ML20217F575

Application for Amends to Licenses DPR-66,NPF-73 & NPF-58, Authorizing Holders to Possess Beaver Valley Power Station, Unit 1 & Authorizes Duquesne Light to Use & Operate Beaver Valley Unit 1 in Accordance W/Procedures

ML20217F575
Person / Time
Site:	Beaver Valley, Perry
Issue date:	07/28/1997
From:	Cross J DUQUESNE LIGHT CO.
To:
Shared Package
ML20217F572	List: ML20217F567 ML20217F575
References
NUDOCS 9708060162
Download: ML20217F575 (188)

Text

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UNITED STATES OF Ah1 ERICA NUCLEAR REGULATORY COhih11SSION In the hiatter of )

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Duquesne Light Company )

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Beaver Valley Power Station, ) Docket Nos. 50 334 Units 1 and 2 ) and 50-412

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Perry Nuclear Power Plant Unit 1 ) Docket No. 50-440 APPLICATION FOR TRANSFERS OF CONTROL REGARDING OPERATING LICENSE NOS. DPR 66 AND NPF 73 FOR THE BEAVER VALLEY POWER STATION AND OPERATING LICENSE NPF 58 FOR THE PERRY NUCLEAR POWER PLANT INTRODUCTION AND BACKGROUND The Duquesne Light Company ("Duquesne Light"), Ohio Edison Company

(" Ohio Edison") and Pennsylvania Power Company ("Penn Power") are the holders of Facility Operating License No. DPR-66, dated July 2,1976 (" Operating License DPR-66"). Operating License DPR-66 authorizes the holders to possess the Beaver Valley Power Station, Unit 1 (" Beaver Valley Unit 1") and authorizes Duquesne Light to use and operate Beaver Valley Unit 1 in accordance with the procedures and limita-tions set forth in the operating license.

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9700060162 970001 PR ADOCK0S0003]4 i

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Duquesne Light, Ohio Edison, The Cleveland Electric Illuminating Company

("CEl") and The Toledo Edison Company ("TE") are the holders of Facility Operating License No. NPF 73, dated August 14,1987 (" Operating Ucense NPF 73"). Operating Ucense NPF 73 authorizes the holders to possess the Beaver Valley Power Station, Unit 2 (" Beaver Valley Unit 2') and authorizes Duquesne Light to use and operate Bea-ver Valley Unit 2 in accordance with the procedures and limitations set forth in the operating license.

Duquesne Light, CEI, Centerior Service Company ("CSC"), Ohio Edison, OES Nuclear Inc., Penn Power and the TE are holders of Facility Operatir.g License No.

NPF-58, dated November 13,1986 (" Operating License NPF 58"). The operating li-cense authorizes the holders to possess the Perry Nuclear Power Plant, Unit No.1

(" Perry") and authorizes CEI and CSC to use and operate Perry in accordance with the conditions and requirements set forth in the operating license.

The purpose of this Application is to request the consent of the Nuclear Regula-tory Commission ("NRC") under 10 C.F.R. S 50.80 to the indirect transfers of control of Duquesne Light's interests in the operating licenses for Beaver Valley Unit 1, Beaver Valley Unit 2 and Perry that will occur under a proposed merger of DQE, Inc.

("DQE") and Allegheny Power System,Inc. (" Allegheny Power"). Duquesne Light is a wholly owned subsidiary of DQE; it owns a 47.50% interest in Beaver Valley Unit 1, a 13.74% interest in Beaver Valley Unit 2, and a 13.74% interest in Perry. The merger will result in the indirect transfer of control of the interests held by Duquesne Light in the Beaver Valley and Perry operating licenses to Allegheny Power, which will be re-named Allegheny Energy,Inc. (" Allegheny Energy"). A copy of theJoint Proxy 2

Statement and Prospectus (which includes as an exhibit a copy of the merger agree.

ment between Allegheny Power and DQE) is filed with this Application as Exhibit A .

Under the proposed merger, Duquesne Light will become an indirect wholly owned subsidiary of Allegheny Energy. As a result of the merger, Duquesne Light and Allegheny Power will achieve significant cost savings and efficiencies that will reduce their operating costs to the benefit of their customers, shareholders and the communi-ties that they serve. The merger will therefore enhance Duquesne Light's financial re-sources to possess its ownership interests in the Beaver Valley and Perry plants.

The merger will have no adverse affect on either the technical management or operation of the Beaver Valley or Perry plants. The technical qualifications of Du.

quesne Light, the plant operator for Beaver Valley Units 1 and 2, wi!! be unaffected since the technical management and nuclear organization of Duquesne Light currently responsible for operating and maintaining Beaver Valley will remain responsible for the plant's operation and maintenance after the merger. Similarly, the merger will have no adverse affect on either the technical management or operation of the Perry plant since CEI and CSC, responsible for the operation and maintenance of Perry, are not involved in the merger.

In addition to the NRC's review, the merger will be reviewed by other Federal and state agencies, including the Federal Energy Regulatory Commission ("FERC"),

the Securities Exchange Commission ("SEC") and potentially the U.S. Department of Justice and the Federal Trade Commission ("FTC"), and the Pennsylvania Public Util-ity Commission. Among the issues that these agencies will consider are the competi-tive aspects of the proposed merger. The NRC itself need not undertake any 3

additional antitrust revicW with respect to the proposed indirect transfers of control concerning the Beaver Valley Unit 2 and Perry licenses because approval of this appli- j cation -like the NRC's recent approval of the indirect transfers of control resulting I from the proposed merger of Ohio Edison and Centerior Energy - does not involve

- the issuance of a license.2 Therefore, as the NRC recently concluded in its review of the Ohio Edison and Centerior Energy merger, the antitrust provisions of section 105c '

of the Atomic Energy Act do not apply.E Part I below sets forth the information required by 10 C.F.R. $ 50.80 with re- 1 spect to the proposed transfers. Part II discusses the effective date for the license I transfers.

I. INFORMATION FOR INDIRECT TRANSFERS OF CONTROL A, - GeneralInformation Concerning Duquesne Light

1. Name and Address Duquesne Light Company  ;

411 Seventh Ave.,16-006 -

P.O. Box 1930 Pittsburgh, Pennsylvania 15320 1930

2. Description Of Business

- Following the merger, Duquesne Light will be an indirect wholly owned sub-sidiary of Allegheny Energy. Its purpose will remain the same as it is now, which is to-E Beaver Valley Unit 1 is a section 104b plant, and therefore the NRC has no antitrust jurisdiction with respect to Unit 1.

E See. eg, Safety Evaluation by the Office of Nuclear Reactor Regulation Related to the Indirect Transfers of Control of License Nos. DPR-66 and NPF 73 for Beaver Valley Power Station, Unit 3 Nos.1 and 2, Docket Nos. 50 334 and 50412 at 3 (June 19,1997).

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engage principally in the generat:on, transmission, distribution and sale of electric en-ergy in Pennsylvania to residential, commercial and industrial customers for their own use and in Pennsylvania and elsewhere to wholesale customers for resale.

3. Organization And Management Duquesne Light is - and will remain after the merger - a corporation organized and existing under the laws of the State of Pennsylvania. All of Duquesne Light's di-rectors and principal officers are citizer.s of the United States.

The Board of Directors of Allegheny Energy will be composed of 15 directors; DQE is to designate six of the directc,rs and Allegheny Power is to designate nine of the directors. Neither DQE nor Allegheny Power has determined who it will desig-nate to be directors, but each currently intends to nominate persons from araong the members ofits respective board of directors at the time of the merger. Additionally, the merger agreement provides that the chairman of the Nuclear Review committee of the new board shall be one of the six directors designated by DQE.

Following the proposed merger, Duquesne Light will not be owned, controlled or dominated by an alien, foreign corporation or foreign government. Duquesne Light is not acting as an agent or representative of any other person in this request for consent to the indirect transfer of control of the licenses.

B. Technical Qualifications The technical qualifications of Duquesne Light to operate Beaver Vallay Units 1 and 2 will be unchanged by the merger since the technical management and nuclear 5

organization of Duquesne Light currently responsible for operating and maintaining Beaver Valley will be responsible for the operation and maintenance of Beaver Valley after the merger. The merger does not involve any change to the Beaver Valley Nu-l clear organization responsible for operating the plant or the reporting relationships within that organization. The Nuclear organization will continue to have clear and di.

<ect lines of responsibility and authority. While specific individuals may over time join or leave the nuclear staff and/or titles or responsibilities may change, the technical i and administrative abilities will remain essentially unchanged. Therefore, the technical qualifications of Duquesne Light to carry out its responsibilities under the Beaver Val-ley Unit 1 and Unit 2 Operating Licenses will remain unchanged and will not be ad-versely affected by the proposed merger.

The proposed merger involves no change to either the management organiza-

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tion or technical personnel of CEI and CSC responsible for operating and maintaining Perry. CEI and CSC are not involved in the merger. Therefore, the technical qualifi-cations of CEI and CSC to carry out their responsibilities under the Perry Operating 4

License will remain unchanged and will not be adversely affected by the proposed merger.

C. Financial Qualifications After the proposed merger, Duquesne Light will continue to generate and dis-tribute electricity and recover the cost of this electricity through rates authorized by the Pennsylvania Public Utility Commission and by the FERC. Therefore, Duquesne Light will continue to meet the definition of electric utility set forth in 10 C.F.R. $

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50.2. Accordingly, its financial qualifications are presumed by 10 C.F.R. S 50.33(f) and no specific demonstration of financial qualifications is required.

i We understand that in connection with recent mergers of other licensees, the NRC has expressed interest in being kept informed of subsequent asset transfers. If this is a consideration in this merger, Duquesne Light is willing to commit to provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from Du-quesne Light to its proposed parent, or to any other affiliated company, facilities for the production, transmission or distribution of electric energy having a depreciated book value exceeding ten percent of Duquesne Light's consolidated net utility plant, as recorded on the its books of account.

D. Decommissioning Funding NRC regulations require information showing " reasonable assurance . . . that funds will be available to decommission the facility." 10 C.F.R. S 50.33(k). Duquesne Light has filed decommissioning reports with the NRC under 10 C.F.R. S 50.75(b) and is providing financial assurance for decommissioning its respective ownership interests in Beaver Valley Units 1 and 2 and Perry in accordance with those reports through ex-ternal sinking trust funds in which deposits are made at least annually. After the merger, Duquesne Light will remain responsible for the decommissioning liabilities as-sociated with its ownership interests in Beaver Valley and Perry and will continue to fund its decommissioning trusts for those plants in accordance with NRC regulations.

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i -E,- Antitrust Considerations

1. . Beaver Valley Unit 1 Is Not Subject To NRC Antitrust Review e

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, Beaver Valley Unit I was licensed under section 104b of the Atomic Energy

! - Act. Nuclear plants licensed under section 104b are not subject to antitrust review by

' the NRC. As stated by the NRC in its approval for the license transfer of the Calvert -

Cliffs Nuclear Power Plant (also a section 104b plant):

l The Calvert Cliffs Nuclear Power Plant received its con-l, struction permit (CP) prior to enactment of Section 105 of j the Atomic Energy Act. Nuclearplants that receive cps prior to enactment of Section 105 in December 1970 were issued 104b licenses rather than 103 commerciallicenses and

[u - were grandfathered for purposes of antitrust review. Con-sequently, the staffis not conducting a significant charige .

antitrust review as a result of the proposed merger invoi i-ing BGE and PEPCO.

61 Fed. Reg 56,714,56,715 (Nov 4,-1996). Therefore, the NRC lacks antitrust juris-l- diction to conduct any antitrust review with respect to the license transfer for Beaver

.- Valley Unit 1. '

2. No NRC Antitrust Review Is Required With

. Respect To Beaver Valley Unit 2 and Perry e e

Beaver Valley Unit 2 and Perry were licensed under section 103 of the Atomic I Energy Act and therefore the NRC does have certain, limited antitrust jurisdiction.

- with respect to Beaver Valley Unit 2 and Perry. The Act, however, only provides for an antitrust review in connection with a construction permit application and, where t-

[- there have been "significant changes" from the time of the construction permit,in 4

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L l - connection with the initial operating license application. 42 U.S.C. $ 2135(c). The leg-islative history of section 105c strongly reinforces its statutory language that the anti-trust review provided for by section 105c is limited to the " initial application" for a

- construction permit or operating license and not to "other applications that may be filed during the licensing process."E Accordingly, no antitrust review is required with respect to the indirect transfers of control that would result from the proposed merger of DQE and Allegheny Power.

In its recent approval of the indirect transfers of control resuiting from the pro-posed merger of Ohio Edison and Centerior Energy, the NRC has expressly recog-nized that no antitrust review - not even a no significant change review -is to be undertaken with respect to an application for an indirect transfer of control of a li-cense under 10 C.F. R. $ 50.80. As stated by the NRC in the Beaver Valley Safety Evaluation for the Ohio Edison and Centerior merger:

E As stated by the Jsint Committee on Atomic Energy, The Committee recognizes that applications may be amended from time to time, that there may be applications to extend or resiew (sic]

a license, and also that the form of an application for a construction permit may be such that, from the applicant's standpoint, it ulti-mately ripens into the application for an operating license. The phrases "any license application", "an application for a license", and "any application" as used in the clarified and revised subsection 105 c.

3 h initial am refer to the initial application for a construction pt rmit, t_he plication f,or a_n operatin,g license, or the initial application for a modi-fication which would constitute a new or substantially different facility, as the case may be, as determined by the Commission. The phrases do not include, for the purposes of trig::ering subsection 105 c, other applications which may be filed during the licensing process.

H. Rep. 911470,91st Cong. 2d Sess., at 29 (1970) (emphasis added).

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The antitrust provisions of Section 105c of the Atomic En-ergy Act apply to an application for a license to construct or operate a facility licensed under Section 103 of the Act.

Although FirstEnergy may become the holding company of the licensees for the Beaver Valley facilities, i.e., may indi-rectly acquire control of the licenses, it will not be perform-ing activities for which a license is needed. Since approval of the instant application would not involve the issuance of a license, the procedures under Section 105c d_o not apply, including the making of any "significant changes" determi-nation. Therefore, there is no need to conduct any addi-tional antitrust review.E Similarly here, the NRC's approval of the instant application for indirect trans-fer of control does not involve the issuance of a license. After the merger, Duquesne will remain the licensee with respect to its interests in both the Beaver Valley and Perry plants. Accordingly, no antitrust review is to be undertaken with respect to this application, not even the making of a no "significant changes" determination.

Additionally, no practical purpose would be served by conducting any type of antitrust review here for the NRC has previously conducted an extensive antitrust re-view with respect to the Perry license. This review resulted in comprehensive anti-trust conditions being added to the Perry license to which Duquesne Light is subject.

S_ee e Operating License NPF-58, Conditions 2.C(3)a,2.C(3)b, and Appendix C. In 1987 in connection with the issuance of the operating license for Beaver Valley Unit 2, the NRC concluded that there had been no significant changes warranting further anti-trust review with respect to Beaver Valley Unit 2, in large measure because of "the im-plementation of the Davis-Besse/ Perry license conditions and the procompetitive E Safety Evaluation by the Office of Nuclear Reactor Regulation Related to the Indirect Transfers of Control of License Nos. DPR-66 and NPF-73 for Beaver Valley Power Station, Unit Nos.1 and 2, Docket Nos. 50 334 and 50-412 at 3 Qune 19,1997) (emphasis added).

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i effect they have had on the planning add day-to-day operations of all CAPCO sys-tems.": 52 Fed. Reg 15,402,15,403 (1987). Further, the NRC itself recently concluded (in reviewing a proposed merger between CEI and TE) that the license conditions found in the Perry Operating License are " extensive and pro-competitive " 59 Fed.

Reg. 40,928,40,929 (August 10, 1994).

Moreover, the competitive effects of the merger will be thoroughly reviewed by other federal and state agencies reviewing the merger, including the FERC and the Pennsylvania Public Utility Commission.- The potential effect of the business ambi-nation of DQE and Allegheny Power on competition will be one of the issues consid-ered by FERC in its review of the merger. The NRC's antitrust role is far more limited than FERC's; the NRC does not possess plenary antitrust jurisdiction. See, eg, Houston Lighting & Power Co. (South Texas Project, Units Nos.1 and 2),

CLI-77-13,5 N.R.C.1303 (1977). Therefore, consistent with Regulatory Guide 9.1, Regulatory Staff Position Statement on Antitrust Matters, the NRC should not dupli-cate FERC's role of evaluating the potential competitive effects of the merger.E In short, no additional antitrust review by the NRC is required or warranted in connection with its review of this application.

E Regulatory Guide 9.1 provides in relevant part as follows: "In general, reliance will be placed on _

the exercise of Federal Power Commission (now FERC) and State agency jurisdiction regarding the ,

specific terms and conditions of the sale of rower, rates of transmission services and such other mat-

-- ters as may be within the scope of their jurisdiction." In addition to FERC review, the proposed

- merger of DQE and Allegheny Power is subject to the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Consequently, both the Federal Trade Commission and the Antitrust Division of the United States Department ofJustice will be provided an opportunity to --

evaluate the antitrust implications, if any, of the proposed merger. -

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l F.- . Statement Of Purposes For The Transfer And The Nature Of The Transaction Necessitating Or Making The License Transfer Desirable The purpose of the merger is to achieve benefits for DOE's and Allegheny -

- Power's shareholders, customers and communities that would not be achievable if they were to remain separate companies. The expected savings related to the merger are ap-proximately $ 1 billion over the first 10 years. The savings will come from the elimi-nation of duplicative activities, improved oper ting efficiencies, lower capital costs, and the combination of the companies' work forces.

l G. Restricted Data This application does not contain any Restricted Data or other classified defense information, and it is not expected that any will become involved.in the licensed ac-tivities. However, in the event that such information does become involved, Du-quesne Light agrees that it will appropriately safeguard such information and will not permit any individual to have access to Restricted Data until the Office of Personnel

- Management (the successor to the Civil Service Commission) shall have made an inves-tigation and reported to the NRC on the character, associations, and loyalty of the in-dividual, an'd the NRC has determined that permitting such person to have access to Restricted Data will not endanger the common defense and security of the United States.

. H. - No EnvironmentalImpact-The merger does not involve any change to the nuclear plant operations or equipment and does not change any environmental impact previously evaluated in the -

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. plant's Final Environmental Statement. Accordingly, this application involves no sig-nificant environmentalimpact, s-li II. EFFECTIVE DATE

, The proposed merger of DQE and Allegheny Power requires the approval of other federal and state regulatory authorities in addition to the NRC, such as FERC.

f Approval by DQE's and Allegheny Power's shareholders is also required. Until all-l necessary approvals have been obtained, the merger cannot be implemented. DQE 1 and Allegheny Power intend to consummate the merger as soon as reasonably possible 1

- after all the necessary approvals have been obtained which are expected by May 1, l 1998. Therefore, the NRC is requested to review this Application on a se.hedule that will permit it to act on and provide its final consent to the proposed indirect transfers of control that would be effectuated by the merger as promptly as possible and in any event before May 1,1998.

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L CONCLUSION For the foregoing reasons, the NRC is requested to consent to the indirect transfers of control that would be result from the merger of DQE and Allegheny Power regarding the interests held by Duquesne Light in Operating Licenses Nos.

DPR-66 and NPF 73 for the Beaver Valley plant and operating license No. NPF 58 for

- Perry plant.

1. sMs [M-gnes E. Cross President, Generation Group Subscribed and sworn to before me this AN day of / 1997

%_ Ld]/n ll Q A N, l' o

Notary Public

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EXHIBIT A JOINT PROXY STATEMENT AND PROSPECTUS 1

D E^ che"o'o" co<nore'e ce"'e' 500 Cherrington Parkway

' Coraopolis, PA 15108 3184 (412) 262-4700 June 25.1997

Dear Stockholder:

You are cordially invited to attend the annual meeting of stockholders (the "DQE Meeting") of DQE, Inc., a Pennsylvania corporation ("DQE"), to be held on August 7,1997, at 11:00 a.m., local time, at the ,

-g Manchester Craftsmen's Ouild Auditorium,1815 Metropolitan Street, Pittsburgh, Pennsylvania 15233, At the DQE Meeting, you will be asked to consider and vote en a proposal to approve a business combinathn (the " Merger") between DQE and r torporation to be formed as a wholly owned subsidiary of Allegheny Power System, Inc. ("APS") which will result in DQE becoming a wholly owned subsidiary of APS and each DQE stockholder receiving 1.12 shares (tha " Exchange Ratio") of APS common stock for each share of DQE common stock ("DQE Common Stock"). Upon consummation of the Merger, former stockholders of DQE will own appcoximately 42% of the outstanding shares of APS, which will have changed its name to Allegheny Energy, %c, The Board of Directors of DQE has received the written opinion, dated .the date of the Joint Proxy Statement / Prospectus that accompanies this letter, of its financial advisor, Credit Suisse First Boston Corporation, to the effect that, as of such date and based upon and subject to certain matters stated in such opinion, the Exchange Ratio was fair to the holders of DQE Common Stock from a financial point of view, YOUR BOARD llAS UNANIMOUSLY DETERMINED TilAT TIIE MERGER IS IN Tile BEST INTERESTS OF DQE AND' ITS STOCKilOLDERS. ACCORDINGLY, YOUR HOARD UNAN1- -

MOUSLY RECOMMENDS TilAT STOCKilOLDERS VOTE FOR ITS APPROVAL.

More detailed information concerning the Merger, together with financial and other information concerning the businesses of DQE and 'APS, is included in the enclosed Joint Proxy Statement / Prospectus. I '

urge you to review this material carefully, In addition, at the DQE Meeting, you will be asked to consider and vote upon a proposal to amend the Amended Articles of incorporation of DQE to cause Pennsylvania Busic.,:ss Corporation Law (E 2541-2548 (the " Pennsylvania Control Transactions Statute") to be iriapplicaMe to DQE (the " Control Transactions Amendment"); to elect four directors to the Board of Directors of r;QE to serve until the annual rnecting of DQE's stockholders in the year 2000 (the " Director Proposal"); to consider and vote upon a proposal to approve the appointment by the Board of Directors of DQE of Deloitte & Touche LLP as independent public '

accountants to audit the books of DQE for the year ending December 31,1997 (the " Accountant Proposal");

1 and to consider and vote upon a proposal from a stockholder of DQE (the " Stockholder Proposal"), if presented at the DQE meeting. Notwithstanding the approval of the Control Transactions Amendment by the stockholders of DQE, DQE will not file the Control Transactions Amendment until all other conditions'to the Merger have been satisfied or waived. Therefore, even if there is stockholder approval of the Control Transactions Amendment,if the Merger does not occur, the Control Transactions Amendment wn! not have Ebecome effective, and DQE will remain subject to the Pennsylvania Control Transactions Statute, YOUR BOARD UNANIMOUSLY RECOMMENDS ADOPTION OF Tile CONTROLThANSAC-TIONS AMENDMENT,T11E DIRECTOR PROPOSAL AND TIIE ACCOUNTANT PROPOSAL AND UNANIMOUSLY RECOMMENDS VOTING AGAINST TIIE STOCKilOLDER PROPOSAL.

