-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WlleMCa74hv5ynA3sRcLDUTgDpsb9ZgM7OZK4+xXQaems1vQm4I/KqKyJtGQVDUq yzYgyYbYiU+bjeqpXSImGg== 0000950132-02-000270.txt : 20021118 0000950132-02-000270.hdr.sgml : 20021118 20021114180453 ACCESSION NUMBER: 0000950132-02-000270 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DQE INC CENTRAL INDEX KEY: 0000846930 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 251598483 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10290 FILM NUMBER: 02827029 BUSINESS ADDRESS: STREET 1: CHERRINGTON CORPORATE CNTR STE 100 STREET 2: 500 CHERRINGTON PKWY CITY: CORAOPOLIS STATE: PA ZIP: 15108-3184 BUSINESS PHONE: 4122624700 MAIL ADDRESS: STREET 1: CHERRINGTON CORPORATE CNTR STE 100 STREET 2: 500 CHERRINGTON PKWY CITY: CORAOPOLIS STATE: PA ZIP: 15108-3184 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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 September 30, 2002 [ ] 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) 411 Seventh Avenue Pittsburgh, Pennsylvania 15219 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (412) 393-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 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 - 74,315,771 shares outstanding as of October 31, 2002. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. DQE Condensed Consolidated Statements of Income (Unaudited)
- ----------------------------------------------------------------------------------------------------------- (Millions of Dollars, Except Per Share Amounts) ----------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Operating Revenues: Electricity sales $250.5 $291.7 $ 724.7 $788.4 Other 30.4 30.1 93.6 115.4 - ----------------------------------------------------------------------------------------------------------- Total Operating Revenues 280.9 321.8 818.3 903.8 - ----------------------------------------------------------------------------------------------------------- Operating Expenses: Purchased power 124.3 120.4 327.2 318.0 Other operating 54.0 55.8 163.7 178.7 Maintenance 4.0 5.7 17.7 17.4 Depreciation and amortization 31.5 96.5 157.9 264.1 Taxes other than income taxes 17.5 15.7 52.5 45.4 - ----------------------------------------------------------------------------------------------------------- Total Operating Expenses 231.3 294.1 719.0 823.6 - ----------------------------------------------------------------------------------------------------------- Operating Income 49.6 27.7 99.3 80.2 - ----------------------------------------------------------------------------------------------------------- Other Income: Investment income 16.4 33.8 55.9 63.1 Investment impairment (Note D) -- -- (10.8) (47.3) - ----------------------------------------------------------------------------------------------------------- Total Other Income 16.4 33.8 45.1 15.8 Interest and Other Charges 19.6 24.6 63.9 80.0 - ----------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Income Taxes 46.4 36.9 80.5 16.0 Income Tax Expense 17.2 12.5 31.4 0.1 - ----------------------------------------------------------------------------------------------------------- Income from Continuing Operations 29.2 24.4 49.1 15.9 Loss from Discontinued Operations - Net (2.2) (1.7) (102.4) (102.7) - ----------------------------------------------------------------------------------------------------------- Income (Loss) before Cumulative Effect of Change in Accounting Principle 27.0 22.7 (53.3) (86.8) Cumulative Effect of Change in Accounting Principle - Net -- -- (113.7) -- - ----------------------------------------------------------------------------------------------------------- Net Income (Loss) 27.0 22.7 (167.0) (86.8) Dividends on Preferred Stock 0.2 0.2 0.5 0.4 - ----------------------------------------------------------------------------------------------------------- Earnings (Loss) Available for Common Stock $ 26.8 $ 22.5 $(167.5) $(87.2) =========================================================================================================== Average Number of Common Shares Outstanding (Millions of Shares) 74.1 55.9 62.6 55.9 =========================================================================================================== Basic Earnings (Loss) Per Share of Common Stock: Earnings from Continuing Operations $ 0.39 $ 0.43 $ 0.78 $ 0.28 Loss from Discontinued Operations $(0.03) $(0.03) $ (1.64) $(1.84) Cumulative Effect of Change in Accounting Principle $ -- $ -- $ (1.82) $ -- - ----------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share of Common Stock $ 0.36 $ 0.40 $ (2.68) $(1.56) =========================================================================================================== Diluted Earnings (Loss) Per Share of Common Stock: Earnings from Continuing Operations $ 0.39 $ 0.43 $ 0.77 $ 0.28 Loss from Discontinued Operations $(0.03) $(0.03) $ (1.61) $(1.84) Cumulative Effect of Change in Accounting Principle $ -- $ -- $ (1.79) $ -- - ----------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share of Common Stock $ 0.36 $ 0.40 $ (2.63) $(1.56) =========================================================================================================== Dividends Declared Per Share of Common Stock $ 0.25 $ 0.42 $ 1.09 $ 1.26 ===========================================================================================================
See notes to condensed consolidated financial statements. 2 DQE Condensed Consolidated Balance Sheets (Unaudited)
- ----------------------------------------------------------------------------------------------- (Millions of Dollars) ---------------------------- September 30, December 31, 2002 2001 - ----------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and temporary cash investments $ 63.8 $ 7.2 Receivables - net 156.0 166.5 Other 62.4 116.9 Discontinued operations 199.9 25.9 - ----------------------------------------------------------------------------------------------- Total Current Assets 482.1 316.5 - ----------------------------------------------------------------------------------------------- Long-Term Investments 594.3 635.5 - ----------------------------------------------------------------------------------------------- Property, Plant and Equipment 2,170.3 2,119.2 Less: Accumulated depreciation (691.3) (647.2) - ----------------------------------------------------------------------------------------------- Total Property, Plant and Equipment - Net 1,479.0 1,472.0 - ----------------------------------------------------------------------------------------------- Other Non-Current Assets: Transition costs 31.8 134.3 Regulatory assets 282.6 267.2 Other 37.2 46.1 Discontinued operations -- 354.3 - ----------------------------------------------------------------------------------------------- Total Other Non-Current Assets 351.6 801.9 - ----------------------------------------------------------------------------------------------- Total Assets $ 2,907.0 $ 3,225.9 =============================================================================================== CAPITALIZATION AND LIABILITIES - ----------------------------------------------------------------------------------------------- Current Liabilities: Notes payable and current debt maturities $ 0.8 $ 151.0 Other 221.4 216.1 Discontinued operations 54.0 19.7 - ----------------------------------------------------------------------------------------------- Total Current Liabilities 276.2 386.8 - ----------------------------------------------------------------------------------------------- Non-Current Liabilities: Deferred income taxes - net 557.2 611.4 Deferred income 94.0 103.5 Other 138.8 169.0 Discontinued operations -- 19.9 - ----------------------------------------------------------------------------------------------- Total Non-Current Liabilities 790.0 903.8 - ----------------------------------------------------------------------------------------------- Commitments and contingencies (Note H) - ----------------------------------------------------------------------------------------------- Capitalization: Long-Term Debt 1,082.2 1,184.5 - ----------------------------------------------------------------------------------------------- DLC Obligated Mandatorily Redeemable Preferred Trust Securities 150.0 150.0 - ----------------------------------------------------------------------------------------------- Preferred Stock: DQE preferred stock 16.4 16.4 Preferred stock of subsidiaries 62.1 62.1 Preference stock of subsidiaries 14.8 13.8 - ----------------------------------------------------------------------------------------------- Total Preferred Stock 93.3 92.3 - ----------------------------------------------------------------------------------------------- Common Shareholders' Equity: Common stock - no par value (authorized - 187,500,000 shares; issued - 126,929,154 and 109,679,154 shares) 1,219.0 994.8 Retained earnings 521.0 759.7 Treasury stock (at cost) (51,560,664 and 53,770,877 shares) (1,224.2) (1,246.7) Accumulated other comprehensive income (0.5) 0.7 - ----------------------------------------------------------------------------------------------- Total Common Shareholders' Equity 515.3 508.5 - ----------------------------------------------------------------------------------------------- Total Capitalization 1,840.8 1,935.3 - ----------------------------------------------------------------------------------------------- Total Liabilities and Capitalization $ 2,907.0 $ 3,225.9 ===============================================================================================
See notes to condensed consolidated financial statements. 3 DQE Condensed Consolidated Statements of Cash Flows (Unaudited)
- ------------------------------------------------------------------------------------------------ (Millions of Dollars) ------------------------------- Nine Months Ended September 30, ------------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Operations $ 14.9 $ 136.0 Cumulative effect of change in accounting principle, net 113.7 -- Changes in working capital other than cash (22.8) (4.2) Cash flows from discontinued operations 87.2 52.8 Other (0.4) (3.5) - ------------------------------------------------------------------------------------------------ Net Cash Provided from Operating Activities 192.6 181.1 - ------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities: Capital expenditures (60.4) (85.2) Proceeds from disposition of investments 21.1 45.8 Collection of note receivable 7.0 -- Other (2.3) (13.7) - ------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (34.6) (53.1) - ------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities: Issuance of debt (Note G) 300.0 -- Reductions of long-term obligations (Note G) (553.0) (65.3) Issuance of common stock 223.4 -- Dividends on common and preferred stock (71.5) (70.8) Other (0.3) 5.5 - ------------------------------------------------------------------------------------------------ Net Cash Used in Financing Activities (101.4) (130.6) - ------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and temporary cash investments 56.6 (2.6) Cash and temporary cash investments at beginning of period 7.2 15.8 - ------------------------------------------------------------------------------------------------ Cash and temporary cash investments at end of period $ 63.8 $ 13.2 ================================================================================================
See notes to condensed consolidated financial statements. DQE Condensed Consolidated Statements of Comprehensive Income (Unaudited)
- --------------------------------------------------------------------------------------------------- (Millions of Dollars) ----------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ----------------------------------------- 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------- Net income (loss) $27.0 $ 22.7 $(167.0) $ (86.8) - --------------------------------------------------------------------------------------------------- Other comprehensive income: Unrealized holding losses arising during the period, net of tax of $(0.3), $(11.4), $(0.3) and $(14.6) (0.5) (21.2) (0.5) (27.1) Reclassification adjustment for realized holding loss -- -- (0.7) -- - --------------------------------------------------------------------------------------------------- Comprehensive Income (Loss) $26.5 $ 1.5 $(168.2) $(113.9) ===================================================================================================
See notes to condensed consolidated financial statements. 4 Notes to Condensed Consolidated Financial Statements (Unaudited) A. CONSOLIDATION AND ACCOUNTING POLICIES Consolidation DQE, Inc. delivers essential products and related services, including electricity, water and communications, to more than one million customers throughout the United States. Our subsidiaries include Duquesne Light Company; AquaSource, Inc.; DQE Energy Services, LLC; Duquesne Power, Inc.; DQE Financial Corp.; DQE Enterprises, Inc.; DQE Communications, Inc.; ProAm, Inc.; Cherrington Insurance, Ltd.; and DQE Capital Corporation. Duquesne Light, our largest operating subsidiary, is an electric utility engaged in the transmission and distribution of electric energy. AquaSource is a water resource management company. Since July 2002, we have entered into agreements to sell more than 85% of AquaSource's assets. AquaSource is now reported as a discontinued operation. (See Note I.) DQE Energy Services is an energy facilities management company that provides energy outsourcing solutions including development, operation and maintenance of energy and alternative fuel facilities. Duquesne Power was formed in April 2002 to explore various alternative generation supply options. DQE Financial owns and operates landfill gas collection and processing systems, and is an investment and portfolio management organization focused on structured finance and alternative energy investments. DQE Capital, a 100%-owned finance subsidiary, provides financing for the operations of our subsidiaries other than Duquesne Light. We fully and unconditionally guarantee payment of DQE Capital's debt securities including $100.0 million of Public Income Notes, due 2039, and a $140.0 million revolving credit facility. At September 30, 2002 no borrowings were outstanding under the credit facility. DQE Enterprises manages our remaining electronic commerce and energy technologies investment portfolios. Our other business lines include the following: propane distribution, communications systems, and insurance services for DQE and various affiliates. The consolidated financial statements include the accounts of DQE and our wholly and majority owned subsidiaries. The equity method of accounting is used when we have a 20 to 50% interest in other companies. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these companies. All material intercompany balances and transactions have been eliminated in the consolidation. Basis of Accounting DQE and Duquesne Light are subject to the accounting and reporting requirements of the Securities and Exchange Commission (SEC). Duquesne Light's electricity delivery business is also subject to regulation by the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FERC) with respect to rates for delivery of electric power, accounting and other matters. As a result of our PUC-approved restructuring plan, the electricity supply segment does not meet the criteria of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Pursuant to the PUC's final restructuring order, and as provided in the Pennsylvania Electricity Generation Customer Choice and Competition Act (Customer Choice Act), generation-related transition costs are being recovered through a competitive transition charge (CTC) collected in connection with providing transmission and distribution services, and these assets have been reclassified accordingly. The electricity delivery business segment continues to meet SFAS No. 71 criteria, and accordingly reflects regulatory assets and liabilities consistent with cost-based ratemaking regulations. The regulatory assets represent probable future revenue, because provisions for these costs are currently included, or are expected to be included, in charges to electric utility customers through the ratemaking process. (See Note B.) The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions with respect to values and conditions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period also may be affected by the 5 estimates and assumptions we are required to make. We evaluate these estimates on an ongoing basis, using historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. The interim financial information for the three and nine month periods ended September 30, 2002 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. This information does not include all footnotes which would be required for complete annual financial statements in accordance with accounting principles generally accepted in the United States of America. These statements should be read with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2001 filed with the SEC. The results of operations for the three and nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the full year. Earnings Per Share Basic earnings per share are computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding, plus the effect of the outstanding Employee Stock Ownership Plan shares, DQE preferred stock and stock options, unless a loss from continuing operations occurs as the inclusion of these shares would be anti-dilutive. The treasury stock method is used in computing the dilutive effect of stock options. This method assumes any proceeds obtained upon the exercise of options would be used to purchase common stock at the average market price during the period. The following table presents the numerators and denominators used in computing the diluted earnings per share for the nine months ended September 30, 2002 and September 30, 2001. Diluted Earnings (Loss) Per Share For the Nine Months Ended September 30, - ----------------------------------------------------- (Millions of Dollars) 2002 2001 - ----------------------------------------------------- Income from continuing operations $49.1 $15.9 Less: Preferred dividends (0.5) (0.4) - ----------------------------------------------------- Income from continuing operations for basic EPS 48.6 15.5 Dilutive effect of: ESOP dividends -- -- Preferred stock dividends 0.5 -- - ----------------------------------------------------- Diluted Earnings from Continuing Operations for Common $49.1 $15.5 ===================================================== - ----------------------------------------------------- (Millions of Shares) 2002 2001 - ----------------------------------------------------- Basic average shares 62.6 55.9 Dilutive effect of: ESOP shares -- -- DQE preferred stock 0.9 -- Stock options -- -- - ----------------------------------------------------- Diluted average shares 63.5 55.9 - ----------------------------------------------------- Diluted Earnings Per Share from Continuing Operations $0.77 $0.28 ===================================================== Recent Accounting Pronouncements On January 1, 2002, we adopted SFAS No. 141, "Business Combinations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the impact of which was not significant to our financial statements. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Specifically, this standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, if a reasonable estimate of fair value can be made. The entity is required to capitalize the cost by increasing the carrying amount of the related long-lived asset. The capitalized cost is then depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. 6 The standard is effective for fiscal years beginning after June 15, 2002. We are currently evaluating, but have yet to determine, the impact that the adoption of SFAS No. 143 will have on our financial statements. Reclassification The 2001 condensed consolidated financial statements have been reclassified to conform with the 2002 presentation. B. RATE MATTERS Competition and the Customer Choice Act The Customer Choice Act enables electric utility customers to purchase electricity at market prices from a variety of electric generation suppliers. As of September 30, 2002, approximately 76.6% of Duquesne Light's customers measured on a kilowatt-hour (KWH) basis and approximately 75.6% on a non-coincident peak load basis received electricity through our provider of last resort service arrangement (discussed below). The remaining customers are provided with electricity through alternative generation suppliers. The number of customers participating in our provider of last resort service will fluctuate depending on market prices and the number of alternative generation suppliers in the retail supply business. Customers who select an alternative generation supplier pay for generation charges set competitively by that supplier, and pay Duquesne Light CTC (discussed below) and/or transmission and distribution charges. Electricity delivery (including transmission, distribution and customer service) remains regulated in substantially the same manner as under historical regulation. In November 2001, the Pennsylvania Department of Revenue established an increased revenue neutral reconciliation tax (RNR) in order to recover a current shortfall that resulted from electricity generation deregulation. Duquesne Light requested and received PUC approval to recover approximately $13 million of costs it will incur in 2002 due to the RNR. Regional Transmission Organization FERC Order No. 2000 calls on transmission-owning utilities such as Duquesne Light to join regional transmission organizations (RTOs). Duquesne Light is committed to ensuring a stable, plentiful supply of electricity for its customers. Toward that end, Duquesne Light had planned to join the PJM West RTO. However, on July 31, 2002, the FERC issued a series of proposals designed to establish a standard market design and transmission service for interstate electricity transactions, and extend the deadline for joining an RTO until September 2004. Duquesne Light will continue to evaluate the FERC's proposals and their impact on the possibility of joining an RTO. Competitive Transition Charge In its final restructuring order, the PUC determined that Duquesne Light should recover most of the above-market costs of its generation assets, including plant and regulatory assets, through the collection of the CTC from electric utility customers. As of September 30, 2002, the CTC balance has been fully collected for approximately 95% of Duquesne Light's customers, and 87% of the KWH sales for the first nine months of 2002. The transition costs, as reflected on the consolidated balance sheet, are being amortized over the same period that the CTC revenues are being recognized. For regulatory purposes, the unrecovered balance of transition costs was approximately $32.6 million ($19.8 million net of tax) at September 30, 2002, on which Duquesne Light is allowed to earn an 11% pre-tax return. A lower amount is shown on the balance sheet due to the accounting for unbilled revenues. Provider of Last Resort Although no longer a generation supplier, as the provider of last resort for all customers in its service territory, Duquesne Light must provide electricity for any customer who does not choose an alternative generation supplier, or whose supplier fails to deliver. As part of the generation asset sale, a third party agreed to supply all of the electric energy necessary to satisfy Duquesne Light's provider of last resort obligations during the CTC collection period. Duquesne Light has extended the arrangement (and the PUC-approved rates for the supply of electricity) beyond the final CTC collection through December 31, 2004 (POLR II). The agreement also permits Duquesne Light, following CTC collection for each rate class, an average margin of 0.5 cents per KWH supplied through this arrangement. Except for this margin, these agreements, in general, effectively transfer to the supplier the financial risks and rewards associated with Duquesne Light's provider of last resort obligations. While there are certain safeguards in the provider of last resort arrangements designed to mitigate losses in the event that the supplier defaults on its performance under the arrangement, Duquesne Light may face the credit risk of such a default. Contractually, Duquesne Light has various credit enhancements that would become activated upon certain events. If the supplier were to fail to deliver, Duquesne Light 7 would have to contract with another supplier and/or make purchases in the market at the time of default at a time when market prices could be higher. While the Customer Choice Act provides generally for provider of last resort supply costs to be borne by customers, recent litigation suggests that it may not be clear whether Duquesne Light could pass any costs in excess of the existing PUC-approved provider of last resort prices on to its customers. Additionally, the supplier has recently been downgraded by the rating agencies. Although we are following the situation closely, our knowledge is limited to public disclosure, and we do not know whether the downgrade could affect the supplier's ability to perform. Duquesne Light also retains the risk that customers will not pay for the provider of last resort generation supply. However, a component of Duquesne Light's delivery rate is designed to cover the cost of a normal level of uncollectible accounts. On October 25, 2002, Duquesne Light petitioned the PUC to issue a declaratory order regarding a provision in its retail tariff that affects its largest industrial customer. The supplier and Duquesne Light have interpreted the tariff differently. The supplier's interpretation could increase the customer's bill by approximately $7 to $9 million annually. Duquesne Light has requested that the PUC affirm Duquesne Light's interpretation of the tariff requirements. Duquesne Light retains the risk of recovering this increase from the customer, should the customer refuse to pay. This risk is not included in the "normal level" of uncollectible accounts described above. Rate Freeze In connection with POLR II, Duquesne Light negotiated a rate freeze for generation, transmission and distribution rates. The rate freeze fixes new generation rates through 2004 for retail customers who take electricity under POLR II, and continues the transmission and distribution rates for all customers at current levels through at least 2003. Under certain circumstances, affected interests may file a complaint alleging that, under these frozen rates, Duquesne Light has exceeded reasonable earnings, in which case the PUC could make adjustments to rectify such earnings. C. RECEIVABLES The components of receivables for the periods indicated are as follows: - ---------------------------------------------------------------------------- (Millions of Dollars) ---------------------------- September 30, December 31, 2002 2001 - ---------------------------------------------------------------------------- Electric customers $100.5 $ 97.1 Unbilled revenue accrual 31.3 36.6 Other utility 3.4 3.2 Other 29.3 36.2 Less: Allowance for uncollectible accounts (8.5) (6.6) - ---------------------------------------------------------------------------- Total $156.0 $166.5 ============================================================================ D. IMPAIRMENT CHARGES Goodwill In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting for acquired goodwill and other intangible assets. This standard requires that goodwill and intangible assets with indefinite useful lives not be amortized but, instead, be tested at least annually for impairment, and more frequently if certain indicators appear. We adopted this standard effective January 1, 2002, and accordingly ceased amortization of goodwill, our only intangible asset with an indefinite useful life. The required test for impairment consists of a two-step process that begins with an estimation of the fair value of our reporting units. The first step is a screen for potential impairment and the second measures the amount of impairment, if any. The new standard requires that we complete the first step of the goodwill impairment test by June 30, 2002. To the extent that an indication of impairment exists upon completion of the first step, we must perform a second test to measure the amount of the impairment. The second test must be performed as soon as possible, but no later than December 31, 2002. However, if the second step of the goodwill impairment test is not complete, but a goodwill impairment loss is probable and can be reasonably estimated, the best estimate of that loss shall be recognized. Any impairment measured as of the date of adoption will be recognized as the cumulative effect of a change in accounting principle. Our goodwill relates to both our water resource management and propane delivery businesses. Beginning in the third quarter of 2002, our water resource management business is treated as a discontinued operation. (See Note I.) Our propane delivery business is included in our all other category. We had independent valuations performed on both of these reporting units in order to determine their fair values as of January 1, 2002. These valuations determined the implied fair values of each of the reporting units using a discounted cash flow analysis and public company trading multiples. These valuations indicated that the fair values of both reporting units were less than their carrying values, an indication of impairment. We then assessed the fair value of the tangible assets and liabilities of each of these reporting units, and determined that substantially all of the goodwill related to the water distribution reporting unit and a portion of the goodwill related to the propane 8 delivery reporting unit was impaired as of January 1, 2002. The valuation of the water distribution reporting unit was further supported by the terms of the July 29, 2002 agreement to sell approximately 85% of AquaSource's 2001 total assets, for a purchase price that was significantly less than the carrying amount of the reporting unit. Accordingly, we recognized a $113.7 million charge, recorded as of January 1, 2002, as the cumulative effect of a change in accounting principle for the write-down of goodwill to its fair value, consisting of $103.0 million related to water distribution and $10.7 million related to propane delivery. The impaired goodwill was not deductible for tax purposes, and as a result, no tax benefit was recorded in relation to the charge. Total goodwill of $20.7 million remains, principally at the propane delivery reporting unit ($19.8 million). The following table reconciles the prior year's reported net income/loss and earnings/loss per share, adjusted to exclude goodwill amortization expense that is no longer recorded under the provisions of SFAS No. 142. - -------------------------------------------------------------------------- Three Months Ended ----------------------------- September 30, September 30, 2002 2001 - -------------------------------------------------------------------------- Reported net income $27.0 $22.7 Goodwill amortization - water distribution -- 0.7 Goodwill amortization - propane delivery -- 0.3 - -------------------------------------------------------------------------- Adjusted net income $27.0 $23.7 ========================================================================== Basic and diluted earnings per share: Reported $0.36 $0.40 Adjusted $0.36 $0.42 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Nine Months Ended ----------------------------- September 30, September 30, 2002 2001 - -------------------------------------------------------------------------- Reported net loss $(167.0) $(86.8) Goodwill amortization - water distribution -- 3.6 Goodwill amortization - propane delivery -- 0.9 - -------------------------------------------------------------------------- Adjusted net loss $(167.0) $(82.3) ========================================================================== Basic loss per share: Reported $ (2.68) $(1.56) Adjusted $ (2.68) $(1.48) - -------------------------------------------------------------------------- Diluted loss per share: Reported $ (2.63) $(1.56) Adjusted $ (2.63) $(1.48) - -------------------------------------------------------------------------- AquaSource In May 2002, we indicated that we were exploring the sale of our water resource management business. In late June 2002, we received indications of interest for this business, and ultimately determined that the likely outcome would be a sale of this business. Based on the information received, an indication of impairment of long-lived assets existed. We estimated the proceeds to be received from a sale and compared them to the carrying amount of the long-lived assets that remained after the goodwill impairment, described above. This comparison indicated that the carrying amount of the investor-owned water and wastewater utilities to be sold significantly exceeded the expected proceeds to be received. As a result, we recorded an impairment charge of $100.9 million in the second quarter of 2002, which reduced the amount of property, plant and equipment and other long-lived assets; this charge is reflected in discontinued operations. No tax benefit was recognized in connection with this impairment charge due to the uncertainty of the recoverability of the resulting deferred tax asset. During 2001, our management team evaluated AquaSource's future direction and the capabilities of its operating platforms. This evaluation determined that the company's potential future performance would result in lower returns than originally anticipated. AquaSource therefore recorded a second quarter 2001 pre-tax impairment charge of $109.2 million, or $99.7 million after tax, to write down various aspects of its business, primarily related to contract operations and construction. The assets determined to be impaired consisted of goodwill, property, plant and equipment, and other assets. This charge is reflected in discontinued operations. We determined the value of the impairments by projecting the undiscounted future cash flows generated by the specific assets over the assets' expected lives. To the extent that the undiscounted future cash flows did not exceed the book carrying value of the assets, the future cash flows were discounted back at our cost of borrowing to determine the carrying value of the assets. The impairment charge recorded is the difference between the previous book carrying value and the carrying value determined by this process. 9 DQE Enterprises During the second quarter of 2002, DQE Enterprises wrote down three investments in publicly traded applied technology businesses to their quoted market value as of the balance sheet date, and recognized the associated impairment charge of $10.0 million. This charge reflects an other-than-temporary decline in the market value of the underlying securities. Enterprises also recorded a $0.8 million impairment charge for the write-off of two investments in privately-held entities which have filed for protection under Chapter 7 of the U.S. Bankruptcy Code. During the second quarter of 2001, Enterprises sold two investments and recognized an impairment charge to write off all or parts of seven other investments, resulting in a pre-tax charge of $47.3 million, or $27.7 million after tax. We determined the value of the impairment of each of these investments by analyzing their business prospects. This analysis included an evaluation of the business' cash on-hand, its fundraising abilities, its number of customers and contracts, and its overall ability to continue as a going concern. In addition, we obtained an independent external valuation for certain of the businesses. E. RESTRUCTURING CHARGES During the fourth quarter of 2001, we recorded a pre-tax restructuring charge of $31.1 million. The restructuring plan included the (1) consolidation and reduction of certain administrative and back-office functions through an involuntary termination plan; (2) abandonment of certain office facilities to relocate employees to one centralized location; and (3) write-off of certain leasehold improvements related to abandoned office facilities. Of the $31.1 million, $20.1 million was for employee termination benefits for approximately 200 management, professional and administrative personnel; $8.0 million was for future lease payments; and $3.0 million was for other lease costs associated with the restructuring plan. To date, approximately 160 employees have been terminated. The restructuring liability at September 30, 2002 was $12.7 million and is included in "other current liabilities" on the condensed consolidated balance sheet. The following table summarizes the current year activity for the accrued restructuring liability for the period ended September 30, 2002: - ---------------------------------------------------------------- Restructuring Liability ----------------------------- (Millions of Dollars) ----------------------------- Employee Termination Lease Benefits Costs Total - ---------------------------------------------------------------- Balance at December 31, 2001 $15.8 $ 8.7 $ 24.5 2002 payments (9.6) (2.2) (11.8) - ---------------------------------------------------------------- Balance at September 30, 2002 $ 6.2 $ 6.5 $ 12.7 ================================================================ We believe that the remaining provision is adequate to complete the restructuring plan. We expect the remaining restructuring liabilities to be paid on a monthly basis throughout 2006. F. COMMON STOCK OFFERING On June 26, 2002 we issued 17,250,000 shares of common stock at $13.50 per share in an underwritten public offering. We received net proceeds, after payment of underwriters discounts and commissions and other expenses, of $223.4 million. G. DEBT In September 2002, Duquesne Light converted approximately $98 million of variable rate debt to fixed rate with maturities in 2011 and 2013, resulting in a weighted average interest rate of 4.20%. On August 5, 2002, we redeemed the following: (i) $10 million aggregate principal amount of Duquesne Light's 8.20% first mortgage bonds due 2022 at a redemption price of 104.51% of the principal amount thereof, and (ii) $100 million aggregate principal amount of Duquesne Light's 7 5/8% first mortgage bonds due 2023 at a redemption price of 103.9458% of the principal amount thereof. On April 15, 2002, Duquesne Light issued $200 million of 6.7% first mortgage bonds due 2012. On April 30, 2002, Duquesne Light issued $100 million of 6.7% first mortgage bonds due 2032. In each case it used the proceeds to call and refund existing debt, including debt scheduled to mature in 2003 and 2004. 10 H. COMMITMENTS AND CONTINGENCIES Construction We estimate that in 2002 we will spend, excluding the allowance for funds used during construction, approximately $70 million for electric utility construction; $53 million for water utility construction (now included in discontinued operations, as discussed in Note I); and $10 million for construction by our other business lines. Guarantees As part of our investment portfolio in affordable housing, we have received fees in exchange for guaranteeing a minimum defined yield to third-party investors. The original amount guaranteed was approximately $250 million, and has declined as investors have earned the guaranteed returns. In addition, we have paid for a partial release from certain guaranteed investors. The remaining amount of such guarantees at September 30, 2002, was $74.5 million (assuming the favorable tax treatment accorded these investments continues). A portion of the fees received has been deferred to absorb any required payments with respect to these transactions. Based on an evaluation of and recent experience with the underlying housing projects, we believe that such deferrals are sufficient for this purpose. Employees Duquesne Light is a party to a labor contract with the International Brotherhood of Electrical Workers (IBEW), which represents the majority of Duquesne Light's employees. This contract expires September 30, 2003. Legal Proceedings AquaSource. In February 2001, 39 former and current employees of our subsidiary AquaSource, Inc., all minority investors in AquaSource, commenced an action against DQE, AquaSource and others in the District Court of Harris County, Texas. The complaint alleged that the defendants fraudulently induced the plaintiffs to agree to sell their AquaSource Class B stock back to AquaSource by falsely promising orally that DQE would invest $1 billion or more in AquaSource, which, plaintiffs allege, would have permitted them to realize significant returns on their investments in AquaSource. The complaint also alleged that the defendants mismanaged AquaSource, and thus decreased the value of plaintiffs' AquaSource stock. Plaintiffs sought, among other relief, an order rescinding their agreements to sell their stock back to AquaSource, an award of actual damages not to exceed $100 million and exemplary damages not to exceed $400 million. In the first quarter of 2002, DQE and AquaSource filed counterclaims alleging that 10 plaintiffs who held key AquaSource management positions engaged in deceptive practices designed to obtain funding for acquisitions and to make those acquisitions appear to meet certain return on investment requirements, and that all plaintiffs were unjustly enriched by these wrongful actions. DQE, AquaSource and AquaSource Utility, Inc. also filed a counterclaim against two plaintiffs alleging claims for breach of contract, breach of warranty, indemnification, fraud and unjust enrichment in connection with the acquisition of various water and wastewater companies from these two plaintiffs. The parties entered into a settlement agreement which became effective October 7, 2002. The total settlement is valued at approximately $22 million, and includes cash, 60,000 shares of our Preferred Stock, Series A (Convertible), a note receivable, an AquaSource building in Houston together with furniture and fixtures, and one other piece of real property in Houston. The building, furniture, fixtures and property were transferred to the plaintiffs' designee. The plaintiffs provided all defendants with a broad release of all claims arising out of the transactions that are the subject of the litigation, as well as all claims relating to any plaintiff's past employment with AquaSource. The plaintiffs also agreed not to solicit AquaSource customers or employees through October 31, 2003. The settlement provides that each holder of the preferred stock received in the settlement has the option to sell all, but not less than all, of such holder's shares of the preferred stock to us on the earlier to occur of (i) a sale by us of all or substantially all of the stock or assets of AquaSource or (ii) the two-year anniversary of the settlement effective date. The purchase price of each share of preferred stock to be so purchased by us will be the $100 liquidation value, plus an amount equal to accrued dividends to the date of payment. The purchase price will be payable entirely in cash or, at our election, in common stock. An estimated reserve for this matter was made at June 30, 2002. The final settlement did not significantly affect our third quarter results of operations or cash flows. 11 Shareholder Class Action. In October and November 2001, a number of putative class action lawsuits were filed by purported shareholders of DQE against DQE and David Marshall, DQE's former chairman, chief executive officer and president, in the United States District Court for the Western District of Pennsylvania. These cases were consolidated under the caption In re DQE, Inc. Securities Litigation, Master File No. 01-1851 (W.D. Pa.), and the plaintiffs filed a second consolidated amended complaint on April 15, 2002. