation,
employment, severance, termination or other plan, agreement, contract, policy,
trust fund or arrangement (each, a "Benefit Plan"), whether or not funded and
whether or not terminated within six (6) years prior hereto, () maintained or
sponsored by the Company, or (i) with respect to which the Company (or DEI with
respect to the Company) has or may have Liability or is obligated to contribute,
or (ii) that otherwise covers any of the current or former employees of the
Company or its beneficiaries, or (i) as to which any such current or former
employees or their beneficiaries participated or were entitled to participate or
accrue or have accrued any rights thereunder (each, a "Company Plan").
Separately disclosed on Schedule 2.25 are (i) the 1996 incentive compensation
-------------
awards that the Company has made or intends to make prior to Closing under the
Company's Incentive Compensation Plan and profit sharing plan, (ii) the 1996
discretionary annual contribution that the Company has made or intends to make
to its 401(K) Plan, and (iii) the outstanding options under the Chester
Engineers 1996 Stock Option Plan.
(b) Company Group Matters; Funding. Neither the Company nor any
------------------------------
corporation that may be aggregated with the Company under Sections 414(b), (c),
(m) or (o) of the Code (the "Company Group") has any obligation to contribute to
or any direct or indirect Liability under or with respect to any Benefit Plan of
the type described in Sections 4063 and 4064 of ERISA or Section 413(c) of the
Code. The Company does not have any Liability, and after the Closing the
Company will not have any Liability, with respect to any Benefit Plan of any
other member of the Company Group, whether as a result of delinquent
contributions, distress terminations, fraudulent transfers, failure to pay
premiums to the Pension Benefit Guaranty Corporation (the "PBGC"), withdrawal
Liability or otherwise. No accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the Code) exists nor has any funding
waiver from the IRS been received or requested with respect to any Company Plan
or any Benefit Plan of any member of the Company Group and no excise or other
Tax is due or owing because of any failure to comply with the minimum funding
standards of the Code or ERISA with respect to any of such plans.
(c) Compliance. Each of the Company Plans and all related trusts,
----------
insurance contracts and funds have been created, maintained, funded and
administered in all respects in compliance with all applicable Laws and in
compliance with the plan document, trust agreement, insurance policy or other
writing creating the same or applicable thereto. No Company Plan is or is
proposed to be under audit or investigation, and no completed audit of any
Company Plan has resulted in the imposition of any Tax, fine or penalty.
(d) Qualified Plans. Schedule 2.25 discloses each Company Plan that
--------------- -------------
purports to be a qualified plan under Section 401(a) of the Code and exempt from
United States
-18-
<PAGE>
federal income Tax under Section 501(a) of the Code (a "Qualified Plan"). With
respect to each Qualified Plan, a determination letter (or opinion or
notification letter, if applicable) covering the U.S. Tax Reform Act of 1986 and
later Code changes for which the remedial amendment period has not closed has
been received from the IRS that such plan is qualified under Section 401(a) of
the Code and exempt from federal income Tax under Section 501(a) of the Code. No
Qualified Plan has been amended since the date of the most recent such letter.
No member of the Company Group, nor any fiduciary of any Qualified Plan, nor any
agent of any of the foregoing, has done anything that would adversely affect the
qualified status of a Qualified Plan or the qualified status of any related
trust.
(e) No Defined Benefit Plans. No Company Plan is a defined benefit
------------------------
plan within the meaning of Section 3(35) of ERISA (a "Defined Benefit Plan").
No Defined Benefit Plan sponsored or maintained by any member of the Company
Group has been terminated or partially terminated after September 1, 1974,
except as set forth on Schedule 2.25. Each Defined Benefit Plan identified as
-------------
terminated on Schedule 2.25 has met the requirement for standard termination of
-------------
single-employer plans contained in Section 4041(b) of ERISA. During the five
year period ending on the Closing Date, no member of the Company Group has
transferred a Defined Benefit Plan to a corporation that was not, at the time of
transfer, related to the transferor in any manner described in Sections 414(b),
(c), (m) or (o) of the Code.
(f) Multiemployer Plans. No Company Plan is a multiemployer plan
-------------------
within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA (a
"Multiemployer Plan"). No member of the Company Group has withdrawn from any
Multiemployer Plan or incurred any withdrawal Liability to or under any
Multiemployer Plan. No Company Plan covers any employees of any member of the
Company Group in any foreign country or territory.
(g) Prohibited Transactions; Fiduciary Duties; Post-Retirement
----------------------------------------------------------
Benefits. No prohibited transaction (within the meaning of Section 406 of ERISA
- --------
and Section 4975 of the Code) with respect to any Company Plan exists or has
occurred that could subject the Company to any Liability or Tax under Part 5 of
Title I of ERISA or Section 4975 of the Code. No member of the Company Group,
nor any administrator or fiduciary of any Company Plan, nor any agent of any of
the foregoing, has engaged in any transaction or acted or failed to act in a
manner that will subject the Company to any Liability for a breach of fiduciary
or other duty under ERISA or any other applicable Law. With the exception of
the requirements of Section 4980B of the Code and except as disclosed on
Schedule 2.25, no post-retirement benefits are provided under any Company Plan
- -------------
that is a welfare benefit plan as described in ERISA Section 3(1).
2.26 Customer/Supplier Relations. Except as set forth in Schedule
--------------------------- --------
2.26, (i) no single customer of the Company which accounted for more than 2% of
- ----
the total net sales of the Company for the twelve-month period ending on the
date hereof and (ii) no current supplier of the Company which accounted for more
than 2% of the total supplies purchased by the
-19-
<PAGE>
Company for the twelve-month period ending on February 28, 1997 (if such
suppliers could not be replaced by the Company at comparable cost) will
terminate, limit or materially reduce or modify its business relationship with
Company other than in the ordinary course of business. A list of all of the
customer contracts and agreements for the Company involving a customer's
obligation to the Company of more than $100,000 on the date hereof is set forth
on Schedule 2.26, with the contracts being an exception to the first sentence of
-------------
this Section being separately identified on Schedule 2.26.
-------------
2.27 Finder's Fees. Neither DEI nor the Company nor any of their
-------------
respective officers, directors or employees has employed any broker or finder or
incurred any Liability for any brokerage fees, commissions or finder's fees in
connection with the transactions contemplated herein, except fees payable to
Anthony F. Lisanti and Legg Mason. The Company has not paid and neither
Acquisition, its Affiliates nor the Company shall pay or be liable for the fees
of Anthony F. Lisanti or Legg Mason. Except as set forth in the immediately
preceding sentence, DEI has made no agreement and taken no other action which
might cause anyone to become entitled to a broker's fee or commission as a
result of the transactions contemplated hereunder.
2.28 Confidentiality Agreements. Schedule 2.28 sets forth a true,
-------------------------- -------------
correct and complete list of all confidentiality agreements to which Company is
a party, which were entered into within three (3) years prior to the date hereof
and which were entered into outside the ordinary course of business. All such
agreements are valid and binding agreements, enforceable in accordance with
their terms and are in full force and effect (i) subject to bankruptcy,
insolvency, reorganization, moratorium and other Laws now or hereafter in effect
relating to creditors' rights and (ii) except that the remedy of specific
performance and injunctive and other terms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The Company has performed all obligations
required to be performed by Company under such agreements and is not in breach
or default in any respect thereunder, and there has been no event which, with
the giving of notice or the lapse of time or both, would become a breach or
default thereunder.
2.29 Compliance with Environmental Laws. Except as provided in
----------------------------------
Schedule 2.29:
- -------------
(a) Compliance; No Liability. The Company has operated its Business
------------------------
and each parcel of Real Property in compliance with all applicable Environmental
Laws. The Company is not subject to any Liability, penalty or expense
(including legal fees) and will not hereafter suffer or incur any loss,
Liability, penalty or expense (including legal fees) by virtue of any violation
of any Environmental Law occurring prior to the Closing, any environmental
activity conducted on or with respect to any property at or prior to the Closing
or any environmental condition existing on or with respect to any property at or
prior to the Closing, in each case whether or not the Company permitted or
participated in such act or omission.
-20-
<PAGE>
"Environmental Law" means any applicable Law relating to public health and
safety or protection of the environment, including common law nuisance, property
damage and similar common law theories. Schedule 2.29 separately identifies any
-------------
actual or potential Liability to the Company in connection with the handling or
disposal of waste waters and any Regulated Materials in such waste waters.