The affirmative vote of a majority of the votes cast at the DOE Meeting is necessary for approval of the Merger. The votes required with respect to the other matters to be acted upon at the DQE Meeting are described in the attached Joint Proxy Statement / Prospectus.

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Promptly after the Merger is consurnmated you will be sent a letter of transmittal with instructions for surrendering your certificates representing sheres of DQE Ccmmon Stock. Picase do not send your share certificates untilyou reccire these materials.

In order that your shares may be represented at the DQE hiceting, you are urged to complete, sign, date

~ and promptly return the accompanying Proxy in the enclosed entelope, whether or not you plan to attend the DQE Meeting, if you attend the DQE Meeting and desire to revoke your Proxy in writing and vote in persor.,

you may do so; in any event, a Proxy may be revoked in a writing delivered to the Corporate Secretary of DQE at any time before it is voted. Your prompt response will be appreciated.

Sincerely.

.A Davio D. M AksiiALL President and Chief Exccutive Oficer .

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as f _DQE che<<>"oto" co<no<e'e cee'e<

500 Cherrington Parhvay Coraopold. PA 15108-3184 (412) 262-4700 NOTICE OF A 9UAL MEETING OF STOCKIIOLDERS TO 112 IIELD ON AUGUST 7,-1997 To the Stockholders of DQE, Inc.:

NOTICE IS IlEREBY GIVEN that the annual meeting of stockholders (the "DQE Meeting") of

-- DQE, a Pennsylvania corporation ("DQE"), has been called by the Board of Directors of DQE (the "DQE Board") and will be held at the Manchester Craftsmen's Guild Auditorium,1813 Mttropolitan Street, Pittsburgh, Pennsylvania 15233 at 11:00 a.m., local time, on August 7,1997, to consider and vote upon the following matters described in the accompanying Joint Proxy Statement / Prospectus:

1. To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of April 5,1997 (the " Merger Agreement"), among DQE, Allegheny Power System, Inc., a Maryland corporation ("APS"), and AYP Sub, Inc., which is to be formed as a Pennsylvania corporation and a wholly owned subsidiary of APS (" Merger-Sub"), pursuant to which Merger Sub will be merged with and into DQE and DQE will become a wholly owned subsidiary of APS, and to approve the transactions provided for in the Merger Agreement;

2. To consider and vote upon a proposal to amend the Amended Articles of incorpora-tion of DQE to make (( 2541-2548 of the Pennsylva-it Business Corporation Law inapplicable to DQE.

3. To elect four directors to the DQE Beard to serve until the annual meeting of stockholders of DQE in the year 2000 or until their respective successors have been chosen and qualified;

4. To consider and vote upon a proposal to approve the appointment, by the DQE Board, of Deloitte & Touche LLP as independent public accountants to audit the books of DQE for the year ending December 31,1997;

5. To consider and vote upon a proposal from a stockholder of DQE,if presented at the DQE Meeting; and

6. To transact such other business as may properly come before the DQE Meeting or any adjournments or postponements thereof.

The Board of Directors of DQE has fixed the close of business on June 16,1997, as the record date for the determination of stockholders entitled to notice of, and to vote at.- the DQE Meeting, _and only stockholders of record at such time will be entitled to notice of, and to vote at, the DQE Meeting.

A form of Proxy and a joint Proxy Statement / Prospectus containing more detailed information with

. respect to the matters to be considered at the DQE Meeting (including the Merger Agreement attached as

' , _ Appendix A thereto) accompany and form a part of this notice.

Whether or not you plan to attend the DQE Meeting, please promptly complete- sign, date and return the enclosed Proxy in the enclosed addressed, postage-prepaid envelope. If you nttend tne DQE Meeting and desire to revoke your Proxy in writing and vote in person, you may do so; in any event, a Proxy may be revoked in a wrhing ddivered to the Corporate Secretary of DQE at any time before it is voted.

By Order of the Board of Directors f

DIANE S. EisMONT Grporate Secretary

- Coraopolis, Pennsylvania June 25,1997

The l'roxy Solicitor for DQE, Inc.:

lleacon 11i11 Partners, Inc.

90 llroad Street New York, NY 10004 Call Toll Free: 1 800-253-3814 Call Collect: 1-212-843 8500 YOUR VOTE IS IMI'ORTANT, l' LEASE SIGN, DATE AND RETURN YOUR l'ROXY. '

Joint Proxy Statement of ALLEGHENY POWER SYSTEM, INC.

and DQE, INC.

Prospectus of ALLEGHENY POWER SYSTEM, INC.

This Joint Proxy Statement / Prospectus is being furnished to stockholders of Allegheny Power System, Inc., a Maryland corporation ("APS"), in connection with the solicitation of proxies by the Board of Directors of APS from holders of outstanding shares of comrnon stock, par value $1.25 per share, of APS ("APS Common Stock"), for use at the special meeting of stockholders of APS to be held on August 7,1997 and at any adjournments or postponements thereof (the "APS Special Meeting"). This Joint Proxy Statement / Prospectus is also being furnished to the stockholdcrs of DQE, Inc., a Pennsylvania corporation ("DQE"), in connection with the solicitation of proxies by the Board of Directors of DQE (the "DQE Board") from holders of outstanding shares of common stock, no par value, of DQE

("DQE rmmon Stock") for use at the annual meeting of stockholders of DQE to be held on August 7,1997 and at any adjourm - s or postponements thereof (the "' E Meeting," and, together with the APS Special Meeting, the

" Stockholders Meetings").

At the APS Special Meeting, the holders of APS Common Stock will be asked to consider and vote upon proposals (i) to approve the issuance of shares of APS Common Stock contemplated by the Agreement and Plan of Merger, dated as of April 5,1997 (the " Merger Agreement"), among DQE, APS and AYP Sub, Inc., which is to be formed as a Pennsylvania corporation and a wholly owned subsidiary of APS (" Merger Sub") and (ii) to approve an amendment to the Restated Charter of APS to change the name of APS to Allegheny Energy, Inc. The Merger Agreement is attached as Appendix A to this Joint Proxy Statement / Prospectus and is incorporated herein by reference.

At the DQE Meeting, the holders of DQE Common Stock will be asked (i) to consider and vote upon a propose! to adopt the Merger Agreement and to approve the transactions contemplated by the Merger Agreement, (ii) to consider and vote upon a proposal to amend the Articles of incorporation, effective January 5,1989, as amended, of DQE (the "DQE Articles") to cause the Pennsylvania Business Corporation Law ss 2541 - 2548 (the " Pennsylvania Control Transactions Statute") to be inapplicable to DQE, (iii) to elect four directors to the DQE Board to serve until the annual meeting of stockholders of DQE in the year 2000. (iv) to consider and vote upon a proposal to approve the appointment of Deloitte & Tou.he LLP as independent accountants of DQE for the year ending December 31,1997, and (v) to consider and vote upon a proposal from a stockholder of DQE, if presented at the DQE Meeting.

The Merger Agreement provides for the merger of Merger Sub with and into DQE (the " Merger"). DQE will be the corporation surviving the Merger and will become a wholly owned subsidiary of APS. Upon the Merger becoming effective, each share of DQE Commen Stock issued and outstanding immediately prior to such time (other than shares of DQE Common Stock owned by APS, Merger Sub or any other direct or indirect subsidiary of APS and shares of DQE Common Stock that are owned by DQE or any direct or indirect subsidiary of DQE,in each case not held on behalf of third parties, and which are not shares of DQE Common Stock held by Duquesne Light Company, a subsidiary of DQE, to provide for redemp;irn of such subsidiary's preference shares pursuant to the terms of such subsidiary's 401(k) plan or to provide benefits under another employee benefit plan of such subsidiary (collectively, the " Excluded Shares")) will be converted into the nght to receive, and become exchangeable for,1.12 shares of APS Common Stock. See "The

- Merger-Terms of the Me ger."

APS has filed a Registration Statement on Form S-4 (including exhibits and amendments thereto, the " Registration Statement") pursuant to the Securities Act of 1933, as amended (the " Securities Act"), covering the maximum number of shares oi APS Common Stock estimated to be issuable upon consummation of the Merger. APS has registered 90,557,682 shares of APS Common Stock ander the Registration Statement. This Joint Proxy Statement / Prospectus

- constitutes the respective Proxy Statements of APS and DQE relating to the solicitation of proxies for use at their respective Stockholders Meetings and the Prospectus of APS filed as part of the Registration Statement. The information contained in this Joint Proxy Statement / Prospectus with respect to APS and its subsidiaries has been supplied by APS, and the information with respect to DQE and its subsidiaries has been supplied by DOE. This Joint Proxy Statement / Prospectus and the proxy cards are first being provided to holders of shares of APS Common Stock and DQE

- Common Stock on or about June 30,1997.

Tile SECURITIES TO BE ISSUED PURSUANT TO YlilS JOINT PROXY STATEMENT / PROSPECTUS IIAVE NOT BEEN APPROVED OR DISAPPROVED BY Tile SECURITIES AND EXCllANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR liAS Tile SECURITIES AND EXCII ANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON Tile ACCURACY OR ADEQUACY OF Tills JOINT PROXY STATEMENT / PROSPECTUS.

ANY REPRESENTATION TO Tile CONTRARY IS A CRIMINAL OFFENSE, The date of this Joint Proxy Statement / Prospectus is June 25.1997

AVAllAllt.1: INI ORM ATION Each of APS and DQE is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the " Exchange Act"), and, in ac'cordance therewith, files reports, prox 3 statemen4 and other information with the Securities and Exchange Commission (the "SEC"). The reports, proxy statements and other information filed by APS and DQE with the SEC can be inspected and copied at the SEC's public reference room k>cated at Room 1024 Judiciary Plata,450 Fifth Street, N.W, Washington, D.C. 20549, and at the public reference facilities in the SEC's regional offices located at: 7 World Trade Center,13th Floor, New York, New York 10048, and Suite 1400, Citicorp Center,500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates by writing to the Securities and Exchange Comndssion, Public Reference Section,450 Fifth Street, N.W, Washington, D.C. 20549 and can be accessed electronically on the SEC's Web site at http://www.sec. gov. The shares of APS Common Stock are listed on the New York Stock Exchange (the "NYSE"), the Chicago Stock Exchange (the "CSE"), the Pacific Exchange, Inc. (the "PEl") and the Amsterdam Stock Exchange (the "AMSE"); and the shares of DOE Common Stock are listed on the NYSE, the CSE and the Philadelphia Stock Exchange (the "PHSE"). As such, the periodic reports, proxy statements and other information filed by APS and DQE may be inspected at the ollices of those exchanges as follows: (i) the NYSE, at 20 Ilroad Street, New York, New York 10005; (ii) the CSE, at One Financial Place,444 LaSalle Street, Chicago, Illinois 60605; (iii) wiih respect to APS, the PEl, at :M1 Pine Street, San Francisco, California 94101; (iv) with respect to APS, the AMSE, at

!!cvrsplein 5 P.O. Ilox 19163,1090 GD Amsterdam, The Netherlands; and (v) with respect to DQE, the PilSE, at 1900 Market Street, Philadelphia, Pennsylvania 19103.

This Joint Proxy Statement / Prospectus is also being furnished to holders of DQE Common Stock for the purposes of electing four directors to the Board of Directors of DQE and of considering and voting upon certain other matters. Certain information with respect to these proposals is being furnished only to the holders of DQE Common Stock. See "Other Information for the DQE Meeting," which is included only in j the Joint Proxy Statement / Prospectus being mailed to holders of DQE Common Stock.

APS has filed a Registration Statement with the SEC under the Securities Act with respect to the shares of APS Common Stock issuable upon consummation of the Merger. This Joint Proxy Statement / Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. The Registration Statement, including any amendments, schedules and exhibits thereto, is available for inspection and copying as set forth above.

Summaries of the contracts or other documents refctred to hercia are summaries of the material provisions thereof and are not necessarily complete and in each instance reference is made to the copy cf such contract or other document filed as an exhibit to the Registration Statement.

INCORPORATION OF CERTAIN INFORMATION llY REFERENCE This Joint Proxy Statement /Prospettus incorporates documents by reference that are not presented herein or delbered herewith. Documents relating to APS, excluding exhibits to such documents unless such exhibits are specifically incorp > rated by refeNnce in such documents, are mallable without charge upon request to Eileen Beck, Secretar), Allegheny Power System, Inc.,10435 Downsiille Pike, lingerstown, Maryland 21740. Telephone requests may he directed to Eileen Heck, Secretary, at (301) 790 3400.

Documents relating to DQE, excluding exhibits to such documents unless such exhibits are specifically incorporated by reference herein, are niallable without charge upon request to Diane Eismont, Corporate Secretary, DQE. Inc., Box 68, Pittsburgh, Penns3 hania 15230-0068. Telephone requests may he directed to Diane Eismont, Corporate Secretary, at (412) 393-6080. In order to ensure timely delbery of any such document, any request should be made 3h July 31,1997.

The following documents filed with the SEC by APS (File No.1-267) are incorporated herein by reference: (a) APS' Annual Report on Form 10-K for the year ended December 31,1996 (the "1996 APS 10-K"); (b) APS' Current Report on Form 8 K, dated April 5,1997 and (c) APS' Quorterly R port on Form 10-Q for the quarter ended March 31,1997.

ii

The following documents filed with the SEC by DQE (File No. 1-10290) are incorporated herein by reference: (a) DQE's Annual Report on Form 10-K for the fiscal year ended December 31,1996 (the "1996 DQE 10-K"); (b) DQE's Qtiarterly Report on Form 10-Q for the quarter ended March 31,1997; (c) DOE's Current Report on Form 8 K, dated April'),1997; and (-d) the description of DQE Common Stock contained in DQE's Registration Statement on Form 8.D/A 1, dated May 1,1995.

All documents filed by either APS or DQE pursuant to Section it a),13(c),14 or if(d) of the Exchange Act subwquent to the date hereof and prior to the date of the at scable Stockho!ders Meeting and any adjournment or postponement thereof shall be deemed to be incorporated herein by reference and to be a part hereof from the date of such filing. Any statement contained herein or in a documenti .corporated or deemed to be incorporated herein by reference shall be deemed to be modified or super 3cded for purposes hereof to the extent that a statement contained herein or in any other subsequently 61ed do:umeat which also is, or is deemed to be, incorporated herein by reference modifies or supersedes such stas: ment. Any such statement so moditied or superseded shall not be deemed to constitute a part hereof, except as so modified or superseded.

No person is authoriicd to rive any information or to make any representations not contained in this Joint Proxy Statement / Prospectus or in the documents incorporated herein by reference in connection with the solicitation and the offering made hereby and,if given or made, such information or representation should not be relied upon as having been authorized by APS or DQE. This Joint Proxy Statement / Prospectus does not constitute an offer to sell, or a solicitation of an ofter to purchase, the securities otTered by this Joint Proxy Statement / Prospectus, or the solicitation of a proxy from any person, in any jurisdiction in which it is unlawful to make such offer, solicitation of an ofter or proxy solicitation. Neither the delivery of this Joint Proxy Statemnt/ Prospectus nor any distribution of the securities made under this Joint Proxy State.

ment / Prospectus hereunder shall, under any circumstances, create an implication that there has been no change in the afTairs of APS or DQE since the date of this Joint Proxy Statement / Prospectus other than as set forth in the documents incorporated herein by reference.

~ . - -

TAllLE OF CONTENTS

_P n

' Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . ........................................, ii Incorporation of Certain Information by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ii Summary..........,......................................................... 1 Th e Co m p a n i e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Stockholders Meetings . .......... ...................... ... ......... ...... 2 The M erger . . . . . . . . . . . .

.......................................................... 3 The Merger Agreement . ......... ........ ,.,,.......... ...... ..... ............ 6 Certain Regulatory Matters . . . . . . . . . . . . . . . . ...... ................. ...... . ...,. 9 Interests of Certain Persons in the Merger .

.. . . .. . ........... .. ..... .. . 10 Accounting Trea' ment . . . .

........... ....... ... . .. .... ......... .... .. , 10 Resale of APS Common Stock . .. ................. .... .... .......... ..... .. ... 11 Dividends . . . . . . . . . .......... ... ............................. .................. 11 Certain Federal Income Tax Consequences . . . . . . . . . . . . .... .... ..... ............. . 11 Certain Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .... ....... ............ Il Certain Effects of the Merger on the Rights of Iloiders of DQE Common Stock . . ...... . 12 APS Charter Amendment . . . . . . ...... .. ... .... .. . . ... . ............ 12 Amendment to the DOE Articles . . . . . . . . . . .. .... .. .. ..... .. ....... 12 Comparative Stock Prices . . , . . . . . . . . . . . . . . . . . . . ............. ..... . . ... 13 Selected Unaudited Historical and Pro Forma Combined Financial Data . , . . . . . . . . . , , . . . . 14 Notes to Selected Unaudited Historical and Pro Forma Combined Financial Data . . . ... ..... 16 The Stockholders Meetings ... .... ..... ........ ...... .............. ....,.. . 17 G e n e ral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . ................... ... . 17 Date. Place and Time . . . . . . . . . ...... ........ . . ..... . . . ... .. . ... 17 Record Dates . . . . . . . . . . . . ..

..... ............. . ...... ... ............... 18 Vot es Requi red . . . . . . . . . . . . . . . . . . . . . . . . . . . ... ... . ... . .. . ... . 18 Yoting and Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . .. . . ....... . ... ., 19 Solicitation of Proxies . . . . . . . . . .. . , . . .... . ..... . ... . . . ... 20 T1.c Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... .. ........ ........ . ....... 20 Prior Contacts Between the Companies , . ... .... .. ..

.. .. .. .. . . 21

- The Merger . . . . .. . .... .. ... . .. . .. , 21 G e ne ral . . . . . . . . . . . .. . . ..... ... . , ,. .... . .. . . . '21 Terms of the Merger. . .. . . .... .. .. , , .. .. , .. . ... 22 EtTective Time . . . . .. ,, . . . ... . . . . . .. 22 Exchange of Certificates , . , . . . ..... ... .. . .. .. ......... .... . 22 Appraisal Rights . .., . .. .. . , , .. . . . . ... , 24 Background of the Merger. ....... ...... . .. .... .. .... . . 25 Reasons for the Merger. Recommendations of the Boards of Directors. . . . . . . . . . . . 26 Synergies . . .. . .... . .. . . ... . . ......,..... . ., 28 Opinions of Financial Advisors , . . .. . . ,. . .....

........ .. 28 Management and Operations Following the Merger, ,

.. . .. . . .... .. . . .... 16 Cautionary Statement Concerning Forward-Looking Statements .. .. .. . .. 36 The Merger Agreement . ... . . . . ... . .. . . . 3/

Representations and W rramics . . . .

.. . . ..... . .. .. . .. .. . . 37 Conduct of Business Pending the Merger; Certain Covenants: Acquisition Proposals 38 Conditio n ... . ,

. 41 Modification or Amendment; Waiver of Conditions: Extension 42 iv

J

_ Pere Termination . . . . . . , . . . . . ..................... ... . ...... . ... . . . 42 Certain Termination Fees. ................ . . ..... . ..... ... ... .... . . .. . 44 Expenses . . . . . . . . . . . ....... . ... ...........'......... ... . .... ....... .... ... 45 Stock Options . . . . . . . . . . . . . . . . . . . ........................ ............ .......... 45 N u : lear M a t t e rs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Ce rt ain Regulatory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 New York Stock Exenange Listirs De. Listing of DQE Common Stock . . . . . . . ............ 46 Certain Regulatory Matters . . . . . . . . . . . . . . .........., ,, .... ..... .. ..... .. . ... 46 IISR Act . . . . . ...... ..... ....... .... .... . . ...... ...... .. . . .. 46 i

Federal Power Act . . . . ...... .. .. ..... . . . .. ..... ... .. ............ . 46 Pull C A . . . . . . . . . . . . ............................ .... .... .......... . ... ... 46 Nu clear Regulatory Commission . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . 47 Pennsylvania Public Utility Commission . . . . . . . . . . . . . . . . . . . ... .. ...... . . . . . .. 47 M aryland Public Serdce Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

. Oth e r P egulat ory M att ers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ 48 Power Supply Agreement . . , . . . ................. ... .. ... .. .. .. ..... .., 48 Effects of Certain Regulatory Trends . . . . . . . . . . . . . . . . . . . . . . . . . . .... . .... ........ 48 l Interests of Certain Persons in the M erger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. . .. 49 l Directors and OMcers . . ........................... ...., ... ....... ....... ..... 49 Severance Agree me nts . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. . . ... . ... ..... 49 DQE, Inc. Long-Term incentive Plan . . . . . . . , .... . ..... . .. .. ...., , 50 Director and Omcer Indemnification and Insurance . . . . . . . . . . ...... ....... . . . .... ,, 51 Acco;nting Treatment . . . . . . . . .............. . ...... ..............:... ............. 51 Resale of APS Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . ...... .......... . ........ 51

-Dividends...........................................,................... ........ 52 Certain Federal Income Tax Consequences of the Merger . . . . , . . . . . . ... .... .......... 52 G e neral . . . . . , , . . . . . . .... .... ......... ., ... , .. .. ...... . . . ... 52 Consequences to DQE Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . ......... .... . 53 Frac tion al S h a re s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....... ...... 53 Consequences to DQE, APS. Merger Sub and Holders of APS Common Stock, . . . ,,, . . . ,, . 53 Certain Related Agreements . . ...... ............... . ..... . .... .... . . 54 i Stock Option Agreement ........................................ ....... .. . ....... 54 Letter Agreement .. . ... ........................ .... .............. ...... .... 56 Unaudited Pro Forma Combined Financial Informatica of APS and DQE , ....., . ,, , 51 4 Notes to Unaudited Pro Forma Combined Financial Information , ..... .. .., . 76 Description of APS Capital Stock. . . . . . . . . . . . . . . . . ... .... .. . .. . ... .. . 77

, . . APS Common Stock ... . ..., ... . ..... .. .. . .. . ...... . ... . 77 Comparison of Certain Rights of the Holders of APS Common Stock and DQE Common Stock , 77 General . , . . . . . . . ............. ...,.., ....... .. ., . 77 Size and Classification of the Doard of Directors .. . . . . .. .... . .. . . . . 78 Election and Removal of Directors; Filling of Vacancies on the Board of Directors ., . . 7h Duties of Directors . . . . . ......... .. .......... , , . . . . . 79 Meetings of Stockholders . ...... . ... .. . .. .. . . . ... .. . . 80 Action by Written Consent . . . . . . . . . .... .. .. . . . . . .. 81 Stockholder Proposals and Stockholder Nominations of Directors . . . . . 81 Amendment of Charter and Bylaws . ...... . .... . . . . . .. ... . 82 Required Vote for Authorization of Certain Actions ..... ... . .., ,. . .. . 83 Appraisal and Dissenters

• Rights. .. .. ..... . 84 v

f*E' S tat e .A n ti.Takeove r S t at utes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85. . . . . . . .