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, and Section 12(a)(2) of the Securities Act of 1933 (the "Securities Act"). The complaint also alleges controlling person liability under Section 20(a) of the Exchange Act and Section 15 of the Securities Act. The complaint alleges that between December 6, 2000 and April 30, 2001, the defendants issued a number of materially false and misleading statements concerning investments made by our subsidiary, DQE Enterprises, and the impact that these investments would have on our current and future financial results. More particularly, the complaint alleges that DQE and Marshall stated their expectation that certain companies in which DQE Enterprises had invested would undertake initial public offerings of their shares, with the result that our earnings would be positively impacted by the public market valuation of DQE Enterprises' interests in these companies, but failed to disclose allegedly adverse facts that made the possibility of successful public offerings of the securities of these companies unlikely. The complaint seeks an award of unspecified compensatory damages, and an order permitting class members who purchased DQE shares through a dividend reinvestment plan to rescind those purchases, pre- and post-judgment interest, attorneys' fees and expenses of litigation and unspecified equitable and injunctive relief. On May 24, 2002, we filed a motion on behalf of DQE and David Marshall, seeking dismissal of the lawsuit. On October 17, 2002, the District Court denied the motion. Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, strenuously deny all of the plaintiffs' allegations of wrongdoing and believe we have meritorious defenses to the plaintiffs' claims. We are vigorously defending this lawsuit. Income Taxes The annual Federal corporate income tax returns have been audited by the Internal Revenue Service (IRS) and are closed for the tax years through 1993. The IRS examination of the 1994 tax year has been completed, and the IRS issued a notice of proposed adjustment increasing our 1994 income tax liability in the approximate amount of $22 million (including penalties and interest). The proposed adjustment relates to an investment by one of our subsidiaries in certain structured lease transactions. We have paid the proposed adjustment and filed a protest, which is currently pending with the IRS Appeals Office. As part of their current audit of our 1995 through 1997 years, the IRS has indicated that it is considering proposed adjustments for these years relating to the same transactions as well as to other similar transactions. If the IRS were to propose adjustments relating to these transactions for the years 1995 through 2001 similar to those proposed for 1994 and if those adjustments were sustained, we would project that the proposed assessment of additional tax would be approximately $175 million (before interest and penalties), including the tax portion of the $22 million adjustment for 1994. We intend to deposit $105 million with the IRS to be applied toward any adjustments which may ultimately be proposed. The tax years 1998 through 2001 remain subject to IRS review. One of our subsidiaries entered into other structured lease transactions from 1995 through 1997. In 1999, the IRS published a revenue ruling setting forth its official position which is to disallow deductions attributable to certain leasing transactions. In October 2002, the IRS published a revenue ruling reaffirming its position to disallow deductions attributable to leasing transactions. We believe the IRS is likely to challenge our subsidiary's structured lease transactions by characterizing them as those described in the revenue ruling. However, the IRS has not yet proposed any adjustments with respect to these transactions, and we cannot predict the nature, extent or timing of any proposed adjustments. It is not possible to predict if, when or to what extent any IRS adjustments ultimately proposed for the period 1994 through 2001 will be sustained. We do not believe that the ultimate resolution of our federal tax liability for this period will have a material adverse effect on our financial position. However, the resolution of this tax liability, depending on the extent and timing thereof, could have a material adverse effect on our results of operations and cash flows for the period in which the liability is determined or paid. 12 Other DQE Financial maintains a limited partnership investment in a waste-to-energy facility. In January 2002, Moody's Investor Service downgraded the credit rating of the general partner's parent, who also guaranteed the partnership's obligations. This credit condition led to an event of default under the partnership's service agreement to operate the underlying waste-to-energy facility for a local authority. On April 1, 2002, the general partner, its parent and the partnership filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The local authority issued a notice to terminate the service agreement; however, the termination has been suspended under the automatic stay protection afforded the partnership by the bankruptcy filing. Subsequent to the bankruptcy filing, the general partner obtained debtor-in-possession financing to meet ongoing cash needs and has obtained a non-binding letter of intent to be acquired upon emergence from Chapter 11. The partnership group, including DQE Financial, is negotiating with the local authority to restructure the service agreement. DQE Financial is currently assessing the effect of these events on the recoverability of its asset carrying value, which is approximately $15.6 million as of September 30, 2002, but cannot predict the extent of any potential charge at this time. DQE Financial has a twenty-year lease for the gas rights to New York City's Fresh Kills landfill. DQE Financial also maintains an investment in a gas processing facility at the landfill and was constructing additional processing capacity when the World Trade Center tragedy occurred. The debris from the World Trade Center was transported to the Fresh Kills landfill and currently rests on top of the landfill's largest hill. Landfill gas volumes have declined substantially at the landfill due to, among other reasons, the excess weight of the debris causing damage to the gas collection system. The decline in gas volumes caused DQE Financial to suspend its construction of additional processing capacity. At December 31, 2001, management determined that the Fresh Kills investment was impaired, and recognized an impairment charge of $45.7 million on a pre-tax basis. During 2002, DQE Financial has realized further reductions in available gas volumes. Management is continuing discussions with the New York City Department of Sanitation in order to improve financial performance of the facility. DQE Financial continues to assess the effect of these events on the recoverability of its asset carrying value, which is approximately $28.4 million as of September 30, 2002, but cannot predict the extent of any potential charge at this time. I. DISCONTINUED OPERATIONS Beginning in the third quarter of 2002, AquaSource and certain items from the "all other" category that are associated with AquaSource have been reflected as discontinued operations in the consolidated financial statements. These statements have been reclassified to conform to the discontinued operations presentation for all periods presented. On July 29, 2002, we entered into an agreement to sell AquaSource's investor-owned water utilities to Philadelphia Suburban Corporation (PSC) for approximately $205 million in cash. In addition, PSC is acquiring selected operating and maintenance contract operations in seven states that are closely integrated with the investor-owned water utilities being acquired. The businesses being acquired represent approximately 85% of AquaSource's 2001 total assets. The final purchase price could vary from $180 to $215 million, as various purchase price adjustments are applied. These adjustments relate to the achievement of specific operating performance metrics during the interim period until closing, involving revenue, rate base and customer connections. The closing is expected to occur in the second half of 2003, contingent upon regulatory approvals. On August 5, 2002, we announced the sale of an AquaSource water utility subsidiary to California Water Services Group for $7.7 million. This sale was contemplated as an option under our agreement with PSC, and a purchase price adjustment (in addition to those discussed above) will be applied with respect to the assets to be acquired by PSC. The closing is expected to occur in early 2003, contingent upon regulatory approval. On September 17, 2002, we announced the sale of the majority of AquaSource's contract operations business to Southwest Water Company, for an expected purchase price, after adjustments, to exceed $10 million in cash, which approximates book value. The portions of the business being acquired have operations primarily in and around Houston, Texas, and the Colorado region. These operations represent approximately 20% of AquaSource's 2001 total revenues and less than 2% of the company's 2001 assets. These contract operations provide operating, maintenance, and management services to state, county, municipal, and industrial water and 13 wastewater systems. The closing is expected to occur during the fourth quarter of 2002. In the first nine months of 2002, we sold various assets, including several other wastewater facilities and real property, receiving proceeds of approximately $6 million, which approximated book value. We are in the process of disposing of the remainder of AquaSource's assets, which primarily includes the construction business. The following table summarizes income statement data from discontinued operations: =================================================== Three Months Ended September 30, ------------------ (In Millions) 2002 2001 - --------------------------------------------------- Revenues $28.5 $29.6 Operating Results, net of tax of $1.6 and $0.2 4.0 (1.7) Loss from sale of Discontinued Operations, net of tax of $(3.4) and $-- (6.2) -- - --------------------------------------------------- =================================================== Nine Months Ended September 30, ------------------ (In Millions) 2002 2001 - --------------------------------------------------- Revenues $ 82.4 $ 81.6 Operating Results, net of tax of $1.8 and $8.7 4.7 (102.7) Loss from sale of Discontinued Operations, net of tax of $(3.4) and $-- (107.1) -- - --------------------------------------------------- The following table summarizes major assets and liabilities for discontinued operations: ======================================================== September 30, December 31, (In Millions) 2002 2001 - -------------------------------------------------------- Other current assets $ 42.4 $ 25.9 Property and equipment, net 157.5 216.4 Other non-current assets -- 137.9 Other current liabilities 40.6 19.7 Debt 13.4 14.3 Other non-current liabilities -- 5.6 - -------------------------------------------------------- AquaSource currently provides water utility service to more than 520,000 water and wastewater customer connections in 18 states. AquaSource's water utility operations are regulated by various authorities in the states where they operate as to rates, accounting and other matters. J. BUSINESS SEGMENTS AND RELATED INFORMATION We report the results of our business segments, determined by products, services and regulatory environment as follows: (1) Duquesne Light's transmission and distribution of electricity (electricity delivery business segment), (2) Duquesne Light's supply of electricity (electricity supply business segment), (3) Duquesne Light's collection of transition costs (CTC business segment), (4) DQE Energy Services' development, operation and maintenance of energy facilities and, for a single customer, alternative fuel facilities (Energy Services business segment), (5) DQE Financial's collection and processing of landfill gas and management of structured finance and alternative energy investments (Financial business segment) and (6) DQE Enterprises' management of electronic commerce and energy technologies investment portfolios (Enterprises business segment). We also report an "all other" category, to include our other subsidiaries below the quantitative threshold for disclosure, and corporate administrative functions, financing, and insurance services for our various affiliates. Operating revenues in our "all other" category are comprised of revenues from our propane delivery and telecommunications business lines, and from our bottled water business in 2001. Because AquaSource is reported as a discontinued operation, we no longer report a water distribution business segment. (See Note I.) 14 Business Segments for the Three Months Ended:
- ----------------------------------------------------------------------------------------------------- (Millions of Dollars) -------------------------------------------------------- Electricity Electricity Energy Delivery Supply CTC Services Financial -------------------------------------------------------- September 30, 2002 - ----------------------------------------------------------------------------------------------------- Operating revenues $ 99.4 $139.9 $15.3 $14.8 $ 3.7 Operating expenses 37.9 130.3 0.6 7.0 10.1 Depreciation and amortization expense 14.1 -- 14.0 0.5 1.8 - ----------------------------------------------------------------------------------------------------- Operating income (loss) 47.4 9.6 0.7 7.3 (8.2) Other income 6.0 -- -- 1.4 13.3 Interest and other charges 16.9 -- -- 0.2 0.5 - ----------------------------------------------------------------------------------------------------- Income (loss) before taxes 36.5 9.6 0.7 8.5 4.6 Income taxes 15.2 3.9 0.3 2.9 (0.8) - ----------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 21.3 5.7 0.4 5.6 5.4 Dividends on preferred stock -- -- -- -- -- - ----------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations available for common stock $ 21.3 $ 5.7 $ 0.4 $ 5.6 $ 5.4 ===================================================================================================== Assets $1,891.8 $ -- $31.8 $38.7 $610.9 ===================================================================================================== Capital expenditures $ 16.4 $ -- $ -- $ 0.1 $ 0.2 ===================================================================================================== - ----------------------------------------------------------------------------------------------- (Millions of Dollars) - ----------------------------------------------------------------------------------------------- Enterprises Other Eliminations Consolidated -------------------------------------------------- September 30, 2002 - ----------------------------------------------------------------------------------------------- Operating revenues $ -- $ 8.3 $(0.5) $ 280.9 Operating expenses 0.2 13.8 (0.1) 199.8 Depreciation and amortization expense -- 1.1 -- 31.5 - ----------------------------------------------------------------------------------------------- Operating income (loss) (0.2) (6.6) (0.4) 49.6 Other income 0.2 0.3 (4.8) 16.4 Interest and other charges -- 6.5 (4.5) 19.6 - ----------------------------------------------------------------------------------------------- Income (loss) before taxes -- (12.8) (0.7) 46.4 Income taxes -- (4.3) -- 17.2 - ----------------------------------------------------------------------------------------------- Income (loss) from continuing operations -- (8.5) (0.7) 29.2 Dividends on preferred stock -- 0.2 -- 0.2 - ----------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations available for common stock $ -- $ (8.7) $(0.7) $ 29.0 =============================================================================================== Assets $12.6 $121.3 $ -- $2,707.1 =============================================================================================== Capital expenditures $ -- $ 3.5 $ -- $ 20.2 ===============================================================================================
15 Business Segments for the Three Months Ended:
- ------------------------------------------------------------------------------------------------------ (Millions of Dollars) --------------------------------------------------------- Electricity Electricity Energy Delivery Supply CTC Services Financial --------------------------------------------------------- September 30, 2001 - ------------------------------------------------------------------------------------------------------ Operating revenues $ 84.5 $125.9 $ 85.8 $10.2 $ 3.7 Operating expenses 36.1 125.9 3.8 8.5 10.2 Depreciation and amortization expense 15.0 -- 77.8 0.5 1.0 - ------------------------------------------------------------------------------------------------------ Operating income (loss) 33.4 -- 4.2 1.2 (7.5) Other income 8.8 -- -- 2.7 15.5 Interest and other charges 19.3 -- -- 0.1 1.1 - ------------------------------------------------------------------------------------------------------ Income (loss) before taxes 22.9 -- 4.2 3.8 6.9 Income taxes 8.9 -- 1.5 1.3 (1.8) - ------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations 14.0 -- 2.7 2.5 8.7 Dividends on preferred stock -- -- -- -- -- - ------------------------------------------------------------------------------------------------------ Earnings (loss) from continuing operations available for common stock $ 14.0 $ -- $ 2.7 $ 2.5 $ 8.7 ====================================================================================================== Assets (1) $1,702.5 $ -- $134.3 $35.2 $623.6 ====================================================================================================== Capital expenditures $ 15.4 $ -- $ -- $ 0.2 $ 14.9 ====================================================================================================== - ----------------------------------------------------------------------------------------------- (Millions of Dollars) -------------------------------------------------- Enterprises Other Eliminations Consolidated -------------------------------------------------- September 30, 2001 - ----------------------------------------------------------------------------------------------- Operating revenues $ 2.3 $ 11.2 $(1.8) $ 321.8 Operating expenses 1.8 13.9 (2.6) 197.6 Depreciation and amortization expense 0.4 1.8 -- 96.5 - ----------------------------------------------------------------------------------------------- Operating income (loss) 0.1 (4.5) 0.8 27.7 Other income 14.7 1.0 (8.9) 33.8 Interest and other charges -- 11.6 (7.5) 24.6 - ----------------------------------------------------------------------------------------------- Income (loss) before taxes 14.8 (15.1) (0.6) 36.9 Income taxes 6.0 (3.4) -- 12.5 - ----------------------------------------------------------------------------------------------- Income (loss) from continuing operations 8.8 (11.7) (0.6) 24.4 Dividends on preferred stock -- 0.2 -- 0.2 - ----------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations available for common stock $ 8.8 $(11.9) $(0.6) $ 24.2 =============================================================================================== Assets (1) $35.2 $314.9 $ -- $2,845.7 =============================================================================================== Capital expenditures $ 0.1 $ 2.5 $ -- $ 33.1 ===============================================================================================
(1) Relates to assets as of December 31, 2001. 16 Business Segments for the Nine Months Ended:
- ------------------------------------------------------------------------------------------------------ (Millions of Dollars) --------------------------------------------------------- Electricity Electricity Energy Delivery Supply CTC Services Financial --------------------------------------------------------- September 30, 2002 - ------------------------------------------------------------------------------------------------------ Operating revenues $265.1 $358.0 $113.9 $36.9 $ 11.6 Operating expenses 114.0 342.7 5.0 18.6 32.5 Depreciation and amortization expense 42.3 -- 105.0 1.5 5.3 - ------------------------------------------------------------------------------------------------------ Operating income (loss) 108.8 15.3 3.9 16.8 (26.2) Other income 26.3 -- -- 2.7 42.0 Interest and other charges 55.8 -- -- 0.5 1.2 - ------------------------------------------------------------------------------------------------------ Income (loss) before taxes 79.3 15.3 3.9 19.0 14.6 Income taxes 32.3 6.2 1.4 6.5 (1.7) - ------------------------------------------------------------------------------------------------------ Income (loss) before impairment 47.0 9.1 2.5 12.5 16.3 Impairment, net -- -- -- -- -- - ------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations 47.0 9.1 2.5 12.5 16.3 Dividends on preferred stock -- -- -- -- -- - ------------------------------------------------------------------------------------------------------ Earnings (loss) from continuing operations available for common stock $ 47.0 $ 9.1 $ 2.5 $12.5 $ 16.3 ====================================================================================================== Capital expenditures $ 51.3 $ -- $ -- $ 0.4 $ 1.7 ====================================================================================================== - ----------------------------------------------------------------------------------------------- (Millions of Dollars) -------------------------------------------------- Enterprises Other Eliminations Consolidated -------------------------------------------------- September 30, 2002 - ----------------------------------------------------------------------------------------------- Operating revenues $ 0.9 $ 33.4 $(1.5) $818.3 Operating expenses 1.9 46.8 (0.4) 561.1 Depreciation and amortization expense 0.1 3.7 -- 157.9 - ----------------------------------------------------------------------------------------------- Operating income (loss) (1.1) (17.1) (1.1) 99.3 Other income 0.6 2.5 (18.2) 55.9 Interest and other charges -- 23.2 (16.8) 63.9 - ----------------------------------------------------------------------------------------------- Income (loss) before taxes (0.5) (37.8) (2.5) 91.3 Income taxes (0.3) (13.0) -- 31.4 - ----------------------------------------------------------------------------------------------- Income (loss) before impairment (0.2) (24.8) (2.5) 59.9 Impairment, net (10.8) -- -- (10.8) - ----------------------------------------------------------------------------------------------- Income (loss) from continuing operations (11.0) (24.8) (2.5) 49.1 Dividends on preferred stock -- 0.5 -- 0.5 - ----------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations available for common stock $(11.0) $(25.3) $(2.5) $ 48.6 =============================================================================================== Capital expenditures $ -- $ 7.0 $ -- $ 60.4 ===============================================================================================
17 Business Segments for the Nine Months Ended:
- ------------------------------------------------------------------------------------------------------ (Millions of Dollars) --------------------------------------------------------- Electricity Electricity Energy Delivery Supply CTC Services Financial --------------------------------------------------------- September 30, 2001 - ------------------------------------------------------------------------------------------------------ Operating revenues $238.9 $332.3 $233.8 $19.2 $ 18.6 Operating expenses 115.3 332.3 10.4 16.1 30.8 Depreciation and amortization expense 44.6 -- 207.3 1.4 3.1 - ------------------------------------------------------------------------------------------------------ Operating income (loss) 79.0 -- 16.1 1.7 (15.3) Other income 30.5 -- -- 8.6 50.0 Interest and other charges 59.7 -- -- 0.4 5.3 - ------------------------------------------------------------------------------------------------------ Income (loss) before taxes 49.8 -- 16.1 9.9 29.4 Income taxes 19.9 -- 5.7 3.3 (0.6) - ------------------------------------------------------------------------------------------------------ Income (loss) before impairment 29.9 -- 10.4 6.6 30.0 Impairment, net -- -- -- -- -- - ------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations 29.9 -- 10.4 6.6 30.0 Dividends on preferred stock -- -- -- -- -- - ------------------------------------------------------------------------------------------------------ Earnings (loss) from continuing operations available for common stock $ 29.9 $ -- $ 10.4 $ 6.6 $ 30.0 ====================================================================================================== Capital expenditures $ 41.9 $ -- $ -- $ 1.1 $ 35.2 ====================================================================================================== - ----------------------------------------------------------------------------------------------- (Millions of Dollars) -------------------------------------------------- Enterprises Other Eliminations Consolidated -------------------------------------------------- September 30, 2001 - ----------------------------------------------------------------------------------------------- Operating revenues $ 13.2 $ 55.7 $ (7.9) $903.8 Operating expenses 11.2 55.0 (11.6) 559.5 Depreciation and amortization expense 2.0 5.7 -- 264.1 - ----------------------------------------------------------------------------------------------- Operating income (loss) -- (5.0) 3.7 80.2 Other income 17.5 (15.3) (28.2) 63.1 Interest and other charges 0.1 37.3 (22.8) 80.0 - ----------------------------------------------------------------------------------------------- Income (loss) before taxes 17.4 (57.6) (1.7) 63.3 Income taxes 6.2 (14.8) -- 19.7 - ----------------------------------------------------------------------------------------------- Income (loss) before impairment 11.2 (42.8) (1.7) 43.6 Impairment, net (27.7) -- -- (27.7) - ----------------------------------------------------------------------------------------------- Income (loss) from continuing operations (16.5) (42.8) (1.7) 15.9 Dividends on preferred stock -- 0.4 -- 0.4 - ----------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations available for common stock $(16.5) $(43.2) $ (1.7) $ 15.5 =============================================================================================== Capital expenditures $ 0.1 $ 6.9 $ -- $ 85.2 ===============================================================================================
18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Part I, Item 2 of this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission (SEC), and the condensed consolidated financial statements, which are set forth in Part I, Item 1 of this Report. DQE, Inc. delivers essential products and related services, including electricity, water and communications, to more than one million customers throughout the United States. Our subsidiaries include Duquesne Light Company; AquaSource, Inc.; DQE Energy Services, LLC; Duquesne Power, Inc.; DQE Financial Corp.; DQE Enterprises, Inc.; DQE Communications, Inc.; ProAm, Inc.; Cherrington Insurance, Ltd.; and DQE Capital Corporation. Duquesne Light, our largest operating subsidiary, is an electric utility engaged in the transmission and distribution of electric energy. AquaSource is a water resource management company. Since July 2002, we entered agreements to sell more than 85% of AquaSource's assets. AquaSource is now reported as a discontinued operation. (See Note I.) DQE Energy Services is an energy facilities management company that provides energy outsourcing solutions including development, operation and maintenance of energy and alternative fuel facilities. Duquesne Power Inc. was formed in April 2002 to explore various alternative generation supply options. DQE Financial owns and operates landfill gas collection and processing systems, and is an investment and portfolio management organization focused on structured finance and alternative energy investments. DQE Enterprises manages our remaining electronic commerce and energy technologies investment portfolios. Our other business lines include the following: propane distribution, communications systems, and financing and insurance services for DQE and various affiliates. Service Areas Duquesne Light's electric utility operations provide service to approximately 586,000 direct customers in southwestern Pennsylvania (including in the City of Pittsburgh), a territory of approximately 800 square miles. ProAm, our propane delivery business, provides service to over 70,000 customers in seven states. Our other business lines have operations and investments in several states and Canada. Regulation DQE and Duquesne Light are subject to the accounting and reporting requirements of the SEC. Duquesne Light's electric delivery business is also subject to regulation by the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FERC) with respect to rates for delivery of electric power, accounting and other matters. Business Segments This information is set forth in "Results of Operations" below and in "Business Segments and Related Information," Note J to our condensed consolidated financial statements. Forward-looking Statements We use forward-looking statements in this report. Statements that are not historical facts are forward-looking statements, and are based on beliefs and assumptions of our management, and on information currently available to management. Forward-looking statements include statements preceded by, followed by or using such words as "believe," "expect," "anticipate," "plan," "estimate" or similar expressions. Such statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events. Actual results may materially differ from those implied by forward-looking statements due to known and unknown risks and uncertainties, some of which are discussed in "Outlook" below. Recent Accounting Pronouncements In June 2001 the Financial Accounting Standards Board (FASB) issued a new accounting standard, Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Specifically, this standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, if a reasonable estimate of fair value can be made. The entity is required to capitalize the cost by increasing the carrying amount of the related long-lived asset. The capitalized cost is then depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either 19 settles the obligation for its recorded amount or incurs a gain or loss. The standard is effective for fiscal years beginning after June 15, 2002. We are currently evaluating, but have yet to determine, the impact that the adoption of SFAS No. 143 will have on our financial statements. RESULTS OF OPERATIONS Overall Performance Three months ended September 30, 2002. Earnings from continuing operations available for common stock were $29.0 million or $0.39 per share in the third quarter of 2002, compared to earnings of $24.2 million or $0.43 per share in the third quarter of 2001, an aggregate increase of $4.8 million. The average shares outstanding increased 18.2 million, or 32.6%, principally due to the June 2002 common stock offering. The increase in earnings from continuing operations is due to a number of factors: . Pittsburgh experienced hotter than normal weather in the third quarter of 2002, due to the third warmest summer on record in our nation's history, which resulted in higher demand for cooling. . During 2002, Duquesne Light began operating under its new provider of last resort arrangement (POLR II, described below). . Third quarter earnings increased at the Energy Services business segment. . Savings from our fourth quarter of 2001 corporate restructuring, and our continued focus on other cost reductions, contributed to third quarter of 2002 income. . Interest expense in the third quarter of 2002 was reduced due to debt retirements in late 2001 and 2002 and favorable interest rates on our variable rate, tax-exempt debt. The following factors partially offset these contributions to earnings from continuing operations: . Although the $8.4 million after-tax gain in the third quarter of 2001 resulting from the sale of the Pittsburgh International Airport energy facility contributed to 2001 income, we recognized no such gain in the third quarter of 2002. . Income from the CTC business segment declined following the full collection of the CTC balance for most of our customers. After considering discontinued operations, the earnings available for common stock were $26.8 million or $0.36 per share in the third quarter of 2002, compared to earnings of $22.5 million or $0.40 per share in the third quarter of 2001, an aggregate increase of $4.3 million. Nine months ended September 30, 2002. Earnings from continuing operations available for common stock were $48.6 million or $0.78 per share in the first nine months of 2002, compared to earnings of $15.5 million or $0.28 per share in the first nine months of 2001, an increase of $33.1 million. The average shares outstanding increased 6.7 million, or 12.0%, principally due to the June 2002 common stock offering. The factors described above as affecting earnings from continuing operations in the third quarter of 2002 also impacted the results of the first nine months of 2002. The following are additional factors that impacted the results of the first nine months of 2002: . After-tax investment impairment charges of $10.8 million in 2002 and $27.7 million in 2001 related to the investments held by the Enterprises business segment. (See Note D.) . An additional $4.9 million after-tax loss recorded in 2001 on the sale of our bottled water business. . Decreased earnings in 2002 from our Financial business segment due to the sale of a significant portion of our affordable housing portfolio in the first quarter of 2002, coupled with decreased landfill gas production and lower gas sales prices in 2002 as compared to 2001. After-tax impairment charges relating to discontinued operations totaling $100.9 million were recorded in the second quarter of 2002, while after-tax impairment charges of $99.7 million were recorded in the second quarter of 2001. (See Notes D and I.) A charge of $113.7 million was recorded effective as of January 1, 2002 related to the cumulative effect of a change in accounting principle relating to the impairment of goodwill resulting from the adoption of SFAS No. 142. (See Note D.) After considering discontinued operations and the cumulative effect charge, the loss attributable to common stock was $167.5 million or $2.68 per share for the first nine months of 2002, compared to a loss of $87.2 million or $1.56 per share in the first nine months of 2001. 20 Results of Operations by Business Segment We report the results of our business segments, determined by products, services and regulatory environment as follows: (1) Duquesne Light's transmission and distribution of electricity (electricity delivery business segment), (2) Duquesne Light's supply of electricity (electricity supply business segment), (3) Duquesne Light's collection of transition costs (CTC business segment), (4) DQE Energy Services' development, operation and maintenance of energy facilities and, for a single customer, alternative fuel facilities (Energy Services business segment), (5) DQE Financial's collection and processing of landfill gas and the management of structured finance and alternative energy investments (Financial business segment), and (6) DQE Enterprises' management of electronic commerce and energy technologies investment portfolios (Enterprises business segment). We also report an "all other" category to include our other subsidiaries below the quantitative threshold for disclosure, and corporate administrative functions, financing, and insurance services for our various affiliates. Because AquaSource is now reported as a discontinued operation, we no longer report a water distribution business segment. (See Note I.) We have restated prior periods where appropriate to present segment information consistent with the manner that is currently utilized by management. Note J shows the financial results of each principal business segment in tabular form. Following is a discussion of these results. Electricity Delivery Business Segment. Three months ended September 30, 2002. The electricity delivery business segment reported $21.3 million of income in the third quarter of 2002 compared to $14.0 million in the third quarter of 2001, an increase of $7.3 million, or 52.1%, as a result of higher revenues in 2002 due to the hotter than normal summer temperatures. Operating revenues for this business segment are primarily derived from the delivery of electricity, including related excise taxes. Sales to residential and commercial customers are primarily influenced by weather conditions. Warmer summer and colder winter seasons lead to increased customer use of electricity for cooling and heating. Commercial sales also are affected by regional development. Sales to industrial customers are influenced by national and global economic conditions. Operating revenues increased by $14.9 million or 17.6% compared to the third quarter of 2001. The increase can be primarily attributed to the 11.3% increase in kilowatt-hour sales to customers from 2001. In addition, there has been a $6.2 million increase in 2002 in the excise taxes that are collected through revenue. The largest excise tax increase is in the Pennsylvania revenue neutral reconciliation (RNR) tax rate, which became effective January 1, 2002. Electric distribution companies, such as Duquesne Light, are permitted to recover this cost from consumers on a current basis. (See "Legal Proceedings.") The hotter than normal summer temperatures in the Pittsburgh region resulted in residential and commercial sales increasing 20.3% and 10.0%, respectively, compared to 2001, in response to higher cooling demands. Industrial sales, which are less sensitive to the weather, also increased by 3.0% due to higher sales to industrial customers in the primary metals sector. The following table sets forth kilowatt-hours (KWH) delivered to electric utility customers. - --------------------------------------------------------------- KWH Delivered ---------------------- (In Millions) ---------------------- Third Quarter 2002 2001 Change - --------------------------------------------------------------- Residential 1,235 1,027 20.3% Commercial 1,863 1,693 10.0% Industrial 871 846 3.0% - ------------------------------------------------------ Sales to Electric Utility Customers 3,969 3,566 11.3% =============================================================== Operating expenses for the electricity delivery business segment consist primarily of costs to operate and maintain the transmission and distribution system; meter reading, billing and collection costs; customer service; administrative expenses; and non-income taxes, such as gross receipts, property and payroll taxes. Operating expenses increased by $1.8 million or 5.0% compared to the third quarter of 2001, primarily due to the increase in gross receipts tax of approximately $4.0 million from the increased RNR in 2002. This increase was partially offset by the corporate restructuring that occurred in the fourth quarter of 2001, as well as our cost reduction initiatives, which continue to generate incremental cost savings. Other income decreased $2.8 million or 31.8% compared to the third quarter of 2001, primarily due to higher interest earnings in the third quarter of 2001. Interest and other charges include interest on long-term debt, other interest and preferred stock dividends of Duquesne Light. Interest and other charges decreased $2.4 million or 12.4% compared to the third quarter of 2001 due to debt retirements during August 2002 totaling $110.0 million, which 21 reduced interest expense by $1.3 million, coupled with favorable interest rates on the variable rate, tax-exempt debt. Nine months ended September 30, 2002. The electricity delivery business segment reported $47.0 million of income in the first nine months of 2002, compared to $29.9 million in the first nine months of 2001, an increase of $17.1 million, or 57.2%. This improvement is a result of higher operating revenues due to the hotter than normal summer weather coupled with lower operating expenses due to the corporate restructuring that occurred in the fourth quarter of 2001, as well as our cost reduction initiatives, which continue to generate incremental cost savings. Operating revenues increased by $26.2 million or 11.0% compared to the first nine months of 2001. The increase can be largely attributed to the $16.2 million increase in the excise taxes that are collected through revenue, in particular the RNR increase. In addition, sales to electric utility customers increased approximately 5.1% due to the hotter than normal summer weather. In addition to the nation's third warmest summer, we also experienced the fifth warmest winter on record. The higher than normal summer demand for cooling more than offset the lower than normal winter demand for heating, and residential and commercial sales increased by 9.0% and 5.0%, respectively. Industrial sales, which are less sensitive to the weather, also increased by 1.2% due to higher sales to industrial customers in the primary metals sector. The following table sets forth KWH delivered to electric utility customers. - ---------------------------------------------------------------- KWH Delivered ----------------------- (In Millions) ----------------------- First Nine Months 2002 2001 Change - ---------------------------------------------------------------- Residential 2,993 2,746 9.0% Commercial 4,982 4,747 5.0% Industrial 2,534 2,504 1.2% - ------------------------------------------------------- Sales to Electric Utility Customers 10,509 9,997 5.1% ================================================================ Operating expenses decreased by $1.3 million or 1.1% compared to the first nine months of 2001. This decrease is due to the corporate restructuring that occurred in the fourth quarter of 2001, as well as our cost reduction initiatives, which continue to generate incremental cost savings. Offsetting these decreases is an increase in gross receipts tax of approximately $11.5 million due to the increased RNR in 2002. Other income decreased $4.2 million or 13.8% compared to the first nine months of 2001. During the first nine months of 2002, we experienced lower interest earnings compared to the first nine months of 2001. Interest and other charges decreased $3.9 million or 6.5% compared to the first nine months of 2001 due to debt retirements during August 2002 totaling $110.0 million, which reduced interest expense by $1.3 million, coupled with favorable interest rates on the variable rate, tax-exempt debt. Electricity Supply Business Segment. Three months ended September 30, 2002. The electricity supply business segment reported income of $5.7 million in the third quarter of 2002, compared with income of zero in the third quarter of 2001. For the period April 28, 2000 through December 31, 2001, this segment's financial results reflected our initial provider of last resort service arrangement (POLR I), which was designed to be income neutral to Duquesne Light. During the first quarter of 2002, Duquesne Light began operating under POLR II, which extends the provider of last resort service (and the PUC-approved rates for the supply of electricity) beyond the final CTC collection through December 31, 2004. POLR II also permits Duquesne Light, following CTC collection for each rate class, an average margin of 0.5 cents per KWH supplied. Operating revenues for this business segment are derived primarily from the supply of electricity for delivery to retail customers and, to a much lesser extent, the supply of electricity to wholesale customers. Retail energy requirements fluctuate as the number of customers participating in customer choice changes. Energy requirements for residential and commercial customers are also influenced by weather conditions; temperature extremes lead to increased customer use of electricity for cooling and heating. Commercial energy requirements are also affected by regional development. Energy requirements for industrial customers are primarily influenced by national and global economic conditions. Short-term sales to other utilities are made at market rates. Fluctuations result primarily from excess daily energy deliveries to Duquesne Light's electricity delivery system. Operating revenues increased $14.0 million or 11.1% compared to the third quarter of 2001, due to higher average generation rates. The average generation rate increased January 1, 2002, due to scheduled rate increases. In addition, the average rates increase incrementally as rate classes become subject to the POLR II arrangement. Those higher 22 average generation rates more than offset the 1.4% decline in total KWH supplied. The following table sets forth KWH supplied for customers who had not chosen an alternative generation supplier, segregated by those customers supplied under the POLR I or the POLR II contract. - ------------------------------------------------------------ KWH Supplied --------------------------------- (In Millions) --------------------------------- Third Quarter 2002 2001 - ------------------------------------------------------------ POLR I POLR II Total POLR I - ------------------------------------------------------------ Residential 60 783 843 675 Commercial 311 1,085 1,396 1,627 Industrial 530 277 807 806 - ------------------------------------------------------------ KWH Sales 901 2,145 3,046 3,108 Sales to Other Utilities 53 36 - ------------------------------------------------------------ Total Sales 3,099 3,144 ============================================================ Operating expenses for the electricity supply business segment consist of costs to obtain energy for our provider of last resort service and gross receipts tax, both of which fluctuate in direct relation to operating revenues. Operating expenses increased $4.4 million or 3.5% compared to the third quarter of 2001. As a result of the higher average generation rates charged to customers in the third quarter of 2002, the cost of energy increased due to the pass-through nature of the provider of last resort arrangements. Nine months ended September 30, 2002. The electricity supply business segment reported income of $9.1 million in the first nine months of 2002, compared to income of zero in the first nine months of 2001. During the first quarter of 2002, Duquesne Light began operating under the POLR II arrangement, discussed above. Operating revenues increased $25.7 million or 7.7% compared to the first nine months of 2001, due to higher average generation rates, discussed above. These higher average generation rates more than offset the 2.8% decline in total KWH supplied. The following table sets forth KWH supplied for customers who had not chosen an alternative generation supplier, segregated by those customers supplied under the POLR I or the POLR II arrangement. - ------------------------------------------------------------ KWH Supplied --------------------------------- (In Millions) --------------------------------- First Nine Months 2002 2001 - ------------------------------------------------------------ POLR I POLR II Total POLR I - ------------------------------------------------------------ Residential 610 1,465 2,075 1,818 Commercial 2,257 1,473 3,730 4,103 Industrial 2,005 332 2,337 2,342 - ------------------------------------------------------------ KWH Sales 4,872 3,270 8,142 8,263 Sales to Other Utilities 164 285 - ------------------------------------------------------------ Total Sales 8,306 8,548 ============================================================ Operating expenses increased $10.4 million or 3.1% compared to the first nine months of 2001. As a result of the higher average generation rates charged to customers in the first nine months of 2002, the cost of energy increased due to the pass-through nature of the provider of last resort arrangements. CTC Business Segment. Three months ended September 30, 2002. For the CTC business segment, operating revenues are derived by billing electric delivery customers for generation-related transition costs. Duquesne Light is allowed to earn an 11% pre-tax return on the net of tax CTC balance. As revenues are billed to customers on a monthly basis, we amortize the CTC balance. The resulting decrease in the CTC balance causes a decline in the return earned by Duquesne Light. In the third quarter of 2002, the CTC business segment reported income of $0.4 million compared to $2.7 million during the same period in 2001, a decrease of $2.3 million or 85.2%. Operating revenues decreased $ 70.5 million or 82.2%, due to the full collection of the allocated CTC balance as of September 30, 2002 for most of our customers, as well as scheduled decreases in the average CTC rate charged to customers from 2001 to 2002. As of September 30, 2002, the CTC balance has been fully collected for approximately 95% of Duquesne Light's customers, and approximately 87% of the KWH sales for the first nine months of 2002. Operating expenses consist solely of gross receipts tax, which fluctuates in direct relation to operating revenues. Operating expenses decreased $3.2 million or 84.2% compared to the third quarter of 2001. 