(b) Treatment; CERCLIS. The Company has not treated, stored,
------------------
recycled or disposed of any Regulated Material on any real property except in
compliance with applicable Environmental Laws, and no other Person has treated,
stored, recycled or disposed of any Regulated Material on any part of the Real
Property except in compliance with applicable Environmental Laws. There has
been no release of, and there is not present any Regulated Material at, on or
under any Real Property. The Company has not transported any Regulated Material
or arranged for the transportation of any Regulated Material to any location
that is listed or proposed for listing on the National Priorities List pursuant
to Superfund, on CERCLIS or any other location that is the subject of federal,
state or local enforcement action or other investigation that may lead to claims
against the Company for cleanup costs, remedial action, damages to natural
resources, to other property or for personal injury including claims under
Superfund. None of the Real Property is listed or proposed for listing on the
National Priorities List pursuant to Superfund, CERCLIS or any state or local
list of sites requiring investigation or cleanup. "Regulated Material" means
any hazardous substance as defined by any Environmental Law and any other
material regulated by any applicable Environmental Law, including,
polychlorinated biphenyls, petroleum, petroleum-related material, crude oil or
any fraction thereof. "CERCLIS" means the Comprehensive Environmental Response
Compensation Liability Information System List pursuant to Superfund.
"Superfund" means the U.S. Comprehensive Environmental Response Compensation and
Liability Act of 1980, 42 U.S.C. Sections 6901 et seq., as amended.
-- ----
(c) Notices; Existing Claims; Certain Regulated Materials; Storage
--------------------------------------------------------------
Tanks. The Company has not received any request for information, notice of
- -----
claim, demand or other notification that it is or may be potentially responsible
with respect to any investigation, abatement or cleanup of any threatened or
actual release of any Regulated Material. The Company has not transported any
Regulated Material for recycling, treatment, disposal, other handling or
otherwise other than in compliance with applicable law. There has been no past,
and there is no pending or contemplated, claim by the Company under any
Environmental Law or Laws based on actions of others that may have impacted on
the Real Property, and the Company has not entered into any agreement with any
Person regarding any Environmental Law, remedial action or other environmental
Liability or expense. All storage tanks located on the Real Property and
installed thereon by the Company, whether underground or aboveground are in
sound condition and are not leaking and have not leaked, except as disclosed on
Schedule 2.29.
- -------------
2.30 Disclosure. None of the representations or warranties of DEI or
----------
the Company contained herein and none of the information contained in the
Schedules referred to in
-21-
<PAGE>
Article II is false or misleading in any material respect or omits to state a
- ----------
fact herein or therein necessary to make the statements herein or therein not
misleading in any material respect.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUISITION
---------------------------------------------
Acquisition represents and warrants to DEI as follows:
3.01 Title to USF Shares. Upon delivery of the USF Shares at Closing
-------------------
against receipt of the Chester Shares, DEI shall acquire legal and valid title
to the USF Shares free of any Encumbrances.
3.02 Securities. Acquisition is an "accredited investor" as such
----------
term is defined in Rule 501 of Regulation D of the Securities Act. Acquisition
understands that the Chester Shares have not been registered under the
Securities Act or any state securities law by reason of specific exemptions
under the provisions thereof which depend in part upon the other representations
and warranties made by Acquisition in this Agreement. Acquisition understands
that the Chester Shares are "restricted securities" under the Securities Act.
Acquisition is acquiring the Chester Shares for investment only and not with a
view toward or in connection with any resale or distribution of such shares.
Acquisition has no present intention of making any sale, gift, transfer or other
disposition of such shares or any interest therein, except that Acquisition may
pledge the Chester Shares to its lender or transfer the Chester Shares to an
Affiliate of Acquisition.
3.03 Organization and Qualification. Acquisition is a corporation
------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Acquisition has all requisite corporate power and authority
to (i) own, lease, operate and use its properties and assets as now owned,
leased, operated and used and conduct the business of Acquisition as currently
conducted and (ii) make, execute and deliver this Agreement and perform its
obligations hereunder without the need for the consent of any other Person.
3.04 Shares; Capitalization. The authorized capital stock of USF
----------------------
consists of (i) 150,000,000 shares of USF Common Stock, of which 71,382,053 were
issued and outstanding as of January 13, 1997 and 26,491,496 were reserved for
issuance on exercise of outstanding warrants or options or upon conversion of
outstanding convertible securities, or otherwise, as of January 13, 1997; and
(ii) 3,000,000 shares of Preferred Stock, $0.10 par value, subject to a
Certificate of Designations of the Series A Voting Cumulative Convertible
Preferred Stock, none of which is issued and outstanding. On the Closing Date,
the USF Shares will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, USF's
Certificate of Incorporation or By-Laws or any agreement to which Acquisition is
a party or is bound.
-22-
<PAGE>
3.05 Authorization and Enforceability. The execution, delivery and
--------------------------------
performance by Acquisition of this Agreement has been duly authorized by all
necessary action on its part. The execution, delivery and performance by USF of
each Other Agreement to which USF is a party has been duly authorized by all
necessary action on its part. This Agreement has been duly executed and
delivered by and constitutes, and each Other Agreement which is to be executed
and delivered by USF and Acquisition, when executed and delivered by USF and
Acquisition, shall constitute the legal, valid and binding obligation of USF and
Acquisition.
3.06 No Violation of Laws or Agreements. None of the execution and
----------------------------------
delivery of this Agreement or any Other Agreements, the consummation of the
transactions contemplated hereby or thereby or the compliance with or
fulfillment of the terms, conditions and provisions hereof or thereof by
Acquisition, nor the execution and delivery of any Other Agreement, the
consummation of the transactions contemplated thereby or the compliance with or
fulfillment of the terms, conditions and provisions thereof by USF, will: (i)
contravene any provision of the charter or bylaws of USF or Acquisition, (ii)
conflict with, result in a breach of or constitute a default or an event of
default (or an event which would, with the passage of time or the giving of
notice or both, constitute a default) under any term, condition or provision of,
or results in the termination or loss of any right (or give others the right to
cause such a termination or loss) under, any license, franchise, indenture,
mortgage or any other contract, agreement or instrument to which USF or
Acquisition is a party or by which one or more of them or any of their assets
may be bound or affected, (iii) violate any judgment or order of any
Governmental Body to which USF or Acquisition is subject, (iv) result in the
creation or imposition of any Encumbrance upon the USF Shares or gives to others
any interests or rights therein, or (v) result in the maturation or acceleration
of any Liability or obligation of USF or Acquisition (or gives others the right
to cause such a maturation or acceleration). Except as may be required by the
HSR Act and the Exchange Act (as defined below), the registration of the USF
Shares with the SEC and the listing of the USF Shares on the New York Stock
Exchange, no consent, approval, declaration or authorization of, or registration
or filing with, any Person (including any Governmental Body) is required in
connection with the execution and delivery by Acquisition of this Agreement and
the Other Agreements and the consummation of the transactions contemplated
hereby and thereby by Acquisition or the execution and delivery by USF of the
Other Agreements to which it is a party and the consummation of the transactions
contemplated thereby by USF.
3.07 SEC Reports. Acquisition has delivered to DEI a copy of each
-----------
report, proxy statement or information statement filed by it since December 31,
1995 and prior to the date hereof, each in the form (including exhibits and any
amendments thereto and all documents incorporated by reference therein) filed
with the Securities and Exchange Commission ("SEC") under the U.S. Securities
Exchange Act of 1934, as amended (the "Exchange Act") and a copy of Amendment
No. 3 to Registration Statement No. 333-07763, as filed by USF with the SEC.
3.08 Finder's Fees. Neither Acquisition, its Affiliates nor any of
-------------
its respective
-23-
<PAGE>
officers, directors or employees has employed any broker or finder or incurred
any Liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated herein. Neither Acquisition nor its
Affiliates has made an agreement or taken any other action which might cause
anyone to become entitled to a broker's fee or commission as a result of the
transactions contemplated hereunder.
3.09 No Agreements with Management. As of the date hereof, neither
-----------------------------
Acquisition nor any of its Affiliates has any agreements with any employee of
the Company.
3.10 Disclosure. None of the representations or warranties of
----------
Acquisition contained herein is false or misleading in any material respect or
omits to state a fact herein or therein necessary to make the statements herein
or therein not misleading in any material respect.
ARTICLE IV
COVENANTS OF DEI AND THE COMPANY
---------------------------------
4.01 Conduct of Business Pending Closing. During the period
-----------------------------------
commencing on the date of this Agreement and ending on the earlier to occur of
(i) the Closing or (ii) the termination of this Agreement (the "Interim
Period"), and unless Acquisition shall otherwise consent or agree in writing and
without limiting any other provision herein, the Company shall, and DEI shall
cause the Company to, conduct its affairs and the affairs of its Subsidiaries as
follows:
(a) Ordinary Course; Compliance. The Business shall be
---------------------------
conducted in the ordinary course and substantially consistent with past
practice. The Company and each Subsidiary shall use reasonable best efforts to
maintain its property, equipment and other assets consistent with past practice
and shall comply timely in all material respects with the provisions of all its
leases, agreements, contracts and commitments in connection with the Business or
its assets.
(b) Preservation of Business. During the Interim Period, the
------------------------
Company and each Subsidiary shall use reasonable efforts to preserve its
business organization intact, keep available the services of its present
engineers and other employees and preserve the goodwill of its suppliers,
customers and others having business relations with it.