I nde m nification of Ollicers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88 ......

Fair Price and Anti.Greenmail Provisions in the Charter Documents . . . . . . . . . . . . . . . . . . . . . . .89 .

Conflict of.i n terest Transactions . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 The A PS C harte r A me ndmen t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 ......

Amendment to the DQE Atticles . . . . . . . . ...... . .. .................. .............. 91 ,

Other luformation for the DQ E h1ceting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Election of Directors. . .

. .............. . . ............ ................. ...... 92 N omine es for Dire c t o rs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 .....

Standing Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... ................ 93 Directors' recs and Plans . . . .... . ................................................ 94 The DQE Iloard and its Commhtecs. .

......... ..... ...... ...... ................. 95 Beneficial Ownership of Securities of DQE . . . . . . . . . . . . . . . . . ... ................. ... 96 Compensation Committee Report on Executive Compc . tion............................. 97 Section 16(a) 13cnclicial Ownership Reporting Complia..cc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Compensation Committec Interlocks and insider Participation . . . . . . . . . , . . . . . . . . . . . . . . . . . . . 101 Performance Grap). .... . . ............. , ... ... . ... ......... ...............

102 Compensation . ..... ................ ... ... ... . .............................. 103

. Retirement Plan . . . . . . . . . . . . . . . . ....... . ...... ., .........................,... 106 Employment and Change of Control . .................. ............................., 107 Approval of Appointment of Independent Public Accountants . . .. . .. .................. 107 Proposal of a DQ E Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 hianagement's Statement in Opposition , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 O t h e r hi a t t e rs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Experts.,.....,,...,,,,......................................................... 110 Validity of Shares . . . . . . . . . .. .... .... ........... ................ ............,.... 110 Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... ... ....................

111 APPENDIX A: Agreement and Plan of hierger, dated as of April 5.1997, among DQE,Inc.,

Allegheny Power System, Inc. and A YP Sub, Inc. . . . . . . . . . . , , . . . . . . . . . . . . . A1 APPENDIX B: Opinion of hierrill Lynch & Co., dated as of June 25,1997 ............. , ... B1

' APPENDIX C: Opinion of Credit Suisse First 130ston Corporation, dated as of June 25,1997..,, C-1

- APPENDIX D: Sections 2541-2548 of the Pennsylvania 13usiness Corporation Law . , ........... D-l APPENDIX E: Form of Amendment to the DQE Articles . . .. . . . , . . . . . . . . . . . . . . . . . . . . . . E 1-vi o

j SUS 1MMW -

7'hejollowing is a summary of certain information contained elsewhere us sis Joint Proxy Statement /

i Prospectus;it does not purport to be complete and is quahfied in its entiety by reference to thefull tear of thu

,loint Proxy Statement / Prospectus. Including the Appendices attached hereto and the documents incorporated herein by reference. Sudholders are urged to read thh Joint Proxy Statement / Prospectus in its enttrety. The information coetained in this Joint Proxy Statement /Prespectus with respect to Allegheny Power System. Inc.

("APS") and AYP Sub. Inc., which is to be formed as a Pennsylvania corporation and a wholly owned subsidiary of APS ("Alerger Sub"), has been supplied by APS, und the information with respect ta DQE, Inc.

("DQE." and sometimes hereinafter referred to, with respect to the periodfollowing tioe Merger (as defined below). as the " Surviving Corporation") has been su;, plied by DQE Neither APS nor DQE is resp <msiblefor inaccuracles. if any, in the information furnished by the other party for use herein.

The Companics APS APS is a registered electric utility holding company which in 1996 had operating revenues of approximately $'!.3 billion. At December 31,1996, APS had total assets af upproximatel) $6.6 billion. APS was incorporated in 1925 in Maryland and owns, d:rectly or kdirectly, vrbus regulated and unregulated subsidiaries. APS' primary subsidiaries are enaaped principally in the generation, tiansmission, distribution and sale of electric criergy, its subsidiaries' properties, which are interconnected and are operated as a single integrated electri utility system, are located in Maryland, Ohio, Pennsylvania, Virgima and West Virginia and provide' energy to customers in portions of each of those states. APS provides elecit;c servic: to nearly 1.4 million customers in an area of about 29,000 square miles.

The mailing address of APS' princip.1 exceutive otlices is 10435 Downsville Pike, llagerstown, Maryland 21740, and its telephone number is (301) 7900400.

DQE-DQE is an energy services holding company incorporated in 1989 in Pennsylvanis which owns various regulated and unregulated subsidiaries. DQE's subsidiaries include (i) an electric utility engaged in the production, transmission, ' distribution and sale of electrical energy, (ii) a co npany

• hat makes strategic investments related to DQE's core energy business, (iii) a company that offers energy solutions to customers in domestic and international markets such as energy facility development, operation and maintenance and independent power production, (iv) a company formed to explore strategic business opportunities in the energy industry, and (v) a financial services company that makes long-term investments and provides fmancing for DQE's services and products. DQE's electric utility provides clectric senice to customers in a senice territory of about 800 square miles in southwestern Pennsylvania, comprised of parts of Allegheny County (including the City of Pittsburgh), and parts of Beaver County and Westmoreland County. This electric utility provides service to about 580,000 customers in this service area and its revenues account for the majority of DQE's revenue in 1996, DQE had operating revenues of approximately 51.2 billion. At December 31,1996, DQE had total assets of approximately 54.6 billion.

Duquesne Light Company, a subsijiary of DQE ("Duquesne Light"), owns interests in three nuclear facilities. Duquesne Light owns a 137.4% interest in Perry Power Station Unit I (" Perry Unit 1"), a 47.50%

interest in Beaver Valley Power Station Unit 1 (" Beaver Valley i ') and a 13.74% hterest in Beaver Valley Power Station Unit 2 (" Beaver Valley 2") (each, a " Nuclear Facility" and, cc.11ectively, the " Nuclear Facilities"),

Allegheny Development Corporation ("ADC") is a wholly owned subsidiary of Duquesne Enterprises, Inc. which,in turn,is a wholly owned subsidiary of DQE. ADC is an electric utility company engaged in the business of owning facilities to provide complete energy senices. Upon approval by the Securities and Ex, change Commission ("SEC"), ADC will assign to DH Energy, Inc. (a wholly owned subsidiary of DQE Energy Services, Inc. (" DES")) all of its rights and obligations under certain agreements, and Dil T > 4.-- m . _ _ _ _ _ _ _ _ _ _ _ _ _ _

l I:ncrgy, lac. will become a public utility company pursuant to the Pubhc Utility lloldmg Company Act of 1935, as amended (the "PUllCA").

In addition, DES will shortly be forming a new wnolly owned subsidiary, MT Energ), Inc. ("MT").

Upoa SFC approval, MT will, among other things, enter into an Operation and Maintenance Services Agreement with ADC, and become a public utility com;any pursuant to the PUllCA.

The mailing address of DQE's principal executive of1 ices is 500 Cherrington Parkway, Coraopolis, Pennsylvania 15108, and its telephone number is (412) 262-4700. -

Merger Sub Merger Sub is to be formed as a wholly owned subsidiary of APS solely for the purpose of effecting the merger of Merger Sub with and into DQE (the " Mercer"). The mailing address of Merger Sub's principal esecutive o0 ices will be 10435 Downsville Pike, llagerstown, Maryland 21740, and its telephone number will be (301) 790-3400.

The Stockholders Meetings APS The special meeting of stockholders of APS (the "APS Special Meeting") to consi6er and vote upon (i) the approval of the issuance of the shares of Common Stock, par valuc $1.25 per share, of APS ("APS Common Stock") as contemplated by the Agreement and Plan of Merger, dated as of April 5,1097 (the

" Merger Agreement"), among DQE, APS and Merger Sub, and (ii) the approval of an amenduent to the Restated Charter of APS ( the "APS Charter") to change the name of APS to Allegheny Energy, Inc. (the

" Charter Amendment") will be held on August 7,1997 at 1:00 p.m., local time, at floward Johnron of flagerstown.1718 Underpass Way, llagerstown, Maryland 21740. Only holders of record of APS Common Stock at the close of business on June 30,1997 (the "APS Record Date") will be entitled to vote at the APS Special Meeting. At June 1,1997, there were 122,111,567 shares of APS Common Stock outstanding and entitled to vote. Each share of APS Common Stock is entitled to one vote.

The affirmative vote of a majority of the votes cast at the APS Special Meeting is necessary for the approval of the issuance of the shares of APS Common Stock pursuant to the Merger Agreement. The affirmative vote of a majority of the total number of shares of APS Common Stock outstanding is necessary for adoption of the Charter Amendment.

As of June 1,1997, directors and executive officers of APS and their aDiliates beneficially owned an aggregate of 75,272 shares of APS Common Stock (including shares which may be acquired within u0 days upon exercise of stock options) or less than 0.1% of the shares of APS Common Stock outstanding on such date. The directors and executive oflicers of APS have indicated their intention to vote their shares of APS Common Stock in favor of approval of the issuance of the shares of APS Common Stock as contemplated by the Merger Agreement and in favor of appioval of the Charter Amendment.

02r' The annual meeting of stockholders of DQE (the "DQE Meeting") (i) to consider and vote upon adoption of the Merger Agreement and approval of the transactions contemplated thereby, (ii) to consider and vote upon a proposal to amend the DQE Articles to cause ((2541-2545 (the " Pennsylvania Control Transacticas Statu'e") of the Pennsylvania Business Corporation Law (the "PBCL") to be inapplicable to DQE (the "Contro! Trawetions Amendment"), (iii) to elect four directors to the Board of Directors of DQE (the "DQE Board") to serve until the annual meeting of stockholders of DQE in the > car 2000. (iv) to consider and vote upon the approval of the appointment by the DQE Board of Deloitte & Touche LLP

("Deloitte & Touche") as :ndependent public accountants to audit the books of DQE for the year ending December 31,1997 (the " Accountant Proposal") and (v) to consider and vote upon a proposal from a stockholder of DQE, if presented at the DQE Meeting (the " Stockholder Proposal") will be held on August 7,1997 at i1:00 a.m . !om I tirne, at the Manchester Craltsmen's Guild Auditorium,1815 Metropoli-2

-. . - - - - .-. . -- .~ - - -- - - - - -- -

tan Street, Pittsburgh, Penn9 1vania 15233. Only holder > of record of DQE Common Stock at the close of business on June 16,1997 (the "DQE Record Date") will be entitled to vote at the DQE Meeting. On June 16,1997, there were 77A08,557 shares of Cornmon Stock, no par value, of DQE ("DQE Common Stock") outstanding and entitled to vote Each share otDQE Common Stock is entitled to one vote.

The aflirmative vote of a majority of the votes cast at the DQE Meeting is necessary for the adoption of the Merger Agreement and approval of the transactions contemplated thereby, With respect to the election of directors of DQE, the four persons rccciving the highest number of votes will be elected as directors of DQE.

The aflirmatisc vote of a majority of the votes cast at the DQE Meeting is necessary for adoption of the l

Control Transactions Amendment, the Accountant Proposal and the Stockholder Proposal.

Stockholders cf DQE have cumulative voting rights with respect to the election of directors of DQE.

Holders of preferred stock or other capital stock of Duquesne Light or any of the other subsidiatics of j DQE will not have voting rights with respect to any of the matters to be acted upon at the DQE Meeting. The l terms of such preferred stock or other capital stock will not be afTected by the Merger.

As of June 16,1997, directors and executive otiicers of DQE and their afliliates beneficially owned an l aggregate of 633,161 shares of DQE Common Stock (including shares which may be accuired within 60 days upon exercise of stock options) or less than 1% of the shares of DQE Common Stock outstanding on such

< date The directors and executive ollicers of DQE have indicated their intention to vote their shares of DQE Common Stt..k in favor of adoption of the Merger Agreement and approval of the transactions contemplated thereby.The directors and executive ollicers of DQE have also indicated their intention to sote their shares of DQE Common Stock in favor of the directors nominated by the DQE Iloard and in favor of the Control

• Transactions Amendment and the Accountant Proposal and against the Stockholder Proposal.

For additional information relating to the Stockholders Meetings, see "The Stockholders Meetings."

4

• The Merger This section describes certain aspects of the Merger. The following d scription does not purport to bc l

complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as

Appendix A to this Joint Proxy Statement / Prospectus and is incorporated herein by reference. All holders of DQL Common Stock and holders of APS Common Stock are urged to read the Merger Agreement in its entirety, i

< General The Merger Agreement provides for a business combination of APS and DQE in which DQE will become a wholly owned subsidiary of APS and each issued and outstanding share of DOE Common Stock

]

will be converted into the right to receive, and become exchangeable for,1,12 shares of APS Common Stock (the " Exchange Ratio"). Upon consummation of the Merger, holders of DQE Common Stock immediately prior to the Merger will own approximately 42% of the outstanding shares of APS Common Stock after the Merger (based on the number of shares of APS Common Stock and DQE Common Stock outstanding as of June 1,1997, and June 16, 1997, respectively).

Ternts of the Merger

}

Subject to the satisfaction of the conditions set forth in the Merger Agreement, MerFer Sub will be merged with and into DQE, and the holders of shares of DQE Common Stock (other than shares of DQE

]

Common Stock ouned by APS, Merger Sub or any other direct or indirect Subsidiary (as detined below) of

APS and shares of DQE Common Stock that are owned by DQE or any ducet or indirect Subsidiary of DQE, in each case not held on behalf of third parties, and which are not shares of DQE Common Stock held by Duquesne Light, to provide for redemption of Duquesne Light's preference shares pursuant to the terms of Duquesne Light's 401(k) olan or to provide benefits under another employee benefit plan of Duquesne Light (collectively, the " Excluded Shares")) will be issued APS Common Stock in a transaction intended to qualify as a " pooling of interests" for accounting purposes and as a reorganization within the meaning of 3

Section .%h(a) of the Internal Revenue Code of 1986, as amended (the " Code"), for federal income tax purposes. As used herein, the term " Subsidiary" means, with respect to APS, DQE or Merger Sub, as the ca:,e may be, any entity whether incorporated 0: unincorporated, in which APS, DQE or Merger Sub, as the case may be, owns, directly or indirectly, at least a majority of the outstanding voting securities or other equity interests having the power to elect a majority of directors, or otherwise direct the management and policies, of such entity Each outstanding share of APS Common Stock will remain outstanding and be unaffected by the Merger, No fractional shares of APS Cormnon Stock will be issued in the Merger. Instead, the Merger Agreement provides that each holder of DQE Common Stock who would otherwi.se be entitled to receive a fractional share of APS Common Stock will be entitled to receive, in lieu thereof, cash representing such holder's proportionate interest in a share of APS Common Stock based on the closing price of a share of APS Common Stock, as reported in The Wall Strcct Journal, New York City edition, on the trading day immediately prior to the EITective Time (as defined below),

7 At the EITective Time, all shares of DQE Common Stock credited to participants' accounts under the 9

Dividend Reinvestment ard Stock Purchase Plan of DQE (the "DQE DRSPP") will be converted into a number of shares of APS Common Stock determined by multiplying the number of such shares of DQE Common Stock by the Exchange Ratio. All such shares of APS Common Stock will be held in the participants' accounts, with individual participant's accounts in the DQE DRSPP being credited with fractional shares of APS Common Stock See "The Merger-Terms of the Merger" EjTective Time The Merger will become etTective at the time when Articles of Merger elTecting the Merger (the

" Pennsylvania Articles of Merger") have been duly filed with the Department of State of the Commonwealth of Pennsylvania (the " Effective Time") as provided in Section 1927 of the PBCL See "The Merger-Effective Time "

Exchange of Certificates Ifolders of UQE Common Stock should NOT send their certificates to the Exchange Agent until they receite transmittal materials from the Exchange Agent, lloiders of APS Common Stock will not exchange their certificates, Promptly after the EtTective Time, the Exchange Agent (as defined in the Merger Agreement) will mail to each holder of DQE Commoa Stock (other than the Excluded Shares) a letter of transmittal with instructions for exchanging certificates representing shares of DQE Common Stock (each a " DOE Cenifi-cate") in exchang for certificates representing shares of APS Common Stock (each an "APS Certificate")

and obtaining cash in lieu of any fractional share of APS Common Stock. See "The Merger-Terms of the Merger."

Appraisal Rights lloiders of APS Common Stock will not be entitled to aay dissenters' or appraisal rights under the Maryland General Corporation Law (the "MGCL") as a result of the matters to bc voted upon at the APS Special Meeting. Holders of DQE Common Stock will not be entitled to any dissenters' or appraisai rights under the merger and appraisal riprits provisioris of the PBCL as a result of any of the matters to be voted on at the DQE Meeting. DQE does not believe holders of DQE Common Stock would be entitled to receive the appraisal-like rights conferred by the Pennsylvania Control Transactions Statute even if the Control Transactbns Amendment is not approved. However, because there is no controlling precedent interpreting this aspect of the Pennsyivania Control Transactions Statute, DQE is seeking approval of the Control Transactions Amendment in order to remove any possible uncertainty or legal challenge See "The Merger -

Appraisal Rights "

4

1 I

Reawnsfor the Alcryct, Recommendanons of the Boards of Directon - APS The APS Iloard I,as determined unanimous l3 that the Merger Agreement and the transactions contemplated therch) are adiisable for, fair to, and in the best interests of, APS' stockholders, Accordingl),

the APS Iloard has unanimously apprmed the Merger Agreement and unanimous l3 recommends that the stockholders of APS sole FOR approial of the issuance of the shares of APS Common Stock as contemplated by the Merger Agreement. The recommendation of the APS Board is based on a number of strategie, operating and financial factors as described in "The Merger - R:asons for the Merger; Recommen-dations of the lloards of Directors - APS."

Reasons for the Alcrger; Recommendations of the Boards of Directors - DQE The DQE Board has determined unanimously that the terms of the Merger are fair to, and in the best interests of, stockholders of DQE and has unanimously apprmed the Merger Agreement and the transac-tions contemplated thereby and unanimously recommends that the stockholders of DQE iote FOR ndoption of the Merger Agreement. The recommendation of the DQE Board is based on a numhet of strategic, operating tmd financial factors as described in "The Merper - Reasons for the Merger; Recommendations of the Boards of Directors - DQE." In considering the recommendation of the DQE Board, holders of DQE Common Stock should be aware that certain members of DQE's management and the DQE Board have other interests in the Merger in add. tion to the interests which holders of DQE Common Stock base pencrally. The DQE Board was aware of these other interests and considered them, among other matters, in approving the Merger Agreement and the transactions contemplated thereb), including the Merger. See " Interests of Certain Persons in the Merger" and "The Merger - Managem:nt and Operations Following the Merger."

Opinions of Financial Advisors

! APS Merrill Lynch & Co. ("Merrill Lynch") has delivered to the Board of Directors of APS ("APS Board")

a its written opimon, dated as of the date of this joint Proxy Statement / Prospectus, to the efTect that, as of such date, the Exchange Ratio was fair from a financial point of view to the holders of APS Common Stock. See "The Merger-- Opinions of Financial Advisors - APS." A copy of the opinion of Merrill Lynch, dated as of the date of this Joint Pros) Statement / Prospectus, which sets forth the assumptions made, procedures Silowed, matters considered and limitations on the scope of the reiiew h3 Merrill L nch 3 in rendering its opinion, is attached as Appendis B to this Joint Prosy Statement / Prospectus, lloiders of APS Common Stock are urged to, and should, read Merrill Lynch's opinion in its entirety, DQE

! Credit Suisse First Boston Corporation ("CSFB") has acteJ as financial advisor to DOE in connection with the Merger and has rendered to the DQE Board a written opinion, dated the date of this Joint Proxy Statement / Prospectus, to the e!Tect that, as of such date and based upon and subject to certain matters stated in such opinion, the Exchange Ratio was fair to the holders of DQE Common Stock from a financial point of

view, The opinion of CSFB is directed to the DQE Board and rela;es only to the fairness of the Exchange Rati

from a tmancial point of view, does not address any other aspect of the proposed Merger or any related transaction and does not constitute a recommendation to any stockholder as to how any stockholder should vote at the DQE Meeting. See "The Merger - Opinions of Financial Advisors - DQE," A copy of the opinion of CSTB, dated the date of this Joint Pros) Statement / Prospectus, which describes the procedures followed, assumptions made, matters considered and limitations on the reiiew undertaken in connection with such opinion, is attached hereto as Appendis C and should he read carefully and in its entiret).

Afanagen cnt and Operations following the Alerger The Merger Agreement provides that, from and after the Effective Time, the APS Board will be composed of 15 dir-etors, of which six will be designated by DQE and nine will be designated by APS pnor to the EtTective Time, in each case to serse until their successors have been duly elected or appointed and 5

4

qualified or until thei! carlier death, resignation or removal in accordance with the APS Char'er and the Bylaws of APS ("APS Bylaws"). As of the date hereof, neith:r DQE nor APS has det:rmined whom it will designate to be directors of APS following the EfTective Time, but each of DQE and APS currently intends to nominate persons from among the members of their respective boards of directors at the Effective Time. In addition, the Merger Agreement provides that, following the Effective Time, the chairmen of certain committees of the APS Board will be selected from among the DQE designees and the chairmen of other committees will be selected from among the APS designees. See " Interests of Certain Persons in the Merger - Directors and Ollicers."

1 The Merger Agreement further provides that, from and after the Effective Time, Alan J. Noia will be the l Chairman and Chief Exccutive Onicer of APS and David D. Marshall will be the President and Chief 4

Operating OfTicer of APS.

The Merger Agreement also provides that, from and after the Effective Time, APS' corporate headquarters will remain in Maryland and substantial operations of Subsidiaries of APS, including the

Surviving Corporation, will remain in the Pittsburgh, Pennsylvania area. See "The Merger- Management i

and Operations Following the Merger."

The Merger Agwement This section describes certain aspects of the Merger Agreement. The following description does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Appendix A to this Joint Proxy Statement / Prospectus and is incorporated herein by reference. AIIholders of DQE Common Stock and APS Common Stock are urged to read the Aterger Agreement in its entirety.

Representations and Warranties The Merger Agreement contains various representations and warranties of DQE, APS and Mcrger Sub, certain of which are qualified by a material adverse etTect standard. See "The Merger Agreement-Representations and Warranties."