23 Depreciation and amortization expense consists of the amortization of transition costs. There was a decrease of $63.8 million or 82.0% compared to the third quarter of 2001, primarily due to the full collection of the allocated CTC balance for certain customers, as discussed above. Nine months ended September 30, 2002. In the first nine months of 2002, the CTC business segment reported income of $2.5 million compared to $10.4 million during the same period in 2001, a decrease of $7.9 million or 76.0%. As the CTC balance is collected from customers, this results in a decline in the return earned by Duquesne Light. Operating revenues decreased $119.9 million or 51.3% compared to the first nine months of 2001. This decrease is due to the full collection of the allocated CTC balance for most of our customers, as well as scheduled decreases in the average CTC rate as discussed above. Operating expenses decreased $5.4 million or 51.9% compared to the first nine months of 2001, due to the decrease in operating revenues. Depreciation and amortization expense decreased $102.3 million or 49.3% compared to the first nine months of 2001, primarily due to the full collection of the allocated CTC balance for certain customers, as discussed above. Energy Services Business Segment Three months ended September 30, 2002. The Energy Services business segment reported income of $5.6 million in the third quarter of 2002, compared to $2.5 million in the third quarter of 2001, an increase of $3.1 million or 124.0%. This increase resulted primarily from an entire quarter's income from alternative fuel service contracts which were entered into during 2001 and the commercial opening of the Detroit Metro Airport energy facility in the second quarter of 2002. Operating revenues are primarily derived from the facility management services for industrial, airport and alternative fuel customers. Operating revenues increased $4.6 million or 45.1% compared to the third quarter of 2001. This increase is due to an entire quarter's revenue from the new alternative fuel service contracts and the airport energy facility. Operating expenses consist of the operating and maintenance costs to manage the facilities, as well as general corporate overhead. Operating expenses decreased $1.5 million or 17.6% compared to the third quarter of 2001, primarily due to decreased overhead, including employee compensation costs. Other income consists of income from tax credits generated from alternative fuel facilities and gains recognized on the sale of assets. Other income decreased $1.3 million or 48.1% compared to the third quarter of 2001, due to the recognition of an early completion bonus and construction management fee income on a new alternative fuel facility in the third quarter of 2001. Nine months ended September 30, 2002. The Energy Services business segment reported income of $12.5 million for the first nine months of 2002, compared to income of $6.6 million in 2001, an increase of $5.9 million or 89.4%. This increase resulted primarily from increased facility management income for the entire period from the alternative fuel service contracts entered into during 2001 and the airport energy facility. Operating revenues increased $17.7 million or 92.2% compared to the first nine months of 2001. This increase is due to the increased facility management income from the additional alternative fuel service contracts and the airport energy facility. Operating expenses increased $2.5 million or 15.5% compared to the first nine months of 2001. This increase resulted from the additional alternative fuel facility management service contracts and the airport energy facility. Other income decreased $5.9 million or 68.6% compared to the first nine months of 2001, due to gains recognized on sales of alternative fuel property and recognition of an early completion bonus and construction management fee income on a new alternative fuel facility in 2001. Financial Business Segment. Three months ended September 30, 2002. In the third quarter of 2002, the Financial business segment reported income of $5.4 million, compared to income of $8.7 million in the third quarter of 2001, a decrease of $3.3 million or 37.9%. This decrease resulted primarily from lower landfill gas production and less income due to the first quarter 2002 sale of most of the affordable housing portfolio. Depreciation and amortization expense consists of the depreciation of landfill gas equipment and gas rights. There was an increase of $0.8 million or 80.0% compared to the third quarter of 2001. This increase resulted from additional depreciation on portions of the Fresh Kills landfill gas investments. 24 Other income consists of income from leveraged lease and affordable housing investments, tax credits generated from landfill, natural gas, and alternative fuel investments, and gains recognized on the sales of investments. Other income decreased $2.2 million or 14.2% compared to the third quarter of 2001, due to reduced tax credits as a result of the sale of most of the affordable housing portfolio, and lower landfill gas production. Nine months ended September 30, 2002. The Financial business segment reported income of $16.3 million, compared to income of $30.0 million in 2001, a decrease of $13.7 million or 45.7%. The decrease resulted primarily from lower landfill gas production, lower gas sales prices, and less income due to the sale of most of the affordable housing portfolio. Operating revenues in this business segment are primarily derived from the sale of landfill gas. Operating revenues decreased $7.0 million or 37.6% compared to the first nine months of 2001. This decrease is due to lower landfill gas production and lower landfill gas sales prices. Depreciation and amortization expense increased $2.2 million or 71.0% compared to the first nine months of 2001. This increase resulted from additional depreciation on portions of the Fresh Kills landfill gas investments. Other income decreased $8.0 million or 16.0% as compared to 2001, due to reduced tax credits as a result of the sale of most of the affordable housing portfolio, and lower landfill gas production. Interest and other charges decreased $4.1 million or 77.4% as compared to the first nine months of 2001, due to the retirement of $85.0 million of medium term notes in 2001. Enterprises Business Segment. Three months ended September 30, 2002. The Enterprises business segment reported zero income in the third quarter of 2002, compared to $8.8 million income in the third quarter of 2001. Included in the third quarter of 2001 was an $8.4 million after-tax gain from the sale of the Pittsburgh International Airport energy facility. We have been in the process of divesting the remaining investments of this business segment, and will continue to do so as opportunities arise and market conditions permit. Nine months ended September 30, 2002. The Enterprises business segment reported an $11.0 million loss for the nine months ended September 30, 2002, compared to a $16.5 million loss for the same period during 2001. Included in the 2002 loss is a $10.8 million after-tax charge for the impairment of five investments. A $27.7 million after-tax charge for the sale of two investments and impairment of seven other investments was included in the second quarter of 2001 results. (See Note D.) All Other. Three months ended September 30, 2002. The all other category reported a loss of $8.7 million in the third quarter of 2002 compared to an $11.9 million loss in the third quarter of 2001, an improvement of $3.2 million or 26.9%. The improvement resulted mainly from lower interest expense, partially offset by lower propane and telecommunications revenues. In the third quarter of 2002, operating revenues decreased by $2.9 million, or 25.9% compared to the third quarter of 2001. This decrease was the result of decreased revenues of $1.1 million due to lower propane prices and propane sales, and $1.8 million due to lower telecommunications lease revenue resulting from the loss of two customers who previously filed for bankruptcy protection. Interest and other charges include interest on long-term debt, other interest, and preferred stock. A decrease of $5.1 million, or 44.0% in the third quarter of 2002 as compared to the third quarter of 2001 was primarily due to lower short-term borrowing levels, lower interest rates and the retirement of $150 million of floating rate notes in January 2002. Nine months ended September 30, 2002. The all other category reported a loss of $25.3 million for the first nine months of 2002, compared to a loss of $43.2 million for the first nine months of 2001. The improvement of $17.9 million was primarily due to lower interest expense in 2002 and the loss on the sale of the bottled water business recognized in 2001. Operating revenues decreased $22.3 million, or 40.0% compared to the first nine months of 2001, primarily due to decreased revenues of $8.1 million from the sale of our bottled water business and $9.8 million due to lower propane prices and propane sales. For the first nine months of 2002, operating expenses decreased $8.2 million, or 14.9% as compared to the same period in 2001. This decrease was primarily due to an $8.4 million decrease in expenses following the sale of the bottled water business, and a decrease in expenses from the cost savings associated with the 2001 restructuring, offset by the $1.9 million increase in expenses associated with the write-off of the costs associated with the previously proposed generating station. (See "Rate Matters - Provider of Last Resort.") 25 For the nine months ended September 30, 2002, other income increased $17.8 million, or 116.3% compared to the first nine months of 2001. This increase is primarily due to the loss on the 2001 sale of the bottled water business. Interest expense decreased $14.1 million, or 37.8% in the first nine months of 2002 compared to the same period in 2001. This decrease was primarily due to lower short-term borrowing levels and the retirement of $150.0 million of floating rate notes in January 2002. Discontinued Operations. Three months ended September 30, 2002. The loss from discontinued operations for the third quarter of 2002 was $2.2 million. This loss was comprised of income from operations of $4.0 million and a loss on disposal of $6.2 million due to costs associated with the sale. The $1.7 million loss in the third quarter of 2001 resulted from operations. (See Note I.) Nine months ended September 30, 2002. The loss from discontinued operations for the first nine months of 2002 was $102.4 million, which was comprised of $4.7 million of income from operations and the loss on disposal of $107.1 million. The $102.4 million loss resulted primarily from the $100.9 million after-tax charge related to the impairment of long-lived assets taken in the second quarter of 2002. For the first nine months of 2001, the loss from discontinued operations was $102.7 million. This resulted primarily from a $99.7 million after-tax charge related to the impairment of the contract operations and construction businesses of the discontinued operations. (See Notes D and I.) LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures Continuing Operations. We estimate that during 2002 we will spend, excluding the allowance for funds used during construction, approximately $70 million for electric utility construction and $10 million for construction by our other business lines. During the first nine months of 2002, we have spent $60.4 million on capital expenditures, consisting of $51.3 million at Duquesne Light, and $9.1 million on other. Discontinued Operations. We estimate that during 2002 we will spend, excluding the allowance for funds used during construction, approximately $53 million for water utility construction. During the first nine months of 2002, we have spent $23.3 million in capital expenditures at AquaSource. Asset Dispositions Continuing Operations. In the first nine months of 2002, we sold a significant portion of our remaining affordable housing portfolio, receiving proceeds of approximately $17 million, which approximated book value. We received $1.3 million from the sale of securities and recognized an after-tax gain of $0.8 million. We received $1.3 million from the sale of a building and recognized an after-tax gain of $0.3 million. We also received $2.3 million for the sale of an electronic commerce investment, which approximated book value. In July 2001, the Allegheny County Airport Authority purchased the Pittsburgh International Airport energy facility from a DQE Enterprises subsidiary, and entered into a 15-year operations and maintenance agreement regarding the facility with DQE Energy Services. The transaction resulted in an after-tax gain of $8.4 million. AquaSource sold its bottled water assets in May 2001. The sale resulted in an after tax loss of approximately $15 million, of which $10.0 million had been recorded in December 2000. We also received $4.3 million for the sale of other non-strategic assets. Discontinued Operations. In the first nine months of 2002, we sold various assets, including several wastewater facilities and real property and received proceeds of approximately $6 million which approximated book value. In addition, since July 2002 we have entered into agreements to sell more than 85% of AquaSource's assets. (See Note I.) Financing On October 7, 2002, we issued 60,000 shares of our Preferred Stock, Series A (Convertible), having an aggregate liquidation value of $6 million, in connection with the settlement of the AquaSource litigation. (See "Legal Proceedings.") In September 2002, Duquesne Light converted approximately $98 million of variable rate debt to fixed rate with maturities in 2011 and 2013, resulting in a weighted average interest rate of 4.20%. On August 5, 2002, we redeemed the following: (i) $10 million aggregate principal amount of Duquesne Light's 8.20% first mortgage bonds due 2022 at a redemption price of 104.51% of the principal amount thereof, and (ii) $100 million aggregate principal amount of Duquesne Light's 7 5/8% first mortgage bonds due 2023 at a redemption price of 103.9458% of the principal amount thereof. On June 26, 2002 we issued 17,250,000 shares of common stock at $13.50 per share in an underwritten public offering. This issuance was made under our April 5, 2002, shelf registration statement for up to 26 $500.0 million of various debt and equity securities. We received net proceeds, after payment of underwriters discounts and commissions and other expenses, of $223.4 million. We have used net proceeds to reduce approximately $171 million principal amount of outstanding long-term debt (as discussed above) and short-term debt, and have targeted the remaining net proceeds for general corporate purposes, including payment of a deposit to the IRS toward any adjustments in conjunction with certain structured lease transactions. (See Note H.) On April 15, 2002, Duquesne Light issued $200 million of 6.7% first mortgage bonds due 2012. On April 30, 2002, Duquesne Light issued $100 million of 6.7% first mortgage bonds due 2032. In each case it used the proceeds to call and refund existing debt, including debt scheduled to mature in 2003 and 2004. In January 2002, we refinanced $150 million of matured DQE Capital floating rate notes through the issuance of commercial paper, primarily at Duquesne Light. Cash generated from operations and equity offering proceeds was used to redeem this debt in full, leaving no outstanding balance at September 30, 2002. Liquidity At September 30, 2002, we had a cash balance of $63.8 million. In the first quarter of 2002, Moody's Investor Service, Standard & Poor's, and Fitch Ratings assessed our short and long-term credit profiles. The ratings reflect the agencies' opinion of our overall financial strength. Ratings impact our ability to access capital markets for investment and capital requirements, as well as the relative costs related to such liquidity capability. In general, the agencies reduced our long-term credit ratings, although staying within the range considered to be investment grade. The agencies maintained the existing credit ratings for Duquesne Light's short-term debt. However Moody's and Fitch reduced DQE Capital's short-term debt rating by one level, thereby restricting DQE Capital from accessing the short-term commercial paper market. DQE Capital is exploring alternative ways to fund its short-term liquidity needs. This ratings downgrade does not limit our ability to access our revolving credit facilities; it does, however, impact the cost of maintaining the credit facilities and the cost of any new debt. These ratings are not a recommendation to buy, sell or hold any securities of DQE or our subsidiaries, may be subject to revisions or withdrawal by the agencies at any time, and should be evaluated independently of each other and any other rating that may be assigned to our securities. We recently renewed our two 364-day revolving credit agreements, one for $150 million at Duquesne Light and one for $140 million (previously $200 million) at DQE Capital. Both expire in October 2003. Interest rates on both facilities can, in accordance with the option selected at the time of the borrowing, be based on one of several indicators, including prime and Eurodollar rates. Fees are based on the unborrowed amount of the commitment. At September 30, 2002 no borrowings were outstanding. Both revolvers have "ratings triggers," pursuant to which changes in our credit ratings will result in an inverse change in the fees and interest rates charged under the facilities. The $140 million facility is subject to cross-default if Duquesne Light defaults on the payment of $50 million or more, including interest or premium, of any debt instrument. Under our credit facilities, we are subject to financial covenants requiring each of DQE and Duquesne Light to maintain a maximum debt-to-capitalization ratio of 65.0%. In addition, DQE is required to maintain a minimum cash coverage ratio of 2-to-1. At September 30, 2002 we were in compliance with these covenants, having debt-to-total-capitalization ratios of approximately 59.2% at DQE and approximately 56.2% at Duquesne Light, and a cash coverage ratio of approximately 2.3-to-1 at DQE. None of our long-term debt will mature before 2008. We expect to make deposits with the IRS in connection with the income tax matter discussed in Note H. (See "Outlook.") At September 30, 2002, we had no commercial paper borrowings outstanding, and $0.8 million of current debt maturities. During the quarter, the maximum amount of bank loans and commercial paper borrowings outstanding was $35 million, the amount of average daily borrowings was $5.3 million, and the weighted average daily interest rate was 2.16%. Contractual Obligations and Commercial Commitments As of September 30, 2002, we have certain contractual obligations and commercial commitments that extend beyond this year, the principal amounts of which are set forth in the following tables: 27 Payments Due By Period
- -------------------------------------------------------------------------------------------- (In Millions) ------------------------------------------------- 2002 2003 2004 2005 After Total ------------------------------------------------- Long-Term Debt (a) $ -- $ 0.9 $ 1.4 $1.5 $1,082.8 $1,086.6 Notes Payable and Current Maturities (b) 0.8 -- -- -- -- 0.8 Capital Lease Obligations 0.1 0.4 0.4 0.5 1.4 2.8 Operating Leases (c) 2.1 8.7 9.2 7.5 70.5 98.0 - -------------------------------------------------------------------------------------------- Total Contractual Cash Obligations $3.0 $10.0 $11.0 $9.5 $1,154.7 $1,188.2 ============================================================================================
(a) Excludes $13.4 million related to discontinued operations. (b) Excludes $0.2 million related to discontinued operations. (c) Excludes $0.1 million and $0.4 million in 2002 and 2003 related to discontinued operations. Other Commercial Commitments
- ----------------------------------------------------------------------------------------- (In Millions) ---------------------------------------------- 2002 2003 2004 2005 After Total ---------------------------------------------- Revolving Credit Agreements (a) $ -- $290.0 $-- $-- $ -- $290.0 Standby Letters of Credit (a) 74.5 -- -- -- -- 74.5 Surety Bonds (b) Commercial 125.3 -- -- -- -- 125.3 Contract 46.9 -- -- -- -- 46.9 Guarantees (See Note H) -- -- -- -- 74.5 74.5 - ----------------------------------------------------------------------------------------- Total Commercial Commitments $246.7 $290.0 $-- $-- $74.5 $611.2 =========================================================================================
(a) Revolving Credit Agreements and Letters of Credit are typically for a 364-day period and are renewed annually. (b) Surety bonds are renewed annually. Some of the commercial bonds cover regulatory and contractual obligations which exceed a one-year period. Rate Matters Competition and the Customer Choice Act The Pennsylvania Electricity Generation Customer Choice and Competition Act (Customer Choice Act) enables electric utility customers to purchase electricity at market prices from a variety of electric generation suppliers. As of September 30, 2002, approximately 76.6% of Duquesne Light's customers measured on a KWH basis, and approximately 75.6% on a non-coincident peak load basis received electricity through our provider of last resort service arrangement. The remaining customers are provided with electricity through alternative generation suppliers. The number of customers participating in our provider of last resort service will fluctuate depending on market prices and the number of alternative generation suppliers in the retail supply business. Customers who select an alternative generation supplier pay for generation charges set competitively by that supplier, and pay Duquesne Light a competitive transition charge (discussed below) and/or transmission and distribution charges. Electricity delivery (including transmission, distribution and customer service) remains regulated in substantially the same manner as under historical regulation. In November 2001, the Pennsylvania Department of Revenue established an increased revenue neutral reconciliation tax (RNR) in order to recover a current shortfall that resulted from electricity generation deregulation. Duquesne Light requested and received PUC approval to recover approximately $13 million of costs it will incur in 2002 due to the RNR. (See "Legal Proceedings.") Regional Transmission Organization FERC Order No. 2000 calls on transmission-owning utilities such as Duquesne Light to join regional transmission organizations (RTOs). Duquesne Light is committed to ensuring a stable, plentiful supply of electricity for its customers. Toward that end, Duquesne Light had planned to join the PJM West RTO. However, on July 31, 2002, the FERC issued a series of proposals designed to establish a standard market design and transmission service for interstate electricity transactions, and extend the deadline for joining an RTO until September 2004. Duquesne Light will continue to evaluate the FERC's proposals and their impact on the possibility of joining an RTO. 28 Competitive Transition Charge In its final restructuring order, the PUC determined that Duquesne Light should recover most of the above-market costs of its generation assets, including plant and regulatory assets, through the collection of the CTC from electric utility customers. As of September 30, 2002, the CTC balance has been fully collected for approximately 95% of Duquesne Light's customers, and 87% of the KWH sales for the first nine months of 2002. The transition costs, as reflected on the consolidated balance sheet, are being amortized over the same period that the CTC revenues are being recognized. For regulatory purposes, the unrecovered balance of transition costs was approximately $32.6 million ($19.8 million net of tax) at September 30, 2002, on which Duquesne Light is allowed to earn an 11.0% pre-tax return. A lower amount is shown on the balance sheet due to the accounting for unbilled revenues. Provider of Last Resort Although no longer a generation supplier, as the provider of last resort for all customers in its service territory, Duquesne Light must provide electricity for any customer who does not choose an alternative generation supplier, or whose supplier fails to deliver. As part of the generation asset sale, a third party agreed to supply all of the electric energy necessary to satisfy Duquesne Light's provider of last resort obligations during the CTC collection period. Under POLR II, Duquesne Light has extended the arrangement (and the PUC-approved rates for the supply of electricity) beyond the final CTC collection through December 31, 2004. POLR II also permits Duquesne Light, following CTC collection for each rate class, an average margin of 0.5 cents per KWH supplied through this arrangement. Except for this margin, these agreements, in general, effectively transfer to the supplier the financial risks and rewards associated with Duquesne Light's provider of last resort obligations. While there are certain safeguards in the provider of last resort arrangements designed to mitigate losses in the event that the supplier defaults on its performance under the arrangement, Duquesne Light may face the credit risk of such a default. Contractually, Duquesne Light has various credit enhancements that would become activated upon certain events. If the supplier were to fail to deliver, Duquesne Light would have to contract with another supplier and/or make purchases in the market at the time of default at a time when market prices could be higher. While the Customer Choice Act provides generally for provider of last resort supply costs to be borne by customers, recent litigation suggests that it may not be clear whether Duquesne Light could pass any costs in excess of the existing PUC-approved provider of last resort prices on to its customers. Additionally, the supplier has recently been downgraded by the rating agencies. Although we are following the situation closely, our knowledge is limited to public disclosure, and we do not know whether the downgrade could affect the supplier's ability to perform. Duquesne Light also retains the risk that customers will not pay for the provider of last resort generation supply. However, a component of Duquesne Light's delivery rate is designed to cover the cost of a normal level of uncollectible accounts. On October 25, 2002, Duquesne Light petitioned the PUC to issue a declaratory order regarding a provision in its retail tariff that affects its largest industrial customer. The supplier and Duquesne Light have interpreted the tariff differently. The supplier's interpretation could increase the customer's bill by approximately $7 to $9 million annually. Duquesne Light has requested that the PUC affirm Duquesne Light's interpretation of the tariff requirements. Duquesne Light retains the risk of recovering this increase from the customer, should the customer refuse to pay. This risk is not included in the "normal level" of uncollectible accounts described above. Duquesne Light is preparing a post-2004 POLR supply plan to be filed with the PUC in the near future. This plan would provide capped rates and offer protection from electric market volatility for residential and small commercial POLR customers. This plan continues to evolve as the wholesale power markets continue to change. For example, given the interest many generating companies have shown in potentially supplying long-term POLR service, we are no longer actively exploring the development of a generating station. We are in the process of evaluating various options and expect to complete our assessment prior to the new filing. Our goal is to mitigate various risks associated with a supply plan and to enhance shareholder value through a continuing earnings stream from the core electric business. Rate Freeze In connection with the POLR II agreement described above, Duquesne Light negotiated a rate freeze for generation, transmission and distribution rates. The rate freeze fixes new generation rates through 2004 for retail customers who take electricity under POLR II, and continues the transmission and distribution rates for all customers at current levels through at least 2003. Under certain circumstances, affected interests may file a complaint alleging that, under these frozen rates, Duquesne Light has exceeded reasonable earnings, in which case the PUC could make adjustments to rectify such earnings. Discontinued Operations As previously discussed, AquaSource is now reported as a discontinued operation. (See Note I.) In June 2000, AquaSource filed consolidated, statewide water and sewer rate change applications with the Texas Natural Resource Conservation Commission (TNRCC) and 17 municipalities. As previously reported, four municipalities denied or altered the rate increase, AquaSource appealed, and 29 the parties have entered into a settlement agreement. The TNRCC entered its final order on September 17, 2002 approving the settlement agreement reached by all parties. In March 2001, AquaSource also filed a rate increase petition with the Indiana Utility Regulatory Commission (IURC) to increase water and sewer rates for Utility Center, Inc., AquaSource's largest regulated subsidiary. Hearings were held in January 2002. AquaSource remains engaged in discussions with the IURC regarding the petition. Final resolution is anticipated in the fourth quarter of 2002. AquaSource is in the process of filing petitions requesting approval of the sale of the investor-owned utilities with all the appropriate state public utility commissions. Most such filings have been made. Outlook We continue to expect earnings, excluding any potential charges from asset divestitures or other write-downs, to be $85 to $90 million for 2002 (comprised of $77 to $81 million from continuing operations and $8 to $9 million from AquaSource) and $95 to $100 million for 2003 (comprised of $84 to $88 million from continuing operations and $11 to $12 million from AquaSource). Our earnings projections reflect pension gains which have resulted from our historically conservative investment and funding strategy. We expect these gains to decline significantly by 2004, due to market conditions. Our 2003 projections also include retirement of debt in anticipation of the AquaSource asset sale to PSC. (See Note I.) In connection with the income tax matter discussed in Note H, we expect to deposit $105 million with the IRS ($55 million in 2002 and $50 million in 2003) to be applied toward any adjustments which may ultimately be proposed. We are receiving indications of interest for the purchase of AquaSource's construction business, and anticipate a final sale by the end of 2002. We have also received proposals for the purchase of all or part of our propane business. Based on the proposals received to date, a decision to sell this business in the near term would likely yield proceeds less than its recorded value of $60 million at September 30, 2002. We cannot predict whether any sales of this business will be completed, or when or at what price. Any sale will be subject to board review and approval. Future earnings will reflect a continued focus on recurring and sustainable earnings through our Back-to-Basics strategy. The foregoing "Outlook" section contains forward-looking statements, the results of which may materially differ from those implied due to known and unknown risks and uncertainties as discussed below. . Projected DQE cash flow, net income, earnings, earnings growth, capitalization, dividends and dividend payout ratio will depend on the performance of our subsidiaries, the effectiveness of the divestiture of non-core businesses, the implementation of our growth plan, the timing of receipt of asset sale proceeds and board policy. . Demand for and pricing of water, electric and telecommunications utility services and landfill gas, changing market conditions and weather conditions, could affect income and earnings levels at DQE and each subsidiary. . Duquesne Light's earnings will be affected by the number of customers who choose to receive electric generation through POLR II, by final PUC approval of its post-2004 POLR plan and by the continued performance of the generation supplier. . The ultimate structure of the post-2004 POLR plan will be subject to PUC review and approval, as well as Duquesne Light's ability to contract with suitable third-party suppliers. . The timing of the various AquaSource asset sale closings, the use of proceeds from the sales, purchase price adjustments, and the accounting treatment of the disposition and the retained assets and liabilities, may affect AquaSource's and DQE's earnings. . The timing of the closing of the various AquaSource asset sales will depend on the results of negotiations with the purchasing parties and determinations by the local public utility commissions. . Customer energy demand, fuel costs and plant operations could affect DQE Energy Services' earnings. . The outcome of the shareholder litigation initiated against DQE may affect performance. . The final resolution of the IRS' proposed adjustments regarding our federal income tax liabilities could affect cash flows, and the size and timing of payments on such adjustments. . Earnings with respect to affordable housing investments, alternative fuel operations and landfill gas will depend, in part, on the continued viability of, and our compliance with the requirements for, applicable federal tax credits. . Market and business conditions, demand for services, and stock market volatility may affect our ability to monetize non-core propane assets and energy technology investments. . The events of September 11, 2001 have created broad uncertainty in the global economy, and we continue to assess the impact on our businesses, including but not limited to DQE Financial. 30 . Overall performance by DQE and its affiliates could be affected by economic, competitive, regulatory, governmental and technological factors affecting operations, markets, products, services and prices, as well as the factors discussed in our SEC filings made to date. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risk represents the risk of financial loss that may impact our consolidated financial position, results of operations or cash flows due to adverse changes in market prices and rates. We manage our interest rate risk by balancing our exposure between fixed and variable rates, while attempting to minimize our interest costs. Currently, our variable interest rate debt is approximately $320.1 million or 29.6% of long-term debt. This variable rate debt is low-cost, tax-exempt debt. We also manage our interest rate risk by retiring and issuing debt from time to time and by maintaining a balance of short-term, medium-term and long-term debt. A 10% increase in interest rates would have affected our variable rate debt obligations by increasing interest expense by approximately $0.7 million for the nine months ended September 30, 2002 and $1.2 million for the nine months ended September 30, 2001. A 10% reduction in interest rates would have increased the market value of our fixed-rate debt by approximately $51.8 million and $55.5 million as of September 30, 2002 and September 30, 2001. Such changes would not have had a significant near-term effect on our future earnings or cash flows. Item 4. Controls and Procedures. Within the 90 days prior to the date of this report, management (including our chief executive officer and principal financial officer) evaluated the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934, Rules 13a-14(c) and 15-d-14(c)). Management concluded that, as of the evaluation date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to management by others within those entities. In addition, there were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the evaluation date, including any corrective actions with regard to significant deficiencies and material weaknesses. ---------- 31 PART II. OTHER INFORMATION. Item 1. Legal Proceedings. AquaSource. In February 2001, 39 former and current employees of our subsidiary AquaSource, Inc., all minority investors in AquaSource, commenced an action against DQE, AquaSource and others in the District Court of Harris County, Texas. The complaint alleged that the defendants fraudulently induced the plaintiffs to agree to sell their AquaSource Class B stock back to AquaSource by falsely promising orally that DQE would invest $1 billion or more in AquaSource, which, plaintiffs allege, would have permitted them to realize significant returns on their investments in AquaSource. The complaint also alleged that the defendants mismanaged AquaSource, and thus decreased the value of plaintiffs' AquaSource stock. Plaintiffs sought, among other relief, an order rescinding their agreements to sell their stock back to AquaSource, an award of actual damages not to exceed $100 million and exemplary damages not to exceed $400 million. In the first quarter of 2002, DQE and AquaSource filed counterclaims alleging that 10 plaintiffs who held key AquaSource management positions engaged in deceptive practices designed to obtain funding for acquisitions and to make those acquisitions appear to meet certain return on investment requirements, and that all plaintiffs were unjustly enriched by these wrongful actions. DQE, AquaSource and AquaSource Utility, Inc. also filed a counterclaim against two plaintiffs alleging claims for breach of contract, breach of warranty, indemnification, fraud and unjust enrichment in connection with the acquisition of various water and wastewater companies from these two plaintiffs. The parties entered into a settlement agreement which became effective October 7, 2002. The settlement is valued at approximately $22 million, and includes cash, 60,000 shares of our Preferred Stock, Series A (Convertible), a note receivable, and an AquaSource building in Houston together with the furniture and fixtures currently in the building and one other piece of real property in Houston. The building, furniture, fixtures and property were transferred to the plaintiffs' designee. The plaintiffs provided all defendants with a broad release of all claims arising out of the transactions that are the subject of the litigation, as well as all claims relating to any plaintiff's past employment with AquaSource. The plaintiffs also agreed not to solicit AquaSource customers or employees through October 31, 2003. The settlement provides that each holder of the preferred stock received in the settlement has the option to sell all, but not less than all, of such holder's shares of the preferred stock to us on the earlier to occur of (i) a sale by us of all or substantially all of the stock or assets of AquaSource or (ii) the two-year anniversary of the settlement effective date. The purchase price of each share of preferred stock to be so purchased by us will be the $100 liquidation value, plus an amount equal to accrued dividends to the date of payment. The purchase price will be payable entirely in cash or, at our election, in common stock. An estimated reserve for this matter was made at June 30, 2002. The final settlement did not significantly affect our third quarter results of operations or cash flows. Shareholder Class Action. In October and November 2001, a number of putative class action lawsuits were filed by purported shareholders of DQE against DQE and David Marshall, DQE's former chairman, chief executive officer and president, in the United States District Court for the Western District of Pennsylvania. These cases were consolidated under the caption In re DQE, Inc. Securities Litigation, Master File No. 01-1851 (W.D. Pa.), and the plaintiffs filed a second consolidated amended complaint on April 15, 2002. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, and Section 12(a)(2) of the Securities Act of 1933 (the "Securities Act"). The complaint also alleges controlling person liability under Section 20(a) of the Exchange Act and Section 15 of the Securities Act. The complaint alleges that between December 6, 2000 and April 30, 2001, the defendants issued a number of materially false and misleading statements concerning investments made by our subsidiary, DQE Enterprises, and the impact that these investments would have on our current and future financial results. More particularly, the complaint alleges that DQE and Marshall stated their expectation that certain companies in which DQE Enterprises had invested would undertake initial public offerings of their shares, with the result that our earnings would be positively impacted by the public market valuation of DQE Enterprises' interests in these companies, but failed to disclose allegedly adverse facts that made the possibility of successful public offerings of the securities of these companies unlikely. The complaint seeks an award of unspecified compensatory damages, and an order permitting class members who purchased DQE shares through a dividend reinvestment plan to rescind those 32 purchases, pre- and post-judgment interest, attorneys' fees and expenses of litigation and unspecified equitable and injunctive relief. On May 24, 2002, we filed a motion on behalf of DQE and David Marshall, seeking dismissal of the lawsuit. On October 17, 2002, the District Court denied the motion. Although we cannot predict the ultimate outcome of this case or estimate the range of any potential loss that may be incurred in the litigation, we believe that the lawsuit is without merit, strenuously deny all of the plaintiffs' allegations of wrongdoing and believe we have meritorious defenses to the plaintiffs' claims. We are vigorously defending this lawsuit. Office of Consumer Advocate. Duquesne Light requested and received PUC approval to recover approximately $13 million of costs it will incur in 2002 due to the RNR. On November 19, 2001, the Pennsylvania Office of Consumer Advocate (OCA) filed a complaint with the PUC, objecting to the recovery approval and stating various matters, such as rate of return and offsetting savings, that should be considered before allowing RNR recovery in excess of rate caps. An initial hearing on the OCA's complaint was held May 2, 2002 before a PUC administrative law judge, who denied the OCA's objections. However, on May 9, 2002, the PUC ordered that Duquesne Light's quarterly earnings may be considered in the RNR proceedings. Additional hearings were held in July 2002. On August 8, 2002, the PUC voted to uphold dismissal of the OCA's case. Proceedings regarding rates are discussed under "Rate Matters." Item 5. Other Information. The Sarbanes-Oxley Act of 2002, which became effective on July 30, 2002, requires disclosure of any non-audit services performed by a company's auditor. As previously disclosed in our 2001 Annual Report to Shareholders, our independent public accountants provide non-audit, tax-related services. Item 6. Exhibits and Reports on Form 8-K a. Exhibits: Exhibit 3.1 - Bylaws of DQE, as amended and effective September 26, 2002. Exhibit 10.1 - LLC Purchase Agreement by and among AquaSource, DQE, and Southwest Water Company, dated as of September 14, 2002. Exhibit 12.1 - Calculation of Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividend Requirements. Exhibit 99.1 - Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 - Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. We filed a Form 8-K on August 14, 2002, to report the submission to the SEC of our principal executive and financial officers' statements under oath regarding facts and circumstances relating to Exchange Act filings. 33 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 November 14, 2002 /s/ Frosina C. Cordisco ---------------------------------------- (Signature) Frosina C. Cordisco Vice President and Treasurer (Principal Financial Officer) Date November 14, 2002 /s/ Stevan R. Schott ---------------------------------------- (Signature) Stevan R. Schott Vice President and Controller (Principal Accounting Officer) 34 CERTIFICATIONS I, Morgan K. O'Brien, Chief Executive Officer and President of DQE, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of DQE, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Morgan K. O'Brien ---------------------------------------- Morgan K. O'Brien Chief Executive Officer and President 35 I, Frosina C. Cordisco, Vice President and Treasurer of DQE, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of DQE, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Frosina C. Cordisco ---------------------------------------- Frosina C. Cordisco Vice President and Treasurer (Principal Financial Officer) 36 EX-3.1 3 dex31.txt BY-LAWS EFFECTIVE 9/26/2002 Exhibit 3.1 DQE BY-LAWS EFFECTIVE September 26, 2002 ARTICLE I STOCKHOLDERS SECTION 1. Annual Meeting. The Corporation shall hold an annual stockholders' meeting for election of Directors at a date, location (within or outside Pennsylvania) and time set by the Board of Directors. SECTION 2. Notice of Business to be Presented at the Annual Meeting. (a) The proposal of business to be considered by the stockholders at an annual meeting of stockholders may be made (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of the preceding sentence, such business must be a proper matter for stockholder action, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such notice must comply with the following requirements. (1) To be timely, a stockholder's notice given pursuant to this Section must be received at the principal executive offices of the Corporation, addressed to the Secretary, not less than 120 calendar days before the anniversary date of the Corporation's proxy statement released to stockholders in connection with the previous year's annual meeting or, if none, its most recent previous annual meeting. Notwithstanding the preceding sentence, if the date of the annual meeting at which such business is to be presented has been changed by more than 30 days from the date of the most recent previous annual meeting, a stockholder's notice shall be considered timely if so received by the Corporation (i) on or before the later of (x) 150 calendar days before the date of the annual meeting at which such business is to be presented or (y) 30 days following the first public announcement by the Corporation of the date of such annual meeting and (ii) not later than 15 calendar days prior to the scheduled mailing date of the Corporation's proxy material for such annual meeting. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. (2) A stockholder's notice given pursuant to this Section shall set forth (A) the name and address of the stockholder who intends to make the proposal and the classes and numbers of shares of the Corporation's stock beneficially owned by such stockholder; (B) a representation that the stockholder is and will at the time of the annual meeting be a holder of record of stock of the Corporation entitled to vote at such meeting on the proposal(s) specified in the notice and intends to appear in person or by proxy at the meeting to present such proposal(s), (C) a description of the business the stockholder intends to bring before the meeting, including the text of any proposal or proposals to be presented for action by the stockholders, (D) the name and address of any beneficial owner(s) of the Corporation's stock on whose behalf such business is to be presented and the class and number of shares beneficially owned by each such beneficial owner and (E) the reasons for conducting such business at the meeting and any material interest in such business of such stockholder or any such beneficial owner. (b) General. (i) Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The chairperson of the meeting shall have the power and the duty to determine whether any business proposed to be brought before a meeting was proposed in accordance with the procedures set forth in this Section and, if any business is not in compliance with this Section, to declare that such defective proposal shall be disregarded. (ii) For purposes of this Section, (A) "public announcement" shall mean disclosure in a press release reported by the PR Newswire, the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and (B) "beneficial ownership" shall be determined in accordance with Rule 13d-3 under the Exchange Act or any successor rule. (iii) Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section shall be deemed to affect any rights of a stockholder to request inclusion of a proposal in the Corporation's proxy statement pursuant to Rule 14a-8 2 under the Exchange Act, or any successor rule, or to present for action at an annual meeting any proposal so included. SECTION 3. Special Meetings. Special meetings of the stockholders may be called at any time by the Chair (as defined in Article II, Section 1(b)) or Chief Executive Officer or by the Board of Directors. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. SECTION 4. Notice of Meetings. Written notice of every meeting of the stockholders shall be given to each stockholder entitled to vote at such meeting, at least five days (or such other period as required by statute) before the meeting, by the Chair or Secretary. Failure to give notice of any annual meeting or irregularity in the notice shall not affect the validity of any proceedings at such meeting (other than proceedings of which special notice is required by law, the Articles or these By-Laws). SECTION 5. Quorum. At all meetings of stockholders, a majority of the voting power of the outstanding shares entitled to vote, represented by stockholders in person or by proxy, shall constitute a quorum. SECTION 6. Judges of Election. Three judges of election shall be appointed by the Board of Directors for any meeting of stockholders. The judges of election shall act as tellers of any ballot vote taken at the meeting and certify the result. SECTION 7. Voting and Proxies. The holders of Series A Preferred Stock will be entitled to vote on all matters submitted to a vote of the holders of Common Stock, voting together with the holders of Common Stock as one class. Each share of Common Stock will be entitled to one vote. Each share of Series A Preferred Stock will be entitled to three votes per share, subject to certain adjustments. At meetings for the election of Directors, each stockholder entitled to vote shall be entitled to votes equal to the number of shares held multiplied by the number of Directors to be elected, and each stockholder may cast all votes for a single candidate or distribute them among any two or more candidates. Any stockholder entitled to vote at any meeting of stockholders may vote either in person or by proxy, but no proxy which is dated more than three years prior to the meeting at which it is offered shall confer the right to vote. Every proxy shall be in writing, signed by a stockholder or duly authorized attorney in fact. 3 SECTION 8. Order of Business. At all meetings of stockholders, the order of business shall be, as far as applicable and practicable, as follows: (1) Organization. (2) Proof of giving of the notice of meeting or of waivers thereof. (3) Submission by the Secretary, or by the judges of election, of a list of stockholders entitled to vote, present in person or by proxy. (4) If an annual meeting, presentation of unapproved minutes of preceding meetings and action thereon. (5) Matters to be voted upon as specified in the notice of meeting. (6) Reports. (7) Unfinished business. (8) New business. (9) Adjournment. ARTICLE II BOARD OF DIRECTORS SECTION 1.(a) Election and Powers. The business and affairs of the Corporation shall be managed by its Board of Directors. The Board may exercise all the powers of the Corporation except such as are by statute, the Articles or these By-Laws conferred upon or reserved to the stockholders. At each annual meeting the stockholders shall elect directors of the class whose term then expires, to hold office until the third succeeding annual meeting. Except as otherwise expressly provided in the Articles, each director shall hold office until a successor is elected and qualified, or until such director's earlier death, resignation or removal in the manner provided in Section 11 of this Article II. The number of directors which shall constitute the full Board of Directors shall be not less than one as fixed by the Board of Directors in the manner provided in the Articles. (b) Chairman or Chairwoman of the Board. At its first meeting following each annual meeting, the Board of Directors shall elect one of its members to be Chairman or Chairwoman of the Board (the "Chair"). The Board of Directors shall fill any vacancy in the position of Chair at such time and in such manner as the Board of Directors shall determine. The 4 Chair may, but need not, be an officer of or employed in an executive or any other capacity by the Corporation. The Chair shall preside at any meeting of the stockholders or of the Board of Directors and shall have all the powers and authority vested in a presiding officer by law or practice to conduct an orderly meeting. In addition to any specific powers conferred by these By-Laws, the Chair shall have the powers and duties assigned by the Board of Directors. (c) Vice Chairman or Vice Chairwoman of the Board. The Board of Directors may also elect one of its members to be Vice Chairman or Vice Chairwoman of the Board (the "Vice Chair"), such election, if any, to take place at the same time as the election of the Chair. The Board of Directors may fill any vacancy in the position of Vice Chair at such time and in such manner as the Board of Directors determines. The Vice Chair may, but need not, be an officer of or employed in an executive or any other capacity by the Corporation. The Vice Chair shall, during the absence or disability of the Chair, have the powers and perform the duties of the Chair. In addition to any specific powers conferred by these By-Laws, the Vice Chair shall have the powers and duties assigned by the Board of Directors. SECTION 2. Eligibility for Election. No person who is an employee of the Company, except the Chair (who may, but need not, be an employee) or Chief Executive Officer, shall be eligible to serve as a director of the Company after retiring as an employee. No person over age 74 as of the date of the Annual Meeting of Stockholders shall be eligible to stand for election to the Board of Directors. SECTION 3. Regular Meetings. After each meeting of stockholders at which directors shall have been elected, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business. Additional regular meetings shall be held as fixed by the Board of Directors. SECTION 4. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the Chair, the Chief Executive Officer or a majority of the Board of Directors. SECTION 5. Place of Meetings. The Board of Directors may hold its regular and special meetings at such places as it designates. SECTION 6. Notice of Meetings. No notice of regular meetings of the Board of Directors need be given. Notice of the place, day and hour of every special meeting shall be given to each director at least one day before the meeting, by personal 5 delivery, by telephone or by facsimile or electronic communication, at the director's residence or usual place of business or in the alternative, by mailing the notice at least three days before the meeting to the director's last known mailing address. The failure to give notice shall not affect the validity of any meeting as to any director who attends the meeting or waives notice in writing. No notice of adjourned meetings of the Board of Directors need be given. All regular and special meetings of the Board of Directors shall be general meetings open for the transaction of any business without special notice of such business. SECTION 7. Quorum. At all meetings of the Board of Directors, a majority of the directors shall constitute a quorum for the transaction of business. Except in cases in which it is by law, the Articles or these By-Laws otherwise provided, a majority of the quorum shall decide any questions. SECTION 8. Vacancies. Vacancies on the Board of Directors shall be filled as provided in the Articles. SECTION 9. Compensation. The directors may be compensated for their services on a periodic basis and/or receive a fixed sum for attendance at each regular, special or Committee meeting and every adjournment thereof. The amount shall be fixed by resolution of the Board of Directors. The directors shall be reimbursed for all reasonable traveling expenses incurred in attending meetings. Directors who are employees of the Corporation shall not be paid for their services as directors. SECTION 10. Removal. Any director, any class of directors or the entire Board of Directors may be removed as provided in the Articles. SECTION 11. Indemnification of Directors and Officers. (a) Right of Indemnification. Except as prohibited by law, every director and officer of the Corporation shall be entitled as of right to be indemnified by the Corporation against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other, whether brought by or in the right of the Corporation or otherwise, by reason of such person being or having been a director or officer of the Corporation or by reason of the fact that such person is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as "action"); provided, however, that no such right of indemnification shall exist with respect to an action 6 brought by a director or officer against the Corporation (other than a suit for indemnification as provided in paragraph (b)). Such indemnification shall include the right to have expenses incurred by such person in connection with an action paid in advance by the Corporation prior to final disposition of such action, subject to such conditions as may be prescribed by law. Persons who are not directors or officers of the Corporation may be similarly indemnified in respect of service to the Corporation or to another such entity at the request of the Corporation to the extent the Board of Directors at any time denominates such person as entitled to the benefits of this Section. As used herein, "expense" shall include fees and expenses of counsel selected by such person; and "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement. (b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such action that the conduct of the claimant was such that under Pennsylvania law the Corporation would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the action or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. (c) Insurance and Funding. The Corporation may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any action, whether or not the Corporation would have the power to indemnify such person against such liability or expense by law or under the provisions of this Section 11. The Corporation may create a trust fund, grant a security interest, cause a letter of credit to be issued or use other means (whether or not similar to the foregoing) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. 7 (d) Non-Exclusivity; Nature and Extent of Rights. The right of indemnification provided for herein (1) shall not be exclusive of any other rights, whether existing now or later, to which those seeking indemnification may be entitled under any agreement, by-law or charter provision, vote of stockholders or directors or otherwise, (2) shall be deemed to create contractual rights in favor of persons entitled to indemnification, (3) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were denominated as entitled to indemnification and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder and (4) shall be applicable to actions, suits or proceedings commenced after adoption, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification may not be amended, modified or repealed so as to limit the indemnification provided herein with respect to any acts or omissions occurring prior to the adoption of any such amendment or repeal. SECTION 12. Personal Liability of Directors. (a) To the fullest extent that the laws of the Commonwealth of Pennsylvania, as in effect on January 27, 1987 or as thereafter amended, permit elimination or limitation of the liability of directors, no director of the Corporation shall be personally liable for monetary damages as such for any action taken, or any failure to take any action, as a director. (b) This Section 12 shall not apply to any action filed prior to January 27, 1987, nor to any breach of performance or failure of performance of duty by a director occurring prior to January 27, 1987. Any amendment or repeal of this Section 13 which has the effect of increasing director liability shall operate prospectively only, and shall not affect action taken, or any failure to act, prior to its adoption. SECTION 13. Applicable Law. Pennsylvania Business Corporation Law of 1988, as amended, Title 15, Part II, Subpart B, Article C, Chapter 25, Subchapters G through J, shall not apply to the Corporation. ARTICLE III COMMITTEES Committees. The Board of Directors may by resolution designate and discontinue such standing or special committees, including an Executive Committee, as it deems desirable. Each committee shall have such powers and perform such duties, not 8 inconsistent with law, as may be assigned by the Board of Directors. ARTICLE IV OFFICERS SECTION 1. Executive Officers. The executive officers of the Corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer and a Controller, and may include a Chief Operating Officer. The Chief Executive Officer shall be chosen from among the directors. The executive officers shall be elected annually by the Board of Directors at its first meeting following the annual meeting, and each such officer shall hold office until the corresponding meeting in the next year and until a successor has been duly chosen and qualified, or until such officer's earlier death, resignation or removal. Any vacancy in the above offices may be filled for the unexpired portion of the term by the Board of Directors, at any regular or special meeting. SECTION 2. Chief Executive Officer. The Chief Executive Officer shall carry out the policies approved by the Board of Directors. In addition to any specific powers conferred by these By-Laws, the Chief Executive Officer shall have supervision over, and shall exercise general executive powers concerning, all the operations and business of the Corporation. The Chief Executive Officer shall also have and exercise such powers and duties as assigned by the Board of Directors and may delegate executive and other powers and duties to any other officer. At the request or in the absence or disability of the Chair and the Vice Chair, the Chief Executive Officer shall preside at any meeting of the stockholders or of the Board of Directors. SECTION 3. President, Chief Operating Officer and Vice Presidents. The President, Chief Operating Officer and each Vice President shall have and exercise such powers and duties assigned to each by the Board of Directors or the Chief Executive Officer. SECTION 4. Secretary. The Secretary shall perform all duties incident to the office of a secretary of a corporation, and such other duties as assigned by the Board of Directors or the Chief Executive Officer. SECTION 5. Treasurer. The Treasurer shall perform all the duties incident to the office of a treasurer of a corporation, and such other duties as assigned by the Board of Directors or the Chief Executive Officer. 9 SECTION 6. Controller. The Controller shall perform all duties incident to the office of a controller of a corporation, and such other duties as assigned by the Board of Directors or the Chief Executive Officer. SECTION 7. Assistant Officers. The Board of Directors may elect one or more assistant officers. In addition, the Chief Executive Officer, the President, the Chief Operating Officer and each Vice President may appoint one or more assistant officers. Each assistant officer shall hold office for such period and shall have such authority and perform such duties as the Board of Directors or the Chief Executive Officer may prescribe. SECTION 8. Certain Powers of Officers. Except in cases in which the signing and execution shall have been expressly delegated by the Board of Directors to some other officer, employee or agent of the Corporation, the Chief Executive Officer or President or Chief Operating Officer or a Vice President may sign and execute in the name of the Corporation all authorized deeds, mortgages, bonds, contracts or other instruments; provided, however, that any such officer may delegate to any General Manager or Manager reporting to such officer authority to sign and execute in the name of the Corporation all authorized contracts and similar instruments pursuant to a policy approved by the Board of Directors. SECTION 9. Compensation. The Board of Directors shall have the power to fix the compensation of the Chief Executive Officer, President, Chief Operating Officer and any Vice President of the Corporation. The Chief Executive Officer shall have the power to fix the compensation of the Secretary, the Treasurer, the Controller and assistant officers. ARTICLE V STOCK SECTION 1. Certificates. Every stockholder shall be entitled to a certificate or certificates of stock of the Corporation in a form prescribed by the Board of Directors, duly numbered and sealed with the corporate seal of the Corporation, and setting forth the number and kind of shares represented thereby; provided however, that the Board of Directors shall have the power to provide for uncertificated shares of any class or series of stock or any part thereof. The certificates shall be signed, by facsimile or otherwise, by the Chief Executive Officer, the President, the Chief Operating Officer or a Vice President and by the Treasurer or the Secretary and shall bear the corporate seal, which may be a facsimile, engraved or 10 printed. The Board of Directors may also appoint one or more Transfer Agents and/or Registrars for its stock of any class and may require stock certificates to be countersigned, by facsimile or otherwise, and/or registered by one or more of such Transfer Agents and/or Registrars. In case any officer, Transfer Agent or Registrar who has signed or whose facsimile signature or authentication has been placed upon any share certificate shall have ceased to be such officer, Transfer Agent or Registrar because of death, resignation or otherwise, before the certificate is issued, the certificate may be issued with the same effect as if the officer, Transfer Agent or Registrar had not ceased to be such at the date of its issue. SECTION 2. Transfer of Shares. The Board of Directors shall have power and authority to make all rules and regulations concerning the issue, transfer, and registration of certificates of stock. SECTION 3. Record Dates. The Board of Directors shall have the authority to fix in advance a date, not exceeding ninety (90) days preceding any meeting of stockholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change, conversion, or exchange of capital stock shall go into effect (each a "stockholder event"), as a record date, in connection with such stockholder event, and in such case only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to participate in such stockholder event, notwithstanding any transfer of any stock on the books of the Corporation after any such record date. SECTION 4. Mutilated, Lost or Destroyed Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any mutilation, loss or destruction thereof, and the Board of Directors may, in its discretion, cause one or more new certificates, for the same number of shares in the aggregate, to be issued to such holder upon the surrender of the mutilated certificate, or in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction and the deposit of indemnity by way of bond or otherwise, in such form and amount and with such sureties or security as the Board of Directors may require to indemnify the Corporation against loss or liability by reason of the issuance of such new certificate or certificates, and the failure of such holder to comply with such requirements shall constitute a waiver by such holder of any right to receive such new certificate or certificates. ARTICLE VI DIVIDENDS AND FINANCE 11 SECTION 1. Dividends. Subject to the provisions of the Articles, the Board of Directors, or an authorized Committee may, in its discretion, declare what, if any, dividends shall be paid upon the stock of the Corporation. Except as otherwise provided by the Articles, dividends shall be payable upon such dates as the Board of Directors may designate. Before payment of any dividend there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors, in their absolute discretion, think proper as a reserve fund to meet contingencies, for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as the Directors shall think conducive to the interests of the Corporation, and the Directors may abolish any such reserve in the manner in which it is created. SECTION 2. Checks, Drafts, Etc. Unless otherwise provided by resolution of the Board of Directors, all checks, drafts, or orders for the payment of money, notes, and other evidences of indebtedness, issued in the name of the Corporation, shall be signed by the Treasurer or an Assistant Treasurer and countersigned by the Chief Executive Officer, the President, the Chief Operating Officer or a Vice President. SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be the calendar year, unless otherwise provided by the Board of Directors. ARTICLE VII SUNDRY PROVISIONS SECTION 1. Seal. The Corporate Seal of the Corporation shall contain within a circle the words "DQE", and in an inner circle the word "SEAL". SECTION 2. Inspection of Books and Records. The Board of Directors may determine whether and, if allowed, when and under what conditions and regulations, the books and records of the Corporation shall be open to the inspection of stock-holders, and the rights of stockholders in this respect are and shall be limited accordingly, except as otherwise provided by statute. No stockholder has the right to inspect any book or record or receive any statement for an improper purpose. SECTION 3. Bonds. The Board of Directors may require any officers, agents, or employees of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of their duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. 12 SECTION 4. Voting Upon Stock in Other Corporations. Any stock in other corporations, which may be held by the Corporation, may be represented and voted at any meeting of stockholders of such other corporations by the Chief Executive Officer, the President, the Chief Operating Officer or a Vice President of the Corporation or by proxy executed in the name of the Corporation by the Chief Executive Officer, the President, the Chief Operating Officer or a Vice President. SECTION 5. Amendments. Except as provided by the Articles or by statute, the authority to adopt, amend and repeal the By-Laws is exclusively vested in the Board of Directors. SECTION 6. Participation in Meeting by Telephone. One or more Directors may participate in a meeting of the Board of Directors or a committee of the Board of Directors by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can communicate with each other. SECTION 7. Informal Action by Directors or Committees. Any action which may be taken at a meeting of the Board of Directors or a committee of the Board of Directors may be taken without a meeting if a consent or consents in writing setting forth the action so taken shall be signed by all of the Directors or the members of the committee and shall be filed with the Secretary of the Corporation. 13 EX-10.1 4 dex101.txt LLC PURCHASE AGREEMENT Exhibit 10.1 LLC PURCHASE AGREEMENT by and among AQUASOURCE, INC. and DQE, INC., on the one hand, and SOUTHWEST WATER COMPANY, on the other hand Dated as of September 14, 2002 TABLE OF CONTENTS ARTICLE I PURCHASE AND SALE OF MEMBERSHIP INTERESTS............................................................ 1 Section 1.1 Sale and Transfer of Membership Interests..................................................... 1 Section 1.2 The Purchase Price............................................................................ 1 Section 1.3 Certain Liabilities, Accounts Receivable and Accounts Payable................................. 2 Section 1.4 Ongoing Revenues Statement.................................................................... 2 Section 1.5 Closing Statements and Payments............................................................... 3 ARTICLE II THE CLOSING......................................................................................... 4 Section 2.1 Closing....................................................................................... 4 Section 2.2 Closing Transactions.......................................................................... 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER....................................................... 4 Section 3.1 Organization and Qualification................................................................ 5 Section 3.2 Subsidiaries.................................................................................. 5 Section 3.3 Ownership and Possession of Membership Interests; Capitalization; Ownership and Possession of Integrated Assets...................................................... 6 Section 3.4 Authority; Non-Contravention; Statutory Approvals; Compliance................................. 6 Section 3.5 Financial Statements.......................................................................... 8 Section 3.6 Absence of Certain Changes or Events.......................................................... 8 Section 3.7 Litigation.................................................................................... 8 Section 3.8 Tax Matters................................................................................... 9 Section 3.9 Employee Benefits; ERISA...................................................................... 10 Section 3.10 Labor and Employee Relations................................................................. 11 Section 3.11 Environmental Matters........................................................................ 12 Section 3.12 No Breaches or Defaults...................................................................... 13 Section 3.13 Insurance.................................................................................... 14 Section 3.14 Brokers or Finders........................................................................... 14 Section 3.15 Competing Lines of Business.................................................................. 14 Section 3.16 Limitation on Representations and Warranties................................................. 14 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER......................................................... 14 Section 4.1 Organization and Qualification................................................................ 14 Section 4.2 Authority; Non-Contravention; Statutory Approvals; Compliance ................................ 15 Section 4.3 Litigation.................................................................................... 16 Section 4.4 Investigation by the Buyer; the Seller's Liability............................................ 16 Section 4.5 Acquisition of Membership Interests for Investment; Ability to Evaluate and Bear Risk..........17 Section 4.6 Financing..................................................................................... 18 Section 4.7 Brokers or Finders............................................................................ 18 ARTICLE V CONDUCT OF BUSINESS PENDING THE CLOSING.............................................................. 18 Section 5.1 Covenants of the Seller....................................................................... 18 Section 5.2 Covenants of the Buyer........................................................................ 20 Section 5.3 Mutual Covenants of the Parties............................................................... 20
i ARTICLE VI ADDITIONAL AGREEMENTS............................................................................... 21 Section 6.1 Access to Company Information................................................................. 21 Section 6.2 Regulatory Matters............................................................................ 22 Section 6.3 Consents...................................................................................... 23 Section 6.4 Directors' and Officers' Indemnification...................................................... 23 Section 6.5 Public Announcements.......................................................................... 24 Section 6.6 Workforce Matters............................................................................. 24 Section 6.7 Seller Plans.................................................................................. 26 Section 6.8 Tax Treatment................................................................................. 27 Section 6.9 Tax Indemnity and Tax Returns................................................................. 27 Section 6.10 Transfer Taxes............................................................................... 29 Section 6.11 Financial Information........................................................................ 29 Section 6.12 Transition Services.......................................................................... 30 Section 6.13 Update of the Seller Disclosure Schedule..................................................... 31 Section 6.14 AquaSource Name.............................................................................. 31 Section 6.15 Officer and Director Resignations............................................................ 31 Section 6.16 Non-Competition Covenants.................................................................... 31 Section 6.17 Enforcement of Other Covenants............................................................... 33 Section 6.18 Surety Bonds................................................................................. 34 Section 6.19 Further Assurances........................................................................... 34 ARTICLE VII CONDITIONS......................................................................................... 35 Section 7.1 Conditions to Each Party's Obligation to Effect the Closing................................... 35 Section 7.2 Conditions to Obligation of the Buyer to Effect the Closing................................... 36 Section 7.3 Conditions to Obligation of the Seller to Effect the Closing.................................. 38 ARTICLE VIII TERMINATION....................................................................................... 39 Section 8.1 Termination................................................................................... 39 Section 8.2 Effect of Termination......................................................................... 40 ARTICLE IX INDEMNIFICATION..................................................................................... 40 Section 9.1 Indemnification Obligations................................................................... 40 Section 9.2 Certain Definitions........................................................................... 41 Section 9.3 Limitations on Indemnification................................................................ 43 Section 9.4 Defense of Claims............................................................................. 45 Section 9.5 Certain Covenants in Respect of Excluded Assets............................................... 48 ARTICLE X GENERAL PROVISIONS................................................................................... 48 Section 10.1 Survival of Obligations...................................................................... 49 Section 10.2 Amendment and Modification................................................................... 49 Section 10.3 Extension; Waiver............................................................................ 49 Section 10.4 Expenses..................................................................................... 49 Section 10.5 Notices...................................................................................... 49 Section 10.6 Entire Agreement; No Third Party Beneficiaries............................................... 51 Section 10.7 Severability................................................................................. 51 Section 10.8 Governing Law................................................................................ 51 Section 10.9 Venue........................................................................................ 51 Section 10.10 Waiver of Jury Trial and Certain Damages.................................................... 52 Section 10.11 Assignment.................................................................................. 52 Section 10.12 Interpretation.............................................................................. 52
ii Section 10.13 No Specific Enforcement..................................................................... 52 Section 10.14 Counterparts; Effect........................................................................ 52