(c) Prohibited Transactions. During the Interim Period, the
-----------------------
Company shall not, nor shall DEI cause the Company or any Subsidiary to:
(i) Amend its charter documents or bylaws;
(ii) Enter into any contract or commitment the performance of
which may
-24-
<PAGE>
extend beyond the Closing, except those contracts or commitments made in
the ordinary course of business, the terms of which are consistent with
past practice, except that the Company may confirm in writing its
agreements regarding the joint ventures identified on Schedule 2.05;
-------------
(iii) Enter into any employment or consulting contract or
similar arrangement that is not terminable at will, without penalty or
continuing obligation; provided, however, that the Company may permit to be
-------- -------
extended employment agreements during the Interim Period under the same
terms and conditions thereof for a period not to exceed one year;
(iv) Fail to pay all Taxes when due (as any such due date may
be extended) or fail to pay when due any other Liability or charge
inconsistent with past practice;
(v) Make, change or revoke any Tax election or make any
agreement or settlement with any taxing authority that relates to the
period after Closing;
(vi) Create any Encumbrance, other than Permitted Encumbrances,
on any assets, tangible or intangible;
(vii) Declare, set aside or pay any dividend or other
distribution (whether in cash, stock, property or any combination thereof)
in respect of the Chester Common Stock or any securities of any Subsidiary,
or directly or indirectly issue, sell, redeem, purchase or otherwise
acquire or dispose of, or create any Securities Rights with respect to, the
Chester Common Stock or any securities of any Subsidiary or any rights to
purchase the Chester Common Stock or any securities of any Subsidiary or
securities convertible into or exchangeable for the Chester Common Stock or
any securities of any Subsidiary;
(viii) Except as set forth in Schedule 4.01, increase any of the
-------------
salaries or other compensation payable or to become payable to, or make any
advance or loan to, any employee, or make any increase in, or any addition
to, other benefits (including any Company Benefit Plan) to which any
employee may be entitled, or make any payments to or in respect of any
Company Benefit Plan or any change in any Company Benefit Plan;
(ix) Except as set forth in Schedule 4.01, make or authorize
-------------
any single capital expenditure in excess of $75,000 or capital expenditures
in excess of $200,000 in the aggregate or acquire (by merger, consolidation
or acquisition of stock or assets) any corporation, partnership or other
business organization or division thereof, or make any investment either by
purchase of stock or securities, contribute capital, make any loan or
advance of funds to any Person or, except in the ordinary course of
business, purchase
-25-
<PAGE>
any property or assets;
(x) Cancel or waive any right or cancel or waive any debts or
claims of value or against any Related Party in excess of $50,000 in the
aggregate or terminate or modify (through course of performance or
otherwise) any Contract (other than terminations through performance in
accordance with its terms), except in the ordinary course of business;
(xi) Sell, transfer or otherwise dispose of any assets, except
sales of assets (other than inventory) in the ordinary course of business
not in excess of $25,000; sell, transfer or otherwise dispose of any assets
for less than fair market value; or purchase any assets for greater than
fair market value; or
(xii) Except as set forth in Schedule 4.01, make any payment,
-------------
loan or advance of any amount to or in respect of, or any sale, transfer or
lease of any properties or assets (whether real, personal or mixed,
tangible or intangible) to, or consummate any transaction or create any
agreement or arrangement with, any Related Party, except for compensation
to the officers and employees at rates not exceeding the rates of
compensation existing on the date hereof and as contemplated by this
Agreement.
4.02 Access, Information and Documents. During the Interim Period,
---------------------------------
DEI and the Company shall give to Acquisition and to its employees and
representatives (including independent public accountants, attorneys,
environmental consultants and engineers) access during normal business hours to
all of the properties (including Real Property for purposes of an environmental
assessment), books, Tax returns, contracts, commitments, records, officers,
personnel and accountants (including independent public accountants) of the
Company and the Subsidiaries and shall furnish to Acquisition all such documents
and copies of documents and all information with respect to the affairs of
Company and the Subsidiaries as Acquisition may reasonably request.
4.03 Preserve Accuracy of Representations and Warranties. DEI shall
---------------------------------------------------
use its reasonable efforts to ensure that the Company conducts, and the Company
shall use its reasonable best efforts to conduct, the Business in such a manner
that, at the Closing, the representations and warranties of DEI and the Company
contained in this Agreement shall be true and correct in all material respects
as though such representations and warranties were made on, as of, and with
reference to such date. DEI and Company shall each promptly notify Acquisition
of any lawsuit, claim, proceeding or investigation that may be threatened,
brought, asserted or commenced after the date hereof against the Company or any
Subsidiary. DEI and Company shall each notify Acquisition of any facts or
circumstances as to which it obtains knowledge that cause any representation and
warranty contained in Article II of this Agreement or relating to any matters
required to be set forth in the Schedules hereto to be untrue.
-26-
<PAGE>
4.04 Filings and Authorizations. As promptly as practicable, each of
--------------------------
the Company and DEI shall make, or cause to be made, such filings and
submissions under law, rules and regulations applicable to it, including the HSR
Act, as may be required for it to consummate the purchase and transfer of the
Chester Shares hereunder, and shall use its best efforts to obtain, or cause to
be obtained, all authorizations, approvals, consents and waivers from all
Governmental Bodies necessary to be obtained by it.
4.05 Notice of Changes. During the Interim Period, DEI and the
-----------------
Company shall give Acquisition prompt written notice of any material change or
inaccuracies in any data previously given or made available to Acquisition
pursuant to this Agreement.
4.06 Section 338(h)(10) Election; Certain Tax Returns. DEI and DQE
------------------------------------------------
shall join with USF in the timely filing of a joint election pursuant to Section
338(h)(10) of the Code (the "Section 338(h)(10) Election") under which, for
federal (and state, where permissible) income tax purposes, the sale of the
Chester Shares and the shares of the corporate Subsidiaries will be treated as
if it were a sale of all of the assets of the Company and the corporate
Subsidiaries in a single transaction on the Closing Date, with the Company and
the corporate Subsidiaries being treated as members of DQE's consolidated group
with respect to such sale. DEI, DQE and Acquisition agree to cooperate fully
in order to make the Section 338(h)(10) Election valid, including, but not
limited to, the filing of IRS Form 8023 (and any state equivalent) and any
accompanying statements or schedules that may be required on a timely basis. The
allocation of Acquisition's "adjusted grossed-up basis" among the tangible and
intangible assets of the Company and the corporate Subsidiaries shall be in
accordance with Schedule 4.06 hereto. Such allocation shall be used by DQE,
-------------
DEI, Acquisition, and the Company and the corporate Subsidiaries for purposes of
allocating the "deemed selling price", and DQE, DEI, USF, and the Company shall
not file any tax return or schedule that is inconsistent with such allocation.
DQE and DEI shall be responsible for and shall indemnify and hold USF,
Acquisition and the Company and the Subsidiaries harmless for any Taxes that
arise from the deemed sale of the assets of the Company and the Subsidiaries
pursuant to the Section 338(h)(10) Election, including, but not limited to,
state and local income or franchise taxes.
4.07 Certain Additional Tax Matters.
------------------------------
(a) Tax Returns and Payment of Taxes for Periods Through the
--------------------------------------------------------
Closing Date. DQE and DEI shall cause DQE to include the income of the Company
- ------------
and each Subsidiary on DQE's consolidated federal income Tax Return for all
periods up to and including the Closing Date and will pay any Tax due thereon.
DQE and DEI shall be responsible for and pay all Taxes of the Company and each
Subsidiary up to and including the Closing Date, including any Taxes
attributable to the audits of the Company's federal income Tax returns currently
in process. All Taxable items of the Company and each Subsidiary shall be
apportioned for the period of time up to and including the Closing Date and the
period of time
-27-
<PAGE>
after the Closing Date by closing the books of Company and each Subsidiary as of
the close of business on the Closing Date. All Tax sharing arrangements between
DQE or DEI (or any Affiliate of DQE) and the Company and any Subsidiary ("Tax
Sharing Arrangements") shall be terminated on or prior to Closing with no
Liability from the Company or any Subsidiary to DQE or DEI or any Affiliate of
the Company and each Subsidiary is hereby released (and DEI shall cause the
Company and each Subsidiary to be released) from any and all obligations to DQE
or DEI (and any Affiliate of DEI) for any and all Taxes regardless of when such
taxes have or shall have accrued. DQE and DEI shall indemnify and hold harmless
USF, Acquisition, the Company and each Subsidiary from Tax Liabilities for all
periods through the Closing Date and from any Tax Liabilities of DEI and DQE or
any of their past or current subsidiaries and Affiliates for all taxable periods
that end on or before the Closing Date or that include the Closing Date with
respect to which the Company may be liable under Treas. Reg. (S) 1.1502-6 or
similar foreign, state, local or other governmental statutes, regulations or
administrative procedures. DEI shall be entitled to all income tax refunds for
all taxable periods ending on or before the Closing Date and shall be entitled
to deal directly with all taxing authorities and make all decisions with respect
to audits for all taxable periods of the Company and each Subsidiary ending on
or before the Closing Date.