Conduet of Business Pending the hierger The Merger Agreement provides 11 at during the period of time from the date of the Merger Agreement until the Effective Time, unless approved in writing by the other party or unless expressly contemplated by the Merger Agreement, the Stock Option Agreement, dated as of April 5,1997, between DQE and APS (the

" Stock Option Agreement"), the respective budgets of DQE and APS (which have been submitted by DQE to APS and by APS to DQE), or as required by applicable Law (as defmed under "- Modification or Amendment; Waiver of Conditions; Extension"), each of DOE and APS will, among other things, conduct its and its Subsidiaries' businesses in the ordinary and usual course, will not pay dividends in excess of certain prescribed amounts and will not take any action or omit to take any action that would prevent the Merger from qualifying for " pooling of interests" accounting treatment or as a "rcorganization" within the meaning of Section 368(a) of the Code. See "The Merger Agreement-Conduct of Business Pending the Merger; Certain Covenants; Acquisition Proposals-Interim Operavns" for a discussion of restrictions on APS.

DQE and their respective Subsidiaries with respect to the couct of their businesses prior to the EfTective Time.

Aequisition Proposals The Merger Agreement also provides that, eu ept as contemplated by the budgets submitted by DQE to APS and by APS to DQE and except as expressly contemplated by the Merger Agreement. neither DQE nor APS nor any of their respective Subsidiaries will, and DQE and APS will not authorizc or permit their officers, directors, employees, agents or other repusentatives retainud by them or any of their Subsidiaries, respectively, (i) to solicit, initiate or encourage, or take any other action designed to facilitate, directly or indirectly, any inquiries or the making of any proposal with respect to a merger, reorganization, share exchange, consolidation or similar transaction involving. or, other than in the ordinary course of business, any 6

~~ . . . . . - - - - -- . - .-. - -- -~ --

d l purchase of all or any signihcant portion of assets or any equity securities of, DQE or APS, as applicable, or of any of their respective Subsidiaries (any such proposal or ofter being referred to as an " Acquisition Proposal" and any such transaction or purchase being referred to as an " Acquisition Transaction") or (ii) to participate in any discussions or negotiations relating to any Acquisition Proposal or Acquisition Transaction. In certain 4

situations the terms of the Merger Agreement will not prohibit either DOE or APS ( A) from furnishing information with respect to it and its Subsidiaries to any person pursuant to a customary confidentiality agreement and (B) from participating in negotiations regarding such Acquisition Proposal. See "The Merger Agreement- Conduct of Business Pending the Merger; Certain Covenants; Acquisition Proposals-Acquisition Proposals."

In addition, the Merger Agreement provides that, except as expressly permitted by the Merger Agt :cment, neither the APS Board nor the DQE Board, as applicable, nor any committee thereof will i (i) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to the other party to the Merger Agreement, the approval or recommendation by such board of directors or such committee of the Merger or the approval and adoption of the matters relating to the Merger to be considered at the APS Special Meeting, in the case of APS, and the DQE Meeting, in the case of DQE; (ii) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal other than the Merger; or (iii) cause or permit APS or DQE, as applicable, to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement or understanding (each, an " Acquisition Agreement") related to any Acquisition Proposal. Notwithstanding the foregoing provisions of the Merger Agreement,in certain situations the proscribed actions may be taken. APS and DQE have also each agreed in the Merger Agreement that in situations in which it is permitted to enter into an Acquisition Agreement, it will not enter into a bnding Acquisition Agreement until at least the sixteenth business day after it has provided the notice to TPS or DQE, as uppucable, required by the Merger Agreement. The Merger Agreement also provides thtt if any party receives an Acquisition Proposal it will immediately advise the other party orally and in writing of such Acquisition Proposal, any request for information, the material terms and conditions of such request or Acquisition Proposal and the identity of the Person making such request or Acquisition Proposal. In additior, APS and DQE have agreed that if either has received an Acquisition Proposal it will keep the other party reasonably informed of the status and details of any such Acquisition Proposal. See "The Merger Agree-ment-Conduct of Business Pending the Merger; Certain Covenants; Acquishion Proposals."

Conditions The respective obligations of DQE, APS and Merger Suh to etTect the Merger are subject to the satisfaction or waiver at or prior to the EfTective Time of a number of conditions, including the following:

(i) approval of the Merger Agreement by holders of DQE Common Stock and by APS as the sole stockholder of Merger Sub and the approval of the issuance of APS Gmmon Stock as contempiated by the Merger Agreement by holders of APS Common Stock; (ii) the authorization for listing on the New York Stock

- Exchange (the "NYSE") upon official notice of issuance of the shares of APS Common Stock to be issued in the Merger; (iii) expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, as amended, and the rules promulgated thereunder (the "HSR Act"), and the receipt of

- all necessary Governmental Consents (as defmed under "The Merger Agreement-Conditions") having been obtained on terms not reasonably likely to have a Material Adverse Effect (as defined under "The Merger Agreement - Representations and Warranties") on either DQE or APS; (iv) there being no statute, rule, regulation, judgment, decree, injunction or other order in effect that restrains, enjoins or otherwise prohibits consummation of the transactions contemplated by the Merger Agreement; (v) APS and DQE having received from APS' independent accounting firm a letter to the etTect that the Merger will qualify for

" pooling of interests" accounting treatment; (vi) APS and DQE having obtained the consent or approval of each person whose consent or approval is required to consummate the transactions contemplated by the Merger Agreement and the Stock Option Agreement under any contract to which APS or DQE or any of their Subsidiaries is a party; (vii) APS and DQE having received the opinions of their respective counsels to the etTect that the Merger will be treated for federal incon.e tax purposes as a reorganization within the meaning of Section 368(a) of the Code, and that each of APS, Merger Sub and DQE will be a party to that reorganization within the meaning of Section 36S(b) of the Code; (viii) APS having received an Affiliate 7

Letter (as dehned under " Resale of APS Common Stock") from each person identified as an alliliate of DQE pursuant to the Merger Agreement; (ix) the absence of any change in the financial condition, properties, business or results of operations of either APS or DQE that would be reasonably likely to have a Material

- Adverse EITect on it; and (x) DQE and APS cach having received from their respective independent pubhc accounting firms customary " comfort" letters See "The Merger Agreement - Conditions,"

Modtfication or Amendment: Walver of Conditions: Extension The Merger Agreement provides that, subject to the provisions of applicable law, ordinance, regulation, judgment, order, decree, arbitration, award, license or permit of any Governmental Entity (each a " Law " and collectively," Laws"), the parties to the Merger Agreement may modify or amend the Merger Agreement by written agreement executed and delivered by duly authorized ollicers of the respective parties. The Merger Agreement also provides that the conditions to each of the parties' obligations to consummate the Merger are for the sole benefit of such party and at any time prior to the EITective Time, such party may waive such d conditions in whole or in part or extend the time for the performance of any of the obligations or other acts of the other parties thereto, to the extent permitted by applicable Law, Termination The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the EITective Time (a) by mutual written consent of DQE, APS and Merger Sub, by action of the DQE Baard and the APS Board, respectively, or (b) by action of the DQE 11oard or the APS lloard if (i) the Merger has not been consummated by October 5,1998, which may be extended for six months under certain circumstances (the " Termination Date"); (ii) any Governmental Consents (as defined under "The Merger Agreement-Condition 5") have been made or obtained by Final Orders (as defined under "The Merger Agreement -Termination") which contain terms or conditions that would cause any of the conditions relating to regulatory consents not to be satisfied; (iii) any statute, tule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that has been enacted, issued, promulgated, enforced or entered by any court or Governmental Entity (as defined under "The Merger Agreement - Representations and Warrantics") of competent jurisdiction is in etTect and restrains, enjoins or otherwise prohibits consummation of the transactions contemplated by the Merger Agreement (collectivelv, an " Order") provided, that it has become final and non appealable; (iv) the necessary vote of DQE s stockholders to efTectuate the Merger has not been obtained at the DQE Meeting, including any adjournments thereof; or (v) the necessary vote of APS'stuckholders to clicctuate the Merger has not been obtained at the APS Special Meeting, including any adjournmer,ts thereof. The Merger Agreement provides that the right to terminate the Merger Agreemer.1 pursuant to clause (ih (ii), (iv) or (v) above will not be mailable to any party that has breached in any material respect its obligations under the Merger Agreement in any manner that has contributed to the failure of the Merger to be consummated, See "The Merger Agreement-Termination,"

Further, the Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the EITective Time by action of the DQE Board or the APS Board, as applicable: (a) subject to and in

. accordance with the termination provisions of the Merger Agreement relating to . Acquisition Proposals; or (b) if (i) the APS Board or the DQE Board, as applicable, has withdrawn or adt rsely modified its apnroval or recommendation of the Merger Agreement or failed to reconfirm its recommendation of the Merger Agreement after a written request by DQE or APS, as applicable, to do so, (ii) there has been a material breach by APS or Merger Sub, on the one hand, or DQE, on the other hand, of any representation, warranty, covenant or agreement contained in the Merger Agreement that is not curable or, if curable, is not-cured within 30 days after written notice of such breach is given by DQE or APS, as applicable, to the party committing such breach, or (iii) APS or DQE, as applicable, or any of their afliliates, representatives or agents, takes any of the actions that would be proscribed by certain provisions of the Merger Agreement which restrict APSor DQE's, as applicable, conduct with respect to Acquisition Proposals. See "The Merger Agreement-Conduct of Business Pending the Merger; Certain Covenants; Acquisition Proposals-Acquisition Proposals."

8

i in the event of tctmination of the Merger Agreement and the abandanment of the Merger, the Merger Agreement (other than certain provisions of the Merger Agreement relating to expenses and conhdentiality and other than as described below under "The Merger Agreement- Certain Termination Tees") will become void and of no efTect with no liability to any parly thereto (or any of its directors, oflicers. smployeca, agents, legal und financial advisors or other representatives); provided. /wwcrcr, cxcept as otherwise provided i therein, no such termination will relieve any party thereto of any liability or damap:s resulting from any breach of the Merger Agreement.

If the Merger is terminated under certain speciFed circumstances, certain termination fees are payable by one party to the other. See "The Merger Agreement - Certain Termination Fees."

Stock Options At the EtTective Time, each outstanding option to purchase DQE Common Stock (a "DQE Option")

under DQE's Long-Term incentive Savings Plan, DRSPP and 1996 Stock Plan for Non-Employee Directors and the Performance incentive Program for DQE and its Subsidiaries (the "DQE Stock Plans"), whether

. vested or unvested, will be deemed to constitute an optica to acquire, on the same terms and conditions as were applicable under such I Option. the same number of shares of APS Common Stock as the holder of 4

such DQE Option would have ocen entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the EITective Time, at a price per share of APS Common Stock equal to

(y) the aggregate exercise price for DQE Common Stock otherwise purchasable pursuant to such DOE Option divided by (7) the number of full shares of APS Common Stock deemed purchasable pursuant to such DQE Option, in addition, pursuant to the Merger Agreement, APS has agreed to assume, elTective as of the 1 EtTective Time, each DQE Option in accordrnce with the terms of the DOE Stock Plan under which it was issued and the stock option agreement by which it is evidenced. See "The Merger Agreement- Stock Options."

Nuclear Matters i The Merger Agre: ment provides that, at least quarterly prior to the EfTective Time, DQE, upon request by APS, will cause its President - Generation Group and its Chief Nuclear Officer to attend a meeting of the APS Board and provide APS' directors with such orti ard written information concerning the Nuciear i Fncihties and DQE's nuclear generation program as such directors and/or the Chief Financial Oflicer of APS may reasonably request. In addition. prior to the EfTective Time, APS is entitled to designate one person u ho will be a director of APS or will be a person expert in nuclear matters to attend and participate in each meeting of the Nuclear Review Committee of the DQE Board. See "The Merger Agreement- Nuclear Matters."

Certain Regulatory Matters Under the FISR Act, certain transactions, including the Merger, may not be consummated unless certain waiting period requirements have been satisfied. APS and DQE will cach file a Premerger Notification and Report Form (a " Notification and Report Form") pursuant to the ilSR Act with the Antitrust Division of the

' Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"). At any time before or after the EfTective Time, the FTC, the DOJ or others could take action under the antitrust laws with respect to the Merger, including seeking to enjoin the consummation of the Merger, to rescind the Merger or to require divestiture of substantial ussets of APS or DQE. There can be no assurance that a challenge to the Merger on antitrust grounds will not be made or. if such a challenge is made, that it would not be successful.

In addition. DQE and/or APS are or may be required to file notices with, and to obtain the approval and consents or , the SEC pursuant to the PUllCA, the Federal Energy Regulatory Commission ("FERC")

pursuant to the Federal Power Act of 1920, as amended (the " Power Act"), the Nuclear Regulatory Commission ("NRC") pursuant to the Atomic Energy Act of 1954, as amended ("AEA"), the Pennsylvania Public Utility Commission ("PAPUC") and the Maryland Public Service Commission (the "MPSC"). See

' Certain Regulatory Matters!

9

interrits of Certain Persons la the Merger Certain members of the management of DQE an,d the DQl. Iloard who have interes addition to their interests as holders of DQL Common Stock panicipated in the negotiation o Merrer Arreement. The DQE lloard considered these interests in reathing its conclus Agreement and the tramurtions contemplated thersty utc fair to and in the best interests of DQ stakholders, customers and employees and the conununities which it sencs.

Directors and Olbren The Meffer Agreement provides that the APS Itoard will, upon consummation of the Me composed of l$ directors, of which sis wih be designated by DQ1i and nine will be designated Purw 11 to the Mcrper Agreement, after the Elitetive lime, Alan J. Nola will be Chairman and Esecutive Olliccr of APS and David D. Marshall will be Presider.t and Chief Operating Ollicer o Sesreunce Aprements 1)QE has entered into severance apreements with 13 olllects of DQE and its alliliates esecutive ollicers of D00. Sec " Interests of Certain Persons in the Merper3er

-Se-Agreements."

D(m LonpTerm Incentier Plan Upon the adoption of the Merret Agreement by the holders of DQL Comnmn Stock, cer purchase shares of DQE Common Stock held by DQE ollicers wih test pursuant to the term Stock Plan undtr which they were granted. Sec " Interests of Ccrialn Persons M ths Merger - DQE, Inc, Lony Terrn incentive Plan."

Director and ofnier indemnification and inwrance Pursuant to the Merper Agreement, APS has agreed that from and niter the EITective Time it w indemnify and hold harmless rach present and former director and oflicer of DQE or ety of hs Su (when acting in such capacity) against any costs or espcnses (including reasonable attorneyf ,

judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim proceeding or investigation, whether civil, criminal, administrative or investipathe, arising out of mat existing or occurring at or prior to the EITectisc Time, whether asserted or claimed prior to, at or a EfTective Time, to the fullest euent that DQU or such Subsidiary is permitted under the law of of incorporation and the Articles of incorporation of DQE, effecthe January 5,1989, as amend Anicles") und the 3 D )aws of DQE (the "DQE Dylaws") b effect on the date of the Merger Agreeme indemnify such person. In addition, the Merger Agreement preides that the Surviving Corpcv maintain DOE's esisth p officers' and directors' liability insurance (9&O Insurarac") for a period of years after the Eficctive Time so long as the annual premium therefor a not in escess of 200% of the annual premium paid prior to the date of the Merger Agreement (the ' Current Premium"); prov/<

/wwcrcr. that if the existing D&O Insatance expires,is terminated or canceled during such s ,

Surviving Corporation will use its reasonable c(Torts to obtain as much D&O Insarance as can be the remainder of such period for a premium not in escess (on an annualized basis) of 200% of the Pretnium.

Accountint: Treatment Consummation of the Merger is conditioned upon the receipt by each of APS and DQE of a let its independent public accountents, Price Waterhouse LLP and Deloitte & Touche, respecti the Merrer, in tWr respective opinions, will qualify as a " pooling of interests" for accounting pur "The Merger Agreement - Conditions." Under this method of accounting, APS will resta.c its conso financial statements at the Et%ctisc Time to include the assets, habilitics, sto;Lholders' equity and operations of DQE. It is unticipated that, upon consummation of the Merper, the final year of the combin company uill be the calendar year. See " Accounting Treatment."

10

l Hessle of APS Common Stock The shares of APS Common Stock iuuable to stockholders of DQE in connection with the Merger will be freely transferable by the holden thereof except for those shares held by holders who may be dectned to be

" affiliates" of DQE, See " Resale of APS Common Stock."

Dhidends it is presently anticiprod that, following the EfTective Time, the current $1,72 unnual dividend per share of APS Common Stock will be maintained or increased, subject to evaluation from time to time by the APS Hoard based on APS' results of operations, financial condition, capital requirements, future businen prospects, regulatory environment and such other considerations as the APS lioard deems relevant, llowever, no assurance can be given that such dividend will be maintained or increased.

Certain Federal income 'las Consequences The Merger is intended to qualify for federalincome tax purposes as a reorganization within the meaning of Section 368(u) of the Code Assuming the Merger so qualifies as a reorganization within the meaning of Section 368(a) of the Code,in general, no gain or lo s will be recognized by holders of DQE Common Stock with respect thereto on the surrender of their DQE Common Stock in exchange for APS Common Stock, escept with respect to cash received in lieu of fractional shares, and no gain or loss will be recognized by APS or DQE. Under the Merger Agreement it is a condition precedent to the respective obligations of APS and DQE to consummate the Merger that each of APS and DQE will have received an opinion of its respective counsel, dated as of the Closing Date (as defined in the Merger Agreement), to the efTect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code and that each of DQE, APS and Merger Sub will be a party to the reorganiration within the meaning of Section %8(b) of the Code. For a further discussion of the federal income tax consequences of the Merger, r,ce "Certain Federal income Tax Consequences of the Merger."

Certain Helated Agreements Stock Option Agreement in connection with the Merger Agreement and the Merper, APS and DQE entered into the Stock Option Agreement, pursuant to which DQE granted to_APS an option (the " Option") to purchase up to l$,379,007 shares of DQE Common Stock under certain circumstances at ar initial cash price per share of DQE Common Stock equal to $27.850, The Stock Option Agrsment provides that in no event will the number of shares of DQE Common Stock for which the Option is exercisable exceed 19.9% of DQE Common Stock issued and outstanding at the time of exercise. See "Certain Related Agreements-Stock Option Agreement."

APS may exercise its Option, in whole or in part, if, but only if, a Triggering Event (as defined under "Certain Related Agreements-Stock Option Agreement") has occurred prior to the occurrence of an

. Exercise Termination Event (as defined under "Certain Related Agreements-Stock Option Agreement");

provided that APS sends DQE a written notice of such exercise within 180 days following the first such Triggering Event. See "Certain Related Agreements - Stock Option Agreement "

The Stock Option Agreement also provides that APS may require DQE to repurchase the Option from APS in certain circumstances. See "Certain Related Agreements- Stock Option Agreement." The Stock Option Agreement further provides that the Total Profit (as defined under "Certain Related Agreements-Stock Orstion Agreement") of APS in such repurchase will not exceed $20.000,000. See "Certain Related Agreements- Stock Option Agreement."

Lettcr Agrerment APS and DQE have also entered into a Letter Agreement, dated April $,1997 (the " Letter j Apeement"). The Letter Agreement provid:s that, in certain circumstances upon a termination of the l 11 ah. Am Ash

Merger Apreement, APS will pa) a fee to DQE of up to $20,000,(M based upon the dillerence between the market value of 19.9% of the outstanding. shares of APS Common Stock on the date of an applicable termination and the market salue of such shares on April .I,1997. See "Certain Related Agreements - Letter Agreement?

Certain Effects of the Merger on the Rights of fluiders of DQE Common Stock llolders of DQE Common Stock who n ccive APS Common Stock pursuant to the Merger will have certain rights as stockholden of APS that are dilTerent from those rights they had as stockholders of DQE. l'or a comparison of certain prosisions of the APS Charter, the APS Ilylaws and the MGCL with the DOB Articles, the DQE Ilylaws and the PilCL, see " Comparison of Certain Rights of the lloiders of APS Common Stock and DQL Common Stock."

APS Charter Amendment The APS livard has determined that the Charter Amendinent is advisable for APS whether or not the Merger is efTectuated. Stockholders of APS should not be afTected in any way by this change of name.

l'urther, stockholders of APS will not be required to tale any actions, following the APS Special Meeting, to cITect the Charter Amendment; stock certificates repter,enting shares of APS Common Stock will not need to be eschunged for new stock certificates. The APS Iloard unanimously recommends that the holders of APS Common Stock note l'OR the Charter AmeMment See "The APS Charter Amendment."

Amendment to the DQE Articles The DQE Iloard has determined that the Control Transactions Amendment, which would amend the DQE Articles to make the Pennsylvania Control Transactions Statute inapplicable to DQE,is advisable for DQE, DQE does not believe holders of DQE Common Stock would be entitled to any rights under the Pennsylvania Control Transactions Statute as a result of the Merger, but because there is no controlling preecdent interpreting this portion of the Pennsylvania Control Transactions Statute, DQE is recommending the Control Transactions Amendment in order to remove any possible uncertainty or legal challenge. If the Pennsylvania Control Transactions Statuic were applicable to the Merger, holders of DQE Common Stock would have the right following the Merger to demand payment for the fair value of their DQE Common Stock as determined in accordance with the Pennsylvank Control Transactions Statute, Such payments could adversely afTect the ability of APS and DQE to account for the Merger as a " pooling of interests" for accounting purposes. Notwithstanding the approval of the Control Transactions Amendment by the r,tock.

holders of DQE, DOE will not file the Control Transactions Amendment until all of the conditions to the Merger have been satisfied or waived. Therefore, even if there is stockholder approval of the Control Transactions Amendment,if the Merger does not occur, the Control Transactions Amendment will not base become effective, and DOE will remair subject to the Pennsylvania Control Transactions Statute. A copy of the Control Transactione Aner,:! ment is attached as Appendix E to this Joint Proy Statement / Prospectus.

The DQE Ilourd unanimously neommends that the holders of DQE Common Stock tote l'OR the Control Transactions Amendnce it, i

(

12 i

l l

t

00%lPAlWilVI: S' LOCK PRICES APS Common Stock and DQL Common Stock are each listed on the NYSE, as well as on certain other exchanges. APS is listed under the symbol"AYP" and DQE is hsted under the sy mbol"DQE". The following table sets fonh, for the periods indicated, the high and low sale prices per share of APS Common Stock and DQE Common Stock as reported on the NYSE Compo'.ite Transactions Tape during the periods hsted.

Alw l H)l' rommon sh ck rommon sn.ck relender 8)uarter llich leu liith I**

199$

First Q u a rt e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............. $24% $21% $22% $19%

25 % 22 % 25 21 %

S e con d Q u a rt e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Third Q u art e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 22 % 26% 23 %

Fou rt h Q u art e r . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . 29 % 25 % 30 % 26%

1996 30% 28 31 % 27 %

First Quarter . . . . . ..... ........ ............ ......