iii INDEX OF PRINCIPAL TERMS Term Page 90 Day Ongoing Revenues...............................................9 Actual Cost..........................................................40 Affected Employees...................................................34 Affiliate............................................................43 Agreement.............................................................7 Assumed Defense......................................................60 Audit................................................................39 Business Employees...................................................17 Buyer.................................................................7 Buyer Disclosure Schedule............................................22 Buyer Indemnifiable Loss.............................................52 Buyer Indemnified Liabilities........................................52 Buyer Indemnitee.....................................................52 Buyer Material Adverse Effect........................................23 Buyer Required Consents..............................................23 Buyer Required Statutory Approvals...................................24 Buyer Subsidiary.....................................................23 Closing..............................................................10 Closing Date.........................................................10 COBRA................................................................35 Code ................................................................18 Company...............................................................7 Company Financial Statements.........................................15 Company Indemnified Parties..........................................32 Company Indemnified Party............................................32 Company Material Adverse Effect......................................12 Company Subsidiary...................................................12 Confidential Information.............................................43 Confidentiality Agreement............................................31 Contracts............................................................21 Covered Excluded Assets..............................................60 December 31, 2001 Balance Sheet......................................15 Deficiency...........................................................10 Designated Employees.................................................44 Direct Claim.........................................................59 DQE ..................................................................7 Encumbrances.........................................................11 Environmental Laws...................................................21 Environmental Whitepaper.............................................20 ERISA................................................................17 ERISA Affiliate......................................................17 Estimated Closing Statement...........................................9 iv Term Page Excepted Liabilities.................................................53 Excess...............................................................10 Excluded Assets......................................................29 Final Closing Statement...............................................9 Final Order..........................................................46 Governmental Authority...............................................14 Hazardous Substances.................................................21 Hiring Conditions....................................................34 Indemnifiable Loss...................................................52 Indemnity Basket.....................................................54 Indemnity Cap........................................................54 Indemnity Period.....................................................52 Initial Termination Date.............................................50 Integrated Assets....................................................13 June 30, 2002 Balance Sheet..........................................15 knowledge............................................................12 Membership Interests..................................................7 Net Accounts Receivable...............................................8 Notified Persons.....................................................60 Other Unbilled Revenue................................................8 Party at Fault.......................................................51 Pending Litigation Matter............................................60 Permitted Encumbrances...............................................11 Person...............................................................12 PreClosing APs........................................................9 Prohibited Activity..................................................42 Purchase Price........................................................7 Qualifying Offer.....................................................34 Representatives......................................................25 Retention Agreements.................................................19 Revenue Statement.....................................................9 Securities Act.......................................................11 Seller................................................................7 Seller Disclosure Schedule...........................................11 Seller Indemnifiable Loss............................................52 Seller Indemnified Liabilities.......................................53 Seller Indemnitee....................................................52 Seller Plans.........................................................17 Seller Required Consents.............................................14 Seller Required Statutory Approvals..................................14 Services I............................................................7 Services II...........................................................7 Services, LP..........................................................7 Severance Obligations................................................34 v Term Page Severance Policy.....................................................34 Straddle Period......................................................38 Subsidiary...........................................................12 Tax .................................................................17 Tax Claim............................................................38 Tax Return...........................................................17 Third Party Claim....................................................57 Unbilled Active Work Order Revenue....................................8 Violation............................................................14 vi LLC PURCHASE AGREEMENT This LLC Purchase Agreement, dated as of September 14, 2002 (this "Agreement"), is entered into by and among AquaSource, Inc., a Delaware corporation (the "Seller"), and DQE, Inc., a Pennsylvania corporation ("DQE"), on the one hand, and Southwest Water Company, a Delaware corporation (the "Buyer"), on the other hand. WHEREAS, the Seller owns all of the issued and outstanding membership interest (the "Membership Interests") of AquaSource Services I, LLC, a Delaware limited liability company ("Services I"); WHEREAS, Services I and its Subsidiaries (as defined in Section 3.2), AquaSource Services II, LLC, a Delaware limited liability company ("Services II"), and AquaSource Services, LP, a Texas limited partnership ("Services, LP"), together with the Company Subsidiaries (as defined in Section 3.2), are collectively referred to in this Agreement as the "Company"; and WHEREAS, each of the Boards of Directors of the Buyer and the Seller and DQE, as applicable, has approved, and deems it advisable and in the best interests of its respective shareholders to consummate, the acquisition of the Company by the Buyer, which acquisition is to be effected by the purchase of all of the Membership Interests by the Buyer upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I PURCHASE AND SALE OF MEMBERSHIP INTERESTS Section 1.1 Sale and Transfer of Membership Interests. Subject to the terms and conditions of this Agreement, on the Closing Date (as defined in Section 2.1), the Seller agrees to sell, convey, assign, transfer and deliver to the Buyer, and the Buyer agrees to purchase and accept from the Seller, all of the Seller's rights, title and interest in and to the Membership Interests. Section 1.2 The Purchase Price. Subject to the terms and conditions of this Agreement, in consideration of the aforesaid sale, conveyance, assignment, transfer and delivery to the Buyer of the Membership Interests, the Buyer shall pay to the Seller the following amounts (together, the "Purchase Price") pursuant to the provisions of this Section 1.2: (a) $7,500,000 in cash at Closing; (b) An amount of cash equal to ninety percent (90%) of the Net Accounts Receivable at Closing. For purposes of this Agreement, "Net Accounts Receivable" shall mean the aggregate amount of the Company's outstanding accounts receivable as of the Closing Date, calculated in accordance with existing practices and procedures used by the 1 Company, minus the amount of any allowance for doubtful accounts attributable to such accounts receivable then included on the books of the Company, provided that the amount of any such allowance for doubtful accounts shall be calculated by taking the aggregate amount of all accounts receivable then included on the books of the Company that have aged more than 120 days, multiplying such aggregate amount by a factor of 0.08, and then adding to the resulting product the amount of $450,000; (c) An amount of cash equal to fifty percent (50%) of the Unbilled Active Work Order Revenue at Closing. For purposes of this Agreement, "Unbilled Active Work Order Revenue" shall mean the aggregate amount of the Company's unbilled revenue attributable to active work orders of the Company for work or services not then fully completed and shall be calculated by determining the number of such active work orders in accordance with existing practices and procedures used by the Company and multiplying such number by $288.29; and (d) An amount of cash equal to one hundred percent (100%) of the Other Unbilled Revenue at Closing. For purposes of this Agreement, "Other Unbilled Revenue" shall mean the aggregate amount of the Company's unbilled revenue attributable to any source other than active work orders of the Company for work or services not then fully completed, including, but not limited to, revenue attributable to base fees, retainer fees or similar fees and revenue attributable to work or services that have been fully completed, and shall be calculated in accordance with existing practices and procedures used by the Company. Section 1.3 Certain Liabilities, Accounts Receivable and Accounts Payable. (a) Consistent with the June 30, 2002 Balance Sheet (as defined in Section 3.5), but subject to agreements in Section 1.3(b) below regarding Pre-Closing APs (as defined in Section 1.3(b)), the Seller agrees that at Closing the Company will have no accounts payable, no cash and no intercompany receivables or payables. However, the Buyer agrees that it will assume vacation accruals, but expressly not accrued payroll for any employees, through the Closing Date for employees who accept the Company's Qualifying Offer made pursuant to Section 6.6(a) below. Additionally, the Keystone, South Dakota, industrial revenue bond obligation will remain an obligation of the Company after the Closing. (b) The Seller or DQE will pay, in the ordinary course and consistent with past practice, all of the Company's accounts payable for obligations incurred prior to Closing ("Pre-Closing APs") that are received in the ordinary course of business prior to the Closing. The Buyer will forward to the Seller all Pre-Closing APs received by the Company in the ordinary course of business during the thirty (30) day period commencing on the Closing Date, and Seller will pay such Pre-Closing APs. All Pre-Closing APs received by the Company after such thirty (30) day period will be paid by the Buyer, but all amounts so paid will each be a Buyer Indemnifiable Loss (as defined in Section 9.1) in accordance with the terms of Article IX. Section 1.4 Ongoing Revenues Statement. On the Closing Date, the earned revenues of the Company for the ninety (90) day period prior to the Closing Date for ongoing customer relations and customer contracts (the "90 Day Ongoing Revenues") must total at least $3,750,000. At the same time that the Seller prepares and delivers to the Buyer the Final Closing 2 Statement (as defined below), the Seller will prepare and deliver to the Buyer a statement (the "Revenue Statement") showing the calculation and amount of the 90 Day Ongoing Revenues. Such calculation will be performed according to the methods and procedures historically used by the Company for calculating earned revenues. Together with the Revenue Statement, the Seller will provide to the Buyer copies of the worksheets and other documentation showing in reasonable detail how the 90 Day Ongoing Revenues were calculated. In the event that the 90 Day Ongoing Revenues are less than $3,750,000, then together with delivery of the Revenue Statement, the Seller will make a payment to Buyer in the amount of $.45 for each $1 by which the 90 Day Ongoing Revenues are less than $3,750,000. Section 1.5 Closing Statements and Payments. (a) At least ten (10) calendar days prior to the Closing Date, the Seller shall prepare and deliver to the Buyer in good faith its estimate of the Purchase Price as calculated pursuant to Section 1.2 (the "Estimated Closing Statement"). For the avoidance of doubt, at the Closing, the Buyer shall pay to the Seller the Purchase Price as reflected on the Estimated Closing Statement. (b) Within fifteen (15) calendar days following the Closing Date, the Seller shall prepare and deliver to the Buyer in good faith a Final Closing Statement setting forth the Purchase Price as calculated pursuant to Section 1.2 (the "Final Closing Statement"). Within fifteen (15) calendar days following the Buyer's receipt of the Final Closing Statement and the Revenue Statement, the Buyer may object in good faith to the Final Closing Statement and/or the Revenue Statement in writing. In the event of any such objection, the Buyer and the Seller shall attempt to resolve their differences by negotiation. If such parties are unable to do so within thirty (30) calendar days following the Seller's receipt of the Buyer's objection, the Seller and the Buyer shall appoint a nationally recognized accounting firm mutually acceptable to each of the Seller and the Buyer, which shall, at the Seller's and the Buyer's joint expense, review the Final Closing Statement and the Revenue Statement, as applicable, and determine the Purchase Price and the 90 Day Ongoing Revenues, as applicable, within thirty (30) calendar days of such appointment. The Seller and the Buyer shall be entitled to make a written submission to such accounting firm setting forth their respective positions and proposed Purchase Price and amount of 90 Day Ongoing Revenues, as applicable. In addition, the Seller and the Buyer agree to cooperate with such accounting firm and provide it with such information as it reasonably requests to enable it to make such determination. The finding of such accounting firm shall be binding on the parties hereto but is expressly limited to (i) a determination of the Purchase Price that neither exceeds the Seller's proposed Purchase Price nor is less than the Buyer's proposed Purchase Price, and (ii) a determination of the amount of 90 Day Ongoing Revenues that neither exceeds the Seller's proposed amount of such revenues nor is less than the Buyer's proposed amount of such revenues, as applicable. Upon determination by agreement of the Seller and the Buyer or by binding determination of said accounting firm of the Purchase Price or the amount of the 90 Day Ongoing Revenues, as applicable, (i) if the Purchase Price or the amount of the 90 Day Ongoing Revenues, as applicable, that is finally agreed upon or determined exceeds the Purchase Price or the amount of the 90 Day Ongoing Revenues, as applicable, that was reflected on the Estimated Closing Statement or the Revenue Statement, as applicable (such excess amount, the "Deficiency"), the Buyer shall pay to the Seller an amount of cash equal to the Deficiency, or (ii) if the Purchase Price or the amount of the 90 Day Ongoing Revenues, as 3 applicable, that was reflected on the Estimated Closing Statement or the Revenue Statement, as applicable, exceeds the Purchase Price that is finally agreed upon or determined (such excess amount, the "Excess"), the Seller shall pay to the Buyer an amount of cash equal to the Excess. Any amount of cash in respect of any Deficiency or Excess owed hereunder shall be paid to the party owed the same by the party owing the same by wire transfer in immediately available funds to an account designed by the party owed the same no later than five (5) business days following the determination by agreement of the Seller and the Buyer or by binding determination of said accounting firm of the Purchase Price. ARTICLE II THE CLOSING Section 2.1 Closing. The consummation of the sale and transfer of the Membership Interests by the Seller to the Buyer (the "Closing") shall take place at the Washington, D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP at 10:00 a.m., local time, on the fifth business day immediately following the date on which the last of the conditions set forth in Article VII hereof is fulfilled or waived, or at such other time, date and place as the Seller and the Buyer shall mutually agree (the "Closing Date"). Section 2.2 Closing Transactions. At the Closing: (a) The Seller shall deliver to the Buyer (i) free and clear of any liens, claims, security interests and other encumbrances of any nature whatsoever (collectively, "Encumbrances"), except for those Encumbrances arising pursuant to restrictions on the transfer of securities imposed under the Securities Act of 1933, as amended (the "Securities Act") or any applicable state securities laws and those Encumbrances created by this Agreement or the Buyer (collectively, "Permitted Encumbrances"), certificates representing the Membership Interests, each such certificate to be duly and validly endorsed in favor of the Buyer or accompanied by a separate instrument of assignment sufficient to vest in the Buyer good title to the Membership Interests and (ii) such other documents as are required to be delivered by the Seller to the Buyer pursuant hereto; and (b) The Buyer shall deliver to the Seller (i) the portion of the Purchase Price to be paid at the Closing, by wire transfer in immediately available funds to an account designated by the Seller prior to the Closing, and (ii) such other documents as are required to be delivered by the Buyer to the Seller pursuant hereto. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller and, only where specifically noted, DQE, represent and warrant to the Buyer as follows, provided, however, that notwithstanding any other provision of this Agreement to the contrary, the Seller and DQE make no representations or warranties with respect to any of the Excluded Assets (as defined in Section 5.3) and all representations and warranties of the Seller and, as applicable, DQE, contained herein expressly exclude such Excluded Assets and shall not be read or deemed to be a representation or warranty regarding any Excluded Asset, 4 consequently, as used in this Article III, the terms "Company", "Company Subsidiary" and "Company Subsidiaries" shall not be read or deemed to include the Excluded Assets. Section 3.1 Organization and Qualification. (a) Except as set forth in Section 3.1(a) of the schedule delivered by the Seller to the Buyer on the date hereof and attached to this Agreement (the "Seller Disclosure Schedule"), (i) the Seller is a corporation duly organized, validly existing and in good standing under the laws of Delaware, and (ii) Services I, Services II, Services, LP and each Company Subsidiary is a limited liability company, limited partnership or corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has all requisite power and authority to own, lease and operate its assets and properties to the extent owned, leased and operated and to carry on its business as it is now being conducted and is duly qualified to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its assets and properties makes such qualification necessary other than in such jurisdictions where the failure to be in good standing or be so qualified neither is having nor is reasonably likely to have a Company Material Adverse Effect (as defined in Section 3.1(b)). True and correct copies of the articles of incorporation and by-laws (or equivalent documents) of Services I, Services II, Services, LP and each Company Subsidiary have been delivered to the Buyer. (b) As used in this Agreement, the term "Company Material Adverse Effect" shall mean any material adverse effect on the business, assets, financial condition or results of operations of the Company, taken as a whole; provided, however, that the term "Company Material Adverse Effect" shall not include (i) any such effect resulting from any change in law, rule, or regulation of any Governmental Authority (as defined in Section 3.4(c)) that applies generally to similarly situated Persons (as defined in Section 3.1(c)) or (ii) effects relating to or resulting from general changes in the industries in which the Company operates its assets or conducts its businesses. (c) As used in this Agreement, (i) the term "knowledge" when referring to the knowledge of the Seller shall mean the knowledge, after reasonable inquiry of employees who are reasonably likely to have the relevant information, of the executive officers of the Seller identified by name and/or title in Section 3.1(c) of the Seller Disclosure Schedule, and (ii) the term "Person" shall mean any natural person, corporation, general or limited partnership, limited liability company, joint venture, trust, association or entity of any kind. Section 3.2 Subsidiaries. Section 3.2 of the Seller Disclosure Schedule sets forth a complete list, as of the date hereof, of all of the Company Subsidiaries and their respective jurisdictions of incorporation or organization. Except as set forth in Section 3.2 of the Seller Disclosure Schedule, all of the issued and outstanding capital stock or other ownership interests of each Company Subsidiary are owned, directly or indirectly, by Services, LP free and clear of any Encumbrances, except for Permitted Encumbrances. As used in this Agreement, the term "Subsidiary" of a Person shall mean any corporation or other entity (including partnerships and other business associations) of which at least a majority of the voting power represented by the outstanding capital stock or other voting securities or interests having voting power under ordinary circumstances to elect directors or similar members of the governing body of such 5 corporation or entity (or, if there are no such voting interests, 50% or more of the equity interests in such corporation or entity) shall at the time be held, directly or indirectly, by such Person. The term "Company Subsidiary" shall mean a Subsidiary of Services, LP. Section 3.3 Ownership and Possession of Membership Interests; Capitalization; Ownership and Possession of Integrated Assets. As of the date hereof, (i) the Seller owns beneficially and of record all of the Membership Interests of Services I free and clear of any Encumbrances, except for Permitted Encumbrances; (ii) Services I owns beneficially and of record all of the membership interests of Services II free and clear of any Encumbrances, except for Permitted Encumbrances; (iii) Services I and Services II, collectively, own beneficially and of record all of the partnership interests of Services, LP free and clear of any Encumbrances, except for Permitted Encumbrances, and (iv) except as set forth on Section 3.2 of the Seller Disclosure Schedule, Services, LP owns beneficially and of record all of the ownership interests of the Company Subsidiaries free and clear of any Encumbrances, except for Permitted Encumbrances. Other than as set forth in the immediately preceding sentence, there are no member, partner or equity interests in the Services I, Services II, Services, LP or any Company Subsidiary outstanding. There are no options, warrants, calls, rights, commitments or agreements of any character to which DQE, the Seller, Services I, Services II, Services, LP or any Company Subsidiary is a party or by which it is bound obligating DQE, the Seller, Services I, Services II, Services, LP or any Company Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional membership, partnership or equity interests of Services I, Services II, Services, LP or any Company Subsidiary or obligating DQE, the Seller, Services I, Services II, Services, LP or any Company Subsidiary to grant, extend or enter into any option, warrant, call, right, commitment or agreement in respect of membership, partnership or equity interests of Services I, Services II, Services, LP or any Company Subsidiary. All of the assets listed on Section 3.3 of the Seller Disclosure Schedule (the "Integrated Assets") are owned, directly or indirectly, by the Seller free and clear of any Encumbrances, except for Permitted Encumbrances. The assets of the Company, together with the Integrated Assets, constitute substantially all of the assets used in the ordinary course of business of the Company as it is currently being conducted. Section 3.4 Authority; Non-Contravention; Statutory Approvals; Compliance. (a) Authority. The Seller and DQE have all requisite corporate power and authority to enter into this Agreement and, subject to the receipt of the applicable Seller Required Statutory Approvals (as defined in Section 3.4(c)) and the applicable Seller Required Consents (as defined in Section 3.4(b)), to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation by the Seller and DQE of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Seller and DQE. No vote of, or consent by, the holders of any class or series of stock issued by the Seller or DQE is necessary to authorize the execution and delivery by the Seller and DQE of this Agreement or the consummation by it of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Seller and DQE and, assuming the due authorization, execution and delivery hereof by the Buyer, constitutes the valid and binding obligation of each of the Seller and DQE enforceable against it in accordance with its terms, subject to, to the extent applicable, bankruptcy, insolvency, fraudulent transfer, 6 reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (b) Non-Contravention. Except as set forth in Section 3.4(b)(i) of the Seller Disclosure Schedule, the execution and delivery of this Agreement by the Seller and DQE does not, and the consummation of the transactions contemplated hereby will not, violate or result in a breach of any provision of, constitute a default (with or without notice or lapse of time or both) under, result in the termination or modification of, accelerate the performance required by, result in a right of termination, cancellation or acceleration of any obligation or the loss of a benefit under, or result in the creation of any Encumbrance, except for Permitted Encumbrances, upon any of the properties or assets of the Company (any such violation, breach, default, right of termination, modification, cancellation or acceleration, loss or creation, is referred to herein as a "Violation" with respect to DQE (in respect of the Company), the Seller (in respect of the Company) and the Company, and such term when used in Article IV has a correlative meaning with respect to the Buyer and the Buyer Subsidiaries) pursuant to any provisions of (i) the articles of incorporation, by-laws or similar governing documents of the Seller, Services I, Services II, Services, LP or any Company Subsidiary, (ii) subject to obtaining the Seller Required Statutory Approvals, any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to DQE (in respect of the Company), the Seller (in respect of the Company) or the Company or any of their respective properties or assets, or (iii) subject to obtaining the third-party consents set forth in Section 3.4(b)(iii) of the Seller Disclosure Schedule (the "Seller Required Consents"), any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Services I, Services II, Services, LP or any Company Subsidiary is a party or by which they or any of their respective properties or assets may be bound or affected, except in the case of clause (ii) or (iii) for any such Violation which neither is having nor is reasonably likely to have a Company Material Adverse Effect. (c) Statutory Approvals. Except as described in Section 3.4(c) of the Seller Disclosure Schedule (the "Seller Required Statutory Approvals"), no declaration, filing or registration with, or notice to or authorization, consent or approval of, any court, federal, state, local or foreign governmental or regulatory body (including a national securities exchange or other self-regulatory body) or authority (each, a "Governmental Authority") is necessary for the execution and delivery of this Agreement by DQE or the Seller or the consummation by the Seller of the transactions contemplated hereby, except those which the failure to obtain neither is having nor is reasonably likely to result in a Company Material Adverse Effect (it being understood that references in this Agreement to "obtaining" such Seller Required Statutory Approvals shall mean making such declarations, filings or registrations; giving such notices; obtaining such authorizations, consents or approvals; and having such waiting periods expire as are necessary to avoid a violation of law). (d) Compliance. Except as set forth in Section 3.4(d)(i), Section 3.7, Section 3.10(a) or Section 3.11 of the Seller Disclosure Schedule, the Company is not in violation of, has not been given notice of and is not currently being charged with any violation of, and, to the knowledge of the Seller, is not under investigation with respect to any violation of any law, statute, order, rule, regulation, ordinance or judgment of any Governmental Authority, except for possible violations which neither are having nor are reasonably likely to have a 7 Company Material Adverse Effect. Except as set forth in Section 3.4(d)(ii) or Section 3.12 of the Seller Disclosure Schedule, to the knowledge of the Seller, Services I, Services II, Services, LP and each Company Subsidiary has all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct their businesses as conducted since July 1, 2001, except those that the absence of which neither are having nor are reasonably likely to have a Company Material Adverse Effect. Except as set forth in Section 3.4(d)(iii) of the Seller Disclosure Schedule, neither Services I, Services II, Services, LP nor any Company Subsidiary is in breach or violation of any term or provision of their respective articles of incorporation or by-laws. Section 3.5 Financial Statements. True and complete copies of the Company Financial Statements (as defined below) are set forth in Section 3.5 of the Seller Disclosure Schedule. The Company Financial Statements have been prepared from, are in accordance with, and accurately reflect the books and records of the Company, comply in all material respects with applicable accounting requirements, have been prepared in accordance with GAAP applied on a consistent basis during the period involved (except as may be stated in the notes thereto) and fairly present the consolidated financial position and the consolidated results of operations and cash flows (and changes in financial position, if any) of the Company as of the time and for the period referred to therein. As used in this Agreement, the term "Company Financial Statements" shall mean the consolidated balance sheet of the Company as at December 31, 2001 (the "December 31, 2001 Balance Sheet") and as at June 30, 2002 (the "June 30, 2002 Balance Sheet"), in each case together with the consolidated statements of income, shareholders' equity and cash flows for the twelve (12) and six (6) month periods, respectively, then ended. The Company Financial Statements are not audited and reflect only the Company, including the related assets and liabilities, contemplated to be transferred to the Buyer pursuant to this Agreement. Section 3.6 Absence of Certain Changes or Events. Except as set forth in Section 3.6 of the Seller Disclosure Schedule, since December 31, 2001, the Company has conducted its business only in the ordinary course of business consistent with past practice and there has not been any development or combination of developments affecting the Company, of which the Seller has knowledge, that is having or is reasonably likely to have a Company Material Adverse Effect. Section 3.7 Litigation. Except as set forth in Section 3.7, Section 3.8(a), Section 3.9(i), Section 3.10(a) or Section 3.11 of the Seller Disclosure Schedule, (a) there are no claims, suits, actions or proceedings before any court, governmental department, commission, agency, instrumentality or authority or any arbitrator pending or, to the knowledge of the Seller, threatened, nor are there, to the knowledge of the Seller, any investigations or reviews by any court, governmental department, commission, agency, instrumentality or authority or any arbitrator pending or threatened against, relating to or affecting the Services I, Services II, Services, LP or any Company Subsidiary, and (b) there are no judgments, decrees, injunctions, rules or orders of any court, governmental department, commission, agency, instrumentality or authority or any arbitrator applicable to Services I, Services II, Services, LP or any Company Subsidiary, except, in the case of clause (a) and clause (b), for such that are not having nor are reasonably likely to have a Company Material Adverse Effect. 8 Section 3.8 Tax Matters. (a) Except as set forth in Section 3.8(a) of the Seller Disclosure Schedule: (i) Services I, Services II, Services, LP and each Company Subsidiary has timely filed (or has had filed on its behalf) with appropriate taxing authorities all material Tax Returns required to be filed by it or, for periods during which Services I, Services II or Services, LP is a member, the affiliated group filing a consolidated federal income tax return the common parent of which is DQE on or prior to the date hereof, such Tax Returns (as defined in Section 3.8(b)) are correct, complete and accurate in all material respects, and all material Taxes (as defined in Section 3.8(b)) owed by Services I, Services II, Services, LP and each Company Subsidiary (whether or not shown on any Tax Return) have been paid; (ii) all material Tax withholding and deposit requirements imposed on or with respect to Services I, Services II, Services, LP and each Company Subsidiary (including any withholding with respect to wages or other amounts paid to employees) have been satisfied in full in all material respects; (iii) there are no liens for Taxes upon any property or assets of the Company, except for liens for Taxes not yet due and payable; (iv) there are no outstanding requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment or collection of any Taxes or deficiencies against the Company; (v) neither Services I, Services II, Services, LP nor any Company Subsidiary has been a member of any affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which is the Seller or DQE); (vi) each of Services I and Services II is, and has been at all times during its existence, properly disregarded as an entity separate from its owner for federal income Tax purposes pursuant to Treasury Regulation Section 301.7701-3(b)(ii) and has not at any time during its existence made any election pursuant to Treasury Regulation Section 301.7701-3(c) to be classified as an association taxable as a corporation for federal income tax purposes; (vii) Services, LP has properly made an election pursuant to Treasury Regulation Section 301.7701-3(c) to be classified as an association taxable as a corporation for federal income Tax purposes; (viii) no claim has ever been asserted in writing by any Tax authority in a jurisdiction where Services I, Services II, Services, LP, or any Company Subsidiary does not file Tax Returns that Services I, Services II, Services, LP, or any Company Subsidiary is or may be subject to taxation by such jurisdiction; (ix) Services II is not, and has never been at any time during its existence, a limited liability company or corporation that does business in the state of Texas, organized in the state of Texas, or authorized to do business in the state of Texas, as set forth in Section 171.001 of the Texas Tax Code or any other applicable Texas statute, regulation, or pronouncement; and (x) neither Services I, Services II, Services, LP nor any Company Subsidiary is a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of (A) any "excess parachute payment" within the meaning of Section 280G of the Tax Code (or any corresponding provision of state, local or foreign Tax law) or (B) any amount that will not be fully deductible as a result of Section 162(m) of the Tax Code (or any corresponding provision of state, local or foreign Tax law). (b) As used in this Agreement: (i) the term "Tax" includes all federal, state, local and foreign income, profits, franchise, gross receipts, environmental, customs duty, capital stock, severance, stamp, payroll, sales, employment, unemployment, disability, use, property, withholding, excise, production, value added, occupancy and other taxes, duties or assessments of any nature whatsoever, together with all interest, penalties and additions imposed with respect thereto; and (ii) the term "Tax Return" includes all returns and reports (including 9 elections, declarations, disclosures, Schedules, estimates and information returns) required to be supplied to a Tax authority relating to Taxes. Section 3.9 Employee Benefits; ERISA. (a) Seller Plans. Section 3.9(a) of the Seller Disclosure Schedule contains a list of each employee benefit plan, program, agreement or arrangement (including without limitation any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), in each case, that is sponsored, maintained or contributed to or required to be contributed to by the Seller, DQE or by any trade or business, whether or not incorporated that together with the Company, the Seller or DQE would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA (an "ERISA Affiliate"), or to which the Seller, DQE or an ERISA Affiliate is a party, for the benefit of any employee or former employee of the Company, the Seller or any affiliate of the Seller whose employment is (in the case of current employees) or was (in the case of former employees) principally attributable to the businesses carried on by or in respect of the Company (such individuals, the "Business Employees," and such plans, programs, agreements or arrangements, collectively, the "Seller Plans"). The Company does not sponsor, maintain, contribute to, and is not a party to, or within the last six (6) years preceding the Closing has not sponsored, maintained, or contributed to, been required to contribute to, or been a party to, any Seller Plans or any other employee benefit plan within the meaning of Section 3(3) of ERISA. (b) Information Regarding Affected Employees. On even date herewith, the Seller has delivered to the Buyer a schedule containing the work location and wage or salary information for each of the Affected Employees (as defined in Section 6.6), which information is true and correct as of the date of this Agreement. (c) Absence of Liability. Except as set forth in Section 3.9(c) of the Seller Disclosure Schedule, no liability under Title IV of ERISA has been incurred by the Company or any ERISA Affiliate with respect to a Seller Plan that has not been satisfied in full, and, to the knowledge of the Seller, no condition exists that presents a material risk to the Company of incurring any such liability, other than liability for premiums due the Pension Benefit Guaranty Corporation (which premiums have been paid when due). (d) Multiemployer Plan. Except as set forth in Section 3.9(d) of the Seller Disclosure Schedule, no Seller Plan is a "multiemployer plan," as defined in Section 4001(a)(3) of ERISA, nor is any Seller Plan a plan described in Section 4063(a) of ERISA. (e) No Violations. Except as set forth in Section 3.9(e) of the Seller Disclosure Schedule, each Seller Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including without limitation ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), and there have been no prohibited transactions (within the meaning of Section 4975 of ERISA and Section 406 of ERISA) involving any Seller Plan for which the Buyer would have any liability. (f) Section 401(a) Qualification. Each Seller Plan "intended" or "designed" to be "qualified" within the meaning of Section 401(a) of the Code has received or 10 timely applied for a current determination letter from the Internal Revenue Service to the effect that it is so qualified and any distribution to an Affected Employee (as defined in Section 6.6(a)) from each such plan will be eligible for treatment as an eligible rollover distribution within the meaning of Section 402(c)(4) of the Code. (g) Post-Employment Benefits. Except as set forth in Section 3.9(g) of the Seller Disclosure Schedule, no Seller Plan provides medical, surgical, hospitalization, death or similar benefits (whether or not insured) for Business Employees for periods extending beyond their respective dates of retirement or other termination of service, other than (i) coverage mandated by applicable law, (ii) death benefits under any "pension plan," or (iii) benefits the full cost of which is borne by the Business Employee (or his beneficiary). (h) Effect of Change of Control. Except to the extent that the Company expressly assumes Severance Obligations (as defined in Section 6.6(b)) or obligations under the Retention Agreements (as defined in Section 3.10(b)), no liability will be incurred by the Company for severance pay or acceleration of compensation or benefits as a result of the transactions contemplated by this Agreement. (i) Claims. Except as set forth in Section 3.9(i) of the Seller Disclosure Schedule, there are no pending, or to the knowledge of the Seller threatened, material claims by or on behalf of any Seller Plan, by any Business Employee or Business Employee beneficiary covered under any such Seller Plan, or otherwise involving any such Seller Plan (other than routine claims for benefits), and there are no pending or, to the knowledge of the Seller, threatened audits, investigations, enforcement actions, or other similar proceedings conducted by any state or federal agency involving any Seller Plan. Section 3.10 Labor and Employee Relations. (a) As of the date hereof, except as disclosed in Section 3.10(a) of the Seller Disclosure Schedule, neither Services I, Services II, Services, LP nor any Company Subsidiary is a party to any collective bargaining agreement or other labor agreement with any union or labor organization. Except as disclosed in Section 3.10(a) of the Seller Disclosure Schedule or except to the extent not reasonably likely to have a Company Material Adverse Effect, (i) there is no strike, lockout, slowdown or work stoppage pending or, to the knowledge of the Seller or DQE, threatened against or involving the Company, and (ii) there is no proceeding, claim, suit, action or governmental investigation pending or, to the knowledge of the Seller or DQE, threatened in respect of which any director, officer, employee or agent of the Company is or may be entitled to claim indemnification from Services I, Services II, or Services, LP or any Company Subsidiary pursuant to their articles of incorporation, by-laws or any indemnification agreement. (b) Except as set forth in Section 3.10(b) of the Seller Disclosure Schedule, prior to the Closing, Services I, Services II, Services, LP and any Company Subsidiary did not have any employees, and on the Closing Date will not have any obligation to persons who provided services to the Company prior to the Closing in any capacity for DQE or the Seller, including employees, consultants, independent contractors, subcontractors, officers or directors of DQE or the Seller. Effective after the Closing, Services I, Services II, Services, LP 11 and the Company Subsidiaries will have only such obligations to the employees that they hire that arise out of services provided by such employees commencing after the Closing which obligations will include the Severance Obligations (as defined in Section 6.6(b)), and obligations under the Retention Agreements (as defined below). The term "Retention Agreements" shall mean (i) the Retention Agreement between Bryan S. Chapline and the Seller dated June 6, 2002, and (ii) the Retention Agreement between Randolph S. Jones and the Seller dated February 14, 2002. (c) Section 3.10(c) of the Seller Disclosure Schedule lists all agreements between DQE, the Seller or the Company and the Designated Employees (as defined in Section 6.17) that include covenants not to compete. Section 3.11 Environmental Matters. (a) Except as set forth in Section 3.11 of the Seller Disclosure Schedule and except for those matters disclosed in the "Environmental White Paper" relating to the Company delivered by the Seller to the Buyer on even date herewith (the "Environmental Whitepaper"): (i) To the knowledge of the Seller, each of Services I, Services II, Services, LP and each Company Subsidiary is in compliance with all applicable Environmental Laws (as defined in Section 3.11(b)(i)), including, but not limited to, possessing all permits and other governmental authorizations required for their operations under applicable Environmental Laws, except for such noncompliance that neither is having nor is reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect. (ii) (A) To the knowledge of the Seller, there is no pending or threatened claim, notice of violation, lawsuit, demand, action, or administrative proceeding against the Seller (in respect of the Company), DQE (in respect of the Company), Services I, Services II, Services, LP or any Company Subsidiary under or pursuant to any Environmental Law that is having or is reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect; (B) neither the Seller (in respect of the Company), DQE (in respect of the Company), Services I, Services II, Services, LP nor any Company Subsidiary is subject to any administrative or judicial consent order or decree in connection with any Environmental Laws or the release or threat of release of Hazardous Substances (as defined in Section 3.11(b)(ii)) that is having or is reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect; and (C) neither the Seller (in respect of the Company), DQE (in respect of the Company), Services I, Services II, Services, LP nor any Company Subsidiary has received written notice from any Person, including but not limited to any Governmental Authority, alleging that the Seller (in respect of the Company), DQE (in respect of the Company), Services I, Services II, Services, LP or any Company Subsidiary is in violation or potentially in violation of any applicable Environmental Law or otherwise may be liable under any applicable Environmental Law, which violation or liability is unresolved and which have or 12 may, individually or in the aggregate, have or may have a Company Material Adverse Effect. (iii) To the knowledge of the Seller, with respect to the real property that was formerly or is currently owned or leased by the Seller (in respect of the Company), DQE (in respect of the Company), Services I, Services II, Services, LP or any Company Subsidiary, there have been no releases or threats of releases of Hazardous Substances on or underneath or from any of such real property that, individually or in the aggregate, have or would be reasonably likely to result in a Company Material Adverse Effect. (b) For purposes of this Agreement: (i) "Environmental Laws" shall mean all federal, state and local laws, common law, regulations, codes, policies, guidance documents, rules and ordinances relating to occupational health and safety, or pollution or protection of the environment, including, without limitation, laws (such as the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (CERCLA)) relating to releases or threatened releases of Hazardous Substances into the environment (including, without limitation, ambient air, surface water, groundwater, land, surface and subsurface strata). (ii) "Hazardous Substances" shall mean any chemicals, materials or substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "hazardous constituents", "restricted hazardous materials", "extremely hazardous substances", "toxic substances", "contaminants", "pollutants", "toxic pollutants", or words of similar meaning and regulatory effect under any applicable Environmental Law including, without limitation, petroleum and asbestos. (c) The representations and warranties set forth in this Section 3.11 are the sole and exclusive representations and warranties relating to environmental matters made by the Seller in this Agreement. Section 3.12 No Breaches or Defaults. Except as disclosed on Section 3.7 or Section 3.12 of the Seller Disclosure Schedule, the Company is not in breach or violation of or in default in the performance or observance of any term or provision of, and no event has occurred which, with the lapse of time or action by a third party, could result in a default by the Company under, nor, to the knowledge of the Seller, is any third party in breach or default in any material respect under, any Contract (as defined below), except, in any such case, for such breaches and defaults by the Company as to which requisite waivers or consents have been or will be obtained prior to the Closing Date and for such breaches and defaults that are not having nor are reasonably likely to have a Company Material Adverse Effect. The term "Contracts" means all written notes, bonds, mortgages, indentures, deeds of trust, licenses, franchises, permits, contracts, leases or other instruments, obligations or agreements of any kind to which Services I, Services II, Services, LP or any Company Subsidiary is a party or by which their properties or assets may be bound, provided, however, that for purposes of this Section 3.12, Contracts shall 13 not include Seller Plans or agreements, if any, with any Governmental Authority regarding compliance with Environmental Laws. Section 3.13 Insurance. Section 3.13 of the Seller Disclosure Schedule describes the fire and casualty, general liability, business interruption, product liability, pollution and sprinkler and water damage insurance policies maintained by the Seller or DQE on behalf of the Company as well as a description of any self-insurance arrangement by or affecting the Company, including any reserves thereunder. To the knowledge of the Seller, all of such policies are in full force and effect, all premiums with respect thereto are currently paid and neither the Seller nor DQE has received any notice of cancellation or termination with respect to any such insurance policy. Section 3.14 Brokers or Finders. The Seller has not entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except Lehman Brothers, whose fees and expenses will be paid by the Seller in accordance with the Seller's agreements with such firm. Section 3.15 Competing Lines of Business. Except as set forth in Section 3.15 of the Seller Disclosure Schedule, to the knowledge of the Seller, neither DQE, the Seller nor any Subsidiary of the Seller is, or owns, indirectly or directly, any interest in any other business which is a competitor of the Company. Section 3.16 Limitation on Representations and Warranties. Except for the representations and warranties contained in this Article III, neither the Seller, DQE nor any other Person or entity acting on behalf of the Seller or DQE makes any representation or warranty, express or implied, concerning the Membership Interests or the business, assets, or liabilities of the Company or any other matter. In addition, notwithstanding any other provision of this Agreement to the contrary, neither the Seller nor DQE makes any representations or warranties with respect to any of the Excluded Assets. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants to the Seller as follows: Section 4.1 Organization and Qualification. Except as set forth in Section 4.1 of the Schedule delivered by the Buyer to the Seller on the date hereof and attached to this Agreement (the "Buyer Disclosure Schedule") the Buyer is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has all requisite power and authority to own, lease and operate its assets and properties to the extent owned, leased and operated and to carry on its business as it is now being conducted and is duly qualified to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its assets and properties makes such qualification necessary other than in such jurisdictions where the failure to be in good standing or be so qualified is not reasonably likely, individually or in the aggregate, to have a Buyer Material Adverse Effect (as defined 14 below). As used in this Agreement, the term "Buyer Material Adverse Effect" shall mean any material adverse effect on the ability of the Buyer to consummate the transactions contemplated by this Agreement and to perform its obligations hereunder; provided, however, that any such effect resulting from any change in law, rule, or regulation of any Governmental Authority that applies generally to similarly situated Persons shall not be included in the term "Buyer Material Adverse Effect." The term "Buyer Subsidiary" shall mean a Subsidiary of the Buyer. Section 4.2 Authority; Non-Contravention; Statutory Approvals; Compliance. (a) Authority. The Buyer has all requisite corporate power and authority to enter into this Agreement and, subject to the receipt of the applicable Buyer Required Statutory Approvals (as defined in Section 4.2(c)) and applicable Buyer Required Consents (as defined in Section 4.2(b)), to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation by the Buyer of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Buyer. No vote of, or consent by, the holders of any class or series of stock issued by the Buyer is necessary to authorize the execution and delivery by the Buyer of this Agreement or the consummation by it of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Buyer and, assuming the due authorization, execution and delivery hereof by the Seller and DQE, constitutes the valid and binding obligation of the Buyer enforceable against it in accordance with its terms, subject to, to the extent applicable, bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (b) Non-Contravention. Except as set forth in Section 4.2(b)(i) of the Buyer Disclosure Schedule, the execution and delivery of this Agreement by the Buyer does not, and the consummation of the transactions contemplated hereby will not, result in a Violation pursuant to any provisions of (i) the certificate of incorporation, by-laws or similar governing documents of the Buyer or any of the Buyer Subsidiaries, (ii) subject to obtaining the Buyer Required Statutory Approvals, any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to the Buyer or any of the Buyer Subsidiaries or any of its or their respective properties or assets, or (iii) subject to obtaining the third-party consents set forth in Section 4.2(b)(iii) of the Buyer Disclosure Schedule (the "Buyer Required Consents"), any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which the Buyer or any of the Buyer Subsidiaries is a party or by which they or any of their respective properties or assets may be bound or affected, except in the case of clause (ii) or (iii) for any such Violation which is not reasonably likely to have a Buyer Material Adverse Effect. (c) Statutory Approvals. Except as described in Section 4.2(c) of the Buyer Disclosure Schedule (the "Buyer Required Statutory Approvals"), no declaration, filing or registration with, or notice to or authorization, consent or approval of, any Governmental Authority is necessary for the execution and delivery of this Agreement by the Buyer or the consummation by the Buyer of the transactions contemplated hereby, except those which the failure to obtain is not reasonably likely to have a Buyer Material Adverse Effect (it being understood that references in this Agreement to "obtaining" such Buyer Required Statutory 15 Approvals shall mean making such declarations, filings or registrations; giving such notices; obtaining such authorizations, consents or approvals; and having such waiting periods expire as are necessary to avoid a violation of law). (d) Compliance. Except as set forth in Section 4.2(d)(i) or Section 4.3 of the Buyer Disclosure Schedule, neither the Buyer nor any of the Buyer Subsidiaries is under investigation with respect to any violation of, or has been given notice of or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment of any Governmental Authority, except for possible violations which are not reasonably likely to have a Buyer Material Adverse Effect. Except as set forth in Section 4.2(d)(ii) of the Buyer Disclosure Schedule or as disclosed in the Buyer SEC Reports filed prior to the date hereof, the Buyer and the Buyer Subsidiaries have all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted except those that the absence of which is not reasonably likely to have a Buyer Material Adverse Effect. Except as set forth in Section 4.2(d)(iii) of the Buyer Disclosure Schedule, neither the Buyer nor any Buyer Subsidiary is in breach or violation of or in default in the performance or observance of any term or provision of, and no event has occurred which, with lapse of time or action by a third party, could result in a default by the Buyer or any Buyer Subsidiary under (i) their respective certificates of incorporation or by-laws or (ii) any contract, commitment, agreement, indenture, mortgage, loan agreement, note, lease, bond, license, approval or other instrument to which they are a party or by which the Buyer or any Buyer Subsidiary is bound or to which any of their property is subject, except for possible violations, breaches or defaults which are not reasonably likely to have a Buyer Material Adverse Effect. Section 4.3 Litigation. Except as set forth in Section 4.3 of the Buyer Disclosure Schedule, (a) there are no claims, suits, actions or proceedings by any court, governmental department, commission, agency, instrumentality or authority or any arbitrator, pending or, to the knowledge of the Buyer, threatened, nor are there, to the knowledge of the Buyer, any investigations or reviews by any court, governmental department, commission, agency, instrumentality or authority or any arbitrator pending or threatened against, relating to or affecting the Buyer or any Buyer Subsidiary which are reasonably likely to have a Buyer Material Adverse Effect, and (b) there are no judgments, decrees, injunctions, rules or orders of any court, governmental department, commission, agency, instrumentality or authority or any arbitrator applicable to the Buyer or any Buyer Subsidiaries except for such that are not reasonably likely to have a Buyer Material Adverse Effect. Section 4.4 Investigation by the Buyer; the Seller's Liability. The Buyer has conducted its own independent investigation, review and analysis of the business, operations, assets, liabilities, results of operations, financial condition, software, technology and prospects of the Company, which investigation, review and analysis was done by the Buyer and its affiliates and, to the extent the Buyer deemed appropriate, by the officers, directors, employees, accountants, counsel, investment bankers, financial advisors and other representatives (collectively, "Representatives") of Buyer. The Buyer acknowledges that it and its Representatives have been provided adequate access to the personnel, properties, premises and records of the Company for such purpose. In entering into this Agreement, the Buyer acknowledges that it has relied solely upon the aforementioned investigation, review and analysis and not on any factual representations of the Seller, DQE or the Seller's or DQE's Representatives 16 (except the specific representations and warranties of the Seller and, as applicable, DQE set forth in Article III of this Agreement), and the Buyer: (a) acknowledges, except for the specific representations and warranties of the Seller and, as applicable, DQE set forth in Article III of this Agreement, that none of the Seller, Services I, Services II, Services, LP, or any Company Subsidiary or any of their respective directors, officers, shareholders, employees, affiliates, controlling Persons, agents, advisors or Representatives makes or has made any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information (including in materials furnished in the Seller's data room, in presentations by the Seller's management, on site visits or otherwise) provided or made available to the Buyer or its directors, officers, employees, affiliates, controlling Persons, agents or Representatives, and (b) agrees, to the fullest extent permitted by law, that none of the Seller, Services I, Services II, Services, LP, or any Company Subsidiary or any of their respective directors, officers, employees, shareholders, affiliates, controlling Persons, agents, advisors or Representatives shall have any liability or responsibility whatsoever to the Buyer or its directors, officers, employees, affiliates, controlling Persons, agents or Representatives on any basis (including in contract or tort, under federal or state securities laws or otherwise) based upon any information provided or made available, or statements made (including in materials furnished in the Seller's data room, in presentations by the Seller's management, on site visits or otherwise) to the Buyer or its directors, officers, employees, affiliates, controlling Persons, advisors, agents or Representatives (or any omissions therefrom), including in respect of the specific representations and warranties of the Seller and, as applicable, DQE set forth in Article III of this Agreement. For the avoidance of doubt, the foregoing limitations, representations and warranties, acknowledgments and agreements of the Buyer set forth in this Section 4.4 shall not modify, limit or effect in any way the specific representations and warranties of the Seller and, as applicable, DQE set forth in Article III of this Agreement, and shall not apply to or limit the Seller's and DQE's indemnification obligations contained in Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. Section 4.5 Acquisition of Membership Interests for Investment; Ability to Evaluate and Bear Risk. (a) The Buyer is acquiring the Membership Interests for investment and not with a view toward, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the Membership Interests. The Buyer acknowledges that the Membership Interests have not been registered under the Securities Act and agrees that the Membership Interests may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act and any applicable state securities laws, except pursuant to an exemption from such registration under the Securities Act and any applicable state securities laws. 17 (b) The Buyer is able to bear the economic risk of holding the Membership Interests for an indefinite period, and has knowledge and experience in financial and business matters such that it is capable of evaluating the risks of the investment in the Membership Interests. Section 4.6 Financing. The Buyer has or will have available, prior to the Closing, sufficient cash in immediately available funds to pay the Purchase Price pursuant to Article I hereof and to consummate the transactions contemplated hereby. Section 4.7 Brokers or Finders. The Buyer has not entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except API, whose fees and expenses will be paid by the Buyer in accordance with the Buyer's agreement with such firm. ARTICLE V CONDUCT OF BUSINESS PENDING THE CLOSING Section 5.1 Covenants of the Seller. As used in this Section 5.1, the terms "Company", "Company Subsidiary" and "Company Subsidiaries", and any reference to their assets, shall not be read or deemed to include the Excluded Assets. After the date hereof and prior to the Closing or earlier termination of this Agreement, the Seller agrees that, except as set forth in Section 5.1 of the Seller Disclosure Schedule and except (i) as expressly contemplated in or permitted by this Agreement or (ii) to the extent the Buyer shall otherwise consent in writing, which decision regarding consent shall be made as soon as reasonably practical, and which consent shall not be unreasonably withheld, conditioned or delayed: (a) the business of the Company shall be conducted in the ordinary and usual course in substantially the same manner as heretofore conducted and, to the extent consistent therewith, the Company shall use its commercially reasonable efforts to preserve its business organization intact and maintain its existing relations and goodwill with customers, suppliers, creditors, regulators, lessors, employees and business associates; (b) neither Services I, Services II, Services, LP nor any Company Subsidiary shall (i) amend its certificate of formation, operating agreement or other operating documents; (ii) issue any new membership or other ownership interests; (iii) declare, set aside or pay any dividend payable in cash, stock or property in respect of any of its membership or other ownership interests; or (iv) repurchase, redeem or otherwise acquire any of its membership or other ownership interests or any securities convertible into or exchangeable or exercisable for any of its membership or other ownership interests; (c) neither Services I, Services II nor Services, LP nor any Company Subsidiary shall (i) issue, sell, pledge, dispose of or encumber any equity interests of, or securities convertible into or exchangeable or exercisable for, or options, warrants, calls, commitments or rights of any kind to acquire, any of its equity interests; or (ii) make any commitments for, make or authorize any capital expenditures (other than (A) capital expenditures not in excess of $150,000 in the aggregate incurred in connection with the repair or 18 replacement of facilities destroyed or damaged due to casualty or accident (to the extent not covered by insurance), (B) as required by law or by any consent agreement with a Governmental Authority by which the Company, or its assets, is bound, or (C) in amounts less than $150,000 in the aggregate); (d) the Company shall not terminate, establish, adopt, enter into, make any new grants or awards of stock-based or membership-based compensation or other benefits under, amend or otherwise modify any Seller Plan or increase the salary, wage, bonus or other compensation of any directors, officers or employees except (i) for grants or awards to directors, officers and employees under existing Seller Plans in such amounts and on such terms as are consistent with past practice, (ii) in the normal and usual course of business (which shall include normal periodic performance reviews and related plans and the provision of individual Seller Plans consistent with past practice for newly hired or appointed officers and employees), or (iii) for actions necessary to satisfy existing contractual obligations under Seller Plans existing as of the date hereof; provided, however, that the Seller shall have satisfied its obligations with respect to the Seller Plans under this provision if DQE maintains the Seller Plans in such a manner as to comply with this provision; (e) the Seller, on behalf of the Company, shall maintain insurance in such amounts and against such risks and losses as are consistent with the insurance heretofore maintained by the Seller or DQE on behalf of the Company; provided, however, that the Seller shall have satisfied its obligations under this provision if DQE maintains such insurance on behalf of the Seller; (f) the Seller shall promptly provide the Buyer with copies of all filings made by the Seller or the Company with, and inform the Buyer of any communications received from, any state or federal court, administrative agency, commission or other Governmental Authority in connection with this Agreement and the transactions contemplated hereby; (g) the Seller shall, and shall cause the Company to, use all commercially reasonable efforts to promptly obtain all of the Seller Required Consents and the Seller Required Statutory Approvals. The Seller shall promptly notify the Buyer of any failure or prospective failure to obtain any such consents or approvals and shall provide copies of all of the Seller Required Consents and the Seller Required Statutory Approvals obtained by the Seller and the Company to the Buyer; (h) The Seller will promptly notify the Buyer in writing if the Seller becomes aware of any fact or condition that causes or constitutes a breach of any of the Seller's representations or warranties, or that would constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of the occurrence or discovery of such fact or condition or if such representation or warranty were not qualified by the term Company Material Adverse Effect. The Seller will promptly notify the Buyer of the occurrence of any breach of any covenant of Seller in this Agreement, or of the occurrence or any event that may make the satisfaction of the conditions in Sections 7.1 and 7.2 impossible or unlikely; and 19 (i) the Seller shall not, and the Seller shall not permit the Company to, willfully take any action that would or is reasonably likely to result in a breach of any provision of this Agreement or in any of its representations and warranties set forth in this Agreement being untrue on and as of the Closing Date or to unduly delay the Closing. Section 5.2 Covenants of the Buyer. After the date hereof and prior to the Closing Date or earlier termination of this Agreement, the Buyer agrees, as to itself and to each of the Buyer Subsidiaries, as follows except as expressly contemplated or permitted in this Agreement or to the extent the Seller shall otherwise consent in writing, which decision regarding consent shall be made as soon as reasonably practical, and which consent shall not be unreasonably withheld, conditioned or delayed: (a) the Buyer shall promptly provide the Seller with copies of all filings made by the Buyer or any of the Buyer Subsidiaries with, and inform the Seller of any communications received from, any state or federal court, administrative agency, commission or other Governmental Authority in connection with this Agreement and the transactions contemplated hereby; (b) the Buyer shall, and shall cause the Buyer Subsidiaries to, use all commercially reasonable efforts to promptly obtain all of the Buyer Required Consents and the Buyer Required Statutory Approvals. The Buyer shall promptly notify the Seller of any failure or prospective failure to obtain any such consents or approvals and, if requested by the Seller, shall provide copies of all of the Buyer Required Consents and the Buyer Required Statutory Approvals obtained by the Buyer to the Seller; (c) the Buyer will promptly notify the Seller in writing if the Buyer becomes aware of any fact or condition that causes or constitutes a breach of any of the Buyer's representations or warranties, or that would constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of the occurrence or discovery of such fact or condition or if such representation or warranty were not qualified by the term Buyer Material Adverse Effect. The Buyer will promptly notify the Seller of the occurrence of any breach of any covenant of the Buyer in this Agreement, or of the occurrence of any event that may make the satisfaction of the conditions in Sections 7.1 and 7.3 impossible or unlikely; and (d) the Buyer shall not, and the Buyer shall not permit any of the Buyer Subsidiaries to, willfully take any action that would or is reasonably likely to result in a material breach of any provision of this Agreement or in any of its representations and warranties set forth in this Agreement being untrue on and as of the Closing Date or to unduly delay the Closing. Section 5.3 Mutual Covenants of the Parties. (a) Notwithstanding any other provision of this Agreement to the contrary, the Seller and the Buyer expressly agree that prior to the Closing, the Seller shall cause any and all of Services I's, Services II's, Services, LP's and the Company Subsidiaries' right, title and interest in and to all of those assets set forth on Section 5.3 of the Seller Disclosure Schedule (collectively, the "Excluded Assets") to be assigned and transferred, without any 20 warranty of title, condition or otherwise, and all such Excluded Assets to be delivered, by Services I, Services II, Services, LP, and the Company Subsidiaries, as applicable, to the Seller or such third party as the Seller may designate, and all of the obligations and liabilities of Services I, Services II, Services, LP or any Company Subsidiary in respect of any such Excluded Assets to be assumed by the Seller or such third party, as the case may be. For the avoidance of doubt, liabilities and obligations of DQE, the Seller or the Company relating to the Excluded Assets shall be Buyer Indemnifiable Losses and subject to the Seller's and DQE's indemnification obligations under Article IX. (b) Notwithstanding any other provision of this Agreement to the contrary, the Seller and the Buyer expressly agree that prior to the Closing, the Seller shall cause any and all of the Seller's and any Subsidiary of the Seller's right, title and interest in and to the Integrated Assets to be assigned and transferred free and clear of all Encumbrances (other than Permitted Encumbrances), but without any other warranty of condition or otherwise, and all such Integrated Assets to be delivered, by the Seller or any Subsidiary of the Seller, as applicable, to the Company, and all of the performance obligations of DQE, the Seller, any Subsidiary of the Seller and the Company which arise after the Closing and relate to the contracts included among the Integrated Assets listed on Section 3.3 of the Seller Disclosure Schedule and all liabilities of the Seller, any Subsidiary of DQE, the Seller, any Subsidiary of the Seller and the Company, direct or indirect, known or unknown, absolute or contingent, which arise after the Closing and relate to the Integrated Assets listed on Section 3.3 of the Seller Disclosure Schedule, provided, however, that the provisions of this Section 5.3(b) shall not limit the representations and warranties of the Seller set forth in the last sentence of Section 3.3 or the Seller's and DQE's indemnification obligations under Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. For avoidance of doubt, liabilities and obligations of DQE, the Seller, any Subsidiary of the Seller or the Company relating to the Integrated Assets which arise prior to the Closing shall be Buyer Indemnifiable Losses and subject to the Seller's and DQE's indemnification obligations under Article IX, and liabilities and obligations of DQE, the Seller, any Subsidiary of the Seller or the Company relating to the Integrated Assets which arise after the Closing and are not a breach of a representation or warranty made by the Seller in respect of any such Integrated Asset shall be Seller Indemnifiable Losses and subject to the Buyer's indemnification obligations under Article IX recognizing that all such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. (c) The parties agree that the Buyer shall not be responsible for any, and the Seller agrees to pay for all, costs or expenses associated with assigning and transferring the Excluded Assets and the Integrated Assets, as contemplated by Section 5.3. ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1 Access to Company Information. Upon reasonable notice, the Seller shall, and shall cause Services I, Services II or Services, LP, and each Company Subsidiary, to, afford to the Representatives of the Buyer reasonable access, during normal business hours throughout the period prior to the Closing Date, to all of the Company's properties, books, contracts, commitments and records (including, but not limited to, Tax 21 Returns) and the Affected Employees and, during such period, the Seller shall, and shall cause Services I, Services II or Services, LP, and each Company Subsidiary, to, furnish promptly to the Buyer and its Representatives, (i) access to each report, Schedule and other document filed or received by the Seller (with respect to the Company) or the Company pursuant to the requirements of federal or state securities laws or filed with or sent to any federal or state regulatory agency or commission and (ii) access to all information concerning the Integrated Assets and the Company and its respective directors and officers and such other matters as may be reasonably requested by the Buyer or its Representatives in connection with any filings, applications or approvals required or contemplated by this Agreement or for any other reason related to the transactions contemplated by this Agreement; provided, however, that (i) any such access shall be granted only in such a manner as not to interfere unreasonably with the Seller's business operations in respect of the Company or otherwise, (ii) upon being granted such access, the Buyer shall not interfere with the Seller's business operations in respect of the Company or otherwise, (iii) in granting any such access the Seller, Services I, Services II, Services, LP and the Company Subsidiaries shall not be required to take any action that would constitute a waiver of any legal privilege, including the attorney-client privilege, the work product privilege and the self critical investigation privilege, (iv) in granting any such access, the Seller, Services I, Services II, Services, LP and the Company Subsidiaries shall not be required to provide the Buyer with access to any information which the Seller, Services I, Services II, Services, LP or any Company Subsidiary is under a legal or contractual obligation to withhold from disclosure, and (v) in granting such access, the Seller, Services I, Services II, Services, LP and the Company Subsidiaries shall not be required to provide the Buyer with access to any information that relates exclusively to the Excluded Assets, provided that, in all cases, the Seller shall be entitled to redact information relating to the Excluded Assets from any information to which the Buyer is granted access. The Buyer shall, and shall cause its Subsidiaries and Representatives to, hold in strict confidence all documents and information concerning the Seller or the Company furnished or made available to it in connection with the transactions contemplated by this Agreement in accordance with the Confidentiality Agreement, dated January 5, 2001, entered into by and among the Seller, DQE and the Buyer (as amended on April 12, 2002, the "Confidentiality Agreement"); provided, however, that the Buyer shall not be in breach of the Confidentiality Agreement if, following the Closing, it uses Proprietary Information (as defined in the Confidentiality Agreement) that is or was developed for, used by, or otherwise related to the operations of the Company; provided, further, that notwithstanding the foregoing, in no event shall the Buyer or any Buyer Subsidiary (including after the Closing, the Company) directly disclose any such Proprietary Information in any manner that is inconsistent with paragraph (iv) of the Acknowledgment and Amendment to the Confidentiality Agreement dated April 12, 2002 (except for disclosures made after the Closing to either Robert Haas or Violet Vela Divin but, in either case, only if such person shall have been hired by the Company and except for disclosures of (i) employee information related to Affected Employees, (ii) purchase contracts for goods and services of the Company that were in effect prior to the Closing, (iii) work orders of the Company relating to the balance sheet of the Company at the Closing, and (iv) such other information the disclosure of which is approved by the Seller and DQE). Section 6.2 Regulatory Matters. The Seller and the Buyer shall cooperate and use all commercially reasonable efforts to promptly prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to use all commercially reasonable efforts to obtain all necessary permits, 22 consents, approvals and authorizations of all Governmental Authorities necessary or advisable to obtain the Seller Required Statutory Approvals and the Buyer Required Statutory Approvals; provided, however, that the Seller and the Buyer shall cooperate to prepare and file any such applications, notices, petitions, filings and other documents timely in order to obtain all such approvals on or before the Initial Termination Date (as defined in Section 8.1(c)) and shall thereafter cooperate to diligently prosecute all such applications, notices, petitions, filings and other documents. The Buyer shall not be required to dispose of or change any portion of its existing business or to incur any other burden expense to obtain a Seller Required Statutory Approval and the Seller shall not be required to dispose of or change any portion of its existing business or to incur any other burden expense to obtain a Buyer Required Statutory Approval. The Buyer shall be precluded from including in any application for regulatory approval contingencies relating to rate treatment of acquisition premiums. Section 6.3 Consents. The Seller and the Buyer agree to use all commercially reasonable efforts to obtain the Seller Required Consents and the Buyer Required Consents, respectively, and to cooperate with each other in connection with the foregoing. The Buyer shall not be required to dispose of or change any portion of its existing business or to incur any other burden expense to obtain a Seller Required Consent and the Seller shall not be required to dispose of or change any portion of its existing business or to incur any other burden expense to obtain a Buyer Required Consent. Section 6.4 Directors' and Officers' Indemnification. (a) Indemnification. To the fullest extent permitted by law, from and after the Closing Date, all rights to indemnification existing immediately prior to the Closing in favor of the current and former employees, agents, directors or officers of Services I, Services II, Services, LP and each Company Subsidiary (each, a "Company Indemnified Party" and, collectively, the "Company Indemnified Parties") with respect to their activities as such prior to or on the Closing Date, as provided in Services I's, Services II's, Services, LP's and each Company Subsidiary's respective certificates of formation, operating agreement, or other organizational documents in effect on the date of such activities or otherwise in effect on the date hereof, shall survive the Closing and shall continue in full force and effect for a period of not less than six (6) years from the Closing Date, provided that, in the event any claim or claims are asserted or made within such six (6) year period, all such rights to indemnification in respect of any claim or claims shall continue until final disposition of such claim or claims. For the avoidance of doubt, liabilities and obligations of the Company to Company Indemnified Parties resulting from the rights to indemnification contemplated by this Section 6.4 and attributable to pre-Closing activities shall be Buyer Indemnifiable Losses and subject to the Seller's and DQE's indemnification obligations under Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. (b) Insurance. For a period of six (6) years after the Closing Date, DQE or the Seller shall maintain policies of directors' and officers' liability insurance for those Persons covered by such policies maintained by the Seller or DQE on behalf of the Company immediately prior to the Closing in respect of pre-Closing acts or omissions on terms no less favorable than the terms of such current insurance coverage. 23 (c) Successors. In the event that after the Closing Date, Services I, Services II, Services, LP or any Company Subsidiary or any of their respective successors or assigns (i) consolidates with or merges into any other Person or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person or entity, then and in either such case, proper provisions shall be made so that the successors and assigns of Services I, Services II, Services, LP or any such Company Subsidiary, as the case may be, shall assume the obligations set forth in this Section 6.4. (d) Benefit. The provisions of this Section 6.4 are intended to be for the benefit of, and shall be enforceable by, each Company Indemnified Party, his or her heirs and his or her representatives. Section 6.5 Public Announcements. Except as may be required by law, applicable rules and regulations, or by obligations pursuant to any listing agreement with or rules of any national securities exchange, DQE, the Seller and the Buyer shall consult with each other prior to issuing any press releases or otherwise making public announcements with respect to this Agreement and the transactions contemplated hereby and shall keep the terms of this Agreement confidential prior to Closing and shall not make any disclosure of this Agreement to any Person. The Seller and the Buyer shall consult with each other concerning the means by which the Company's employees, customers, suppliers and other Persons dealing with the Company will be informed of the transaction contemplated by this Agreement and representatives of the Buyer shall have the right to be present for any such communication at any general meeting of the employees. Section 6.6 Workforce Matters. (a) Prior to the Closing, the Buyer shall make a "qualifying offer" of employment as that term is defined in the AquaSource Severance Policy dated January 1, 2002 (the "Severance Policy" and, such qualifying offer, a "Qualifying Offer") to each of the employees of the Seller identified in Section 6.6(a) of the Seller Disclosure Schedule (such individuals, the "Affected Employees"). The Qualifying Offers shall be subject to Closing and contingent on the Affected Employee satisfying the Buyer's drug testing policy and other requirements imposed by applicable law, such as the Immigration Reform and Control Act of 1986, as applicable (the "Hiring Conditions"). Subject to Closing and satisfaction of the applicable Hiring Conditions, such Qualifying Offers shall be accepted or rejected by the Affected Employees prior to the Closing Date, to be effective immediately after the Closing. In connection with the hiring process for Affected Employees, the Buyer shall comply with applicable laws pertaining to labor and employment, including, without limitation, Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, the Americans With Disabilities Act, the Rehabilitation Act and comparable state and local laws. (b) Effective immediately after the Closing, the Company shall assume, and continue in effect for a period of not less than twelve (12) months from the Closing Date, the Severance Policy for the benefit of all Affected Employees who have accepted Qualifying Offers and satisfied the Hiring Conditions (the "Severance Obligations"), except that for purposes of the assumption, all references in the Severance Policy to "AquaSource" shall be to the Company, 24 and all references to "any DQE Subsidiary" shall be to any Buyer Subsidiary. If any Affected Employee does not accept a Qualifying Offer or does not satisfy the Hiring Conditions, then the Buyer shall have no further obligation to such Affected Employee or to the Seller or DQE with regard to such Affected Employee. For the avoidance of doubt, liabilities and obligations in respect of Affected Employees who do not accept a Qualifying Offer or satisfy the applicable Hiring Conditions shall be Buyer Indemnifiable Losses and subject to the Seller's and DQE's indemnification obligations under Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. As between the Seller and the Buyer, neither the Seller nor DQE shall be obligated to provide any severance or separation pay benefits to any Affected Employee who has accepted a Qualifying Offer and satisfied the Hiring Conditions on account of any termination of such Affected Employee's employment after the Closing. Pursuant to Section 10 of the Retention Agreements, effective upon the Closing, the Company hereby assumes and agrees to perform the Seller's obligations under the Retention Agreements in the same manner and to the same extent that the Seller would be required to perform, had such succession not taken place. In addition, effective upon the Closing, (i) DQE and the Seller hereby assign to the Company those agreements set forth in Section 3.10(c) of the Seller Disclosure Schedule and (ii) the Company hereby assumes and agrees to perform the Seller's or DQE's obligations which arise after the Closing under those agreements set forth in Section 3.10(c) of the Seller Disclosure Schedule, provided, however, that DQE and the Seller retain sufficient rights under such agreements necessary to satisfy their respective obligations contemplated by the last sentence of Section 6.17(a). For the avoidance of doubt, liabilities and obligations of DQE, the Seller or the Company which arise after the Closing under the Retention Agreement and those agreements set forth in Section 3.10(c) of the Seller Disclosure Schedule shall be Seller Indemnifiable Losses and subject to the Seller's indemnification obligations under Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. (c) The Buyer shall be responsible for providing any continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") in respect of Affected Employees who experience a qualifying event (within the meaning of COBRA) after the Closing, except for those Affected Employees who do not accept a Qualifying Offer or who do not satisfy the Hiring Conditions. The Buyer shall not have any further responsibility for compliance with the continuation coverage requirements under COBRA with respect to any other employees of the Seller or DQE. The Seller shall be responsible for providing continuation coverage required under COBRA in respect of Affected Employees who experience a qualifying event (within the meaning of COBRA) before the Closing Date and in respect of Affected Employees who do not accept a Qualifying Offer or who do not satisfy the Hiring Conditions. (d) The Seller shall be responsible for any notices required to be given under, or otherwise comply with, the WARN Act or similar statutes or regulations of any jurisdiction relating to any "plant closing" or "mass layoff" or similar triggering event ordered by DQE or the Seller with respect to the Affected Employees prior to or on the Closing Date. The Buyer shall be responsible for any notices required to be given under, or otherwise comply with, the WARN Act or similar statutes or regulations of any jurisdiction relating to any "plant closing" or "mass layoff" or similar triggering event ordered by the Buyer or any Buyer Subsidiary after the Closing with respect to the Affected Employees who have accepted a 25 Qualifying Offer and satisfied the Hiring Conditions. For the avoidance of doubt, for purposes here, the parties intend for the "effective date" within the meaning of the WARN Act to refer to and mean the Closing Date. To the extent possible, the Buyer and the Seller agree to treat the Buyer as a "successor employer" and the Seller or one or more of its affiliates as a "predecessor employer" within the meaning of Sections 3121(a)(1) and 3306(b)(1) of the Code, with respect to Affected Employees, for purposes of Taxes imposed under the United States Federal Unemployment Tax or the United States Federal Insurance Contributions Act. Provided that the Buyer fully performs its obligations to make Qualifying Offers and to employ Affected Employees who accept such Qualifying Offers pursuant to this Section 6.6, the Seller and DQE shall, jointly and severally, indemnify and hold harmless the Buyer against any liabilities related to any WARN Act obligations arising from the transactions contemplated hereby attributable to the actions of the Seller or DQE. (e) The Buyer expressly agrees that (i) from the date hereof until the first anniversary of the Closing Date, it will not directly or indirectly solicit for employment, other than through solicitations made to the general public, any of those persons listed on Section 6.6(e) of the Seller Disclosure Schedule, and from the Closing Date until the first anniversary of the Closing Date, it will cause the Company not to directly or indirectly solicit for employment, other than through solicitations made to the general public, those persons listed on Section 6.6(e) of the Seller Disclosure Schedule and (ii) from the date hereof until