(b) Tax Reimbursement Amount. Notwithstanding the foregoing, the
------------------------
Company shall pay to DEI an amount equal to thirty (35%) percent of the pretax
income of the Company and the Subsidiaries for the period beginning January 1,
1997 and ending on the Closing Date (the "Tax Reimbursement Amount"). At the
Closing Date, the Company shall deliver to DEI an amount equal to the parties'
good faith estimate of the Tax Reimbursement Amount. Within 45 days after the
Closing Date, the parties shall reach definitive agreement on the Tax
Reimbursement Amount and settle on the difference between such definitive amount
and the estimated amount paid at Closing. Taxable income shall be determined in
a manner consistent with the 1995 federal income tax return for the Company and
the Subsidiaries (computed on a stand-alone basis). The parties hereto agree
that payment of the Tax Reimbursement Amount is based on a compromise for
certain pre-Closing Taxes and is not intended to be a computation of actual
Taxes owed or accrued by the Company prior to or at the Closing Date.
(c) Mutual Cooperation. Acquisition, DQE and DEI shall each provide
------------------
the other, and USF shall cause the Company and each Subsidiary to provide and
DQE and DEI, with such assistance as may reasonably be requested by any of them
in connection with the preparation of any Tax Return, any Tax audit, or any
judicial or administrative proceedings relating to any Tax, and each will retain
and provide the other with any records or information that may be relevant to
such Tax Return, Tax audit, proceeding or determination. The party requesting
assistance hereunder shall reimburse the other for direct expenses incurred in
providing such assistance.
4.08 Lease with PVL. DEI shall cause the lease between the Company
--------------
and PVL
-28-
<PAGE>
to be amended to permit a six-month right of termination at any time by the
Company subject to a termination payment by the Company equal to the product
obtained by multiplying $250,000 by a fraction, the numerator of which is the
number of days between the date of termination of the lease and the date of
expiration of such lease by its terms (without renewal or extension), and the
denominator of which is the number of days between the Closing Date and the date
of expiration of such lease by its terms (without renewal or extension).
4.09 Acquisition Proposals. Neither DEI, the Company nor any
---------------------
Subsidiary shall (nor shall DEI permit any of its Affiliates to) directly or
indirectly, solicit, initiate or encourage any inquiries or the making of any
proposals from, engage or participate in any negotiations or discussions with,
provide any confidential information or data to, or enter into (or authorize)
any agreement or agreement in principle with any Person or announce any
intention to do any of the foregoing, with respect to any offer or proposal to
acquire all or any substantial part of the assets, properties, or the Business
or the Chester Shares, whether by merger, purchase of capital stock or assets or
otherwise. Notwithstanding the foregoing, if this Agreement is terminated by
Acquisition because of an alleged default hereunder by DEI or the Company, then
this Section 4.09 shall remain in effect and shall thereafter terminate only
------------
upon receipt by Acquisition of the Liquidated Damages or the date that
Acquisition receives notice from a bank or trust company who is not engaged in
any material business with any of DQE, USF or their Affiliates that such bank or
trust company is holding in escrow an amount of readily available federal funds
equal to the Liquidated Damages, and confirmation that such funds will not be
released from escrow until such bank or trust company receives joint
instructions to do so from Acquisition (or any of its Affiliates) and DEI or a
final non-appealable order from the Arbitrators (as defined in Section 7.05).
------------
4.10 Assurance. At the Closing, DEI shall deliver or cause to be
---------
delivered to Acquisition an unconditional guarantee of payment and performance
(and not collection) by PVL of the indemnification obligations of DEI pursuant
to Section 8.02 hereof (which guarantee is sometimes referred to herein as the
------------
"PVL Guarantee"), secured by a first and only mortgage on the property known as
411 Seventh Avenue, Pittsburgh, Pennsylvania ("PVL Mortgage"). The PVL
Guarantee and the PVL Mortgage shall be standard commercial mortgage and
guarantee documents of a type customarily used in the commercial middle-market
banking industry providing to Acquisition customary remedies under Pennsylvania
law, without offset or condition, for a transaction of the size and nature
contemplated herein in forms reasonably acceptable to Acquisition; provided,
--------
however, that the PVL Mortgage shall not provide for escrows or approvals over
- -------
any leases or modifications thereto, and provided, further, that during the term
-------- -------
of the PVL Mortgage all material transactions between PVL and any Affiliate of
PVL with respect to the property subject to the PVL Mortgage shall be at arms'
length. The PVL Mortgage shall be released by Acquisition on the second
anniversary of the Closing (the period commencing on the Closing and ending on
the second anniversary thereof is sometimes referred to herein as the
"Indemnification Period"). At any time and from time to time during the
Indemnification Period, DEI may, upon written notice to Acquisition, cause an
alternative
-29-
<PAGE>
method of assuring adequate resources of DEI (in an amount not less than $26
million of unencumbered assets) to satisfy any obligations of DEI pursuant to
Section 8.02 of the Agreement during the Indemnification Period to be
- ------------
implemented, which shall be subject to Acquisition's prior written approval
(which approval shall not be unreasonably withheld, conditioned or delayed), in
which event, upon implementation of such alternative method, Acquisition shall
cause the PVL Guarantee to be canceled and the PVL Mortgage to be satisfied.
4.11 Accounts Receivable. Within 10 business days after the date
-------------------
180 days after the Closing Date, Acquisition may at its sole discretion require
DEI to purchase (with all rights of collection) from the Company for cash on
such 10th business day any account receivable existing on the Closing Date which
is not collected within 180 days after the Closing Date, for a purchase price
equal to the stated amount thereof; provided, however, that as a condition to
-----------------
such obligation, (i) the Company shall not have made any formal or informal
arrangement whatsoever with such customer, including, without limitation,
arrangements involving offset, recoupment, additional products or services or
barter directly or indirectly related to such uncollected receivable, (ii) the
Company shall have applied all cash receipts from such customer against the
invoice specified in the payment, and if no invoice is specified, then to the
oldest outstanding invoice, and (iii) the Company shall have made its best
efforts to collect such accounts (without having to file suit against any
account debtor).
4.12 Employee/Employee Benefit Matters. The Company shall cause its
---------------------------------
committee designated by the Board of Directors to administer the Chester
Engineers 1996 Stock Option Plan (the "Chester Option Plan") to exercise its
authority under Section 6.03(e) of the Chester Option Plan to specify that all
Participants in the Chester Option Plan shall (i) be granted replacement Non-
Qualified Stock Options to purchase shares of USF Common Stock ("Reset Options")
subject to the unexercised portion of the vested and non-vested Options held by
such Participants (as defined in the Chester Option Plan) under, and in
accordance with, the Chester Option Plan, and (ii) receive such other
consideration as provided in Section 6.03 of the Chester Option Plan as shall be
determined by USF. Each Reset Option shall (i) have a purchase price per share
of USF Common Stock equal to the USF Shares Average Price; (ii) expire on the
stated expiration date of the original Option; and (iii) otherwise meet all of
the requirements of Section 6.03(e) of the Chester Option Plan which shall be
deemed to be incorporated by reference herein.
4.13. Resale of USF Shares. DEI (and any assignee of the USF Shares)
--------------------
shall not sell the USF Shares in the public market, unless it does so by or
through Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") or such
other investment banking firm as may be reasonably satisfactory to DEI, and,
further, DEI shall sell the USF Shares in the public market only in such
quantities and at such times as DLJ or such investment banking firm reasonably
believes will not be materially disruptive to the market for the USF Shares.
Acquisition shall pay for any sales commissions in excess five cents per share
on such sales through such investment banking firm. DEI shall not transfer the
USF Shares (other than in the public market) to any Person without first
requiring that Person to be bound to USF by the provisions of this Section
-------
-30-
<PAGE>
4.13.
- ----
ARTICLE V
COVENANTS OF ACQUISITION
------------------------
5.01 Filings and Authorizations. As promptly as practicable,
--------------------------
Acquisition shall make, or cause to be made, such filings and submissions under
law, rules and regulations applicable to it, including the HSR Act, as may be
required for it to consummate the purchase and transfer of USF Shares hereunder,
and shall use its best efforts to obtain, or cause to be obtained, all
authorizations, approvals, consents and waivers from all Governmental Bodies
necessary to be obtained by it.
5.02 Notice of Changes. During the Interim Period, Acquisition
-----------------
shall deliver to DEI copies of any material public disclosures made by USF.
5.03 Merger. Immediately after Closing, Acquisition shall cause the
------
Company to merge into Acquisition (or an Affiliate of Acquisition), or
Acquisition (or an Affiliate of Acquisition), shall merge into the Company,
subject to the determination by USF in its judgment that such merger shall not
adversely affect any material right of the Company, cause any additional
Liability to the Company, accelerate any then existing Liability of the Company,
require any significant expenditures by the Company, adversely affect any then
existing contract to which the Company is a party or license held by the Company
otherwise have a material adverse effect on the Company, or cause any
significant Tax liability to USF or its Affiliates.