Second Quarter . . . .. ... . .. . ..... . .., . . . . 31W 28 % 28% 25 %

Third Quarter . . . . . . . . . ... .. ... , . .. . . 31 20 28 % 27 j Fourth Quarter. . . . . ., . ... . . . ... ... . . 31 % 2h% 30 % 27 1997 31 % 29 % 29 % 27 %

Fi rs t Q u a rt e r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... .

Second Quarter (through June 24,1997) ....... .... , , 30 % 25 % 29 % 26 %

On April 4,1997, the last trading day before the public announcement of the Merger Arreement, the closing prices of APS Common Stock and DQE Common Stoch as reported on the NYSE Composite Transactions Tape were $29.7$ per share and $27.12$ per share, respectively. Based on the Exchange Ratie.

the pro forma equivalent per share value of DQE Common Stock on April 4,1997, was $33.32 per t. hare. The pro forma equivalent per share value of DQE Common Stock on any date eqcals the closing sale price of APS Common Stock on such date, as reported on the NYSE Composite Transaction Tape, multiplied by the Exchange Ratio.

On June 24,1997, the closing sale prices of APS Common Stock and DOE Common Stock as reported on the NYSE Composite Transactions Tape were $26.4375 per share and $28 per share ($29.61 on a pro forma equivalent per share basis), re.crectively, lloiders of shares of DQl'. Common Stock and APS Common Stock are urged to obtain current quotations for the market prices of APS Common Stock and DQl: Common Stock.

No assurance can be given as to the market prices of APS Common Stock or DOE Common Stock at the EfTectisc Time. The Exchange Ratio is faed in the Merger Agreement. As a result, the market value of APS Common Stock that holders of DOE Common Stock will receive upon consummation of the Merger may vary significantly from the market value of the shares of APS Common Stock that holders of DQE Common Stock would receise if the Merger were consummated and holders of DOE Common Stock received shares of APS Common Stock on the date of this joint Proxy Statement / Prospectus.

1 13 i-

- -- . , , . . , , - - - - . , - , ,-v ,,.r,n ., . , - - , - - - --w . - - , - - - -- - - - -

SI:1.iril:D LtN Al'lil'lI:D lilSTOltlCAL AND PHO l'OltMA COMillNI:ll l'INANCI Al. DATA The following table presents selected historical, f'ryancial data of APS and DQl and selected unaudited pro forma combined hnancial data after giving efTect to the Merger as a " pooling of interests," APS' and DQE's selected historical data for each of the five > cars in the period ended December 31,1996 and the three months ended March 31.1997 have been derived from financial statements filed with the SEC. The pro forma combined finanelal data are presented for illustrative purposes only and are not necenarily indicative of the brancial position or operating results that would base occurred or that will occur upon consummation of the Merger. The pro forma combined financial data do not give efTect to any cost savings which may result from the integration of APS' and DQu's operations. Additionally, the pro forma combined financial data do not include any transaction costs relating to the Merger, not do they consider any reorganization costs that mlpht occur as a result of the Merger. The following selected financial data should be read in con.lunction with the notes thereto and with the related historical and pro forma combined financial statements and notes thereto incorporated by reference or included herein. See "Available Information," " incorporation of Certain Information by iteference" and "Unaudited Pro l'orma Combined I'mancial Information of APS and I)QE."

1 Selected llistorleal l'inancial Data APS

'three Months d,"fh 11. Year l nded liertnehet .ti, 1997 avw, 1995 avv.s nov2

_ _ i vo.1 (llollars in Millions, Ixept l'er Short Arnounts)

Income Statement Data

'! otal ites enue . . .. . . $ 615 $2,328 $2,315 $2,185 $2,051 $1,963 Operating ihrenses. . .

.. 491 1,937 1.893 1,802 1,676 1.607  !

1 Income from Operations (c) . . . . . 124 391 422 383 375 356 Income before Cumulative EITect of Accounting Change ....... 78 210 240 220 216 204 Cumulative Effect of Accounting Change (a) ..... . .. .

43 - -

l Net income (c) . . . . . . . . . . , , $ 76 $ 210 $ 240 $ 263 $ 216 $ 204 i Earnings Per Share before EfIect of Accounting Change .., $ 0.64 $ l.73 $ 2.00 $ l.b6 $ l.8F $ 1.83 Cumulative EfTect of Accounting Change (a) . . ... - -

0.37 - -

Earnings Per Share after EfTeet of Accounting Change. .. .. $ 0.64 $ 1,73 $ 2.00 $ 2.23 $ l.86 $ 133 Dividends Declared Per Share of APS Common Stock . . . . . . . $ 0.43 $ 1.69 $ l.65 $ 1.64 $ l.63 $ 1.61 Italance Sheet Data Total Assets . . . $6,o18 $6,619 $6,447 $6,362 $ 5,940 $5,039 Capitalization Long Term Debt . .... $2,307 $2,397 $2,273 $2,179 $2,00s $1,952 Preferred /Preferoce Stock . . 170 170 170 325 276 278 Common Shareholders' Equity 2.202 2.169 2.130 2.059 1.956 1.828

Total Capitalization. . , $4,679 $4,736 $4,573 $4,563 $4,240 $4.058 Ilook Value Per Share of APS Common Stock .. . , $18.04 $17.80 $17.65 $17.26 $16.62 $ 16.05 14 1

Selected llistorical l'inancial Data 1)Ql' 1here htonths his h M. I '"' Idhd'd O"'*h 3I.

lW7 _ lWf, lWS IW4 IW3 lW2 IDollets la htillions, l.sttpt l'er hhart Amountn) income Slettment Data

$ 30) 51,225 $1.220 $1.224 $1,183 $1,153 Tot al lle ve n u c . . . . . . . . . . . . . . . . .

Operating Expenses . . . . . . . . . . . . 226 923 898 907 870 809 income from Operations. . . . . . . . . 75 302 322 317 313 344 l

income before Cumulative Eficct of Accounting Changes , . . . . . . . 45 179 171 157 141 142 l Cumulative Effect of Accounting Changes (a) . . . . . . . . . . . . . . , . . - - - - 3 -

Ne t i ncome . . . . . . . . . . . . . . . . . . $ 45 $ 179 $ 171 $ 157 $ 144 $ 142 Entnings l'er Share before Elicct of Accounting Changes. . . . . . . . 5 0.58 $ 2.32 5 2.20 $ l.98 $ 1.77 $ 1.78 Cumulative Effect of Accounting Changes (a) . . . . . . . . . . . . . . . . 5 - $ - $ -

$ - 1 0.04 $ -

, Earnings Per Sharc after EfTect of Accounting Changes , , . . . . . . . . 5 0.58 5 2.32 $ 2.20 $ 1.98 $ 1.81 $ 1.78 Dividends Declared l'er Share of DQE Common Stock . . . . . . . . . $ 0.34 $ 1.30 $ l.21 $ 1.13 $ l.08 $ l.03

]

llalance Sheet Data Total Asse ts . . . . . . . . . . . . . . . . . . $4,623 $4.639 $4.459 $4,427 $4.$50 $3,778 l

j Capitalization Long Term Debt . . . . . . . . . . . . $1,402 $1,440 $1,401 $1,378 $1,417 $1,413

' 132 Preferred / Preference Stock . . . . 224 223 71 95 133 l Common Shareholders' Equity 1.409 1.392 1.329 J.277 1.231 1.171 Total Capitalization . . . . . . . . . 13.03! $3,055 $2.801 $2,750 $2,781 $2.716 Dook Value Per Share of DQE Common Stock . . . . . . . . . . . . . . $18.22 $18.01 $17.13 $16.27 $15.47 $14.75 I

h 4

15 1

-9 -

e.--.y----,r--- -

_.-,-n.- .. ..m, -y y , .m-g.-- , ...w.--3 ---- --- - -

Selected Unaudited Pro Forma Financial Data APS and DQl:

Three Month M rth 4 Y Il"d'd I""'I 31 Iw? tw6 lws tw4 (llollers in Millions lattpt Pet Share Aenonnts and l'tttentages) locome Statement Data (b)

To t al R e ve n u e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 909 $ 3,$46 5 3.$35 $ 3,398 Operating Expenses . . . . . . . . . . . . . . . ~ . . . . . . . . . . . . 666 2,718 2.638 2.$61 Income from Operatbns (c) . . . . . . . . . . . . . . . . . . . . . 243 828 897 837 Ne t in come ( c ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 393 409 383 Earnings Per Share (d) . . . . . . . . . . . . . . . . . . . . . . . . $ 0.57 $ 1.89 $ l.98- 5 1.8$  ;

Dividends Per Share of Common Stock (d) . . . . . . . . $ 0.38 $ 1,47 $ 1,41 $ l.37 '

Dividend Payout Ratio (f) . . . . . . . . . . . . . . . . . . . . . . . 75.4% 91.0% - -

-Equivalent DQE Pro Forma Per Sharc Data Earnings Per Share ( c ) . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 64 $ 2.12 $ 2.21 $ 2.07 Dividends Per Share of Common Stock (c) . . . . . . . . $ 0.43 $ 1.65 $ 1.58 5 1.$3 Italance Sheet Data (b)

Tot al A s se t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,269 $11,290 $10,941 $10,819 Capitalization Long Term De b t . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,709 $ 3,837 $ 3.674 5 3,556 Preferred / Preference Stock. . . . . . . . . . . . . . . . . . . . . 394 393 241 265 i Common Shareholders' Equity . . . . . . . . . . . . . . . . _ 3.621 3.535 3.429 3.308-Total Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.724 $ 7,765 .t. 7,344 $ 7,129

~

Ilook Value Per Share of Common Stock (d) .. .. .. $ 17.37 $ 16.96 $ 16.52 $ l$.96  ;

Equivalent DQE Pro Forma Per Sharc Data '

!!ook Value Per Share of Common Stock (c) ... ... $ 19.45 $ 19.00 $ 18.50 $ 17,88 Notes to Selected Unsudited Historical and Pro Forma Combin$d financial Data -

(a) The 1994 umount of $43 million ($.37 per share) represents the cumulative effect of a change in APS' f accounting to provide for the accrual of revenue for services rendered but unbilled. The 1993 amount of

$3 million ($.04 per share) represents DQE's net cumulative effect for changes in accounting for the adoption of " Statement of Financial Accounting Standards No.109, income Taxes" ($8.0 million) and  :

the cumulative effect of accounting for maintenance costs by accruing over the perieds between outages for anticipated expenses of scheduled major fossil rencrating station outages ($$ 4 million).

(b) The revenues, expenses, assets, liabilities and equity of APS and DQE have been reclassified where appropriate to conform to the presentation expected to be med by the combined company in the future.

. See "Unaudited Pro Forma Combined Financial Information of APS and DQE."

. (c) Income /carnings for the year ended December 31,1996 and December 31,1995 include pretax charges of $103.9 million and $23,4 million, respectively, related to restructuring activities.

(d) Pro forma per common share amounts give effect to the conversion of each share of DQE Common-

- Stock outstanding into 1.12 shares of APS Common Stock. See "The Merger Agreement" and

'"Unaudited Pro Forma Combined Financial Information of APS and DQE."

(c) Represents the pro forma equivalent of one share of DQE Common Stock calculated by multiplying tne pro forma information by the Exchange Ratio.

(f) Calculated by dividing the current annual dividend rate of APS per share by pro forma carnings per share.

- The $1.72 current dividend rate per share represents the dividend rate APS expects to maintain or increase following the Merger. However, no assurance can be given' that such dividend rete will be '

maintained or increased.

16-k

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'ltil: S'IUChilul.Dl:RS Ml:l:TIMS General .

APS This Joint Proxy Statement /l'rospectus is being furnished to holders of APS Common Stock in i connection with the solicitation of proxies by the APS lloard for use at the APS Special Meeting, to be held  !

f on August 7,1997, and any adjournments or postponements thereof, to considet and vote upon (i) the approval of the issuance of APS Common Stock contemplated by the Merger Agreement and (ii) the approval of the Charter Amendment, and to transact such other business as may properly come before the APS Speelal Meeting or any adjournments or postponements thetcof, The APS Iloard han unanimously approted the Mergtr Agreement and the Charter Amendment and unanimously recommends thal APS stockholders tote l'OR_ the apprmal of the issunnee of shares of APS Common Stock pursuant to the Merger Agreement and tote l'UR the Charter Amendment.

Euch copy of this Joint Proxy Statement / Prospectus malled to holders of APS Common Stock is accompanied by a form of proxy for use at the APS Special Meeting.

DQL' i

This joint Proxy Statement / Prospectus is also being furnished to holders of DQE Common Stock in connection with the solicitation of proxies by the DQE tioard for use at the DQE Meeting, to be held on Augurt 7,1997, and any adjournments or postponements thereof, (i) to consider and vote upon the adoption of the Merger Agreement and approval of the transactions contemplated thereby, (ii) to consider and vote upon the approval of the Control Transaedons Amendment, (iii) to circt four directors to the DQE !!oard to serve until the atinual meeting of stockholders of DQE in the year 2000, (iv) to consider and vote upon the a

approval of the Accountant Proposal, (v) to consider and vote upon the Stockholder Proper.alif presented at '

the DQE Meeting and (vi) to transact such other business as may properly come before the DQE Meeting or any adjournments or postponements thereof.

The DQE Iloard has unanimously approicd the Merger Agreement and unanimously recommends that stockholders of DQE ime FOR the adoption of the Merger Agreement and apprmal of the transactions -

contemplated thereby, The DQE Iloard unanimously recommends that stockholders of DQE sole FOR the Control Transactions Amendment, note FOR the directors nominated by the DQE iloard for election to the DQE Iloard,50te FOR the Accountant Proposal and sole AGAINST the Stockholder Proposal.

Each copy of this Joint Proxy Statement / Prospectus mailed to holders of DQE Common Stock is

. accompanied by a form of proxy for use at the DQE Meeting.

This Joint Proxy Statement / Prospectus is also furnished to DQE stockholders as a prospectus in connection with the issunnee by APS of shares of APS Common Stock contemplated by the Merger Agreement.

Date, Place and Time

. The APS Special Meeting will be held at _lioward Johnson of 11agerstown,1718 Underpass Way, llagerstown, Mar 31and 21740 on August 7,1997 at 1:00 p.m., local time.

The DQE Meeting will be held at the Manchester Craftsmen's Guild Auditorium,1815 Metropolitan Street, Pittsburgh, Pennsylvania 15233 on August 7,1997 at 11:00 a.m., local time.

17

ltecord Dates AlW

'Ihe Esecutive Committee of the APS Board has fixed the clost of busincas on June 30,1997 as the APS Record Date for the determination of the holders of APS Common Stock entitled to receive notice of and to vote at the APS Special Meeting and at any adjournments or postponements thereof.

DQE The DQE Board han fined the close of business on June 16,1997 as the DQE P,ccord Date for the determination of the holders of DQE Common Stock entitled to receive nutice of and to vo'c at the DQ Meeting and at any adjournments or postponements thereof, Voten Required Al$

As of June I,1997, there were 122.111,567 shares of APS Common Stock issued and outstanding. Each sharc of APS Common Stock outstanding on the APS Record Date is entitled to one vote upon cach matter properly submitted at the APS Special Meeting. The afhrmative vote of a majority of the votes cast at the APS Special Meeting is necessary for the approval of the issuance of the shares of APS Common Stock contemplated by the Merger Agreement. The aflirmative vote of a majority of the total numhet of shares of APS Common Stock outstanding is necessary for approval of the Charter Amcndment.

Under the rules of the NYSE, in order to approve these proposals, the total number of votes cast (whether for or against) with respect to such matter must be in excess of 50% of the outstanding shares of APS Comnwn Stock. Abstentions will be counted as present for the purposes of determining whether a quorum is present. Any abstei.tlon or broker non vote will have the effect of reducing the aggregate number of sharos of APS Common Stock voting and the number of shares of APS Common Stock rcquired to approve the issuance of shares of APS Common Stock contemplated by the Merger Agreement. With respect to the Charter Amendment, any abstention or broker non. vote will have the same effect as a ney ,tive vote. Under the rules of the NYSE, brokers uho hold shares in street name for cu tomers will not have authority to vote either on the issuance of shares of APS Coramon Stock contemplated by the Mercer or on the Charter Amendment, unless they receive specific instructions from beneficial owners.

As of Jee 1,1997, directors and execative oflicers of APS and their affiliates beneficially owned an aggregate of 75,272 shares of APS Common Stock (including shares which may be acquired within 60 days upon exercise of employee stock options), or less than 0.1% of the shares of APS Common Stock outstanding on such date. The directors and executive officers of APS have indicated their intention to vote their shares of APS Common Stock in favor of approval of the issuance of the shares of APS Common Stock contemplated by the Merger Agreement and in favor of approval of the Charter Amcodment.

• As of June 16,1997, the directors and executive officers of DQE owned no shares of APS Common Stock.

See "-Interuts of Certain Pen.ons in the Merger,"

DQE As of June 16,1997, there were 77,408,557 shares of DQE Common Stock issued and outstanding. Other than with respect to the election of directors, each sharc of DOE Common Stock outstanding on the DQE Record Date b entitled to one vote upon each matter properly submitted at the DQE Meeting. The aflirmative vote of a majority of the votes cast at the DQE Meeting is necessary for the adoption of the Merger Agreement and the approva! of the transactions contemplated thereby, With respect to the election of directors, the four persons receiving the highest number of votes will be elected as directors. The affirmative vote of a majority of the votes cast at the DQE Meeting is necessary for the adoption of the Control Transactions Amendment, the Accountant Proposal and the Stockholder Proposal.

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Stockholders of DQl. have cumulatne soung rights with respect to the electmn of duettors of l>QL Cumuhitne sotmp entuits each stocktmlJer of DQl. to as many sotes as is equal to the number of who!c sh nes of DQL Common Stock held by such stockholder, muhiphed by the number of directors to be elected Each stockholder may cast all of those sotes for a single nomince or may distribute them among two or more nominees.

IloWrs of preferred stock or capital stock of Duquesne Eight or any of the other subsidiaries of DQE will not have soting rights with respect to any of the matters to be acted upon at the DQE hiceting.1he terms of such preferred stock or other capital stock will not be allected by the hierper.

T he presence in person or by proy at the DQE hiceting of the holders entitled to sole a ma.ionty of the outstanding shares of DQL Common Stock is necessary to constitute a quorum for the transaction of business.

Abstentions will be counted as present for the purposes of determining whether a quorum is preset.t. Any abstention or broker non vote will base (i) the ellect of reducing the afprepate number of shares of DQL Common Stock required to adopt (a) the Merper Agreement and approve the transactions reqdred thereby, (b) the Accountant Proposal and (c) the Stockholder Proposal, and (ii) no ellect on the election of directors of DQE, Under the rules of the NYSE, brokers who hold shares in street name for customers will have no authority to sote on the Merper, the Control Transactions Amendment or the Stockholder Proposal, unless they receive specibe instructions from benehcial owners. Such oroters, howeser, ina) vote in the election of directors or on the Accountant Proposal without having receised specihc instructions frorn benencial owners As of June 16, 1997, directors and ewcutive ollicers of DQL and its albliates benchcially owned an apprepate of 633.161 shares of DQE Common Stock (including shares which may be acquired within 60 dap upon ewrcise of employee stock options) or less than 1% of the shares of DQE Common Stock outstanding on such date. T he directors and executive oHicers of DQE have indicated their intention to vote their shares of DQE Common Stock in fasor of adoption of the Merper Agreement and approval of the transactions contemplated thereby. The dacctors and esecutive otheers of DQL have also indicated their intention to vote their shares of DQL Common Stock in favor of the directors nominated by the DQE 11oard, the Control 1ransactions Amendment and the Accountent Proposal and against the Stockholder Proposal.

As of June 1,1997, directors r.nd executive othccrs of APS owned no shares of DQE Comnion Stock. See

" Interests of Certain Persons in the Merper."

Voling und 1(ciocation of Prosies Shares of APS Common Stock and DQE Common Stock represented by a proxy properly signed and received at or prior to the appropriate Stockholders Meeting, unless subsequently revoked, will be soled in accordance with the instructions thereon. If a prosy is signed and returned without indicating an) soting instructions, shares of APS Common Stock represented by the prosy will be toted i Olt the proposal to apprmt the issuance of shares of APS Common Stock contemplated by the Merger Agnecment and will be noted i OR the proposal to adopt the Cnatter Amendment, and shares of DQE Common Stock represented h) n proxy properly signed und receiied will be noted l'OR the proposal to adopt the Merger Agreement und to apprme the transactions contemplated thereb), l'OR the election as a director of DQE of each of the persons non:inated for director of DQL by the DQE lloard, l'OR the Control Transacilons Amendment, FOR the Accountant Proposal and AGAINST the Stockholder Proposal. Votes for election of directors will be cumulated selectively (at the discretion of the hoHers of such stockholder's proxy) among those nominees for director for whom the stockholder has not withheld authority to vote, Any proxy given pursuant to this soiicitation may be resoked by the person giving it at any time before the proxy is voted by filmp a duly executed resocation with the Secretary of APS, for stockholders of APS. or with the Corporate Secretary of DQE, for stockholder, of DQE, prior to or at the appropriate Stockholders Meeting or, in the case of stockholders of APS, by the execution of a subsequent proxy in favor of another person, All untten notices of resocation and other communications with respect to revocation of APS proxies should be addressed as follows: Allegheny Power Sys:cm, Inc ,10435 Downnille Pike, Hagerstown. Maryland 21N0. Attention:

Secretary. All written notices of resocation ano other communications with respect to revocation of DQL 19

proxin should be addicued as follows. DQE, Inc.. .ll) Sesenth Asenue,15th I hior, Pittsburgh, Penn9lvania 15219. Attention: Secrctary.

lloiders of DQE Common Stock will be entitled to present matters for consideration at the DQh hiceting. lloiders of APS Common Stock would be entitled to present matters for consideration at the APS Special hiceting,if additional proposah are permitted at the APS Special Meeting and,in such a situation, the stockholder complies with the applicable provisions of the APS Ilylaws. See " Comparison of Certain itights of "the llolders of APS Common Stock and DQE Common Stock - hicetinrs of Stockholders APS," and

- Stock). older Proposah and Stockholder Nominations of Directors - APS."