the first anniversary of the Closing Date, it will not employ any of those persons listed on Section 6.6(e) of the Seller Disclosure Schedule, unless it shall have first given notice to the Seller of its intent to make an offer of employment to any such persons, and, from the Closing Date until the first anniversary of the Closing Date, it will cause the Company not to employ any of those persons listed on Section 6.6(e) of the Seller Disclosure Schedule, unless it shall have first given notice to the Seller of its intent to make an offer of employment to any such persons. Section 6.7 Seller Plans. (a) Continued Employment; Service Credit. The Buyer does not, indirectly or directly, assume or otherwise take responsibility for contribution to benefits under, COBRA continuation coverage under, or the administration, maintenance, or sponsorship of, any Seller Plan other than the Severance Obligations and the Retention Agreements, nor shall there be any transfer of assets or liabilities of any Seller Plan to any plan, program or arrangement maintained by the Buyer or any of its affiliates. For the avoidance of doubt, liabilities and obligations of the Seller Plans (other than the Severance Obligations and the Retention Agreements) shall be Buyer Indemnifiable Losses and subject to the Seller's and DQE's indemnification obligations under Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. However, if any Affected Employee becomes a participant in any employee benefit plan, practice or policy of the Buyer or any of its affiliates to the extent reasonably permitted by applicable law and existing insurance contracts, such Affected Employee shall be given credit under such plan for all service prior to the Closing Date with the Company, any of its affiliates, any ERISA Affiliate or any predecessor employer to the extent such credit was given by the Company, any of its affiliates, any ERISA Affiliate or any predecessor employer under a Seller Plan, and for all service with the Buyer or any of its affiliates on and after the Closing Date but prior to the time such employee becomes such a participant, for purposes of determining eligibility, vesting, 26 benefit accrual and for all other purposes for which such service is either taken into account or recognized; provided, however, such service need not be credited to the extent it would result in a duplication of benefits, including for purposes of benefit accrual under defined benefit plans. Further, the Buyer shall, and shall cause its affiliates to, to the extent reasonably permitted by applicable law and existing insurance contracts, (i) waive all limitations as to preexisting conditions exclusions and waiting periods with respect to participation and coverage requirements applicable to each Affected Employee under any welfare plan or welfare benefit plan in which the Affected Employee participates on or after the Closing Date, except to the extent of limitations or waiting periods that are already in effect with respect to the Affected Employee as of the Closing Date under the Seller Plans and that have not been satisfied as of the Closing Date and (ii) credit each Affected Employee for any co-payments and deductibles paid prior to the Closing Date in satisfying any applicable deductible or out-of-pocket requirements for the year in which the Closing Date occurs under any welfare plan or welfare benefit plan in which the Affected Employee participates on or after the Closing Date. The parties acknowledge that the welfare plans which the Buyer will make available to the Affected Employees will provide benefits substantially similar to those provided by the welfare plans of the Buyer and the Buyer Subsidiaries for their current employees. As of the Closing, the Company and its affiliates shall cease to provide coverage and benefits for Affected Employees and their dependents and beneficiaries under any benefit plan maintained by the Seller or DQE or any of their respective affiliates, except as required by applicable law. The provisions of this Section 6.7 shall not create or modify any Seller Plan (other than the Severance Obligations) or employee benefit plans or agreements of the Buyer. (b) Continuation of Agreements. The Buyer shall, and shall cause the Company to, assume and honor the obligations arising under the Severance Obligations and the Retention Agreements according to the terms thereof. Section 6.8 Tax Treatment. Neither the Seller nor the Buyer shall make or file any election under Section 338 of the Code (or any similar provision of the law of any state or other taxing jurisdiction) with respect to the purchase of the Membership Interests (or the acquisition of shares in any Company Subsidiary) in connection with the transactions contemplated by this Agreement. For purposes of all Tax Returns and other applicable filings, the Buyer and the Seller will each report the transactions contemplated hereby as a purchase and sale, respectively, of the Membership Interests. Section 6.9 Tax Indemnity and Tax Returns. Notwithstanding any other provision of this Agreement to the contrary, the Seller and DQE shall, jointly and severally, indemnify, defend and hold harmless each Buyer Indemnitee (as defined in Section 9.1(a)), and the Buyer shall indemnify, defend and hold harmless each Seller Indemnitee (as defined in Section 9.1(b)) from and against any and all of the liabilities of the Seller and DQE, and the Buyer, respectively, as set forth below: (a) The Seller and DQE shall be liable for, shall pay to the appropriate Tax authorities (or shall pay to the Company as a reimbursement of Taxes paid to the appropriate Tax authorities for a Straddle Period (as defined below) Tax Return), and shall indemnify and hold the Buyer and the Company harmless against, all Taxes of the Company that relate to (i) the taxable periods ending before or on the Closing Date (other than Taxes attributable to 27 transactions not in the ordinary course of business occurring after the Closing which are effectuated or initiated by the Buyer), (ii) any taxable period that includes but does not end on the Closing Date (a "Straddle Period"), but only to the extent that such Taxes relate to the portion of such Straddle Period up to and including the Closing Date, and (iii) any liability for Taxes of the consolidated group of which DQE or the Seller is the common parent arising under Treasury Regulations section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferor or successor, by contract or otherwise. The Seller shall be entitled to all Tax refunds (including interest) attributable to the taxable periods for which it is liable. (b) The Buyer shall be liable for, shall pay to the appropriate Tax authorities, and shall indemnify and hold the Seller and DQE harmless against all Taxes of the Company that relate to (i) the taxable periods that begin after the Closing Date (including, for this purpose, any Taxes attributable to transactions not in the ordinary course of business occurring after the Closing which are effectuated or initiated by the Buyer) and (ii) the portion of any Straddle Period commencing with the first day after the Closing Date. The Buyer shall be entitled to any Tax refund (including interest) attributable to the taxable periods for which it is so liable. (c) The obligations of the parties to indemnify each other pursuant to this Section 6.9 shall continue until the statutory period of limitations (taking into account any extensions or waivers thereof) for the assessment of Taxes, covered by this Section 6.9, has expired. Any payment due to an indemnified party pursuant to this Section 6.9 shall be paid promptly by the indemnifying party upon receipt of written notice and, for further clarification, shall not be subject to, or included in, the Indemnity Basket (as defined in Section 9.3(b)) or the Indemnity Cap (as defined in Section 9.3(b)). (d) No party shall take any action the purpose and intent of which is to prejudice the defense of any claim subject to indemnification hereunder or to induce a third party to assert a claim subject to indemnification hereunder. (e) After the Closing, each of the Seller and the Buyer shall notify the chief tax officer of the other party in writing (including by telecopier) within ten (10) days of the receipt of any written notice of any pending or threatened Audit (as defined below) which, if determined adversely, could be grounds for indemnification under this Section 6.9 (a "Tax Claim"); provided, however, that any failure to give such notice shall not affect the rights of the parties hereunder unless and to the extent such failure materially and adversely affects the indemnifying party's right to participate in and defend such Tax Claim. The Seller shall have the right at its expense to participate in and control the conduct of any Tax Claim of or attributable to the Company relating to taxable periods ending on or before the Closing Date and to employ counsel of its own choice at its expense; provided, however, that the Seller shall not settle any such Tax Claim or make or agree to any adjustment in any manner without the consent of the Buyer, which consent shall not be unreasonably withheld, conditioned or delayed; and provided, further, that the Buyer shall have the right to participate in (but not to control) such Tax Claim. If the Seller fails to participate in any Tax Claim of the Company relating to taxable periods ending on or before the Closing Date for which notice was provided pursuant to this Section 28 6.9(e), the Buyer may defend and settle such Tax Claim in such manner as it may deem appropriate in its sole discretion. Except as set forth above in the first sentence of this Section 6.9(e), the Buyer shall control the conduct of any Tax Claim of the Company relating to any taxable period ending after the Closing Date and may defend and settle such Tax Claim in such manner as it may deem appropriate in its sole discretion. The term "Audit" means any audit, assessment of Taxes, reassessment of Taxes, or other examination by any Governmental Authority or any judicial or administrative proceedings or appeal of such proceedings. (f) All indemnity payments made by DQE or the Seller to the Buyer, or by the Buyer to the Seller, pursuant to this Agreement shall, to the maximum extent permitted under the Code (or other applicable Tax law), be treated for all Tax purposes as adjustments to the consideration paid with respect to the Membership Interests. (g) The Seller shall prepare and file, or cause to be prepared and filed, when due all Tax Returns that are required to be filed by or with respect to the Company for taxable years or periods ending on or before the Closing Date. The Buyer shall prepare and file, or cause to be prepared and filed, when due all Tax Returns that are required to be filed by or with respect to the Company for taxable years or periods ending after the Closing Date. Any Tax Return required to be filed by the Buyer relating to any Straddle Period shall be prepared based on past practice and submitted (with copies of any relevant Schedules, work papers and other documentation then available) to the Seller for the Seller's approval not less than thirty (30) days prior to the due date for the filing of such Tax Return, which approval shall not be unreasonably withheld. The Seller and the Buyer shall make available all books and records and cooperate with each other as reasonably necessary for the preparation and filing of any Tax Returns relating to the Company. (h) Except as otherwise provided in this Agreement, any tax sharing agreement between DQE and/or the Seller (including any of its Subsidiaries) and the Company will be terminated with respect to the Company as of the Closing Date, and the Company shall not have any obligation after the Closing Date to make any payment under any such tax sharing agreement. Section 6.10 Transfer Taxes. Notwithstanding any other provision of this Agreement to the contrary, the Buyer shall pay (a) all transfer (including real property transfer and documentary transfer) Taxes and fees imposed with respect to the transactions contemplated hereby and (b) all sales, use, gains (including state and local transfer gains), excise and other transfer or similar Taxes imposed with respect to the transactions contemplated hereby; provided, however, that the Buyer shall not be responsible for any, and the Seller shall pay all, costs, fees or Taxes imposed in respect of the transfer of the Excluded Assets and the Integrated Assets, as contemplated by Section 5.3 of this Agreement. The Seller shall execute and deliver to the Buyer, and the Buyer shall execute and deliver to the Seller at the Closing any certificates or other documents as the requesting party may reasonably request in order to perfect any exemption from any such transfer, documentary, sales, use, gains, excise or other Taxes, or to otherwise comply with any applicable reporting requirements with respect to any such Taxes. Section 6.11 Financial Information. (a) After the Closing, upon reasonable written notice, the Buyer and the Seller shall furnish or cause to be furnished to each other and their respective accountants, 29 counsel and other Representatives, during normal business hours, such information (including records pertinent to the Company) as is reasonably necessary for financial reporting and accounting matters of the party to whom information is furnished. (b) At the Closing, all books and records of the Company, including all financial and accounting information and all of the books, records, files and other information maintained with respect to the business of the Company, will be either delivered to Buyer or made available for pickup by Buyer. The Buyer shall retain all such books and records of the Company for such period after the Closing Date as Buyer may determine, provided that before disposing of such books or records, the Buyer shall give notice of its intent to do so to the Seller and give the Seller an opportunity for thirty (30) days after such notice to remove and retain all or any part of such books or records as the Seller may select. (c) Without limiting the generality of the provisions of Section 6.16(b) below, any information provided by the Buyer to the Seller under the provisions of this Section 6.11 shall be Confidential Information of the Company (as defined in Section 6.16(b)). Section 6.12 Transition Services. Except as agreed to in writing by the Seller and the Buyer, all data processing, accounting, insurance, banking, personnel, legal, communications and other products and services provided to the Company by the Seller or any affiliate of the Seller, including any agreements or understandings (written or oral) with respect thereto, shall terminate simultaneously with the Closing without any further action or liability on the part of the parties thereto. Notwithstanding the foregoing, in the absence of a written agreement, at the Buyer's request, the Seller shall provide, for a period of six (6) months after the Closing, services (similar to those contemplated by the preceding sentence as shall be mutually agreed to by the parties) to the Company, which services, at the Buyer's request, shall be provided at a price for such services that is equal to DQE's or the Seller's Actual Cost (as defined below) for such services, as the case may be, to be paid on a monthly basis by the Buyer to DQE or the Seller. The term "Actual Cost" shall mean the sum of (A) the reasonable costs or expenses actually incurred by the Seller or DQE attributable to the provision of transition services to the Buyer, including (i) the reasonable salary and benefits for personnel performing transition services for those hours when such personnel are performing transition services, (ii) reasonable payments to temporary contract employees for, or related to, transition services, and (iii) reasonable payments to vendors and other third parties for, or related to, transition services, and (B) costs of the Seller or DQE, including all overheads, that cannot be specifically identified with a particular service or product provided to the Buyer but that are reasonably allocable to the products or services rendered by the Seller or DQE. At the request of the Buyer prior to Closing, the Seller and the Buyer will cooperate to negotiate reasonable and mutually acceptable terms upon which specific transition services will be provided after the Closing. In addition, at the request of the Buyer prior to the Closing, the Seller and the Buyer will cooperate to negotiate reasonable and mutually acceptable terms pursuant to which the Seller, to the extent it retains, following the Closing, an ownership or leasehold interest in the office building located in the Brittmoore-Tanner Industrial Park, shall lease to the Company for a period of one (1) year following the Closing Date (or such shorter period of time in the event that the Seller's ownership or leasehold interest shall expire or terminate prior to the conclusion of such one year period) such space in said office building that is substantially equivalent to the space that the 30 Company is using in said building on the date hereof at a monthly rent payment equal to the Seller's actual costs in respect of such space. Section 6.13 Update of the Seller Disclosure Schedule. The Seller may from time to time prior to or on the Closing Date by notice in accordance with this Agreement supplement or amend the Seller Disclosure Schedule, including one or more supplements or amendments thereto, to promptly disclose any fact, event or circumstance that has arisen, occurred or changed since the date of this Agreement. Notwithstanding any other provision hereof to the contrary, the Seller Disclosure Schedule and the representations and warranties made by the Seller and DQE shall be deemed for all purposes to include and reflect such supplements and amendments as of the date hereof and at all times thereafter, including the Closing Date. Section 6.14 AquaSource Name. The Seller agrees that on the Closing Date, and continuing until the sixth month anniversary of Closing Date, it shall grant to Buyer the non-exclusive, fully-paid license to use the name "AquaSource" or any derivations thereof that may have been used by the Company on the date hereof anywhere in the United States of America. Section 6.15 Officer and Director Resignations. At the Closing, the Seller will cause each officer and director of the Company to resign, or the Seller shall remove each such officer and director, from such position as an officer and/or director. Section 6.16 Non-Competition Covenants. (a) Prohibited Activities. Each of the Seller and DQE agree that effective upon the Closing it will not, for a period of five (5) years following the Closing Date, directly or indirectly, either in its own capacity or as a partner, agent, consultant, through an Affiliate (as defined in Section 6.16(c)), or otherwise, or by means of any corporate device, do any of the following, such activity constituting a "Prohibited Activity": (i) engage in any business identical to or which competes with the business providing water and wastewater services for municipal utility districts and municipalities, as such business was conducted by the Company during the period commencing on January 1, 2001 and continuing through the Closing Date, within 100 miles of the downtown business districts of the cities of Houston, Texas and Denver, Colorado, or engage in any business which would require use, directly or indirectly, of the Company's trade secrets or the Company's confidential or privileged information; provided, however, that the limitations provided for in this Section 6.16(a)(i) shall not apply to the Seller or DQE with regard to those systems within 100 miles of the downtown business district of the city of Houston, Texas listed on Exhibit 6.16(a)(i); (ii) solicit, induce, recruit or encourage any of Company's employees, consultants or independent contractors, to leave their employment or terminate their relationship with the Company, provided, however, that neither the Seller nor DQE shall be in violation of this Section 6.16(a)(ii) by continuing to utilize those consultants and independent contractors listed on Exhibit 6.16(a)(ii) 31 or those consultants and independent contractors who, on the date of this Agreement, are performing services for DQE, the Seller or Subsidiaries of the Seller (other than the Company); or (iii) solicit any person or entity which is, or which has been within one (1) year prior to the date of solicitation, a customer of the Company for the purpose of selling to such customer services or products which are in direct competition with the services or products offered by the Company prior to the Closing. (b) The Seller and DQE recognize and acknowledge that it and its Affiliates had in the past, currently have, and in the future will have, access to Confidential Information of the Company (as defined in this Section 6.16(b)). The Seller and DQE agree that from the Closing Date until April 12, 2005 neither the Seller nor any of its Affiliates will disclose such Confidential Information to any person, firm, corporation, association or other entity for any purpose whatsoever, unless (i) such Confidential Information becomes known to the public generally through no fault of the Seller, or (ii) disclosure is required by law or the order of any governmental authority, provided, that prior to disclosing any Confidential Information pursuant to this clause (ii) the Seller shall, if possible, give prior written notice thereof to the Buyer and provide the Buyer with the opportunity to contest such disclosure. In the event of a breach or threatened breach by the Seller or any of its Affiliates of the provisions of this Section 6.16(b), the Buyer shall be entitled to an injunction restraining the Seller or any of its Affiliates from disclosing, in whole or in part, such Confidential Information. Nothing herein shall be construed as prohibiting the Buyer from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. For purposes of this Section 6.16(b), "Confidential Information" shall mean all information of the Company which is not generally known in the industries in which the Company is engaged during the period commencing on January 1, 2001 and continuing through the Closing Date, about the Company's business, products, processes and services, including, without limitation, 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, servicing, purchasing, accounting, engineering, costs and costing strategies, sources of supply, customer lists, customer requirements, business methods or practices, training and training programs, proprietary information, trade secrets, confidential information supplied from outside sources, and related documentation, provided that, notwithstanding any other provision of this Section 6.16(b), neither DQE nor the Seller shall be in violation of this Section 6.6(b) by using information that is or was developed for, used by, or otherwise related to the operations of DQE, the Seller or any of their Affiliates other than the Company. (c) Reasonable Restraint. The Seller and DQE acknowledge that the covenants in this Section 6.16 impose a reasonable restraint on the Seller and DQE in light of the activities and business of the Buyer and the Company on the date of the execution of this Agreement and the current plans of the Buyer and the Company. The Seller and DQE further acknowledge that the covenants in this Section 6.16 contain limitations as to time, geographic area and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the good will or other business interests of the Buyer and the Company. 32 (d) Affiliate. For purposes of this Section 6.16, the term "Affiliate" shall mean a Person that directly or indirectly controls, or is controlled by or under common control with the Seller or DQE; provided, that, this Section 6.16 shall not apply to any Person who has ceased to be an Affiliate for any reason. Control including the terms "controlled by" and "under common control with," with respect to any entity includes officers, directors, and 10% or greater owners, and other individuals or entities with the power to direct or cause the direction of the management and policies of such entity, directly or indirectly, whether through ownership of voting securities or by contract or otherwise. (e) Equitable Relief. Because of the difficulty of measuring economic losses to the Buyer or the Company as a result of a breach of the covenants in this Section 6.16, and because of the immediate and irreparable damage that could be caused to the Buyer or the Company for which they would have no other adequate remedy, the Seller and DQE agree that the covenants in this Section 6.16 may be enforced by Buyer or the Company by injunctions, restraining orders and other equitable actions. (f) Severability; Reformation; Survival. The covenants in this Section 6.16 are severable and separate, and the unenforceability of any specific covenant shall not affect the continuing validity and enforceability of any other covenant. In the event that any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth in this Section 6.16 are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable and this Agreement shall thereby be reformed. The covenants in this Section 6.16 shall survive the Closing. (g) Material Covenants. The Seller and DQE acknowledge that their agreement with the covenants in this Section 6.16 are material conditions to Buyer's agreement to execute and deliver this Agreement and to consummate the transactions contemplated hereby, are essential elements of this Agreement and without the agreement of Seller and DQE to comply with such covenants, Buyer would not have agreed to purchase the Membership Interests pursuant to this Agreement. (h) Independent Covenants. All of the covenants in this Section 6.16 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Seller or DQE against Buyer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Buyer of such covenants. It is specifically agreed that the respective periods during which the covenants of the Seller or DQE made in this Section 6.16 shall survive and shall be computed by excluding from such computation any time during which Seller or DQE is in violation of any provision of this Section 6.16. The covenants contained in this Section 6.16 shall not be affected by any breach of any other provision of this Agreement by any party hereto. Section 6.17 Enforcement of Other Covenants. (a) The Buyer may attempt to negotiate agreements with Bryan K. Chapline, Kenneth W. Lindsey, James L. Coursey, Robert G. Haas, and Randolph S. Jones (the "Designated Employees"), which agreements will become effective only upon the Closing and will include covenants not to compete, on terms mutually acceptable to the Buyer and each 33 Designated Employee. Prior to and after the Closing, the Seller shall cooperate with the Buyer and use all actions reasonably necessary to enforce the "Covenants Against Competition" set forth in the agreements listed in Section 3.10(c) of the Seller Disclosure Schedule, including by seeking legal damages and/or injunctions or other equitable relief. The Seller and DQE shall, prior to the Closing and for a period of one (1) year after the Closing, cooperate with the Buyer and the Company and use all actions reasonably necessary to enforce David Beyer's existing covenants not to compete for the benefit of the Company. (b) The Buyer shall reimburse the Seller or DQE, as applicable, for any reasonable costs and expenses, including reasonable legal fees, incurred by the Seller or DQE, as applicable, after the Closing in complying with their respective obligations set forth in Section 6.17(a). Section 6.18 Surety Bonds. (a) After the Closing, the Buyer shall, and shall cause the Company to, use all commercially reasonable efforts to recover and replace those surety bonds listed in Exhibit 6.18(a) and to have such surety bonds returned to Seller within ninety (90) calendar days of the Closing Date. (b) The Buyer expressly acknowledges that, after the Closing, the Seller and/or DQE may cancel those surety bonds listed in Exhibit 6.18(b) without notice to the Buyer, subject to the terms of the bond documents. (c) After the Closing, the Buyer shall, and shall cause the Company to, use all commercially reasonable efforts to replace the Seller as guarantor under that certain Marshall Office Park II Lease Agreement between MOPII, B1, LLC and AquaSource Services, LP, dated November 13, 2001. Section 6.19 Further Assurances. Each party will, and will cause its Subsidiaries to, execute such further documents or instruments and take such further actions as may reasonably be requested by any other party in order to consummate the transaction contemplated hereby in accordance with the terms hereof or otherwise perform those obligations required hereunder. In the event that any asset reflected in the Company Financial Statements to be conveyed, assigned, transferred and delivered hereunder to the Company shall not have been so conveyed, assigned, transferred and delivered to the Company at the Closing, the Seller shall as promptly as practicable after the Closing Date convey, assign, transfer and deliver such asset to the Company at which time the Buyer shall cause the Company to assume all liabilities and obligations, and be entitled to all benefits, associated therewith that are due, or received, after (but not before) such assignment, transfer and delivery and such asset shall thereafter be deemed to be an Integrated Asset for all other purposes under this Agreement, including Article IX, except that they shall be deemed to have been included among the Integrated Assets as of the date of such assignment and transfer. 34 ARTICLE VII CONDITIONS Section 7.1 Conditions to Each Party's Obligation to Effect the Closing. The respective obligations of each party to effect the Closing shall be subject to the satisfaction on or prior to the Closing Date of the following conditions, except, to the extent permitted by applicable law, that such conditions may be waived in writing pursuant to Section 10.3 of this Agreement: (a) No Injunction. No temporary restraining order or preliminary or permanent injunction or other order by any federal or state court preventing consummation of the transactions contemplated hereby shall have been issued and be continuing in effect, and the transactions contemplated hereby shall not have been prohibited under any applicable federal or state law or regulation. (b) Statutory Approvals. The Seller Required Statutory Approvals and the Buyer Required Statutory Approvals shall have been obtained at or prior to the Closing Date, such approvals shall have become Final Orders (as defined below) and such Final Orders shall not, individually or in the aggregate, impose terms or conditions (other than the preclusion of recovery of an acquisition premium) which would have a material adverse effect on the business, operations, properties, assets, financial condition, or results of operations of the Company and the Buyer and their respective Subsidiaries taken as a whole. A "Final Order" means action by the relevant regulatory authority which has not been reversed, stayed, enjoined, set aside, annulled or suspended, with respect to which any waiting period prescribed by law before the transactions contemplated hereby may be consummated has expired, and as to which all conditions to the consummation of such transactions prescribed by law, regulation or order have been satisfied. (c) Assignment, Transfer and Delivery of Excluded Assets and Assumption of Related Liabilities. All of Services I's, Services II's, Services, LP's and the Company Subsidiaries' right, title and interest in and to the Excluded Assets shall have been assigned and transferred, and all such Excluded Assets shall have been delivered, to the Seller or such third party as the Seller may designate, and the Seller or such third party, as the case may be, shall have assumed all of the obligations and liabilities of Services I, Services II, Services, LP and the Company Subsidiaries in respect of such Excluded Assets, as contemplated by Section 5.3(a) of this Agreement; provided, however, that if any such assignment, transfer or delivery requires the approval or consent of any third party which shall not have been obtained, the parties shall use commercially reasonable efforts, at the Seller's expense, to secure such consent or otherwise effect such assignment, transfer and delivery following the Closing and the Seller shall fully indemnify the Buyer and the Company for and against any consequences of the failure to secure such consent prior to the Closing. For the avoidance of doubt, liabilities and obligations of DQE, the Seller or the Company relating to the Excluded Assets shall be Buyer Indemnifiable Losses and subject to the Seller's and DQE's indemnification obligations under Article IX. (d) Assignment, Transfer and Delivery of Integrated Assets and Assumption of Related Liabilities. All of the Seller's and any Subsidiary of the Seller's right, 35 title and interest in and to the Integrated Assets shall have been assigned and transferred, and all such Integrated Assets shall have been delivered, to the Company, and the Company shall have assumed all of the performance obligations of DQE, the Seller, any Subsidiary of the Seller and the Company which arise after the Closing and relate to the contracts included among the Integrated Assets listed on Section 3.3 of the Seller Disclosure Schedule and all liabilities of DQE, the Seller, any Subsidiary of the Seller and the Company, direct or indirect, known or unknown, absolute or contingent, which arise after the Closing and relate to the Integrated Assets listed on Section 3.3 of the Seller Disclosure Schedule, as contemplated by Section 5.3(b) of this Agreement; provided, however, that if any such assignment, transfer or delivery requires the approval or consent of any third party which shall not have been obtained, the parties shall use commercially reasonable efforts, at the Seller's expense, to secure such consent or otherwise effect such assignment, transfer and delivery following the Closing and the Seller shall fully indemnify the Buyer and the Company for and against any consequences of the failure to secure such consent prior to the Closing. For avoidance of doubt, liabilities and obligations of DQE, the Seller, any Subsidiary of the Seller or the Company relating to the Integrated Assets which arise prior to the Closing shall be Buyer Indemnifiable Losses and subject to the Seller's and DQE's indemnification obligations under Article IX, and liabilities and obligations of DQE, the Seller, any Subsidiary of the Seller or the Company relating to the Integrated Assets which arise after the Closing shall be Seller Indemnifiable Losses and subject to the Buyer's indemnification obligations under Article IX, recognizing that all such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. Section 7.2 Conditions to Obligation of the Buyer to Effect the Closing. The obligation of the Buyer to effect the Closing shall be further subject to the satisfaction, on or prior to the Closing Date, of the following conditions, except as may be waived by the Buyer in writing pursuant to Section 9.3: (a) Performance of Obligations of the Seller. The Seller (and/or DQE or the Company) will have performed in all material respects its agreements and covenants contained in or contemplated by this Agreement which are required to be performed by it at or prior to the Closing. (b) Representations and Warranties of the Seller. The representations and warranties of the Seller (and DQE in Section 3.4) set forth in this Agreement shall be true and correct (i) on and as of the date hereof and (ii) on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (except for representations and warranties that expressly speak only as of a specific date or time which need only be true and correct as of such date or time provided that the Seller's representations and warranties in Section 3.3 shall be true and correct on and as of the Closing Date) except in each of cases (i) and (ii) for such failures of representations or warranties to be true and correct (without giving effect to any materiality qualification or standard contained in any such representations and warranties) which, individually or in the aggregate, would not result in a Company Material Adverse Effect. (c) Closing Certificates of the Seller. The Buyer shall have received a certificate signed by a duly authorized officer on behalf of the Seller and DQE, dated the Closing 36 Date, to the effect that the conditions set forth in Section 7.2(a) and Section 7.2(b) have been satisfied. (d) Company Material Adverse Effect. No Company Material Adverse Effect shall have occurred and there shall exist no facts or circumstances that, individually or in the aggregate, are reasonably likely to have a Company Material Adverse Effect. For the purpose of this Section 7.2(d): (w) events, facts or circumstances need not constitute, or be likely to constitute, a breach of a representation or warranty in order to have, or be reasonably likely to have, a Company Material Adverse Effect, (x) no materiality or knowledge qualification or standard contained in the representations and warranties shall be taken into account in determining whether or not events, facts or circumstances, have, or are reasonably likely to have a Company Material Adverse Effect, (y) if a Designated Employee is subject to a "Covenant Against Competition" with the Seller, and such Designated Employee's employment with the Seller is terminated prior to the Closing, then such termination of employment or any impact on the Company resulting therefrom will not constitute a Company Material Adverse Effect so long as the Seller and DQE are complying with their obligations to use all actions reasonably necessary actions to enforce the "Covenants Against Competition" set forth in the agreements listed in Section 3.10(c) of the Seller Disclosure Schedule, as contemplated by Section 6.17(a) of this Agreement, and (z) the inability of the Company to own or operate its assets in materially the same manner as such assets are owned or operated by the Company on the date hereof resulting specifically from any change in law, rule or regulation of any Governmental Authority, which change is made specifically in order to enhance or protect the safety and security of water and wastewater systems in light of concerns arising due to national or international occurrences, and which change applies generally to parties providing water and wastewater services for municipal utility districts and/or municipalities, will be taken into account in determining whether or not there is, or there is reasonably likely to be, a Company Material Adverse Effect. (e) The Seller Required Consents. The Seller Required Consents, the failure of which to obtain would have a Company Material Adverse Effect, shall have been obtained. (f) Additional Documents. Each of the following documents shall have been delivered to the Buyer: (i) A certified copy of resolutions of the Seller's Board of Directors, and of DQE's Board of Directors, as applicable, authorizing the transactions contemplated by this Agreement, and the authority of the parties acting on behalf of the Seller to execute and deliver documents in connection therewith; (ii) Certificates of Good Standing and Existence (or the equivalent) with respect to Services I, Services II, Services, LP and each Company Subsidiary, dated no earlier than five (5) business days prior to the Closing Date; and 37 (iii) Such additional documents as the Buyer may reasonably request for the purpose of facilitating or in connection with the Closing of the transactions contemplated by this Agreement. Section 7.3 Conditions to Obligation of the Seller to Effect the Closing. The obligation of the Seller to effect the Closing shall be further subject to the satisfaction, on or prior to the Closing Date, of the following conditions, except as may be waived by the Seller in writing pursuant to Section 9.3: (a) Performance of Obligations of the Buyer. The Buyer (and/or its appropriate Subsidiaries) will have performed in all material respects its agreements and covenants contained in or contemplated by this Agreement which are required to be performed by it at or prior to the Closing Date. (b) Representations and Warranties. The representations and warranties of the Buyer set forth in this Agreement shall be true and correct (i) on and as of the date hereof and (ii) on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (except for representations and warranties that expressly speak only as of a specific date or time which need only be true and correct as of such date or time) except in each of cases (i) and (ii) for such failures of representations or warranties to be true and correct (without giving effect to any materiality qualification or standard contained in any such representations and warranties) which, individually or in the aggregate, would not result in a Buyer Material Adverse Effect. (c) Closing Certificates. The Seller shall have received a certificate signed by a duly authorized officer of the Buyer, dated the Closing Date, to the effect that, to the best of such officer's knowledge, the conditions set forth in Section 7.3(a) and Section 7.3(b) have been satisfied. (d) Buyer Material Adverse Effect. No Buyer Material Adverse Effect shall have occurred and there shall exist no fact or circumstance that would result in a Buyer Material Adverse Effect. (e) Buyer Required Consents. The Buyer Required Consents, the failure of which to obtain would have a Buyer Material Adverse Effect, shall have been obtained. (f) Additional Documents. Each of the following documents shall have been delivered to the Seller: (i) A certified copy of resolutions of the Buyer's Board of Directors authorizing the transactions contemplated by this Agreement, and the authority of the parties acting on behalf of the Buyer to execute and deliver documents in connection therewith; (ii) Certificate of Good Standing and Existence (or the equivalent) with respect to the Buyer, dated no earlier than five (5) business days prior to the Closing Date; and 38 (iii) Such additional document as the Buyer may reasonably request for the purpose of facilitating or in connection with the Closing of the transactions contemplated by this Agreement. ARTICLE VIII TERMINATION Section 8.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual written consent of the Seller and the Buyer; (b) by the Buyer or the Seller, if any state or federal law, order, rule or regulation is adopted or issued, which has the effect, as supported by the written opinion of outside counsel for such party, of prohibiting the Closing, or by the Buyer or the Seller, if any court of competent jurisdiction in the United States or any state shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and, in either case, if such order, rule, regulation, judgment or decree shall have become final and nonappealable; (c) by the Buyer or the Seller, by written notice to the other party, if the Closing shall not have occurred on or before sixty (60) days after the date hereof (the "Initial Termination Date"); provided, however, that the right to terminate the Agreement under this Section 8.1(c) shall not be available to any party whose failure, or whose Affiliate's failure, to fulfill any obligation under this Agreement shall have proximately contributed to the failure of the Closing to occur on or before such date; and provided, further, that if on the Initial Termination Date the conditions to the Closing set forth in Sections 7.1(b), 7.2(e) and/or 7.3(e) shall not have been fulfilled but all other conditions to the Closing shall be fulfilled or shall be capable of being fulfilled, then the Initial Termination Date shall be extended to one hundred twenty (120) days after the date hereof; (d) by the Buyer if, at the Closing, any breach or breaches of any of the Seller's representations or warranties, covenants or agreements result, or are reasonably likely to result, individually or in the aggregate, in a Company Material Adverse Effect and such breach or breaches shall not have been cured by the Seller or in respect of which the Seller shall not have agreed to indemnify the Buyer (pursuant to which indemnity agreement, all Indemnifiable Losses relating to, resulting from or arising out of such breach or breaches shall be Buyer Indemnifiable Losses subject to the Seller's indemnification obligations under Article IX but shall not be limited by, or taken into account in determining whether Buyer Indemnifiable Losses exceed, the Indemnity Cap or be limited by the Indemnity Period). For the avoidance of doubt, if at the Closing there are any breaches of the Seller's representations and warranties that do not result, or are not reasonably likely to result, individually or in the aggregate, in a Company Material Adverse Effect, then following the Closing all Indemnifiable losses relating to, resulting from or arising out of such breaches, to the extent uncured by the Seller, shall be Buyer Indemnifiable Losses subject to the Seller's indemnification obligations under Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. 