ARTICLE VI
CONDITIONS TO CLOSING
---------------------
6.01 Mutual Conditions Precedent. The obligations of Acquisition and
---------------------------
DEI to proceed with the Closing under this Agreement are subject to the
fulfillment prior to the Closing of the following conditions:
(a) Litigation. No order of any Governmental Body shall be
----------
in effect that enjoins, restrains or prohibits the transactions contemplated
hereby or that would limit or adversely affect Acquisition's ownership of the
Chester Shares or DEI's ownership of the USF Shares, and there shall not have
been threatened, nor shall there be pending, any action or proceeding by or
before any Governmental Body challenging any of the transactions contemplated by
this Agreement or the Other Agreements or seeking monetary relief by reason of
the consummation of such transactions.
(b) Filings. The filing and waiting period requirements of any
-------
applicable federal or state law or Governmental Body relating to the
consummation of the transactions contemplated by this Agreement and the Other
Agreements shall have been complied with.
-31-
<PAGE>
(c) Listing on NYSE. The USF Shares to be issued pursuant
---------------
hereto shall have been authorized for listing on the NYSE, subject to official
notice of issuance.
(d) S-4 Registration of USF Shares. USF shall have filed a
------------------------------
registration statement with the SEC on Form S-4 to register, among others, the
USF Shares and such registration statement shall have been declared effective
and no stop order shall be in effect with respect thereto. USF shall consent in
writing to allow DEI to use such registration statement in connection with the
resale of the USF Shares in the public market.
6.02 Conditions Precedent to Obligations of Acquisition. The
--------------------------------------------------
obligation of Acquisition to proceed with the Closing under this Agreement is
subject to the fulfillment prior to or at Closing of the following conditions
(any one or more of which may be waived in whole or in part by Acquisition at
Acquisition's option):
(a) Accuracy of Representations and Warranties. Each of the
------------------------------------------
representations and warranties of DEI and the Company contained in Article II of
this Agreement shall be true and correct in all material respects on and as of
the Closing Date, with the same force and effect as though such representations
and warranties had been made on, as of and with reference to such date;
provided, however, that this Section 6.02(a) shall not be a condition to
- -------- ------- ---------------
Acquisition's obligations to close hereunder if DEI indemnifies Acquisition for
the failure to be true of any of the representations and warranties as of the
Closing Date.
(b) Performance and Compliance. DEI and the Company shall
--------------------------
each have performed in all material respects all of the covenants and complied
in all material respects with all of the provisions required by this Agreement
to be performed or complied with by it on or before the Closing.
(c) No Material Adverse Change. Between the date hereof and the
--------------------------
Closing Date, there shall have been no material adverse change in the financial
condition, assets, Liabilities, net worth, Business or prospects of the Company
or any Subsidiary, and no event or condition shall have occurred or exist that
might be expected to cause such a change in the future.
(d) Closing Documents. Acquisition shall have received the
-----------------
deliveries referred to in Section 1.06(a).
---------------
(e) Estoppel Certificates. Acquisition shall have received an
---------------------
estoppel certificate in form and substance satisfactory to Acquisition from PVL,
and the Company shall permit Acquisition to use Acquisition's best efforts to
obtain estoppel certificates from each of the other lessors of the leases
identified in Schedule 2.19 (receipt of such other estoppel certificates not
-------------
being a condition to Closing hereunder).
-32-
<PAGE>
(f) Consents. The consents set forth in Schedule 2.07 shall
-------- -------------
have been obtained; provided, however, that this Section 6.02(f) shall not be a
-------- ------- ---------------
condition to Acquisition's obligations to close hereunder if DEI indemnifies
Acquisition for the failure to obtain such consents.
(g) Lease with PVL. The terms of the lease between the
---------------
Company and PVL shall have been amended in the manner contemplated by Section
-------
4.08.
- ----
(h) Termination Agreement. All Tax Sharing Arrangements shall
---------------------
have been completely terminated with no payments by or continuing Liability of
the Company as a result of such termination, and evidence of such termination
by DEI and DQE shall be delivered to Acquisition.
(i) Absence of Debt. The Company shall have no Liabilities of
---------------
any kind to any Related Party, except as expressly provided herein, in any
Schedule or in any Other Agreement, and the Company shall have no Liabilities to
any other Person for borrowed money, except as disclosed on Schedule 6.02(i).
----------------
(j) Chrysler de Mexico. The Company shall have paid to USF
------------------
in cash an amount equal to $445,517.85 and shall have recorded such payment in
its pre-Closing financial accounting records as a loss on its contract with
Chrysler de Mexico, substantially in accordance with that certain letter dated
January 3, 1996 to John Lucey from Alan Ellingson, as annotated by USF and
delivered by USF to the Company.
(k) Inactive Subsidiaries. All of the equity and other
---------------------
interests in each Inactive Subsidiary shall have been transferred and assigned
to DEI with no future Liability or Security Rights with respect thereto
remaining with the Company.
(l) DQE, Inc. Certificate. Acquisition shall have received a
---------------------
duly executed certificate of DQE, Inc. in the form attached as Exhibit C.
---------
(m) NJ-ISRA. The Company shall have obtained a letter of Non-
-------
Applicability with respect to its facility located in New Jersey under the New
Jersey Industrial Site Recovery Act (PL 1993, ch. 39).
6.03 Conditions Precedent to the Obligations of DEI. The
----------------------------------------------
obligation of DEI to proceed with the Closing hereunder is subject to the
fulfillment prior to or at Closing of the following conditions (any one or
more of which may be waived in whole or in part by DEI at DEI's option):
(a) Accuracy of Representations and Warranties. Each of the
------------------------------------------
-33-
<PAGE>
representations and warranties of Acquisition contained in Article III of this
Agreement shall be true and correct in all material respects on, as of, and with
reference to the Closing Date, with the same force and effect as though such
representations and warranties had been made on, as of and with reference to
such date, except with respect to Section 3.04 concerning the number of
------------
outstanding and reserved shares of stock, which number is likely to fluctuate
prior to Closing.
(b) Performance and Compliance. Acquisition shall have
--------------------------
performed in all material respects all of the covenants and complied in all
material respects with all of the provisions required by this Agreement to be
performed or complied with by it on or before the Closing. USF shall have
performed in all material respects all of the covenants and complied in all
material respects with all of the provisions required by the Other Agreements to
which it is a party to be performed or complied with by it on or before Closing.
(c) Closing Documents. DEI shall have received the deliveries
-----------------
referred to in Section 1.06(b).
---------------
ARTICLE VII
CERTAIN ADDITIONAL COVENANTS AND AGREEMENTS
-------------------------------------------
7.01 Costs and Expenses. Acquisition and DEI shall each pay all
------------------
their own expenses incurred in connection with this Agreement and the
transactions contemplated hereby, including, but not limited to, all accounting,
legal and appraisal fees and settlement charges. DEI shall pay all such costs
and expenses of the Company and the Subsidiaries.
7.02 Confidentiality. In connection with this Agreement, each party
---------------
hereto has furnished and will furnish to the other parties confidential
information concerning its business and financial condition. Each party shall,
and shall cause its employees, agents, accountants, attorneys and investment
advisors to, maintain the confidentiality of such information received from the
other parties and shall not use such information for any purpose except in
furtherance of the transactions contemplated hereby. In the event of a
termination of this Agreement, upon written request of a party, the other
parties shall return or destroy all copies of written confidential information
received from such party, whether pursuant to this Agreement or otherwise, and
all documents prepared by them which contain such information.
7.03 Publicity. No party hereto shall issue any press release or
---------
make any public announcements to any Person the existence of, or any matter with
respect to, this Agreement, the Other Agreements or the transactions
contemplated hereby or thereby without the express prior written consent of the
other parties hereto, except that Acquisition shall be permitted to complete its
due diligence investigation of the Company and the Subsidiaries, the parties
shall make the required filing under the HSR Act, the filings to register the
USF Shares, DEI may obtain the consents identified on Schedule 2.07, USF may
-------------
obtain listing approval for the USF Shares and the parties may consult with
their outside advisers in connection herewith;
-34-
<PAGE>
provided, however, that either party (or any Affiliate thereof) may issue a
- -------- -------
press release, make any public statement or make a public disclosure regarding
the existence of, or any matter with respect to, this Agreement, the Other
Agreements or the transactions contemplated hereby without the prior written
consent of the other party if USF (or any Affiliate of USF) is not identified as
the purchaser of the Company. Notwithstanding the foregoing, either party may
make such other public disclosure as may be required by applicable law based on
advice of counsel that such disclosure is necessary in order to avoid material
violation of such law, subject to the prior reasonable approval of the content
of such disclosure by the other parties hereto. Discussions with analysts or the
like shall not constitute a breach hereof. This Section shall survive
termination hereof or Closing hereunder.