The APS lloard and the DQE lloard are not currently aware of any business to be acted upon at their respective Stockholders hicetings other than as described herein. If, however, other matters are pioperly brought before either Stocknolders hiceting, or any adjournments or postponements thereof, the persons appointed as proxies will have discretion to vote or act thereon according to their best judgment. Such adjournment may be for the purpose of soliciting additional proxies. Shares represented by proxies voting arainst the luuance of r, hares of APS Common Stock contemplated by the hierger Agreement, in the case of APS, and against the adoption of the Merger Agreement and the approval of the transactions contemplated thereby,in the case of 1)QE, will be voted against a proposal to adjourn the respectisc Stockholder Meeting for the purpose of soliciting additional proxies. Neither APS nor DQE currently intends to seek an adjournment of its respective Stockholder Meeting.

Solicitation of Proxin

'n addition to solicitation by mail, directors, oflicers and employees of APS and DQE, none of w hom will be specif cally compensated for such services. may solicit proxies from the stockholders of APS and DQE, respectively, personally or by telephone, telecopy, telegram or other forms of communication firokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners, in addition, APS and DQE have retained MacKenric Partners, Inc. and lleacon flill Partners, Inc.,

respectively, to assist in the solicitation of proxies from their respective stockholders. The fees to be paid to such firms for such r,crices by each of APS and DQE are not expected to exceed $15,000 and $10,000, respectively, plus,in each case, reasonable out of pocket costs and expenses. APS and DQE cach will bear its own expenses in connection with the solicitation of proxies for its Stockholders Meeting, except that each will pay one half of all printing ard filing costs and expenses incurred in connection with the Registration Statement and this Joint Proxy Statement / Prospectus.

111E111DQEPitSTOCKilOLDEllS 0XY CAllDS, SilOULD NOT SEND DQE COMMON STOCK CEltTiriCATES WITil Tile COMPANIES APS APS is a reginered electric utility ho'dmg company which in 1996 had operating revenues of approximately $2.3 billion. At December 31,1996, APS had total assets of approximately $6.6 billion. APS was incorporated in 1925 in Maryland and owns, directly or indirectly, various regulated and unregulated subsidiaries. APS' primary subsidiaries are engaged principally in the generation, transmission, distribution and sale of electric energy, its subsidiaries' properties, which are interconnected and operats as a single integrated electric utility system, are located in Maryland, Ohio, Pennsylvania, Virginia and West Virginia and provide energy to customers in portions of each of those states. APS provides electric senice to nearly 1.4 million customers in an area of about 295JO square miles.

20 i

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DQE DQE i, an energ) senices bolding company incorporated in 19b9 in Penn9 rania 1 which owns various regulated and unregulated subsidiaries. DQE's subsidiaries include (i) an electric utility engaged in the

! production, transminion, distribution and sale of electrical energy. (ii) a 5 ampany that makes strategic investments related to DQE's core energy business, (iii) a company that offers encrpy solutions to customers in domestic and international markets such as energy facility development, operation and maintenance and independent power production, (iv) a company formed to esplore strategic businen opportunities in the energy industry, and (v) a f nancial services company that makes long term investments and provides fmancing for DQE's services and products. DQE's electric utility provides electric service to customers in a senice territory of about 800 square miles in southwestern Pennsylvania, comprised of parts of Allegheny County (including the City of Pittsburgh) and parts of licaser County and Westrnoreland County, This electric utility provides service to about $80,000 customers in this service area, and its revenues account for the majority of DQE's revenue.

Duquesne Light owns a 13.749i interest in Perry Unit 1, a 47.50% interest in licaver Valley 1 and a ,

13.74% interest in lleaver Valley 2.

ADC is a wholly owned subsidiary of Duquesne Enterprises, ine., which, in turn, is a wholly owned subsidiary of DQE, ADC is an electric utilhy company engaFed in the business of owning facilities to provide complete energy services. Upon approval by the SEC, ADC will assign to Dil Energy, Inc all of its rights and obligations under certain agreements, and Dil Energy, Inc. will become a pubhc utihty company pursuant to the PUllCA.

In addition, DES will shortly be forming MT. Upon SEC approval, MT will, among other things, enter into an Operation and Maintenance Services AF reement with ADC, and become a public utility company pursuant to the PUllCA.

Merger Sub MerFer Sub is to be formed by APS as a wholly owned subsidiary of APS solely for the p. mse of efTecting the Merger.

PRIOR CONTACTS IIETWEEN Tile COMPANIES In October 1996. AYP Energy, Inc., an indirect wholly owned Subsidiary of APS, purchased Duquesne h Light's 50% interest in Unit No. I of the Fort Martin Power Station for a price of approximately $170 million pursuant to an agreement entered into in November 1995, in addition, APS and DQE are parties to several power exchange and regulatory agreements.

Tilt MERGER This section describes certain aspects of the Merger. The following description does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, w hich is attached as Appendix A to this joint Proxy Statement / Prospectus and is incorporated herein by reference. All holders of DQE Common Stock and holders of APS Common Stock are urged to read the MerFer Agreement in its entirety.

For a further description of the Merger Agreement, see "The Merger Agreement."

General The Merger Agreement provides for a business combination between APS and DQE in which, subject to the satisfaction of the conditions therein, the Merger will be effected, DQB will become a wholly owned Subsidiary of APS, and the holders of DQE Common Stock, other than the Excluded Shares, will be issued APS Common Stock in a transaction intended to qualify as a " pooling of interests" for accounting purposes and as a "rcorganiration" within the meaning of Section 368(a) of the Code for federalincome tax purposes.

In the Merger, each outstandmg share of DQE Common Stock (other than the Excluded Shares) will be 21

converted into the right to recche, and become exchangeable for, l.l shares of APS Common Stock. Each outstanding share of APS Comm en Siwk will remain outstandmp and be unaffected by the Merger. As a result of the Merger, holders of DOE Common Stock immediately prior to the Merget will own approximately 42% of the outstanding APS Common Stock after the Merger (based on the number of shares of APS Common Stock and DQE Comnion Stock outstanding as of June 1,1997, and June 16,1997. respectively).

Terms of the Merger At the EfTective Time, APS, Merycr Sub and DQE will consummate the Merger in which Merger Sub will be merged with and into DQE, and the separate corporate existence of Merger Sub will thereupon ecuse.

DQE, as the Surviving Corporation, will be a wholly owned subsidiary of APS and will continue to be governed by the law: of the Commonv calth of f ennsylvania. The Merger Agreement provides that the articles of incorporation of DQE in efTect immediately prior to the Effective Time will remain the articles of incorporation of the Surviving Corporation. The Merpet Agreement provides that the bylaws of Merger Sub in effect at the Effective Time shall be the bylaws of the Suniving Corporation following the Merger, At the Effective Time, each issued and outstanding share of DOE Common Stock (other than the Excluded Shares) will be converted into the right to receive, and become exchangeable for,1,12 shares of APS Common Stock, and the right, if any, to receive cash in lieu of any fractional Omre into which such shares of DQE Common Stock have been converted (as described below) and any distribution or dividend with a record date after the Effective lim:, in each case without interest liy virtue of the Merger, the Excluded Shares shall cease to be outstat Jing and shall be canceled and retired without payment of any consideration. {

If at any time during the period between the date of the Merger Agreement and the Eflective Time there is a change in the number of shares of APS Common Stock or securities convertible or exchangeable into or exercisable for shares of APS Cornmon Stock issued and outstanding as a result of a reclassification, stock split, stock dividend or distribution, or other similar transaction, the Exchange Ratio will be equitably adjusted.

No fractional r. hares of APS Common Stock will be issued in the Merger. Instead, the Merger Agreement provides that each holder of DQE Common Stock who would otherwise have been entitled to receive a fractional share of APS Common Stock will be entitled to receive, in lieu thereof, cash representing such holder's proportionate interest in a share of APS Common Stock, based on the closing price of such shares as reported in The WallSirreiJournal. New Yo.L City edition, on the trading day immediately prior to the Effective Time.

The DQE DRSPP provides that dividends on DQE Common Stock of plan participants will be used to purchase shares of DQE Common Stock e market value and also permits participants to invest in additional shares of DQE Common Stock through optional cash payments. The DQE DRSPP credits whole shares and fractional shares of DQE Common Stock to participants' accounts. At the Effective Time, all shares of DQE Common Stock credited to participants' accounts under the DQE DRSPP will be converted into a number of shares of APS Common Stock determined by maltiplying the number of such shares of DQE Common Stock by the Exchange Ratio. All such shares of APS Common Stock will be held in the participants' accounts, with individual participants' accounts in the DQE DRSPP being credited with fractional sharer, of APS Common Stock.

Effecibe Time The Merger will become efTeetive at the time wher, the Fennsylvania Articles of Merger have been duly filed with the D$partment of State of the Commonwenith of Pennsylvania as provided in Section 1927 of the PBCL Exchange of Certifkates Pursuant to the Merger Agreement, promptly after the EfTective Time, the Surviving Corporation will cause the Exchange Agent to mail to each holder of DQE Common Stock (other than holders of the 22 e---,e. .,m.a ,m +e -- -. -m., --,,ne--,-w-- n, -

-n- - -n..-nn,,,,,,.,,.,,,,,.-,a .,y,,--- . , , , - - - - - - - --n --,www- .- ., v-w .www,-me

liscluded Shares) (i) a letter of transmittal specifying that delivery will be eflected, and risk ofloss and title to the DQE Certihcates will paw only upon delivery of the DQE Certificates (or afhdavits of loss in lieu thereof) to the Exchange Agent, such letter of transmittal to be in such form and to have such other provisions as APS and DQE may reasonably apree, and (ii) instructions for use in effecting the surrender of the DQE Certificates in exchange for (A) APS Certificates and (11) any unpaid dividends and other distributions and cash in lieu of fractional shares. Upon surrender of a DQE Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly esecuted, the holder of such DQE Certificate will be entitled to receive in exchange therefor (x) an APS Certificate representing the number of whole shares of APS Common Stod that such holder is entitled to receive pursuant to the Merger Agreement, (y) a check in the amount (after giving effect to any required tax withholdings) of ( A) any cash in lieu of fractional shares plus (11) any unpaid non, stock dividends and any other dividends et other distributions that such holder has the right to receive pursuant to the Merger Agreement, and the DQE Certificate so surrendered will forthwith be canceled, No interest will be paid or will have accrued on any amount payabk upon due surrender of the DQE Certificates. DQE Certificates r,urrendered by " affiliates" of DQE, as determined pursuant to the Merper Agreement, will be exchanged in accordance with the above procedure after APS receives from the " affiliate" a written arreement not to transfer the shares of APS Common Stock received in the exchange, except as permitted in the written agreement, in the event of a transfer of ownership of DQE Common Stock that is not registered in the transfer records of DQE, an APS Certificate representing the proper number of shater. of APS Common Stock, together with a check for any cash to be paid upon due surrender of the DQE Certificate and any other dividends or distributions in respect thereof, may be issued and/or t aid to such a transferee if the DQE Certificate formerly representing such shares of DQE Common Stock is presented to the Exchange Apent, accompanied by all documents requircd to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid, if any APS Certificate is to be issued in a rame other than that in which the DQE Certificate surrendered in excnance therefor is registered,it will be a condition of such exchange that the person or entity requesting such exchange pay any transfer or other taxes required by reason of the issuance of APS Certificates in a name other than that of the registered holder of the DQE Certificate surrendered, or establish to the satisfaction of APS or the Exchange Agent that such tax has been paid or is not applicable.

All APS Common Stock issued in connection with the Merper will be deemed issued und outstanding as of the EITective Time and whenever a dividend or other distribution is declared by APS in respect of the APS Common Stock, the record drte for which is at or after the EfTective Time, that declaration will include dividends or other distributions in respect of all shares issuable pursuant to this Agreement, No dividends or other distributions in respect of the APS Common Stock will be paid to any holder of any unsurrendered DQE Certificate until such DQE Certificate is surrendered for exchange in accordance with the provisions of the Merger Agreement, Sub,icct to applicable Laws, following surrender of any such Certificate, there will be issued and/or paid to the holder of the APS Certificates issued in exchange therefor, without interest, (A) at the time of such surrender, the dividends or other distributions with a record date after the Eficctive Time theretofore payable with respect to such whole shares of APS Common Stock and not paid and (11) at the apt, mriate pa) ment date, the dividends or other distributions payable with respect to such whole shares of APS Common Stock with a record date after the EfTective Time but with a payment date subsequent to surrender, in addition, pursuant to the Merger Agreement, holders of unsurrendered DQE Certificates will be entitled to sote after the EfTeetite Time at any meeting of APS r,tockholders the number of whole shares of APS Common Stock represented by such DQE Certificates, regardless of whether such holders have exchanged their DQE Certificates.

After the EfTective Time, there will be no transfers on the stock transfer books of DQE of shares of DQE Common Stock that were outstanding immediately prior to the EITective Time.

In the event any DQE Certificate is lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such DQE Certificate to be lost, stolen or destro)cd and, if required by APS, the 23

posting by such person of a bond in customary amount as indemnity against any claim that ma) be made against it uith respect to such DQE Certificate, the lachanpc Agent will issue in exchange for such lost, stolen or destroyed DQE Certihcate the shares of APS Common Stock and any cash payable and any unpaid <

dividends or other distributions in respect of APS Common Stock pursuant to the Merger Agreement upon due surrender of and delivery pursuant to the Merger Agreement in respect of the DQE Common Stock to l which such Certif cate relates.

l

, llOLDEllS OF DQL COMMON STOCK SilOl'LD NOT SEND TilElit CI:ltTilICATI:S TO Till:

EXCllANUl: AGENT UNTIL TitANSMITTAl. MATI:ltlALS Alt 0 Iti:CEIVED l'ItOM Tile 1:N.

CilANGE AGENT, llOLDEllS Ol' APS COMMON STOCK WILL NOT EXCilANGE TilElit 1 CEltTil1 CATES.

Appraisal flights i iloiders of APS Common Stock will not be entitled to any dissenters' or appraisal rights under the MGCL as a result of the matters to be voted upon at the APS Special Meeting. Ilolders of DQE Common Stock will not be entitled to any dissenters' or appraisal rights under the merFer and appraisal rights provisions of the PilCL as a result of any of the matters to be voted on at the DQE Meeting.

Pursuant to the terms of the Merger Agreement DQL has agreed that the provisions of the Pennsylvania Control Transactions Statute will be inapplicable to DQE at the Eficctive Time. DQE beheves that the Pennsylvania Control Transactions Statute is inapplicable to the Merger even if the Control Transactions Amendment is not approved, but in the absence of controlling legal precedent is seeking approval of the Control Transactions Amendment. In the event that the Control 1ransactions Amendment were not approved and the Penns31 vania Control Transactions Statute were applicable to the Merper, APS could hav: the right not to consummate the Merger, although APS and DQE have not determined how to proceed under such circumstances. If applicable, the Pennsylvania Control Transactions Statute provides,in effect, that any holder of DQE Common Stock who objects to the Merger will be entitled to the rights and remedies provided in the Pennsylvania Control 1ransactmns Statute. In connection with their consideration of the Merger, holders of DQE Common Stock are being asked to approve the Control Transactions Amendment.

The Pennsylvania Control Transactions Statute provides, among other things, that any holder of shares of a corporation subject to the statute (as DQE is today) that becomes the subject of a control transaction (as dermed in the Pennsylvania Control Transactions Statute) who shall object to the transaction shall be entitled to the rights and remedies provided by the Pennsylvania Control Transactions Statute, A control transaction is ths acquisition, subject to certain specified exemptions, of voting power over voting shares entitled to cast at lea;t 20% of the votes that all stockholdert would be entitled to cast in an election of directors. The controlling persin is required to give prompt notice that a control transaction has occurred to each stockholder of record and a Pennsylvania court, accompanied by a petition requesting that the court determir,e the fair value of the voting shares. The Pennsylvania Contml Transactions Statute also sets out procedures to be follovad for determining such fair value for holders of voting shares to receive such payment.

Although DQE does not believe the Pennsylvania Control Transactions Statute is applicable to statutory mergers, such as the Merger,it could have the effect of deterring an acquisition by any person of 20% or more of the shares of DOE Common Stock with'ut acquiring. or ofTering to acquire all of the shares of DQE Common Stock Notwithstanding the approval of the Control Transactions Amendment by the stockholders of DQE, DOE will not file the Control Transactions Amendment until all other conditions to the Merger have been satished or waived. Therefore, esen if there is stockholder approval of tl.c . Control Transactions Amendment, if the Merger does not occur, the Control Transactions Amendment will not have become effective, and DQE will remain subject to the Pennsylvania Control Transactions Statute.

The forepoing description of the Pennsylvania Control Transactions Statute is qualif ed in its entirety by reference to the text of the Pennsyhania Control Transactions Statute which is attached as Appendix D to this Joint Prosy Statement / Prospectus.

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llacks:round of the Merpt The electric utility industry throughout the United States is in the early stages of dramatic changes that are intended to bnng competition to what has been, kince the electric industry's inception, a collection of regional monopolics. These changes have been brought about in part through the adoption of the Energy Policy Act of 1992 and through orders 688 and 889 of the FERC. In addition,in Pennsylvania, where DQE has all of its electric utility business and APS has a substantial portion ofits electric utility business, the trend to bring about competition led to the enactment in late 1996 of the Electricity Generaticn Customer Choice and Competition Act,66 Pa. Cons. Stat. k 2601 et seg. (the " Pennsylvania Restructuring Legislation"), w hich provides, among other things, for a phase in of competition for retail electric customers in Pennsylvania and an opportunity for recovery of certain capital costs (" stranded costs") incurred by utilities in a regulated environtnent that are not likely to be tscoverable through prices charged in a competitive environment, in light of these developments, both the APS lioard and the DQE lioard have been engaged in reviews of steps they might take to best position their respective companies to take advantage of the changes occurring in the electric utility industry.

In late 1996, the chief esecutive omccrs of APS and DQE met on several occasions and had $cteral phone conversations to discuss a possible combination between APS arid DQE, As result of these contacts.

APS and DQE agreed ia December of 1996 to commence a process of duc diligence and to determine if a mutually desirable transaction could be agreed upon. These early contacts concluded with understandings that APS was open to the idea of negotiating an eschange ratio that would give holders of DQE Common Stock a premium to its market trading price, that the board of directors of the combined company could include representation from the DOE Iloard approximately equivalent to the percentage ownership of DOE stockholders in the combined company after the Merger and that APS saw a good fit for DQE management in APS after the Merger.

An initial meeting of APS and DQE managements and their respective legal and financial advisors was held in late December 1996, at which time important areas of duc dili;cnce were identified and a subsequent mutual duc diligence presentation was scheduled. After this December meeting, APS and DQE began the organization of duc diligence information regarding their respective companies for review by the other, in mid-January 1997, the senior managements of APS and DQE met and each gave a business overview presentation to the other party and its legal and financial advisors and responded to questions. Thereafter, representatives of APS and DQE performed financial, operating and legal due diligence investigations on the other party and throughout January through April 1997, negotiated the legal and financial terms of the Merger. In addition, APS retained legal counsel experienced in nuclear related matters, a firm of consulting nuclear engineers and a retired nuclear utility executive to assist APS in its due dilicence investigation of the Nuclear Facilities.

The negotiations of the terms of the Merger Agreement focused most intensely upon the rumber of shares of APS Common Stock into which each share of DQE Common Stock would be converted in the Merger, the status of esents concerning the Nuclear Facilities, whether contractual language relating to an adverse regulatory or operating event at the Nuclear facihths that does not give rise to a material adverse efTect on DOE should give APS a right not to consummate the Merger or result in a reduction in the Exchange Ratio, the circumstances under which the terms of regulato approvals could give APS, or APS and DQE, a right not to consummate the M:rger, the cl.cumstances under which termination fees would be payable and the amount of those fees, and the circumstances under which either 11 arty cou d negotiate with a third party regarding an alternative merger proposal or terminate the Merger Agreement to accept such a ,

proponal. During the week of March 31,1997, an understanding with respect to potentially mutually aprecable i positions on the principal issues was reached, and thereafter documentation s,as fmalized, duc diFgel ce was l compl:ted and the APS lloard and the DQE lioard each approved-the Merger and related matters at respective meetings held late in the day on April 4,1997, following presentations from their respective senior managements and their legal and financial advisors (including derriptions of the Merger Agreement by their respectise legal advisors) and after having received the fairness opinions of their respective financial advisors.

l 25 n

.,,, _ , , . - , , _ , , . , . _ _ . . . . . . . , _ , . . . . . , - .._ _ _ , , _ . . . .. .m,,., -_.._. y... - . ,_.,.. . . _

Hensons far the Mergsr; Hecommendations s f the lloards of Directors ,

AlW .

The APS Iloard has unanimously determined that the terms of the Merger Agreement and the transactions contemplated thereby are advisable for, fah to, and in the best interests of, APS and its stockholders. In reaching this determination, the APS Iloard concluded that the Merger ellered an opportunity to increase the long. term value of stockholders' investment in APS over what that value would have been had APS not agreed to the Merger, and that such opportunity more than offsets the risks inherent in the Merger. In reaching this conclusion, the APS lloard considered that:

(i) the Merger would better position APS to take advantage of changes in thec 'lectrie utility industry by expanding its service territory and number of customers served by combining its existing service territories with DQE's contiguous service territories; (ii) APS management has historically been better than its peer companies at managing electric generation, transmission and distribution and its belief that the Merger would permit the combined management to utillic this expertise over greater amounts of generation and distribution; (iii) based upon reports from its outside adsisors and APS management and publicly available materials regarding DQE, DQE management has historically been better than its peer companies in developing unregulated businesses and the APS lloard's belicI that the Merger would permit the

- combined management to utilire this expertise as a part of a birrer, financially stronger enterprise; (h) the terms of the recently enacted Pennsylvania restructuring legislation and the significant mitigation clierts already undertaken by DQE would permit DQE to reemer such stranded costs asociated with DQE's ir vestment in the Nuclear Facilities as determined to be just and reasonable by the PAPUCt and (s) the synergies estimated by the managements of APS and DQE appear to be achievable.

In reaching the determination that the terms of the Merget were udvisable for, fair to and in the best interests of APS and its stockholders, the APS Iloard also considered a number of additional factors, including its knowledge of APS' basiness and discussions with APS' management concerning the results of APS' manvgement's due diligence investigation of DQE, the economic and regulatory environment, strategie, opetational and financial opportunities and risks associated with the Merger and the terms of the Merger Agreement, the historical, c arrent and 30-day average market prices of DQE Comraon Stock and the opinion of APS' financial advisor, Merrill Lynch, to tbc elTect that, as of the date of such opinion, the Exchange llatio was fair from a financial point of view to the holders of APS Common Stock. The APS lloard also considered certain risks and potential disadvantages associated with the Merger, including the acquisition of interests in the Nuclear Facilities and the fact that APS has historically avoided ownership of nuclear power plants, the possibility that APS would be unable to retain, after the Merger, the senior management of DQE responsible for DQE's unregulated businesses, the risk that the projected synergies will not be realized in the amounts expected or that they will be ofhet by unarticipated increases in expenses or revenue losses, the management distractions necessarily associated with a business combination of the magnitude of the Merger and the potential disruption to the businesses of APS and DQE. along with the risk that the transaction might not be completed as a result of a failure to satisfy the conditions to the Merger Agreement.