39 (e) by the Seller if, at the Closing any breach or breaches of any of the Buyer's representations or warranties, covenants or agreements result, or are reasonably like to result, individually or in the aggregate, in a Buyer Material Adverse Effect and such breach or breaches shall not have been cured by the Buyer or in respect of which the Buyer shall not have agreed to indemnity the Seller (pursuant to which indemnity agreement all Indemnifiable Losses relating to, resulting from or arising out of such breach or breaches shall be Seller Indemnifiable Losses, subject to the Buyer's indemnification obligations under Article IX but shall not be limited by, or taken into account in determining whether Seller Indemnifiable Losses exceed, the Indemnity Cap or be limited by the Indemnity Period). For the avoidance of doubt, if at the Closing there are any breaches of the Buyer's representations and warranties that do not result, or are not reasonably likely to result, individually or in the aggregate, in a Buyer Material Adverse Effect, then following the Closing all Indemnifiable Losses relating to, resulting from or arising out of such breaches, to the extent uncured by the Buyer, shall be Seller Indemnifiable Losses subject to the Buyer's indemnification obligations under Article IX, recognizing that such indemnification obligations are always subject to the limitations and restrictions contained in Articles IX and X. (f) by the Buyer if one or more supplements to or amendments of any sections of the Seller Disclosure Schedule made by the Seller pursuant to Section 6.13, individually or in the aggregate, materially and adversely affects the benefits to be obtained by the Buyer under this Agreement. Section 8.2 Effect of Termination. In the event of termination of this Agreement by either the Seller or the Buyer pursuant to Section 8.1 there shall be no liability on the part of either the Seller or the Buyer or their respective officers or directors hereunder, except that: (a) in the event of fraud or willful breach of this Agreement by one party (the "Party at Fault"), or in the event of the failure of a condition to a party's obligation to effect the Closing that results from the other party's (also the "Party at Fault") willful breach of its obligations under this Agreement, then the party who is not the Party at Fault shall have the right to terminate this Agreement and pursue all available legal remedies against the Party at Fault, which right shall survive termination unimpaired, and in addition to the foregoing, upon such termination, the Party at Fault shall pay the party who is not the Party at Fault the sum of one million dollars ($1,000,000). (b) Sections 8.2, 10.2, 10.4, 10.5, 10.8, 10.9, 10.10, 10.11, 10.12 and 10.13, and the agreement contained in the last sentence of Section 6.1 shall survive the termination. ARTICLE IX INDEMNIFICATION Section 9.1 Indemnification Obligations. (a) Subject to the limitations set forth in Sections 9.3 and 9.4 hereof, the Seller and DQE shall, jointly and severally, indemnify, defend and hold harmless the Buyer, the 40 Buyer Subsidiaries (including, after the Closing, the Company), and its and their officers, directors, employees, shareholders, affiliates and agents (each, a "Buyer Indemnitee") from and against any and all Indemnifiable Losses (as defined below) asserted against or suffered by any Buyer Indemnitee (each, a "Buyer Indemnifiable Loss") and for which a Buyer Indemnitee makes a claim during the Indemnity Period (as defined below) in any way relating to, resulting from or arising out of (i) any breach by the Seller of the representations and warranties contained in Article III hereof, and (ii) the Buyer Indemnified Liabilities (as defined below). (b) Subject to the limitations set forth in Sections 9.3 and 9.4 hereof, the Buyer shall, jointly and severally, indemnify, defend and hold harmless the Seller, DQE, its and their Subsidiaries, officers, directors, employees, shareholders, affiliates and agents (each, a "Seller Indemnitee") from and against any and all Indemnifiable Losses asserted against or suffered by any Seller Indemnitee (each, a "Seller Indemnifiable Loss") during the Indemnity Period in any way relating to, resulting from or arising out of (i) any breach by the Buyer of the representations and warranties contained in Article IV hereof, and (ii) the Seller Indemnified Liabilities (as defined below). Section 9.2 Certain Definitions. As used in this Agreement: (a) the term "Indemnity Period" shall mean the period of time commencing with the Closing Date and continuing until the second (2nd) anniversary of the Closing Date; (b) the term "Indemnifiable Loss" shall mean any claim, demand, suit, loss, liability, damage (including, but not limited to, diminution in value, if proven, and, in respect of liabilities of obligations relating to certain Contracts contemplated by Section 9.2(c)(ii), proven damages resulting from performance of the subject Contract), obligation, payment, fine, penalty, cost or expense (including, without limitation, the cost and expense of any action, suit, proceeding, assessment, judgment, settlement or compromise relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith); (c) the term "Buyer Indemnified Liabilities" shall mean: (i) all litigation or other legal proceedings (including any settlements or judgments in respect thereof), existing or threatened, that are set forth in Section 3.7 of the Seller Disclosure Schedule and all other litigation or other legal proceedings (including any settlements or judgments in respect thereof) that involve the Company and are based on facts or circumstances arising, existing or occurring prior to the Closing, (ii) any liabilities or obligations that relate to the Excluded Assets, (iii) any liabilities or obligations that relate to the Integrated Assets, and, in any case of this (iii), that relate to, result from, arose during, or are attributable to events, facts, circumstances or conditions in existence prior to the Closing or which occurred prior to the Closing, (iv) any liabilities or obligations relating to any Contracts with annualized revenues or liabilities in excess of $25,000 individually that are not disclosed on Section 9.2 of the Seller Disclosure Schedule or otherwise reflected in the Company Financial Statements, (v) any other liabilities, obligations or other Indemnifiable Losses of Services I, Services II, Services, LP or the Company Subsidiaries except for Excepted Liabilities (as defined in Section 9.2(d)), in any case of this (v) that relate to, result from, arose during, or are attributable to events, facts, circumstances or conditions in existence prior to the Closing or which occurred prior to the Closing, and in any case for each (i), 41 (ii), (iii), (iv) and (v) above whether direct or indirect, known or unknown, absolute or contingent, and regardless of whether or not such liability, obligation or other Indemnifiable Loss is asserted against or suffered by a Buyer Indemnitee before or after the Closing, regardless of whether such liability, obligation or other Indemnifiable Loss results from a breach of any of Seller's representations or warranties and without regard to any materiality, knowledge or other qualifier contained in any such representatives or warranties; provided, however, that Buyer Indemnified Liabilities shall exclude any liability or obligation or other Indemnifiable Loss that is an Excepted Liability, including Excepted Liabilities that are disclosed in any Section of the Seller Disclosure Schedule that are expressly designated, by agreement of the parties, as Excepted Liabilities on such Seller Disclosure Schedule, but, subject to the provisions of Section 9.2(d), Buyer Indemnified Liabilities shall expressly include any liability or obligation or other Indemnifiable Loss disclosed on the Seller Disclosure Schedule that is not designated an Excepted Liability; and the term "Seller Indemnified Liabilities" shall mean: (x) any liabilities or obligations of Services I, Services II, Services, LP or the Company Subsidiaries that are neither Buyer Indemnified Liabilities nor otherwise covered by DQE's and the Seller's indemnity obligations in Section 9.1(a), and any liabilities that relate to or arise by virtue of the Buyer's ownership of the Company that are not Buyer Indemnified Liabilities, in either case whether direct or indirect, known or unknown, absolute or contingent, that relate to, result from, arise during, or are attributable to, events, facts, circumstances or conditions in existence after (but not before) the Closing or which occur after the Closing, and (y) any liabilities or obligations or other Indemnifiable Losses that relate to the Excepted Liabilities and any liabilities or obligations that arise after the Closing and relate to the Integrated Assets, the Retention Agreements and those agreements set forth in Section 3.10(c) of the Seller Disclosure Schedule; (d) the term "Excepted Liabilities" shall mean (i) any liabilities or obligations of Services I, Services II, Services, LP or the Company Subsidiaries that arise out of any of the following liabilities or obligations incurred by Services I, Services II, Services, LP or the Company Subsidiaries, as the case may be: (1) any liability or obligation of Services I, Services II, Services, LP or the Company Subsidiaries, that is allocable to the right of Services I, Services II, Services, LP or the Company Subsidiaries, as the case may be, to receive property, services or other benefits on or after the Closing Date under a contract or agreement entered into on or after the Closing Date, and (2) any liability or obligation of Services I, Services II, Services, LP or the Company Subsidiaries to make any expenditure or to perform any obligation that is due after (but not before) the Closing under any Contract disclosed on Schedule 9.2 of the Seller Disclosure Schedule, any Contracts not disclosed on Schedule 9.2 of the Seller Disclosure Schedule but having annualized revenues or liabilities that are equal to or less than $25,000 individually, or any Contract otherwise reflected in the Company Financial Statements or to make any expenditure to perform any obligation that is due after (but not before) the Closing pursuant to any order, rule or regulation of any Governmental Authority by which Services I, Services II, Services, LP or the Company Subsidiaries, or any of their assets, is bound, as listed in the Seller Disclosure Schedule, (ii) those liabilities or obligations which arise after the Closing and that are disclosed on any Section of the Seller Disclosure Schedule and expressly designated on such Section of the Seller Disclosure Schedule, by agreement of the parties, as Excepted Liabilities, and (iii) the liabilities of the Company reflected on the June 30, 2002 Balance Sheet (but excluding any liability for Pre-Closing APs), the liabilities of the Company for vacation accruals for employees who accept Qualifying Offers, and the liabilities of the Company with respect to the Keystone, South Dakota industrial revenue bond. 42 Section 9.3 Limitations on Indemnification. (a) Notwithstanding any other provision of this Agreement to the contrary, the parties' obligations pursuant to this Article IX are, and at all times shall be, subject to the limitations set forth in this Section 9.3. The parties shall not be required to indemnify, defend or hold harmless any Buyer Indemnitee or Seller Indemnitee, as the case may be, until the aggregate dollar amount of the Buyer Indemnifiable Losses or Seller Indemnifiable Losses, as the case may be determined taking into account all Indemnifiable Losses (except for Indemnified Losses to which the Indemnity Cap does not apply) asserted against or suffered by the Buyer Indemnitees or the Seller Indemnitees, as the case may be, exceeds the Indemnity Basket (as defined in Section 9.3(b)), following which the indemnifying party shall indemnify, defend and hold harmless the Buyer Indemnitees or the Seller Indemnitees, as the case may be, only to the extent that the aggregate amount of Buyer Indemnifiable Losses or the Seller Indemnifiable Losses, as the case may be, exceeds the Indemnity Basket. In addition, the Seller's and DQE's liability, taken together, for Buyer Indemnifiable Losses and the Buyer's liability for Seller Indemnifiable Losses, in either case, as contemplated by this Article IX shall in no event exceed an aggregate amount of dollars equal to the Indemnity Cap (as defined in Section 9.3(b)). (b) As used in this Agreement, (i) the term "Indemnity Basket" shall mean Two Hundred Thousand Dollars ($200,000), and (ii) the term "Indemnity Cap shall mean Four Million, Two Hundred, Twenty-Five Thousand Dollars ($4,250,000). Notwithstanding any other provision of this Agreement to the contrary, the Seller's and DQE's liability for the following Buyer Indemnifiable Losses shall not be limited by, nor taken into account in determining whether Buyer Indemnifiable Losses exceed the Indemnity Cap, shall not be limited by the requirement to make a claim during the Indemnity Period and shall not be limited by any requirement to meet or exceed the Indemnity Basket: Buyer Indemnifiable Losses relating to (i) Excluded Assets, (ii) any and all liabilities and obligations of the Seller or the Subsidiaries of the Seller (other than any liabilities or obligations of the Seller (in respect of the Company), Services I, Services II, Services, LP or any Company Subsidiary), (iii) indemnity obligations of the Seller in respect of Taxes, as set forth in Section 6.9, (iv) litigation or other legal proceedings (including any settlements or judgments in respect thereof), existing or threatened, that are set forth in Section 3.7 of the Seller Disclosure Schedule and all other litigation or other legal proceedings (including any settlements or judgments in respect thereof), that involve the Company and are based on facts or circumstances arising, existing or occurring prior to the Closing, including any claims that were brought or could have been brought in the litigation captioned Edward Wallace, et al v. AquaSource, Inc., et al (Case No. 2001-05987), filed in the 270th Judicial District Court of Harris County, Texas, (v) any indemnity given pursuant to the first sentence of Section 8.1(d) and (vi) any fraud committed by DQE, the Seller, Services I, Services II, Services, LP or any Company Subsidiary (provided that the foregoing reference to Services I, Services II, Services, LP or any Company Subsidiary refers to fraud committed prior to the Closing Date); in addition, the Buyer's liability for the following Seller Indemnifiable Losses shall not be limited by, nor taken into account in determining whether Seller Indemnifiable Losses exceed the Indemnity Cap, shall not be limited by the requirement to make a claim during the Indemnity Period, and shall not be limited by any requirement to meet or exceed the Indemnity Basket: Seller Indemnifiable Losses relating to (x) indemnity obligations of the Buyer in respect of Taxes, as set forth in Section 6.9, (y) any indemnity given pursuant to the first sentence of Section 8.1(e), and (z) any fraud committed by the Buyer, any Buyer 43 Subsidiary, Services I, Services II, Services, LP or any Company Subsidiary (provided that the foregoing reference to Services I, Services II, Services, LP or any Company Subsidiary refers to fraud committed on or after the Closing Date). (c) For the avoidance of doubt, if at any time during the Indemnity Period, the amount of the Seller's and DQE's aggregate dollar amount of liability for Buyer Indemnifiable Losses, taking into account all liability for Buyer Indemnifiable Losses incurred by the Seller and DQE since the Closing Date (other than those Buyer Indemnifiable Losses that are not limited by the Indemnity Cap as contemplated by Section 9.3(b)), equals the Indemnity Cap, then the Seller shall have no further obligation whatsoever to indemnify, defend or hold harmless any Buyer Indemnitee in respect of any Buyer Indemnifiable Losses that are subject to the Indemnity Cap; similarly, if at any time during the Indemnity Period, the amount of the Buyer's aggregate liability for Seller Indemnifiable Losses, taking into account all liability for Seller Indemnifiable Losses incurred by the Buyer since the Closing Date (other than those Seller Indemnifiable Losses that are not limited by the Indemnity Cap as contemplated by Section 9.3(b)), equals the Indemnity Cap, then the Buyer shall have no further obligation whatsoever to indemnify, defend or hold harmless any Seller Indemnitee in respect of any Seller Indemnifiable Losses that are subject to the Indemnity Cap. (d) Notwithstanding any other provision of this Agreement to the contrary, any Buyer Indemnitee or Seller Indemnitee shall use commercially reasonable efforts to mitigate all losses, damages and the like relating to a claim under these indemnification provisions, including availing itself of any defenses, limitations, rights of contribution, claims against third Persons and other rights at law or equity. The Buyer Indemnitee's or Seller Indemnitee's, as the case may be, commercially reasonable efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any loss or expenses for which indemnification would otherwise be due, and the indemnifying party shall, to the extent that Buyer Indemnifiable Losses or Seller Indemnifiable Losses, as the case may be, exceed the Indemnity Basket, reimburse the Buyer Indemnitee or Seller Indemnitee, as the case may be, for its reasonable expenditures (except for any portion of the wages, salary, benefits, overhead or other costs attributable to Buyer Indemnitee or Seller Indemnitee, as the case may be, and its officers, directors, employees and agents) in undertaking the mitigation and, subject to Section 9.3(b) shall, to such extent, take such expenses into account in calculating the aggregate amount of the Seller's and DQE's liability for the Buyer Indemnifiable Losses or the Buyer's liability for the Seller Indemnifiable Losses, as the case may be. Notwithstanding any other provision of this Agreement to the contrary, any Buyer Indemnifiable Loss or Seller Indemnifiable Loss shall be net of (i) the dollar amount of any insurance or other proceeds actually received by the Buyer Indemnitee or any of its affiliates with respect to the Buyer Indemnifiable Loss or by the Seller or DQE or any of their affiliates with respect to the Seller Indemnifiable Loss, and (ii) income tax benefits to the Buyer Indemnitee, to the extent realized by the Buyer Indemnitee, or to the Seller Indemnitee, to the extent recognized by the Seller Indemnitee. Any Person seeking indemnity hereunder shall, to the extent they have the right to do so under an insurance policy, use commercially reasonable efforts to seek coverage (including both costs of defense and indemnity) under applicable insurance policies with respect to any such Buyer Indemnifiable Loss or Seller Indemnifiable Loss, as the case may be. 44 (e) Notwithstanding any other provision of this Agreement to the contrary, (i) except to the extent otherwise provided in Article VIII, the rights and remedies of the parties under this Article IX are exclusive and in lieu of any and all other rights and remedies which the parties may have under this Agreement for monetary relief with respect to (A) any breach by the parties of their respective representations and warranties and (B) the Indemnified Liabilities, and (ii) except in the case of fraud, no party (nor any Buyer Indemnitee or Seller Indemnitee) shall be entitled to recover from any other party for any liabilities, damages, obligations, payments, losses, costs, or expenses under this Agreement any amount in excess of the actual compensatory damages, court costs and reasonable attorneys' and other advisor fees suffered by such party (or Buyer Indemnitee or Seller Indemnitee, as the case may be). Each party waives any right to recover incidental, special, exemplary and consequential damages arising in connection with or with respect to this Agreement (except in the case of fraud). Section 9.4 Defense of Claims. The parties agree that the provisions set forth below in (a), (b) and (c) shall not apply to claims made in respect of Excluded Assets or in respect of any litigation or other legal proceedings (including any settlements or judgments in request thereof) contemplated by Section 9.2(c)(i), but that such provisions shall apply to all other claims under this Article IX. (a) (i) If any Buyer Indemnitee receives notice of the assertion or commencement of any claim, action or proceeding made or brought by any Person who is neither a party to this Agreement nor an affiliate of a party to this Agreement (a "Third Party Claim") with respect to which indemnification is to be sought from the Seller and DQE, the Buyer Indemnitee shall give the Seller and DQE reasonably prompt written notice thereof, but in any event such notice shall not be given later than forty-five (45) calendar days after the Buyer Indemnitee's receipt of written notice of such Third Party Claim, provided, that the failure to give such notice within such time period shall not relieve the Seller or DQE of any liability except to the extent the Seller or DQE is prejudiced by such failure. To the extent known, such written notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Buyer Indemnifiable Loss that has been or may be sustained by the Buyer Indemnitee. The Seller and DQE will have the right to participate in or, by giving written notice to the Buyer Indemnitee, to elect to assume the defense of any Third Party Claim by the Seller's own counsel, the cost for which shall be borne by the Seller and DQE to the extent that Buyer Indemnifiable Losses exceed the Indemnity Basket and shall, to such extent, be taken into account in calculating the aggregate amount of the Seller's and DQE's liability for Buyer Indemnifiable Losses under the Indemnity Cap. The Buyer Indemnitee shall cooperate in good faith in such defense at such Buyer Indemnitee's own expense. If the Seller and DQE elect not to assume the defense of any Third Party Claim, the Buyer Indemnitee may compromise or settle such Third Party Claim over the objection of the Seller and DQE, which settlement or compromise shall conclusively establish the Seller's and DQE's liability pursuant to this Agreement. (ii) If any Seller Indemnitee receives notice of the assertion or commencement of a Third Party Claim with respect to which indemnification is to be sought from the Buyer, the Seller Indemnitee shall give the Buyer reasonably prompt written notice thereof, but in any event such notice shall not be 45 given later than forty-five (45) calendar days after the Seller Indemnitee's receipt of written notice of such Third Party Claim, provided, that the failure to give such notice within such time period shall not relieve the Buyer of any liability except to the extent the buyer is prejudiced by such failure. To the extent known, such written notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Seller Indemnifiable Loss that has been or may be sustained by the Seller Indemnitee. The Buyer will have the right to participate in or, by giving written notice to the Seller Indemnitee, to elect to assume the defense of any Third Party Claim by the Buyer's own counsel, the cost for which shall be borne by the Buyer to the extent that Seller Indemnifiable Losses exceed the Indemnity Basket and shall, to such extent, be taken into account in calculating the aggregate amount of the Buyer's liability for Seller Indemnifiable Losses under the Indemnity Cap. The Seller Indemnitee shall cooperate in good faith in such defense at such Seller Indemnitee's own expense. If the Buyer elects not to assume the defense of any Third Party Claim, the Seller Indemnitee may compromise or settle such Third Party Claim over the objection of the Buyer, which settlement or compromise shall conclusively establish the Buyer's liability pursuant to this Agreement. (b) (i) If, after a Buyer Indemnitee provides written notice to the Seller and DQE of any Third Party Claims, the Buyer Indemnitee receives written notice from the Seller or DQE that the Seller or DQE has elected to assume the defense of such Third Party Claim, the Seller and DQE will not be liable for any legal expenses subsequently incurred by the Buyer Indemnitee in connection with the defense thereof. Without the prior written consent of the Buyer Indemnitee, the Seller and DQE shall not enter into any settlement of any Third Party Claim that would lead to liability or create any financial or other obligation on the part of the Buyer Indemnitee for which the Buyer Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Buyer Indemnitee for which the Buyer Indemnitee is not entitled to indemnification hereunder and the Seller and DQE desire to accept and agree to such offer, the Seller and DQE shall give written notice to the Buyer Indemnitee to that effect. If the Buyer Indemnitee fails to consent to such firm offer within thirty (30) calendar days after its receipt of such notice, the Seller and DQE shall be relieved of their obligations to defend such Third Party Claim and the Buyer Indemnitee may contest or defend such Third Party Claim. In such event, the maximum liability of the Seller and DQE as to such Third Party Claim will be the amount of such settlement offer plus reasonable costs and expenses paid or incurred by the Buyer Indemnitee up to the date of said notice, at all time subject to the additional limitations on the Seller's and DQE's liability contained in this Article IX. (ii) If, after a Seller Indemnitee provides written notice to the Buyer of any Third Party Claims, the Seller Indemnitee receives written notice from the Buyer that the Buyer has elected to assume the defense of such Third Party Claim, the Buyer will not be liable for any legal expenses subsequently incurred by the Seller Indemnitee in connection with the defense thereof. Without the prior written consent of the Seller Indemnitee, the Buyer shall not enter into any settlement of any Third Party 46 Claim that would lead to liability or create any financial or other obligation on the part of the Seller Indemnitee for which the Seller Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Seller Indemnitee for which the Seller Indemnitee is not entitled to indemnification hereunder and the Buyer desires to accept and agree to such offer, the Buyer shall give written notice to the Seller Indemnitee to that effect. If the Seller Indemnitee fails to consent to such firm offer within thirty (30) calendar days after its receipt of such notice, the Buyer shall be relieved of its obligation to defend such Third Party Claim and the Seller Indemnitee may contest or defend such Third Party Claim. In such event, the maximum liability of the Buyer as to such Third Party Claim will be the amount of such settlement offer plus reasonable costs and expenses paid or incurred by the Seller Indemnitee up to the date of said notice, at all time subject to the additional limitations on the Buyer's liability contained in this Article IX. (c) (i) Any claim that does not result from a Third Party Claim (a "Direct Claim") by a Buyer Indemnitee on account of a Buyer Indemnifiable Loss shall be asserted by giving the Seller and DQE reasonably prompt written notice thereof after the Buyer Indemnitee becomes aware of such Direct Claim, stating, to the extent known, the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than forty-five (45) calendar days after the Buyer Indemnitee becomes aware of such Direct Claim, provided, that the failure to give such notice within such time period shall not relieve the Seller or DQE of any liability except to the extent the Seller or DQE is prejudiced by such failure, and the Seller and DQE shall have a period of thirty (30) calendar days from receipt of such notice within which to respond to such Direct Claim. If the Seller or DQE does not respond within such thirty (30) calendar day period, the Seller and DQE shall be deemed to have accepted, and shall be liable for, such claim. If the Seller and DQE reject such claim, the Buyer Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement. (ii) Any Direct Claim by a Seller Indemnitee on account of a Seller Indemnifiable Loss shall be asserted by giving the Buyer reasonably prompt written notice thereof after the Seller Indemnitee becomes aware of such Direct Claim, stating, to the extent known, the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than forty-five (45) calendar days after the Seller Indemnitee becomes aware of such Direct Claim, provided, that the failure to give such notice within such time period shall not relieve the Seller or DQE of any liability except to the extent the Seller or the Buyer is prejudiced by such failure, and the Buyer shall have a period of thirty (30) calendar days from receipt of such notice within which to respond to such Direct Claim. If the Buyer does not respond within such thirty (30) calendar day period, the Buyer shall be deemed to have accepted, and shall be liable for, such claim. If the Buyer rejects such claim, the Seller Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement. 47 (d) If the amount of any Buyer Indemnifiable Loss or Seller Indemnifiable Loss, as the case may be, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith (together with interest thereon from the date of payment thereof at the publicly announced prime rate then in effect of The Chase Manhattan Bank) shall promptly be repaid by the Buyer Indemnitee to the Seller and DQE or by the Seller Indemnitee to the Buyer, as the case may be. (e) With respect to those pending litigation matters set forth in Schedule 3.7 of the Seller Disclosure Schedule (each a "Pending Litigation Matter"), the parties agree as follows: DQE and/or the Seller will defend, continue to defend or assume the defense of each Pending Litigation Matter on and after the Closing Date (each such defense, an "Assumed Defense"). The Buyer agrees to cooperate, and to cause its Subsidiaries, officers, directors and employees to cooperate, fully in connection with such Pending Litigation Matters, including, but not limited to, providing access to personnel and records. The Seller or DQE shall reimburse the Buyer, and its Subsidiaries for any out of pocket expenses (e.g. travel, lodging, meals and related expenses) incurred by them in cooperation with the Seller or DQE as contemplated by this Section 9.4(e); provided, however, that the Seller and DQE shall not reimburse the Buyer or its Subsidiaries, and the Buyer and its Subsidiaries shall not be entitled to reimbursement, for any portion of the wages, salary, benefits, overhead or other costs, attributable to the officers, directors and employees of the Buyer or its Subsidiaries whose cooperation may be required by this Section 9.4(e). Notwithstanding any other provision of this Agreement to the contrary and for the avoidance of doubt, (i) the defense of any Pending Litigation Matter, shall not be the responsibility of the Buyer on and after the Closing Date, except for the obligations in respect thereof set forth in this Section 9.4(e) and (ii) the obligations set forth in this Section 9.4(e) in no way limit or reduce the Seller's and DQE's indemnity obligation, in respect of any Pending Litigation Matter or otherwise. Section 9.5 Certain Covenants in Respect of Excluded Assets. The parties agree that the Seller may deliver such notices to such persons as it deems advisable in respect of the assignment and transfer of the Excluded Assets (such persons to whom such notice is delivered, "Notified Persons" and such Excluded Assets in respect of which such notices are delivered, "Covered Excluded Assets"); provided, however, that any such notices must (i) include the name and contact information of the transferee or assignee and (ii) be sent to Notified Persons by Certified U.S. mail. The Seller shall provide the Buyer with a list of Notified Persons and Covered Excluded Assets, which list may be updated from time to time to reflect additional notices delivered. For a period of five years from the Closing Date, the Buyer shall, and shall cause the Company to, deliver to the Seller and DQE, in such a manner so as not to prejudice the Seller or DQE, notices of any claims received by the Buyer or the Company and brought by the Notified Persons in respect of the Covered Excluded Assets; provided, however, that the Seller or DQE shall bear the burden of proof in respect of any such prejudice. ARTICLE X GENERAL PROVISIONS 48 Section 10.1 Survival of Obligations. The representations and warranties of the parties contained in this Agreement shall survive the Closing until the second (2nd) anniversary of the Closing Date. None of the covenants, obligations or agreements of the parties contained in this Agreement or in any instrument, certificate, opinion or other writing provided for herein, shall survive the Closing of this transaction; provided, however, that, notwithstanding the foregoing, the covenants of DQE, the Seller and the Buyer, as applicable, contained in Sections 1.1, 1.2, 1.3, 1.4, 1.5, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.14, 6.15, 6.16, 6.17, 6.18 and 6.19, the last sentence of Section 6.1 and all of Articles II, V, IX and X shall survive the Closing of this transaction. Section 10.2 Amendment and Modification. This Agreement may be amended, modified and supplemented in any and all respects, but only by a written instrument signed by all of the parties to this Agreement expressly stating that such instrument is intended to amend, modify or supplement this Agreement. Section 10.3 Extension; Waiver. Any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein, and any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and any time for the performance of any of the obligations or other acts of a party hereto, may be waived or extended, as the case may be, but only pursuant to a written instrument signed by all parties entitled to the benefits thereof; provided, however, that any such waiver or extension of such obligation, covenant, agreement or condition, or inaccuracy, shall not operate as a waiver of, or estoppel with respect to, any subsequent failure to comply therewith. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights. Section 10.4 Expenses. Unless otherwise provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. Section 10.5 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given (a) when delivered personally, (b) when sent by reputable overnight courier service, or (c) when telecopied (which is confirmed by copy sent within one (1) business day by a reputable overnight courier service) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) If to the Seller, to AquaSource, Inc. c/o DQE, Inc. 411 Seventh Avenue Pittsburgh, Pennsylvania 15219 Telecopier No.: 412-393-1071 Telephone No.: 412-393-1143 Attention: David R. High, Esq. 49 with a copy to Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, D.C. 20005 Telecopier No.: (202) 393-5760 Telephone No.: (202) 371-7000 Attention: Erica Ward, Esq. (ii) if to DQE, to DQE, Inc. 411 Seventh Avenue Pittsburgh, Pennsylvania 15219 Telecopier No.: 412-393-1071 Telephone No.: 412-393-1143 Attention: David R. High, Esq. with a copy to Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, D.C. 20005 Telecopier No.: (202) 393-5760 Telephone No.: (202) 371-7000 Attention: Erica Ward, Esq. and (iii) if to the Buyer, to Southwest Water Company 225 North Barranca Ave., Suite 200 West Covina, California 91791-1605 Attention: Peter J. Moerbeek 50 with a copy to Jenkens & Gilchrist, LLP 12100 Wilshire Blvd., 15th Floor Los Angeles, CA 90025 Telecopier No.: (310) 820-8859 Telephone No.: (310) 422-8885 Attention: John F. Cermak, Jr., Esq. Section 10.6 Entire Agreement; No Third Party Beneficiaries. This Agreement, including the Schedules attached hereto, and the Confidentiality Agreement (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among DQE, the Seller and the Buyer with respect to the subject matter hereof and thereof, and (b) are not intended to confer any rights or remedies hereunder upon any Person other than the parties hereto and thereto, the Company Indemnified Parties to the extent set forth in Section 6.4 and the Buyer Indemnitees and the Seller Indemnitees to the extent set forth in Article IX. Section 10.7 Severability. Any term or provision of this Agreement that is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction or other authority declares that any term or provision hereof is invalid, void or unenforceable, the parties agree that the court making such determination shall have the power to reduce the scope, duration, area or applicability of the term or provision, to delete specific words or phrases, or to replace any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. Section 10.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to the principles of conflicts of law thereof. Section 10.9 Venue. EACH OF THE PARTIES HERETO (A) CONSENTS TO SUBMIT ITSELF TO THE EXCLUSIVE PERSONAL JURISDICTION OF ANY FEDERAL OR STATE COURT LOCATED IN OR FOR DENVER, CO IN THE EVENT ANY DISPUTE ARISES OUT OF THIS AGREEMENT, (B) AGREES THAT IT SHALL NOT ATTEMPT TO DENY OR DEFEAT SUCH PERSONAL JURISDICTION BY MOTION OR OTHER REQUEST FOR LEAVE FROM ANY SUCH COURT, PROVIDED, HOWEVER, THAT IN THE EVENT THAT ANY SUCH COURT REFUSES JURISDICTION IN RESPECT OF SUCH ACTION, THEN EACH OF THE PARTIES (X) CONSENTS TO SUBMIT ITSELF TO THE EXCLUSIVE PERSONAL JURISDICTION OF ANY FEDERAL OR STATE COURT LOCATED IN OR FOR PITTSBURGH, PA OR WEST COVINA, CA, (Y) AGREES THAT IT SHALL NOT ATTEMPT TO DENY OR DEFEAT SUCH PERSONAL JURISDICTION BY MOTION OR OTHER REQUEST FOR LEAVE FROM ANY SUCH COURT AND (C) AGREES THAT IT SHALL NOT BRING ANY ACTION RELATING TO THIS 51 AGREEMENT IN ANY COURT OTHER THAN A FEDERAL OR STATE COURT SITTING IN OR FOR DENVER, CO, PITTSBURGH, PA OR WEST COVINA, CA AS CONTEMPLATED BY THIS SECTION 10.9. Section 10.10 Waiver of Jury Trial and Certain Damages. EACH PARTY TO THIS AGREEMENT WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, (A) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND (B) ANY RIGHT IT MAY HAVE TO RECEIVE DAMAGES FROM THE OTHER PARTY BASED ON ANY THEORY OF LIABILITY FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL (INCLUDING LOST PROFITS) OR PUNITIVE DAMAGES (EXCEPT IN THE CASE OF FRAUD). The parties agree that (i) the aggregate liability of the Seller and DQE arising out of or relating to this Agreement or the transactions contemplated herein shall in no event exceed the Purchase Price (except in the case of Buyer Indemnifiable Losses specifically listed in Section 9.3(b) of this Agreement) and (ii) the aggregate liability of the Buyer arising out of or relating to this Agreement or the transactions contemplated herein shall in no event exceed the Purchase Price (except in the case of Seller Indemnifiable Losses specifically listed in Section 9.3(b) of this Agreement). Section 10.11 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto (whether by operation of law or otherwise) without the prior written consent of the Buyer and the Seller; provided, however, that the Seller may assign this Agreement, without the consent of the Buyer, to the Seller's successor as a result of a change in control of the Seller, a consolidation of the Seller with or into another entity, a sale of all or substantially all of the assets of the Seller, or a merger of the Seller with or into another entity, in any case whether or not the Seller is the surviving entity. Section 10.12 Interpretation. When a reference is made in this Agreement to Articles or Sections, such reference shall be to an Article or Section of this Agreement, respectively, unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." Section 10.13 No Specific Enforcement. Except with respect to the obligations set forth in the last sentence of Section 6.1 and all of Sections 1.2, 1.3, 1.4, 1.5, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.14, 6.15, 6.16, 6.17, 6.18, 6.19, 8.1, 8.2, 10.1, 10.4, 10.7, 10.8, 10.9, 10.10 and 10.11 and all of Article V and Article IX, the parties agree that in the event of a breach of this Agreement, the parties shall not be entitled to specific performance of the terms hereof. Section 10.14 Counterparts; Effect. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 52 SIGNATURES FOLLOW ON NEXT PAGE 53 IN WITNESS WHEREOF, each of the Seller, DQE and the Buyer have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. AQUASOURCE, INC. By: /s/ Frank A. Hoffmann ------------------------------ Name: Frank A. Hoffmann Title: President DQE, INC. By: /s/ Frank A. Hoffmann ------------------------------ Name: Frank A. Hoffmann Title: Executive Vice President SOUTHWEST WATER COMPANY By: /s/ Peter J. Moerbeek ------------------------------ Name: Peter J. Moerbeek Title: CFO 54 EX-12.1 5 dex121.txt RATIO OF EARNINGS TO FIXED CHARGES DQE Exhibit 12.1 DQE and Subsidiaries Calculation of Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividend Requirements (Dollar Amounts in Millions)
Nine Months Ended Year Ended September 30, December 31, 2002 2001 2000 1999 1998 1997 ----------------- ------ ------ ------ ------ ------ FIXED CHARGES: Interest on long-term debt $ 42.6 $ 62.3 $ 73.6 $ 79.4 $ 81.1 $ 87.4 Other interest 10.0 25.6 35.0 26.9 14.0 13.8 Portion of lease payments representing an interest factor 2.4 3.1 6.8 43.0 44.1 44.2 Dividend requirement (a) 11.9 16.0 14.1 14.7 15.6 21.7 ------ ----------------------------------------------- Total Fixed Charges $ 66.9 $107.0 $129.5 $164.0 $154.8 $167.1 ------ ----------------------------------------------- EARNINGS: Income (loss) from continuing operations $ 49.1 $(46.5) $160.0 $196.9 $195.2 $199.1 Income taxes 31.4 (45.0) 79.9 108.3(b) 100.2(b) 95.8(b) Fixed charges as above 66.9 107.0 129.5 164.0 154.8 167.1 ------ ----------------------------------------------- Total Earnings $147.4 $ 15.5 $369.4 $469.2 $450.2 $462.0 ------ ----------------------------------------------- RATIO OF EARNINGS TO FIXED CHARGES 2.20 0.14(c) 2.85 2.86 2.91 2.76 ====== ===============================================
(a) Includes annual dividend requirements of $12.6 million for the Monthly Income Preferred Securities per year. (b) Earnings related to income taxes reflect a $3.0 million, $12.0 million and $17.0 million decrease for the twelve months ended December 31, 1999, 1998 and 1997, respectively, due to a financial statement reclassification related to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The ratio of earnings to fixed charges, absent this reclassification, equals 2.88, 2.99 and 2.87 for the twelve months ended December 31, 1999, 1998 and 1997, respectively. (c) In order to achieve a ratio of earnings to fixed charges of one to one, Total Earnings would need to increase by $91.5 million for the twelve months ended December 31, 2001. EX-99.1 6 dex991.txt CERTIFICATION OF MORGAN K. O'BRIEN EXHIBIT 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of DQE, Inc. ("DQE") for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Morgan K. O'Brien, as Chief Executive Officer of DQE, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of DQE. WITNESS the due execution hereof this 14th day of November, 2002. /s/ Morgan K. O'Brien ------------------------------------- Morgan K. O'Brien President and Chief Executive Officer This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by DQE for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.2 7 dex992.txt CERTIFICATION OF FROSINA C. CORDISCO EXHIBIT 99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of DQE, Inc. ("DQE") for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Frosina C. Cordisco, as Vice President and Treasurer of DQE, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of DQE. WITNESS the due execution hereof this 14th day of November, 2002. /s/ Frosina C. Cordisco ----------------------------- Frosina C. Cordisco Vice President and Treasurer (Principal Financial Officer) This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by DQE for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----