7.04 Further Assurances. DEI and Acquisition shall, respectively,
------------------
at any time and from time to time on and after the Closing Date, upon request by
Acquisition or DEI, as the case may be and without further consideration, take
or cause to be taken such actions and execute, acknowledge and deliver, or cause
to be executed, acknowledged and delivered, such documents as may be convenient
or necessary to better convey the Chester Shares to Acquisition or to issue or
deliver the USF Shares to DEI.
7.05 Termination. This Agreement may be terminated at any time prior
-----------
to Closing by: (i) mutual consent of Acquisition, DEI and the Company; (ii)
Acquisition, if any of the conditions specified in Section 6.02 hereof shall not
------------
have been fulfilled by May 30, 1997 and shall not have been waived by
Acquisition; or (iii) DEI and if any of the conditions specified in Section
-------
6.03 hereof shall not have been fulfilled by May 30, 1997 and shall not have
- ----
been waived by DEI. In the event of termination of this Agreement on or prior
to May 30, 1997 by DEI or the Company, on the one hand, or Acquisition, on the
other hand, as a result of a material breach by the other party or parties
hereto, then the breaching party shall promptly pay to the non-breaching party
the sum of $2 million cash as liquidated damages, and not as a penalty, which
remedy shall be in lieu of any other remedy at law or in equity ("Liquidated
Damages"). A material breach by USF under any Other Agreement to which it is a
party shall be a material breach hereunder by Acquisition. The parties have
agreed to liquidated damages of $2 million, because they mutually believe that,
considering, among other things, the effect of such breach on the ability of DEI
to sell the Company and the damage to USF in the marketplace for a failed
transaction, the measure of their respective damages in the event of a breach
would be impossible to determine. Notwithstanding the foregoing, in the event
that this Agreement is terminated by one party hereto pursuant to clause (ii) or
(iii) of the first sentence of this Section solely as a result of a breach by
another party hereto of a representation or warranty of such other party as of a
date after the date of this Agreement, which breach could not have been
reasonably anticipated by such other party and was beyond the reasonable control
of such other party, then neither party shall have any liability to the other
with hereunder. Any dispute arising under this Section 7.05 shall be resolved
------------
by arbitration in accordance with the rules of the American Arbitration
Association in the City of Pittsburgh using three arbitrators, one being chosen
by DEI, one being chosen by Acquisition and the third being chosen by the other
two arbitrators (collectively, the
-35-
<PAGE>
"Arbitrators").
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
--------------------------------------------
8.01 Survival of Representations. All representations, warranties,
---------------------------
covenants and agreements made by any party in this Agreement or pursuant hereto
shall survive the Closing, but no claim may be made with respect to any breach
of any representation or warranty hereunder after the twenty-fourth (24th) month
anniversary of the Closing Date; provided, however, that claims for breach of
the representations and warranties contained in Sections 2.11, and 2.25 and
-------------- ----
claims for breach of any representations and warranties relating to title and
claims for breach of any representations and warranties contained in Section
-------
2.20 may be made at any time during the period of the applicable statute of
- ----
limitations relating to the subject matter thereof plus 90 days, the
representations and warranties contained in the Section 2.14(b) shall survive
---------------
without limitation as to time and the representations and warranties contained
in Section 2.13 shall not survive Closing. DEI and the Company acknowledge that
------------
their representations and warranties in Article II shall not be affected or
mitigated by any investigation conducted by Acquisition or its representatives
prior to the Closing or any knowledge of Acquisition. Similarly, Acquisition
acknowledges that its representations and warranties in Article III shall not be
affected or mitigated by any investigation conducted by DEI or its
representatives prior to the Closing.
8.02 Indemnification by DEI. Subject to Section 8.06 below, DEI
---------------------- ------------
shall indemnify, defend, save and hold Acquisition and its officers, directors,
employees, Affiliates and agents (including, after Closing, the Company and the
Subsidiaries) (collectively, "Acquisition Indemnitees") harmless from and
against all demands, claims, actions or causes of action, assessments, losses,
damages, deficiencies, Liabilities, costs and expenses, including reasonable
attorneys' fees, interest, penalties, and all reasonable amounts paid in
investigation, defense or settlement of any of the foregoing (collectively,
"Acquisition Damages") asserted against, imposed upon, resulting to or incurred
by any of the Acquisition Indemnitees, directly or indirectly, in connection
with, or arising out of, or resulting from (i) a breach of any of the
representations and warranties made by DEI or the Company in this Agreement,
except as set forth above in the first sentence of Section 8.01, (ii) a breach
------------
of any of the covenants or agreements made by DEI or the Company in or pursuant
to this Agreement and in any Other Agreement to which DEI or the Company is a
party, (iii) by virtue of the fact that the Company and the Subsidiaries are or
at any time were members of a controlled group or affiliated group of entities
of which DQE or DEI is a member, (iv) the Discontinued Operations and the
Inactive Subsidiaries, (v) indemnification obligations of the Company or any
Subsidiary to any of their officers or directors required by the Company's
Amended By-Laws or Articles or the organic documents of any Subsidiary arising
out of any facts or circumstances occurring on or prior to the Closing Date,
(vi) any material fact or facts that Acquisition discovers during the course of
its due diligence and investigation of the Company (including, without
limitation, review of the
-36-
<PAGE>
Company's assets, properties and projects, and discussions with third parties
and Company employees) not fully disclosed in the Schedules hereto and
identified in writing by Acquisition to DEI prior to Closing that would
individually or in the aggregate adversely affect the financial condition,
results of operation, condition of assets, Business or prospects of the Company
and which would constitute a breach of representation or warranty by DEI
hereunder; (vii) replacement, modification or repair of equipment related to CM
Services, Inc.'s Engineering Procurement Construction Facilities Operation
Contract against AK Steel Corporation dated May 18, 1995, as amended, in
connection with the dispute describe in item 5(a) of Schedule 2.16, provided
-------------
that the indemnity in this clause (vii) shall not exceed $2 million and shall be
made only after CM Services, Inc. first exercises it best efforts to exhaust its
remedies under such contract with AK Steel Corporation (without arbitration or
litigation), provided further that this clause (vii) shall be Acquisition's sole
remedy with respect to the dispute identified in item 5(a) of Schedule 2.16 (but
-------------
not to any other matter involving Damages, if any, relating to such contract)
and, provided, further, that any such repairs shall be subject to the prior
-----------------
approval of DEI (which approval shall not be unreasonably withheld, conditioned
or delayed); (viii) a partial termination, if any, of the Employee Retirement
Plan of Chester Environmental as a result of employee terminations during 1995
or 1996; and (ix) all of the matters and claims identified on Schedules 2.15 and
--------------
2.29 for amounts in excess (in the aggregate) of the balance of the applicable
- ----
reserves on the Company's 12-31-96 Balance Sheet. The waiver by Acquisition of
any condition to Closing set forth in Section 6.02 shall not be deemed to be a
------------
waiver by Acquisition of its rights of indemnification hereunder. DEI waives any
applicable statute of limitations with respect to the matter governed by clause
(iv) above. Failure by Acquisition to notify DEI of any fact identified with
respect to the matters governed by clause (vi) above shall not prejudice
Acquisition's rights to indemnification under clause (i) if Acquisition did not
know of such facts prior to Closing. DEI shall have no liability hereunder for
matters contained in clause (vi) above with respect to which it has not received
a notice or notices of claim pursuant to Section 8.04 within two years after the
------------
Closing Date. Notwithstanding the foregoing, Acquisition and the Company (and
not DEI) shall be solely liable for any breach by the Company after the Closing
Date (based on actions by the Company after the Closing Date) of the covenant
not to compete contained in Section 8.4 of the Asset Purchase Agreement between
the Company and Ground Water Technology, Inc. dated February 15, 1995.
8.03 Indemnification by Acquisition. Subject to Section 8.06 below,
------------------------------ ------------
Acquisition shall indemnify, defend, save and hold DEI and its officers,
directors, employees, Affiliates and agents (collectively, "Duquesne
Indemnitees") harmless from and against any and all demands, claims, actions or
causes of action, assessments, losses, damages, deficiencies, Liabilities, costs
and expenses, including reasonable attorneys' fees, interest, penalties, and all
reasonable amounts paid in investigation, defense or settlement of any of the
foregoing (collectively, "Duquesne Damages") asserted against, imposed upon,
resulting to or incurred by any of the Duquesne Indemnitees, directly or
indirectly, in connection with, or arising out of, or resulting from, (i) a
breach of any of the representations and warranties made by Acquisition in this
Agreement, except as set forth above in the first sentence of Section 8.01 or
------------
(ii) a breach of
-37-
<PAGE>
any of the covenants or agreements made by Acquisition in or pursuant to this
Agreement and in any Other Agreement to which Acquisition is a party.