The foregoing discussion of the information und factors which were given ueight by the APS lloard is not intended to be exhaustive but is beheved to incluce all material factors considered by the APS Iloard. The APS lloard did not assign specific weights to the foregoing factors and individual directors may have given different weights to different factors. Attcr considering all such factors, the APS 11oard unanimously datermined that the terms of the Merger Agreement and the transactions conterr 11ated thereby are advisable for, fair to, and in the best interests of. APS and its stockholders and unanimously recommends to its stockholders that they upprove the issuance of shares of APS Common Stock pursuant to the Merger Aprectnent, 26

i lill: APS Ilo\itD U,YANIMOUSIN Iti:COMMI:NDS lilAT APS SiOChilOI.DI:lts \ 011:

l'Olt APPitOYAl, Of lilE ISSUANCE Ol' SilAltES Ol' APS COMMON STOCK l'UltSUANT 'lO Tilt MEltGl;lt AGitEl: MENT, ,

DQT The DQE 11oard har, unanimously approved the Merger Agreement and the transactions contemplated thereby, having determined that the terms of the Merger Agreement and the transactions contemplated thereby are fair to, and in the best interests of, its stockholders. In reaching this deictmination, the DQE Iloard concluded that the Merger was likely to increase the value of its stockholders

• in estment in DQE over what DQL could probably achieve on its own. In reaching ibis conclusi m. the DQE Iloard considered that:

(1) the Merger will allow the combiwd company to rueet ihe challenges of the increasingly competitive environment in the utility industry more ellectively than DQE could on its own because it will have the critical mass necessary to compete in a deregulacd utility environmcnt, including an expanded cur,tomer base from which to grow unreputated activities, a stronper financial and operational position and less nuclear exposure; (ii) the estimated synergies from the Merger should improve DOE's financial perfornwnee due to savings from the climination of duplicate activities and by creating impmved operating tiliciencies and lower capit,d costs; (iii) the Merper will permit stockholders of DQE to bencht from the combined company *n flexibility and leverage in financing its operations and its enhanced abil;ty to take advantage of future strategic opportunit:es and to reduce its exposure to changes in economic conditions in any r,epment of its business; (iv) the combined service territories of DQE and A PS will be inore peopraphically diverse than the service territory of DQE alone, reducing DQE's exposure to changes in economic, corupetitive or cli natic conditions, as well as providing a larcer regional platform from which to expand DQE's customer base; (v) APS' winter peaking, low cost, etlicient operations, and suburban and rural customer base, will complem:nt DQE's summer paking operations and urban customer base; (vi) DQE's current customers will receive a wider range of energy-related pmducts t.nd senices; and (vii) DQE's mix of regulated and unregulated enerpy products and services provides a strategic fit with APS' core businesses, in reach.ng the determination that the terms of the Merger were fair to, and in the best interests of, stockholders of DQE, the DQE Board also considered a number of additional factors, including its knowledge of DQE's business and discussions with DQE's management concerning the results of DQE's due dilipence investigation of APS, the economic and regulatory environment, strategic, operational and financial opportuni-ties open to DQE, the terms of the Merger Agreement, the historical and current market prices of DQE Common Stock and APS Common Stock and the opinion of DQti's financial advisor, CSFil, to the etTect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair to the holders of DQE Common Stock from a financial point of view, The DOE inoard aho considered certain risks and potential disadvantages associated with the Merper, including the risk that the

, estimated synergies will not be realized in the amounts expected or that they wil! be ofTset by unanticipated increases in expenses or revenue losses, the management distractions necessarily associated with a business combination of the magnitude of the Merger and the potential disruption to the businesses of APS and DQE, along with the risk that the transaction might not be completed as a result of a failure to satisfy the conditions to the Merger Agreement, and the fact that certain members of DQE's management and the DQE Board had other interesis in the Merger in addition to the interests which holders of DQE Common Stock hm e penerally.

27

1he foregoing discussion of the information and f actors which were riven weight by the DQli lloard is not intended to be exhaustive but is believed to include all material f actors considered by the DQL lloard, The DQL lloard did not saign speci4 weights to the forcroing factors and individual Directors may have given diflerent weighs to different factors. After considering all such factors, the DQL lloard unanimoudy apprmed the Merger Agreement and unanimoudy recommends to lta stockholders that they approve the adoption of the Merger Agreement and the transactions contemplated thereby.

Till: DQl: 110AHD UNANIMOUSLY Hl:COMMI:NI)S TilAT DQl STOCKil0LDI:HS VOTI:

FOR ADOPTION Ol' Till: MI:HGl:H AGHl:EMENT AND APPHOVAL Ol' TID: TRANSAUll0NS CONTEMPI ATED Till:Hl:llY, S>nergies APS and DQE have jointly studied the estimated synergies arising out of a combination of their companies.

The companies estimuted that the Merger could result in savings of approximately $1 billion over the 10. year penod from 1996 to Xm, taking into account the costs estimated to be necessary to achieve such synergiet The savings are expected to come from climin.ition of duplicate activities (including labor and comorate and administrative programs), improved operating efuciencies and lower capital costs. The labor reductions would be achieved from a combination of reduced hiring, attrition and targeted voluntary reduchn programs.

lloiders of APS Common Stock or DQE Common Stock should note that the analysn employed in devch ping these savings estimates were based upon various assumptions that involve judgments with respect to economic conditions, inflation rates, regulatory treatment, weather conditiens, financial market conditions, interest rates and other factort. which a+e each ditlicult to predict and beyond the control of DQU and APS.

A;cordingly, although the APS Iloard and DQE Iloard believe that reasonable assumptions were used to develop these estimates of synergies, there can be no assurance that these estimates will approximate the future experience of the combined company or the extent to which it can realia these nnergies. See "The MerFer- Cautionary Statement Concerning Forward Looking Statemento" Op'clons of Financial Adilsors APS On April 4,1997, Merrill Lynch delisered its oral opinion to the APS Iloard, which was subsequer.tly contirtued in a written opinion dated 'as of that date and as of the date of this Joint Proxy State.

ment / Prospectus (ths "Merrill Lynch Opinion"), to the effect that, as of such dates, and based upon the assumptions made, matters considered and limits of review set forth in such opinion, the Escharge Ratio was fair w holders of Al'S Common Stock from a financial point of view.

A copy of the Merrill L3nch opinion, dated as of the date of this Joint Prosy Statement / Prospectus, which sets forth the assumptions made, matters considered and certain limitations on the scope of reilew undertaken i y Merrill L3nch,is attached as Appendis 11 to flis Joint Presy Statement /Prrnpectus. lloiders of APS Common Stock are urged to, and should, read such opinion in its entirety, The Merrill L3mh opinion is directed only to the fairnen of the 1:schange Hallo from a financial point ofilew to the holders of APS Common Stock and does not constitute a recommendation to any APS stockholder as to how such stockholder should note at the APS Special Meeting. The summary of (Sc Mmill Lynch Opinion set forth in this Joint Proy Statement / Prospectus is qualified in its entirety by reference to the full test of such opinion.

in arriving at the Merrill Lynch Opinion Merrill Lynch, among other things: (1) revicued APS' Annual Reports Form 10 Ks and related financial information for the three fiscal year period ended December 31, 1996 and certain other fihnps made with the SEC, including proxy statements, Form 8 Ks and registration statements, during the last three years: (2) reviewed 'DQE's Annual Reports, Form 10 Ks and related fmancialinformation for the three fiecal year period ended December 31,1996 and certain other filings made w:.h the SEC, including proxy statements. Form 8 Ks and registration statements, during the last three years; 1 (3) reviewed certain information, including f nancial forecasts, relating to the business, earnings, cash flow, assets and pmspects of APS and DQE furnished to Merrill Lyrch by APS and DQE: (4) conducted discussions with members of senior management of APS and DQE concerning their respective businesses, regulatory environments, pmspects and strategic objectives; (5) reviewed the market prices and valuation 28

multip;es for APS Common Stock and DQl; Common Stock and cornpared them with those of certam publicly traded companies which Merrill Lynch deemed to be acasonably similar to APS and DQL, ropectisely; (6) compared the results of operations of APS and DQB with those of certain companies uhich Merrili L)nch deemed to be reasonably similar to APS and DQE, respectively; (7) compared the proposed financial terms of the transaction cont-mplated by the Merret Agreement with the financial terms of certain other transactions which hierrill Lynch deemed to be relevara; (8) considered the pro forma effect of the-Merger on APS' capitalization ratios and earnings, dividends and book value per share; (9) reviewed the Merger Agreement; (10) reviewed this joint Proxy Statement / Prospectus (with respect to the Mert.1 Lynch Opinion, dated as of the date hereof); and (111 reviewed such other financial studies and analyses and performed such other investigations and took inta account such other matters as Merrill Lynch deemed necessary,in:luding its nuessment of general economic, market monetary and other conditions.

In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the accuracy and the completeness et all information supplied or otherwise made available to it by APS and DQE, and Merrill Lynch did not independently verify ruch information or undertake an independent evaluation or appraisal of the assett, or liabilities c' APS or DQE. In addition, Merrill Lynch did not conduct any physicalinspection of the properties or facilitics of APS or DQE. With respect to the fmancial forecasts and the estimated syncrgies furnished by i APS and DQE, Merrill Lynch assumed that they were reascnably prepared and tellected the best currently available estimater, and judgments of APS' or DQE's management as to the expected future fmancial performances of APS or DQE, as the case may be, and as to 6e expected future projected outcomes of various legal, regulatory and other contingencies. Merrill Lynch .aumed that the Merger will be accounted for as a pooling of interests and will be free of federal tax to APS, DQE and the holders of shares of APS Common Stock and the holders of shares of DQE Common Stock.The Merrill Lynch Opinien is neecisarily based upon general economic, market, monetary and other conditions as they existed and could be evaluated, and the information made available to Merrill Lynch, as of the date of such opinion. The Merrill Lynch Opinion was prepared solely for the information and use of the APS Iloard, in connection with the preparation of the Merrill Lynch Opinion, Merrill Lynch expressed no opinion as to what the value of APS Common Stock actually will be when issued upon consummation of the Merger or what the value of APS Common Stock or DQE Common Stock _will be at any time after the date of the Merrill Lynch Opinion. No limitations were imposed by APS on Merrill Lynch with respect to the investigations made or procedures followed by Merrill Lynch in rendering its opinion.

The following is a summary of certain of the financial and comparative analyses performed by Merrill Lynch in arriving at the Merrill Lynch Opinion dated as of April 4,1997.

1. tstortral MarAct l'alue Analysis. Merrill Lynch reviewed the performance of the daily closirig prices per share of DQE Common Stock and APS Common Stock in relation to cach other for the period from February 1,1994 to April 4,1997, Merrill Lynch also reviewed the historical ratios of such daily closing prices per share of DQE Common Stock to those of APS Common Stock (the "liistorical Trading itatios") for the period from February 1,1994 to April 4,1997, and the mean of such llistorical Trading itation for the one-year, two year and three year periods ended on April 4,1997, and compared such llistorical Trading itatios to the Exchange Itatio. This analysis showed that, during the three year period ended on April 4,1997, the.

llistorical Trading Ratio ranged from 1.079 to 0.861, and the mean of the Historical Tradin: Ratios for the one year, two9 ear and three year periods ended on April 4,1997 were 0.937,0.973 and 0.959, respectively.

Comparable Publicly Traded Company Analysis. Using publicly available information, Merrill Lynch compared certain financial and operating it. formation and ratios (described below) for DQE with the cortcaponding fmancial and operating information and ratios for separate groups of publicly traded companics that Merrill L>nch deemed to be rearonably comparaole to DQE. The companics included in the DQE analyses weie: Baltimore Gas & Electr'c Cempany, Boston Edison Company DTE Energy Company, Florida Progress Corporation, GPU, Inc., lilinova, New England Electric System and PPAL Resources, Inc.

(collectively, the *DQE Comparables").

-In de"ving an estimated valuation range for DQE, Merrill Lynch compared: (i) current trading price to estimated 1997 earnings per share ("EPS") for the DQE Comparables, whkh estimates were obtained from Institutional Brokers Estimate System ("lBES") ano ranged from 8.3x to ll.6x, with a mean of 10Os.

29

compared to a multiple of II.4s for DQL Comnwr Stock based upon citimates from lilES; (ii) current trading price to estimated 1998 carnings per sharc for the DQL Compath!cs, which estimates were obtained from illES and runted from 7.9s to ll.h. with a rucah of 10.0x, compared to a multiple of II.04 for DQE Common Stock based upon estimates from lilES; (iii) current trading pn.t to bout value for the DQE Comparables, which ranted from 1.0lx to 1.5h, with a mean of 1.26x, compared to a multiple of 1.5h for DOE Com:'mn Stockt (h-) hrm value to 1996 carnings before interest, taset depreciation and amortitation

(" Ell!'I DA") for the DQL Comparables, which ranged from 5.h to 7.h, with a mean of 6.Os, compared to a multiple of 6.6s for DQE Common Stock; (v) htm value to 1996 carnings before interest and tases ("ElllT")

for the DQL Comparables, which ranged from 7.1x to ll.h, with a mean of 9.h, compared to a multiple of II.4s for DQE Common Stock; (vi) the dividend yield satio for the DQE Coroparables, which ranged from 5.7% to 8.4% vith a mean of 6.8%, compared to the dhidend yield ratio of 4.9% for DQE Common Stosk; and (vii) the forward payout ratio for the DQE Comparables, whkh ranged from 46 8% to 80.M. uith a mean of 65.5% compared to the di idend yield ratio of 56.4% for DQL Common Stock, liased upon the estimated valuation ranges for DQE in such analpes and the APS cuqcnt trading price as of April 1,1997, Merrill Lynch calculated an imphed exchanyc ratio of a share of DQU Common Stock to a sharc ni APS Common Stock ranging from 0.8h to 1.00x, compared to the thcharge P.atio of 1.12.

No public company utilind as a comparimn in the analpes described above is identical to DQL.

Accordingly, an analpis of publicly traded comparabic companics is not mathematical; eather it involves complex considerations and judgments concerning dilTerences in financial and operating characteristics of the comparable companics and other factors that could afTect the public trading value of the comparable companlefor company to which they are beir.g compared.

ComparoNe Transartlom Analpit Using publicly available information, Merrill Lynch reviewed eighteen transactions announced be, ween May 1995 and December 1996, involving selected electr,e utility companics, cleven transactions of which were mergers of electric utility comparues (the " Electric iderger Transactions") and seven transactions of which were m called " convergence" transactions or mergers of utilities providing difTen nt types of power (the " Convergence Transactions"), The Electric Merger Transac-tions and the date cach transaction was announced were as follows: Northern States Power Com-pany/Whconsin Energy Corporation (May 1995), CIPSCO Incorporated / Union Electric Company (August 1995), Southwestern Public Service Company /Public Service Company of Colorado ( August 1995).

Potomac Electric Power Company /llattimore Gas and Electric Company (September 1995), UtiliCorp United inc./ Kansas City Power & Light Company (May 1996), Kansas City Power & Light Com-pany/ Western liesourecs, Inc. (June 1996), Atlantie Energy, Inc./Delmarva Power & Light Compny

( August 1990), IES Industries Inc./Wpl lloidings, Inc. ( August 1996), IES Industries Inc./Mid American Energy Comnan) ( August 1996), Interstate Power /WPL lloidmgs, Inc. ( August 1996) and Centerior Energy Corporation / Ohio Edison Company (bepicmber 1996). The Convergence Transactions and the da;c cach transaction was announced were as follows: Washington Lncrpy Company 1,%/Puget Sound Power &

Light Company (October 1995) ENSEllCil Corporation / Texas Utilitics Company (April 1996), Portland General Corporadon/Enron Corp. (July 1996), NotAm Enctpy Corp./lloustor industrics incorporated

( August 1996), Pacific Enterprists/Enova Corporation (October 1996), PanEaerFy Corp./ Duke Power Company (November 1996) and Long Island Lightinr Company /The llrooklyn Union Gas Company (December 1996).

Merrill Lynch reviewed the transaction price in certain of the above transactions as a multiple of (i) Lst.

twelve months pre announcement net income of the acquired company, which ranged from approximately 12,0s to 15.0x. (ii) pre announcement book value of the acquired company, which ranged from npproximctcly 1.5% to 1.90s (iii) last twelve months pre announcement ElllT of the acquired company, which ranged from approximately 9.0x to ll.Os and (iv) last twehe months pre announcement ElllTDA of the acquired company, which ranged from approximately 6.0x to 7.0x; and estimated transaction prices for DQE on the basis of such multiples.

Ilascd upon the transaction prices estimated for DQE in such analpes using transaction price as a multiple of adjusted la:t tuche months pre announument net income and the APS current tradmg price as 30

of Apnl 1,1997, Merrill Lynch calculated an implied exchange ratio of a share of DQL Common Stock to a i Share of APS Common Stock ranping from 1.01 to 1.27, compated to the Lxchange Itatio of 1.12.

Nme of the business combinations utihred as a comparison in the analyses described above is identical to the Merger, Accordingly, an analysis of comparable business combinations is not mathematical; rather it involves complex considerations and judgments concerning dillerences in financial and operating characteris-ties of the comparable companies and other factors that could aflect the public trading value of the comparable companies or company to which they are bcing compared.

Di3 counted Cad /70w Anolpit Merrill Lynch derived estimated valuation ranges for APS and DQE oy performing discounted cash Dow ("DCr") analyses.

In the case of APS, the DCF was calculated assuming discount rates ranging from 7.$% to 11.5% and was comprised of the sum of the present value of (i) the projected unlevered free cash Dows for years 1997 to 2006 estimated by APS and (ii) the 20(* terrninal value based upon a range of multiples from 6.5x to 7.0x of projected 2006 ElllTDA, in the case of DQL, the DCF was calculated assuming discount rates ranging from 7.5% to l1.5% and was comprised of the sum of the present value of (1) the projected unlevered free cash Dows for years 1997 to 2006 estimated by DQE and (ii) the 2006 terminal value based upon a range of multiples from 6.25x to 6.75x of pnjected 2006 ElllTDA.

liased upon the c>timated valuation range of DQE set forth above and the APS current trading price as of Apri; 1,1997, Merrill Lynch calculated an imphed exchange rrtio of a share of DQL Comr.on Stock to a share of APS Common Stock ranging from 0.91 to 1.22, compued to the Exchange itatio of 1.12.

Coertiburlon Analpit Merrill Lynch calculated the contribution of each of APS and DQE to the pro forma combined company with respect to (i) carnings per share, (ii) common equity per share, (iii) dividends per share, (iv) bout value per share (v) ElllTDA and (vi) ElllT, in each case for the historical fiscal years 199l through 1996, and for the projected fiscal years 1997 through 2001 using the projections of the respective companies' managements, liased upon the estimated implied ratios in such analyses calculated with respect to ElllTDA, Merrill Lynch calculated implied exchange ratios of a share of DQE Common Stock in a share o r Apg commen Stock ranging from 1.17 to 1.51, compared to the Exchange Itatio of 1.12.

The summary set forth above does not purport to be a complete description of the analyses performed by Merrill Lynch. Arriving at a fairness opinion is a complex process not necessarily susceptible to partial analysis or summary description. Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all such factors and analyses, could create a misleading view of the processes underlying its opinion. Merrill Lynch did not assign relative weights to any of its analyses in preparing its opinion. The matters considered by Merrill Lynch in its analyses are based on numerous macroeconomic, operating and financial assumptions with respect to industry performance, pencral business and economic conditions and other matters, many of which are beyond APS' or-DQE's control and involve the application of complex methodologies and educated judgment. Any estilantes incorporated in the analyses performed by Merrill Lynch are not necessarily indicatise of actual past or future restl ' values. which may be significtntly more or less favorable than such estimates. Esiimated values do not pc,W to be appraisals and do not necessarily reacct the prices at which businesses or companies may be sold in tne future, and such estimates are inherently subject to uncertainty.

Merrill Lynch is an intemationally recognized imestment banking firm and is continually engaged in the valuation of businenes and their securities in connection with mergers and acquisitions, corporate and other

- purposes. Merrill Lynch was selected to act as financial advisor to the APS Iloard because of its substantial expertise in transactions similar to the Merger and its reputation in investment banking and mergers and acquisi tions.

In connection with APS' engagement of Merrill Lynch, APS and Merrill Lynch have entered into a letter agreement (the "Merrill Lynch Engagement Letter"), (1) pursuant to which Merrill Lynch was paid a fee of

$250.000 on the date of such letter agreement and (2) which provides that if, during the period Merrill Lynch is retained by APS or within 18 months thereafter, (a) a Merger Transaction (as dehned in the Merrill Lynch 31 W

Lngagement i etter) is consummated or (h) APS or its afliliate enters into an agreement with DOE which subsequently results in a Merger 'Iransaction, an additional fee of 18,650.000 will be payable. Any fee presiously paid to hierrill L)nch in accordance with clause (1) of this paragraph will be deductei from the fee to which hierrill Lynch is entitled in accordance with clause (2). Pursuant to the hierrill Lynch Engagement Letter,if APS recches any bust up fee, break up fee, tcrmination fee, expense reimbursement or any similar type of payment from DQE in connection with a proposed Merger Transaction, then APS has agreed to pay hictrill L> nch 10% of such payment received (excluding any payment to APS related to the reimbursement of actual out of pocket expenses incurred by APS, prm/dcd. however, that hictrill Lynch's fee pursuant to this sentence will not be considered as an out of pocket expense for purpmes of this sentence), up to a maximum of $6,250.000. In addition, pursuant to the Merrill Lynch Engagement Letter, APS has agreed to pay certain other ex} enses of, and has granted certain rights of indemnification to, Merrill Lynch.

In the ordinary course of Merrill Lynch's busmess Merrill Lynch may actively trade the securitics of APS or DQE for its own account and for the accounts ofits customers and, accordingly, may at any time hold a long or short position in such securities.

DQC

'SFil has acted as hnancial advisor to DQE in connection with the Merger. CSFil . ras r, elected by DQE based on CsFIFs experience, expertise and familiarity with DQE and its business. CSFil is an internationally recognired investnient banking firm and is regularly engaged in the valuation of businesses and securities in connection with mergets and acquisitions, leveraged buyouts, negotiated underwritings, competitive biddin -

secondary distributions of listed and unlisted securitics, private placements and valuations for corporate and other purposes, in connection with CSFB's engagement, DQE requested that CSFB cvaluate the fairness of the Exchange Itatio from a financial point of view. On April 4,1997, at a meeting of tne DQE Board, CSFB rendered to the DQE Iloard an oral opinion, to the effect that, as of such date and based upon oc.d subject to certain matters stated in such opin!cn, the Exchange Itatio was fair to the holders of DQE Common Stock from a finaricial point of view, CSFil has confirmed its earlier opinion by delivery of a written opinion dated the date of this Joint Proxy Statement / Prospectus, in connection with its opinion dated the date of this Joint Proxy Statement / Prospectus, CSFil updated certain of the analyses performed in connection with its catlier opinion and miewed the assumptions on which such analyses were based and the f actors considered in wnnection therewith.