8.04 Notice of Claims. If any Acquisition Indemnitee or Duquesne
----------------
Indemnitee (an "Indemnified Party") believes that it has suffered or incurred or
will suffer or incur any Acquisition Damages or Duquesne Damages ("Damages") for
which it is entitled to indemnification under this Article VIII, or if any
legal, governmental or administrative proceeding which may result in such
damages is threatened or asserted (including any written notice from any taxing
authority), such Indemnified Party shall so notify the party or parties from
whom indemnification is being claimed (the "Indemnifying Party") with reasonable
promptness and reasonable particularity in light of the circumstances then
existing. If any action at law or suit in equity is instituted by or against a
third party with respect to which any Indemnified Party intends to claim any
Damages, such Indemnified Party shall promptly notify the Indemnifying Party of
such action or suit. Except as provided in the penultimate sentence of Section
-------
8.02, the failure of an Indemnified Party to give any notice required by this
- ----
Section 8.04 shall not affect any of such party's rights under this Article VIII
- ------------
except to the extent such failure is actually prejudicial to the rights or
obligations of the Indemnifying Party.
8.05 Third Party Claims. In case any legal, governmental or
------------------
administrative proceeding which may result in such Damages is instituted,
threatened or asserted (including any written notice from any taxing authority)
by or against a third party with respect to which an Indemnified Party intends
to claim any Damages and the Indemnified Party notifies the Indemnifying Party
of such proceeding as provided in Section 8.04, the Indemnifying Party shall be
------------
entitled to participate therein and, to the extent that it may wish, jointly
with any other Indemnifying Party similarly notified, to assume the defense
thereof, with counsel satisfactory to such Indemnified Party (who shall not,
except with the consent of the Indemnified Party, be counsel to the Indemnifying
Party), and after notice from the Indemnifying Party to such Indemnified Party
of its election so to assume the defense thereof, the Indemnifying Party will
not be liable to such Indemnified Party under this Article VIII for any legal or
other expenses subsequently incurred by such Indemnified Party in connection
with the defense thereof other than reasonable costs of investigation. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending or threatened action in respect of
which any Indemnified Party is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Party unless such settlement
includes an unconditional release of such Indemnified Party from all Liability
on any claims that are the subject matter of such proceeding.
8.06 Limitation on Damages; Insurance; Etc. Notwithstanding any
--------------------------------------
provision under this Article VIII to the contrary, neither DEI nor Acquisition
shall have any indemnity liability under clauses (i) or (vi) of Section 8.02 or
------------
clause (i) of Section 8.03, respectively, for any Damages until the aggregate
------------
amount of such Damages incurred by the other party exceeds the sum of $350,000,
but if the aggregate amount of Damages thereunder exceeds
-38-
<PAGE>
$350,000, indemnification shall be made to the full extent of Damages; provided,
--------
however, that, the foregoing limitations shall not apply to Section 2.11, the
- ------- ------------
last sentence of Section 2.08 or any matter relating to title to the Chester
------------
Shares, title to the Company's or the Subsidiaries' assets or title to the USF
Shares. In no event shall DEI's indemnity liability for breach of any
representation or warranty contained herein exceed $25 million. All Damages
payable hereunder shall be paid promptly in cash. In determining Damages
hereunder, (i) the Company shall be required to pursue all valid claims against
any insurance carrier providing coverage with respect to the matter giving rise
to such Damages, (ii) if such Damages arise out of matters concerning any
customers of the Company, the Company shall use its best efforts to pursue its
rights and remedies against such customers (without litigation or arbitration),
and (iii) if such Damages arise out of matters involving Persons other than
customers of the Company and the Company has indemnification rights against such
Persons, then the Company shall permit DEI, at DEI's expense, to pursue any and
all remedies against such Persons and DEI shall be entitled to the proceeds
thereof to the extent of such Damages; provided, however, that no such
-----------------
requirement shall delay DEI's obligations to indemnify Acquisition or the
Company hereunder (except that DEI's indemnification obligation hereunder shall
be delayed if and to the extent that the applicable insurance company under
clause (i) above assumes the defense or acknowledges liability).
8.07 Additional Remedies. At the Closing, DEI will deliver to
-------------------
Acquisition a certified copy of the agreement pursuant to which it acquired the
Company from Mestek, Inc. (the "Mestek Purchase Agreement"). To the extent that
DEI's rights under the Mestek Purchase Agreement are assignable, DEI shall
assign those rights to Acquisition at the Closing. If such rights are not
assignable, then, without limiting any other rights or remedies of Acquisition
or the Company herein, if after Closing Acquisition or the Company sustain any
Damages with respect to which it is determined that Acquisition or the Company
would not be entitled to indemnification pursuant to Section 8.02 hereof, but
------------
with respect to which DEI would have rights of indemnification against Mestek,
Inc. under the Mestek Purchase Agreement, then DEI shall, at the Company's
notice, direction and expense, actively and timely pursue and prosecute its
claims and remedies against Mestek, Inc. (for the benefit of Acquisition and the
Company) under the Mestek Purchase Agreement and shall promptly deliver all
compensation that it receives from such claims and remedies, minus any
reasonable expenses (including attorney's fees) incurred by DEI in prosecuting
such claims and remedies, to the Company. Nothing herein shall be deemed to be
a waiver by DEI of any remedy that it may now or hereafter have under any
applicable securities laws with respect to the transactions contemplated hereby.
8.08 Good Faith Effort to Settle Disputes. The parties agree that,
------------------------------------
prior to commencing any litigation against the other concerning any matter with
respect to which such party intends to claim a right of indemnification in such
proceeding, the chief executive officers of Acquisition and DEI shall meet in a
timely manner and attempt in good faith to negotiate a settlement of such
dispute during which time such individuals shall disclose to the others all
-39-
<PAGE>
relevant information relating to such dispute.
ARTICLE IX
MISCELLANEOUS
-------------
9.01 Construction. As used herein, unless the context otherwise
------------
requires: (i) the terms defined herein shall have the meaning set forth herein
for all purposes; (ii) references to "Article" or "Section" are to an article or
section hereof; (iii) all "Exhibits" and "Schedules" referred to herein are to
Exhibits and Schedules attached hereto and are incorporated herein by reference
and made a part hereof; (iv) "include", "includes" and "including" are deemed to
be followed by "without limitation" whether or not they are in fact followed by
such words or words of like import; (v) "writing," "written" and comparable
terms refer to printing, typing, lithography and other means of reproducing
words in a visible form; (vi) "hereof", "herein", "hereunder" and comparable
terms refer to the entirety of this Agreement and not to any particular article,
section or other subdivision hereof or attachment hereto; (vii) references to
any gender include references to all genders, and references to the singular
include references to the plural and vice versa; (viii) references to an
agreement or other instrument or law, statute or regulation are referred to as
amended and supplemented from time to time (and, in the case of a statute or
regulation, to any successor provision) and all regulations, rulings and
interpretations promulgated pursuant thereto; (ix) the preliminary statements
made on page 1 hereof are incorporated herein and made a part hereof; (x) the
headings of the various articles, sections and other subdivisions hereof are for
convenience of reference only and shall not modify, define or limit any of the
terms or provisions hereof; (xi) the deadline for all deliveries and notices
hereunder shall be determined by reference to the local time of the place such
delivery or notice is properly made; and (l) all currency references herein are
to U.S. dollars.
9.02 Notices. All notices, and other communications given or made
-------
pursuant to this Agreement shall be in writing and shall be deemed to have been
duly given or made (i) the second day after mailing, if sent by registered or
certified mail, return receipt requested, (ii) upon delivery, if sent by hand
delivery, (iii) when received, if sent by prepaid overnight carrier, with a
record of receipt, or (iv) the first day after dispatch, if sent by cable,
telegram, facsimile or telecopy (with a copy simultaneously sent by registered
or certified mail, return receipt requested), to the parties at the following
addresses (or at such other addresses as shall be specified by the parties by
like notice):
(a) if to Acquisition, to:
Chester Acquisition Corporation
40-004 Cook Street
Palm Desert, CA 92211
Attention: Damian C. Georgino, Esq.
-40-
<PAGE>
(b) if to DEI, to:
Duquesne Enterprises, Inc.
One Northshore Center
Suite 100
Pittsburgh, PA 15212
Attention: Mr. Thomas A. Hurkmans
with a copy to Linda S. Ackerman
Assistant General Counsel, Esq.
15/th/ Floor
411 Seventh Street
Pittsburgh, PA 15219
(c) if to the Company, to:
Chester Engineers, Inc.
600 Clubhouse Drive
Moon Township, PA 15108
Attention: Mr. Anthony F. Lisanti, Chief Executive Officer
9.03 Successors and Assigns. This Agreement and all the rights and
----------------------
powers granted hereby shall bind and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
9.04 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the Commonwealth of Pennsylvania without regard
to its conflict of law doctrines.
9.05 No Assignment. This Agreement and the rights, interests and
-------------
obligations hereunder may not be assigned by any party hereto without the prior
written consent of the other parties hereto, except that Acquisition may assign
its rights hereunder to any direct or indirect wholly owned subsidiary of USF,
so long as Acquisition remains fully liable hereunder.
9.06 Amendment and Waiver; Cumulative Effect. The parties may by
---------------------------------------
mutual agreement amend this Agreement in any respect, and any party, as to such
party, may (i) extend the time for the performance of any of the obligations of
any other party, waive any inaccuracies in representations by any other party,
(ii) waive compliance by any other party with any of the agreements contained
herein and performance of any obligations by such other party, and (iii) waive
the fulfillment of any condition that is precedent to the performance by such
party of any of its obligations under this Agreement. To be effective, any such
amendment or waiver must be in writing and be signed by the party against whom
enforcement of the same is sought.
-41-
<PAGE>
Neither the failure of any party hereto to exercise any right, power or remedy
provided under this Agreement where otherwise available in respect hereof at law
or in equity, or to insist upon compliance by any other party with its
obligations hereunder, nor any custom or practice of the parties at variance
with the terms hereof, shall constitute a waiver by such party of its right to
exercise any such right, power or remedy or to demand such compliance. The
rights and remedies of the parties hereto are cumulative and not exclusive of
the rights and remedies that they otherwise might have now or hereafter, at law,
in equity, by statute or otherwise; provided, however, that Acquisition shall
-------- -------
not be entitled to injunctive relief prior to Closing and neither party hereto
shall be entitled to consequential or incidental damages after Closing.
9.07 Entire Agreement. This Agreement and the Schedules and Exhibits
----------------
set forth all of the promises, covenants, agreements, conditions and
undertakings between the parties hereto with respect to the subject matter
hereof, and supersede all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written.
9.08 Severability. If any term or other provision of this Agreement
------------
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms, conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
9.09 No Third Party Beneficiaries. This Agreement is not intended to
----------------------------
confer upon any Person other than the parties hereto any rights or remedies
hereunder, except the provisions of Sections 8.02 and 8.03 relating to
------------- ----
Acquisition Indemnitees and Duquesne Indemnitees, respectively, which are
intended to benefit such indemnitees.
9.10 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall be deemed to be one and the same instrument.
-42-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: DUQUESNE ENTERPRISES, INC.
By: By: /s/ Thomas A. Hurkmans
-------------------- ----------------------
Title: Title: President
----------------- --------------------
ATTEST: CHESTER ACQUISITION CORPORATION
By: By: /s/ Damian Georgino
-------------------- ----------------------
Title: Title:
----------------- --------------------
ATTEST: CHESTER ENGINEERS, INC.
By: By: /s/ Anthony S. Lisanti
-------------------- ----------------------
Title: Title: CEO
----------------- --------------------
-43-
<PAGE>
AMENDMENT
---------
TO
--
STOCK PURCHASE AGREEMENT
------------------------
================================================================================
THIS AMENDMENT ("Amendment") is made and entered into as of the 30th
day of April, 1997 by and among DUQUESNE ENTERPRISES, INC., a Pennsylvania
corporation ("DEI"), CHESTER ENGINEERS, INC., a Pennsylvania corporation (the
"Company"), and CHESTER ACQUISITION CORPORATION, a Delaware corporation
("Acquisition").
W I T N E S S E T H:
WHEREAS, DEI, the Company and Acquisition entered into that certain
Stock Purchase Agreement, dated as of March 17, 1997, pursuant to which
Acquisition agreed to acquire from DEI, and DEI agreed to sell to Acquisition,
all the issued and outstanding shares of common stock of the Company (the "Stock
Purchase Agreement"); and
WHEREAS, the parties wish to amend the Stock Purchase Agreement,
under the terms and conditions set forth herein,
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties agree as follows:
1. Incorporation of Recitals/Definitions. The recitals set forth
-------------------------------------
above are incorporated into and made a part of this Amendment. Unless otherwise
defined herein, capitalized terms used herein shall have the definitions
ascribed thereto in the Stock Purchase Agreement.
2. Amendment. Section 8.02(vii) of the Stock Purchase Agreement
---------
is hereby amended and restated in full, as follows:
(vii) with respect to the CM Services, Inc. Engineering Procurement
Construction Facilities Operation Contract with AK Steel Corporation,
dated May 18, 1995, as amended (the "AK Steel Contract"), (A) the
dispute described in Item 5(a) on page 8 of Schedule 2.16 (the
--------------
"Dispute"), including, without limitation, replacement, modification
or repair of equipment, POTW charges,
<PAGE>
fines and lost profits (as determined in accordance with Schedule 1
hereto) under the AK Steel Contract and (B) the exercise of a
termination for convenience by AK Steel pursuant to Sections 30.6,
30.7 and 30.8 of the AK Steel Contract (a "Termination for
Convenience"); provided that (x) the indemnity in this clause (vii)(A)
--------
(including, without limitation, a Termination for Convenience granted
to AK Steel for a failure of a performance test of the improvements
constructed to address the matters underlying the Dispute to be
successfully completed) shall not exceed $2,000,000 and the indemnity
on this clause (vii)(B) shall not exceed $500,000; (y) this clause
(vii) shall be Acquisition's sole remedy with respect to the Dispute
(but not to any other matter involving Damages, if any, related to
such contract) and a Termination for Convenience and (z) with respect
to a Termination for Convenience, the indemnity under this clause
(vii) shall include only the book value of the WWTP (as such term
defined in the AK Steel Contract) less sums payable by AK Steel
pursuant to a Termination for Convenience assuming (I) depreciation of
the WWTP in a manner consistent with past practice (of approximately
$110,000 per month), (II) no improvements to the WWTP beyond those
reflected on the 12/31/96 Balance Sheet and (III) no amendment to the
AK Steel Contract which would reduce the fees payable by AK Steel in
the event of a Termination for Convenience.
3 Miscellaneous.
-------------
(a) This Amendment may be amended only by a writing signed by
each of the parties, and any such amendment shall be effective only to the
extent specifically set forth in such writing.
(b) This Amendment may be executed in any number of
counterparts, and by each of the parties on separate counterparts, each of
which, when so executed, shall be deemed to be an original, but all of which
shall constitute but one and the same instrument.
(c) The Stock Purchase Agreement, as amended by this Amendment,
contains the entire agreement of the parties with respect to the transactions
contemplated hereby and thereby and supersedes all prior written and oral
agreements, and all contemporaneous oral agreements.
(d) All titles and headings in this Amendment are intended
solely for convenience of reference and shall in no way limit or otherwise
affect the interpretation of any of the provisions hereof.
(e) This Amendment shall be binding upon and shall inure to the
benefit of each of the parties and their respective successors and assigns.
<PAGE>
(f) Except as expressly provided hereunder, the Stock Purchase
Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first above written.
Witness: DUQUESNE ENTERPRISES, INC.
By: By: /s/ Thomas A. Hurkmans
-------------------- ----------------------
Title: Title: President
----------------- ---------------------
Witness: CHESTER ENGINEERS, INC.
By: By: /s/ Anthony S. Lisanti
-------------------- ----------------------
Title: Title: CEO
----------------- --------------------
Witness: CHESTER ACQUISITION CORPORATION
By: By: /s/ Damian Georgino
-------------------- ----------------------
Title: Title:
----------------- --------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,680,253
<OTHER-PROPERTY-AND-INVEST> 676,191
<TOTAL-CURRENT-ASSETS> 594,964
<TOTAL-DEFERRED-CHARGES> 671,174
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,622,582
<COMMON> 73,199
<CAPITAL-SURPLUS-PAID-IN> 914,294
<RETAINED-EARNINGS> 796,429
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,409,209<F1>
3,000
220,674<F2>
<LONG-TERM-DEBT-NET> 1,402,286
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 930
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 86,917
0
<CAPITAL-LEASE-OBLIGATIONS> 24,150
<LEASES-CURRENT> 20,229
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,455,187
<TOT-CAPITALIZATION-AND-LIAB> 4,622,582
<GROSS-OPERATING-REVENUE> 302,084
<INCOME-TAX-EXPENSE> 21,541<F3>
<OTHER-OPERATING-EXPENSES> 226,767
<TOTAL-OPERATING-EXPENSES> 226,767
<OPERATING-INCOME-LOSS> 75,317
<OTHER-INCOME-NET> 20,001
<INCOME-BEFORE-INTEREST-EXPEN> 95,318
<TOTAL-INTEREST-EXPENSE> 28,680<F4>
<NET-INCOME> 45,097
0
<EARNINGS-AVAILABLE-FOR-COMM> 45,097
<COMMON-STOCK-DIVIDENDS> 26,275
<TOTAL-INTEREST-ON-BONDS> 21,782
<CASH-FLOW-OPERATIONS> 92,943
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
<FN>
<F1>Includes $(374,633) of Treasury Stock at cost
<F2>Includes $10,066 of Preference Stock
<F3>Non-Operating Expenses
<F4>Includes $4,188 of Preferred and Preference Stock Dividends
</FN>
</TABLE>