The full text of CSFil's written opinion to the DQE Iloard, dated the date of this Joint Prosy Stat? ment / Prospectus, whlch sets forth the procedures followed, assumptions made, matters considered and l limitations on the teilew undertaken,is attached as Appendix C to this ,1oint Proxy Statement / Prospectus and is incorporated herein by reference, Stockholders of DQE are urged to, ead should, read the opinion of CSI11 carefully and in its entirety, CSFil's opinion is directed to the DQE Iloard and relates only to the fairness of the Exchange Itatio from a financial point of slew and does not constitute a recommendation to any steekhcider as to how such stockholder should sote at the DQE Meeting.The summary of the opinion of CSFil set forth in this Joint Proxy Statement /l rospectus is <iualified in its entiret) by reference to the full text of such opinion, in arriving at its opinion, CSFB reviewed the Merger Agreement and certain publicly available business and financialinformation relating to DQE aad APS and,in connection with its opinion dated the date of this Joint Proxy Statement / Prospectus, reviewed this Joint Proxy Statement / Prospectus. CSFB also reviewed certain other information relating to DQE and APS including f nancial forecasts provided to CSFil by DQE and APS, and met with the managements of DQE and APS to discuss the businesses and prospects of DQE and APS. CSFB aho considered certain financial and stock market data of DOE and APS and compared those data with similar data for other publicly held companies in businesses similar to those of DQE and APS, and considered, to the extent publicly available, the financial terms of certain other business combinations and other transactions recently effected. CSFli also considered such other information, financial studies, analyses and investigations and financial economic and market criteria that CSFB deemed relevant.

32

In connection with its reuew, CSI li did not awume any responsibility for independent scriheation of un3 of the information provided to or otherwise reviewed by CSI II (including the information contained in this joint Prosy Statement / Prospectus) and relied on such information being complete and accurate in all material respects. With sespect to the f nancial forecasts, CSFil assumed that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of DQE and APS as to the futute financial performance of DQE and APS. CSill also assumed, with the consent of the DQE llourd and based upon the views of the management of, and regulatory counsel for. DQE, that,in the course of obtaining the necessary regulatory and third party consents for the Merger, no restriction will be imposed that will have a material adverse elket on the contemplated benehts of the Merger. CSI11 was not requested to conduct, and did not conduct, an independent evaluation or appraisal of the assets or liabihties (contingent or otherwise) of DQE or APS, nor was CSFB furnished with any such evaluaticas or appraisals.

CSI frs opinion was necessarily based upon information available to CSFil, and financial, economic, market and other conditions as they esisted and could be evaluated, on the date of its opinion. CSI:ll did not espress any opinion as to the actual value of the APS Common Stock when issued pursuant to the Merger or the ,

prices at which the APS Common Stock will trade subsequent to the Merper, in connection with its engagement, CSI 11 was not requested to, and did not, solicit third party indications of interest in acquiring all or any part of DQE. Ahhough CSFil evaluated the Eschange Ratio Imm a financial point of view, CSI H was not requested to, and did not, recommend the specific consideration payable in the Mercer, which consideration was determined through negotiation between DQE and APS. No other limitations were imposed by DQE on CSFil with respect to the investigations made or procedures followed by CSFil in rendering its opinion.

In preparing its opinion to the DQE lloard, CSFD performed a variety of financial and comparative analyses, including those described below, The summary of CSFirs analyses set forth below does not purport to be a complete description of the analyses underlying CSI triopinion ~lhe preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods

[ of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily suzceptible to summary description. In arriving at its opinion, CSFil made qualitative  !

judgments as to the significance and relevance of each analysis and factor considered by it, Acedingly, ,

l CSFil believes that its analyses must be considered as a whole and that selecting portions of its analyses and 4 factors, without considering all analyses and factors, could create a misleading or incomplete view of the r

j processes underlying such analyses and its opinion in its analyses, CSFB made numerous assumptions with i respect to DQE, APS, industry performance, regulatory, peneral business, economic, market and fmancial

conditions and other matters, many of which are beyond the control of DOE and APS, No company,

transaction or business used in such analyses as a comparison is identical to DQE, APS or the Merper, nor is. l j n evaluation of the results of such analyses entirely mathematical; rather, such analyses involve complex

! considerations and judgments concerning financial and operating characteristics and other factors that could u%ct the acquisition, public trading or o'her values of the companies, business segments or transactions being i analyred The estimates contained in such analyses and the ranges of valuations resulting from any particular i

analysis are not necessarily indicative of ,clual values or predictive of future results or values, which may be

+ significantly more or less favorable than thoac suggested by such analyses. In addition. analyses relating to the i- value of businesses or securities do not purport to l.* appraisals or to reflect the prices at which businesses or j securitics may actually be sold. Accordmply, such anaipes and estimates are inherently subject to substantial

. uncertainty, CSFirs opinion and financial analyses were only one of many factors considered by the DQE  ;

lloard in its evaluation of the proposed Merger and should not be viewed as determinative of the view 5 of the DQE Board or management with respect to the Exchanpc Ratio or the Merger.

l l The following is a summary of the material financial analyses presented t)y CSFit t the DQE Board at ,

1 the meeting of the DOE lloard held on April A 199h l Discounted Cash r/ow Analysts. CSFB estimated the present value of the future streams of after tax

} tree cash flows that could be produced through fiscal 2006 by caeh of DQE's business segments (Le.,

- Duquesne Light

Montauk: and Duquesne Enterprises, DQE Energy Partners and DOE Energy Senices (the "Dther Unregulattd liusinesscs")), based upon internal estimates of DQE management, as adjusted after 33 1

L

I consultation with DQE management. Ranges of estimated terrninal values, when applied, were calculated using either terminal multiples of operating cash flow ("OCF") or perpetuity prowth rates.'lhe free cash flow streams and estimated terminal values were then discounted to present value using various discount rates depending upon the bur,iness segment analyred. For Duquesne Light (excludius Duquesne Light's generation equipment investment), terminal OCF multiples of 6.$x to 7.05 and discount rates ranging from ),75% to 8.25% were utilited. For Duquesne Llpht's generation equiprnent investment, discount rates ranging from 13.0% to 13.5% were utilized over the imestment's remaining fixed life. For Momuuk, perpetuity growth rates of (3.5%) to (3.0'TO and discount rates ranging from 12.0% to 12.5% were utilized, CSFil also analyred hiontaul's corrent investment portfolio (assuming no additional investments), utilizing discount rates of 10.0% to 14.0L The Other Unregulated liusinesses were valued business by business, utilizing perpetuity l growth rates of (0.5%) to 7.0% and discount rates ranging from 9.25% to 23.0%, depending upon the particular l business. The Other Unregulated liusinco.es 6ho were analyred taking into account only current businesses I and those planned by the end of fiscal 199L This analysis indicated an enterprise reference range of -

approsimately $2.9 billion to $3.2 bil!;on for Duquesne Light and an overall enterprise reference range for DQU of upprosimately $3.5 billion ta $3.9 billion.

CSrit also performed a d;scounted cash flow analys of APS' electric utilities ousinesses (consisting of West Penn Power Company (" West Penn"), The Potomac Edison Company (" Potomac Edison") and Monongahela Power Company ("Monongahela")) (collectively, the "APS Electrie Utihty liusinesses"),

Allegheny Generating Company and AYP Capital, Inc. ("AYP Capital") based upon internal culmates of APS management, as adjusted after consultation with DQE management. Ranges of estimated terminal values were calcuhted by applying multiples of terminal year 2006 OCF of 6.$x to 7.0x to the APS Electric Utility Businesses,8.0x to F.$x to Allegheny Generating Company and 10.Os to ll.0x to AYP Capital. The after tax free cash flow streams and estimated terminal values were then discounted to present value using discount rates ranging from 7,75% to 8.25% This analysis indicated an enterprise reference range for APS of ,

approximately $6.1 billion to $6.6 billion.

Sr/rcred Companics Analysis. CSF8 compared certain financial and operating information of Duquesne Light to corresponding data of the following selected publicly traded companies in the electric utility industry:

APS: Cinergy Corporation; DTE Eaergy Company; GPU, Inc.; New England Electric System Ohio Edison Company; PECO Energy Company; and PP&L Resources, Inc. (the "Duquesne Comparables"). CSFil compared adjusted market values (equity market value plus nel debt and other .orporate adjustments) as a ,

multiple of, among other things, estimated calendar 1997 OCF and operating income, and compared equity market values as a multiple of net income and book value. Estimates for the Duquesne Comparables were based on estimwes of selected in"estment banking firms, and estimates for Duquesne Light were based on internal estimates of DQE management, as adjusted after consultation with DQE management. All multiples were based on closinkstock prices on April 1,1997. Applying a range of selected multiples for the Duquesne Comparables of estimated calendar 1997 DCF, operating income, net income and book value of $.7x to 6.7x, 9.5x to 10.0x,11.0s to 12.0s and 1.3x to 1.$x, respectively, to corresponding financial data of Duquesne Light resuhed in an enterprise reference range for Duquesne Light of approximately $2.8 billion to $3.1 billion.

CSFil did not derive an enterprise refuence range for Montauk, the Other Unregulated Businesses or Duquesne Light's pencration equipment ingestment based on this analysis since there were no publicly traded companies directly comparable to Montaut, the Other Unregulated Businesses or such investment.

CSFD also compared certain financial and operating information of the APS Electric Utility llusinesses and Allegheny Generating Company to corresponding data of the following selected publicly traded companies in the electric utility industry: American Electric Power Company, Inc.; Carolina Power & Light Company; Dominion Resources Inu; NIPSCO Industries Inc.; OGE Energy Corp.; and PP&L Resources,-

loc. (the "APS Comparables") CSFB compared adjusted market values as a multiple of, among other thinp. estimated calendar 1997 OCF and operating income, and compared equity market values as a muhirle of net income and book value. Estimates for the APS Comparables were based on estimates of selected investment banking firms and estimates for APS were based on internal estimates of APS management, as adjusted after consultation with DQE management. All multiples were based on closing stock prices on April 1,1997. Appi, sing a range of selected multiples for the APS Comparables of estimaMd calendar 1997 34 m.s-.- m,www.r-, ,-,y,-m,.-.~, - .

,. ,,--m ..,...-+-o4w_. gg%-,-- ym m.cy-,. v,.,.-wre,a.--,%-%,--,,,wo%,,y, , m.,,,-wg -

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OCF, operating incorne, net income and twk value of 6.2s to 6.h,9.Os to 10.Os,12.Os to 13.0x and 1.5.: to i 1.hs, respectively, to cortcapondmp financial data of the APS Electric Utility llusincues and 7.5x to h.5s,9.h

to 10.5x,12.Os to 13.0s and I,$s to 1,8s, respectiscl), to corresponding financial data of Allegheny Generating Compan), resulted in un overall enterprise teference range for the APS Electric Utility llusinesses and

, Alleghen) Generating Company of approsimatcly $6.0 billion to $6.5 billion. CSFil did not derive an cnterprise reference range for AYP Capitat bawd on this analysis since there were no publicly traded

- companies directly comparable to AYP Capital.

Sr/rcred Transactions Analpix. Using publicly usailable information, CSFil analyicd the purchase

- prices and implied transaction multiples paid or propmed to be paid in the following selected transactions in the electric utility industry (acquitor/ target)

Western itesources,Inc./Kamas City Power & Light Company:

l

. The llrooklyn Union Oas Company /Long Island Lighting Company; Ohio Edimn Company /Centerior 1 -

Energy Corporation: Delmarva Power & Light Company / Atlantic linerp) Inc4 MidAmerican Lnergy i Company /IES Industries Inc.; Enron Corporation /I'ortland Ocneral Corporation; Kansas City Power & Light  !

I Company /UtihCorp United inc.; WPL lloidings, Inc./IES Industrics Inc. and interstate "ower; Public i Service Company of Colorado / Southwestern Public Service Company; Union Electric Company /CIPSCO Incorpoi1ted. PECO Energy Company /PPAL ltesources, inca and Wisconsin Encrpy Corporation / Northern i States Power Company (the " Selected "Iransactions"). CSIil compared adjusted purchase prices as a multiple oflatest 12 months DCF and operating income, and swpared purchase prices as a multiple of net j income and book value. All multiples were based on historical financial information available at the time of announcement of the transaction. Applying a ranyc of selected multipks for the Selected Transactions of the i latest 12 months OCF, operating income, net income and look value of 6.5x to 7.5s,10.5x to ll.5x,14.5x to 15.5x and 1,7x to 1,9x, respectively, to corresponding financial data of Duquesne Light resulted in un emerprise reference range for Duquesne Light (excluding Duquesne Light's peneration equipment invest.

ment) of approximately $3.3 billion to $3.6 billion. CSI11 did not derive an enterprise reference ranpc for j Montauk, the Other Unreputated flusinesses or Duquesne Light's generation equipment investment based on j this analysis since there were no transactions uhich involved companics directly comparable to Montaut, the Other Unregulated llusinesses ot such investment.

I Aggregate Reference Ranges. On the basis of the valuation methodologies employed in the analyses described above, CSFil derived are aggregate enterprise and per share equity reference range for DQE of approximately $3.7 billion to $4.1 billion, or approximately $30.32 to $35D4 per fully diluted common share,

! and an aggregate enterprise and per sharc equity reference ranpc for APS of approximately 50.0 billion to $6.6 billion, or approximately $27.32 to $31.91 per fully diluted common shate, j Relarhc Contribution Analysix. CSFil analyred the relative contributions of DQE and APS to the estimated revenues, OCF, operating income, net income, book value and total assets of the pro forma combined company for fiscal 1997. This analysis indicated that, in f scal 1997, DQE would contribute approximately 33% 37% 26% 40% 39% and 41% of the revenues, OCF, operating income, r":t income, book value and total assets, respectively, of the pro forma combined company, and APS would contribute approximately 67% 6N 74% 60% 61% and 59% of the revenues, OCF, op: rating income, net income, book

> value and total assets, respectisely, of the pro forma combined company, liased on the Exchanpc 1(atio, current holders of DQE and APS would own approximately 42% and $8% respectively, of the combined company upon consummation of the Merger.

Pro rorma Merger AnulpIA. CSFil aral)ied the potential pro forma effect of the Merger on the EPS of APS during Oscal year > 1997 through 1999. This analysis indicated that the Merger could be dilutive to APS' EPS in fiscal years 1997 and 1998 and accretive to APS' EPS in finn! year 1999. The actual results achieved by the combined company ma3 vary from projceted results and the variations may be material.

4 Pursuant to the terms of CSFirs enpapement,- DQE has aptced to pay CSFil for its services in connection with the Merger an aggregate f nancial advisory fee of $8.65 million. DQE also has agreed to

reimburse CSFil for reasonable out of pocket expenses incurred b) CSFilin perforrning its services, including the fees and expenses of legal counsel and any other advisor retained by CSFil, and to indemnify CSFit and

certain related pctsons and entitics against certain liabilitics, including liabilities under the federal secunties 35 y ,, nw,--~.. -- -

-w--m----mn-,rm. - - -e --,m. ,m- , , - - - - - , , . ---wmm>v ,----e , - - ~ + - ~ - - -- ---v

laws, arising out of CSI li's enparement. CSI li has in the past previded knancial services to DQli unrelated to the proposed Merper, for ubich services CSFil he received compensation.

In the ordinary course of its businco, CSril and its afliliates may acti cly trade the debt and equity securities of both DQE and AFS for their own accounts and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities.

Management and Operations Iollowing the Merger The Merrer Agreement provides that, from and after the EITective Time, the APS lloard will be composed of 15 directors and that, immediately prior to the EfTective Time, DQE will designate sis of such directors, att APS will designate nine of such directors, and that all such designated directors will be the ,

directors of APS from and af ter the EfTective Time until their succewors have been duly elected or appointed l and qualified or until their earlier death, resignation or removal in accordance with the APS Charter and the APS It> laws. Although us of the date hereof, neither DQE nor APS has determined whom it will designate to he directors of APS following the EITective Time, each of DQE and APS currently intends to nominute persons from among the members of its board of directors at the Effective Tinie. In addbn, the Merger Agreement provides that following the Ellective Time four of the six directors of APS designated by DQE pursuant to the Merper Agreement will tw the chairmen of the following committees of the APS lloard:

Nuclear Review; New liusincu; Finance; and Employee and Community Reladons, and that four of the nine directors of APS desipated by APS pursuant to the Merper Agreement will be the chairmen of the following committees of the APS Iloard. Audit Management P.eview; Nomineing; and licael,ts.

The Merger Agreement further provides that, from and after the Effective Time, Alan J. Nola will be the i Chairman and Chief Executhe Ollicer of APS and David D. Marshall will be the President and Chief Operating Ollicer of APS.

The Merper Agreement also prmides that, from and after the Effective Time, APS' corparate headquarters will remain in Maryland and substantial operations of APS Subsidiaries, including the Surviving Corporation, will remain in the Pittsburgh, Pennsylvania area.

Cautionary Statement Concerning Forward looking Statements Certain rnatters discussed in this ,loint Proxy Statement / Prospectus contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward looking statements relate to anticipated financial performance, management's plans and objectives for future operations, business prospects, market canditions and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward looking statements. In order to comply with the terms of that safe harbor APS and j DQE note that a variety of factors could cause the actual results of the combined company to difier materially l from the anticipated results expressed in such forward looking statements. The following discussion is l

intended to identify certain factors that could cause future outcomes to difier materially from those set forth in the forward looking statements contained in this Jomt Proxy Statement / Prospectus.

Forward-looking statements include the information concerning possible or assumed future results of operations of APS and DOE set forth under "-Opinions of Financial Advisors," "- Reasons for the Merger: Recommendations of the lloards of Directors," and "- Synergies." Readers are cautioned that such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of APS and DQE to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements, Such factors may affect APS', DQE's or the combined company's operations, markets, products, sersices and prices. Such factors include, among others. the following: pencral economic and business conditions: industry capacity changes in technology; changes in political, social and economic conditions; regulatory matters; integration of the operations of APS and DQE; reFulatory conditions to the combination; the loss of any significant customers changes in business strategy or development plans; the speed and degree to which competition enters the electric utility industry; state and federal legislative and regulatory initiatives that increase competition, affect cost and investment recovery and have an impact on rate structures; industnal, commercial l 30

_ . . _. ., , ,--_ _ -,_ _. _ -_ _. -__ _ _ _ . ___ _ _____4_ -_

i i

and residential growth in the senice terntories of APS and DQE; the weather anc' other natural phenomena: ,

the timin ,nd extent of changes in commodity prices and interest rates: and piouth in opportunities for Subsidiaries of APS and DQL 1

Till: MI:RGl:lt AGl ! rNI:NT

This section describes certain aspects of the hierger Agreentit. This section is not a complete description of the Merger Agrcernent and is qualihed in its entlicty by reference to the hierger Agrccment, which it attached as Appendix A to thh Joint /*roy Statement /l'rospectus and b incorporated herein by reference. All holde's of DQl

Common Stock and Al'S Common Stock are urged to read the Merger Agrcernent in its entirety.

Hepresentations and Warrantles T

the Merger Agreement contains various representations and warranties of DQE, APS and Merger Sub, certa!n of which are qualified by a Material Adverse Eficct (as denned below) standard. Pursuant to the 1

Merger Agreement, DQE represents and warrants to APS and APS represents and warrants to DQE ,

3 regarding, among others, the following inattets (1) the corporate existence and capitalization of it and its respective Subsidiatics: (ii) corporate power and authority to execute, deliver and perform its obligations under the Merger Apteement and the Stock Option Agreement and to consummate the Merger; (iii) the execution,6elivery and performance of the Merger Agreement and the Stock Option Agreement, and the consummation of the Merger and the other transactions contemplated by the Merger Agreement and the l

Stock Option Agreement, will not violric any law, rule, regulation, any governmental or non-governmental permit or license or the organizational documents of it er of its Subsidiaries and the making or provision of all required filings and notices with or to any governmental or regulatory authority, agency, commission, body or other governmen al enthy (" Governmental Entity"): (iv) consents, registrations, approvals, permits or authorizations required by any Governmental Entity, including 6 tings with applicable utility commissions, the SEC, the FERC and :he NRC; (v) its nnancial statemenu; (vi) the conduct of its ar;d its Subsidiaries' businesses since December 31, 1996: (vil) pending or threatened civil, criminal or administrative actions, suits; claims, hearings, investigations or proceedings and obliges >ns and liabihties of it or any of its Afliliates (as that term it, defined under Rule 145 of the Securities Act of 1933, as amended (the "Securitics Act"), and for the purposts of applicable interpretations regarding the "pouling of interests" method of accounting);

(viii) its bonus, deferred compensation, pension, retirement, profit sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted s = ek, stock option, employment, termination, severance, compensation, medical, heahh or other plan, agreement,-policy or arrangement that covers employees, directors, former employees or former directors of APS DQE or their respective Subsidiaries ("Compen'a.

tion and Benefit Plans"); (ix) compliance with all Laws: (x) with respect to DQE, the inapplicability of any

" fait price," " moratorium " " control rhare ucquisition" or other similar anti takeover statute or regulation, i including the Pennsylvania Control Transactions Statute (each, a " Takeover Statute"): (xi) environmental matters; (xii) the absence of any action that uould prevent APS from accounting for the Merger as a " pooling of interests" or prevent the Merger and the other transactions contemplated by the Merge Agreement from

, qualifying as a " reorganization" within the meaning of Section 368(a) of the Code; (xiii) tax matters:

(xiv) labor matters; (xv) the adequacy and maintenance of insurance coverage for all insurable risks; (xvi) intellectual property rights and infringements on intellectual property rights; (xvii) its and its

" subsidiary companies'" and " affiliates'" (as such terms are defined in the PUllCA) status as a regulated i utility: with respect to DQE, that it is an exempt holding company under Section 3(a)(1) of the PUllCA and, with respect to APS, that it is a registered holding company under the PUllCA; and ( Aviii) with respect to DQE, that its Nuclear Facilities have conducted their operations in compliance with all applicable laws and that insurance coverages consistent with industry practice are maintained.

" Material Adverse Effect" is defined in the Merger Agreement to mean, with respect to any person, a material adverse effect on the financial condition, properties, operations, busiricss or results of operations of such person and its Subsidiaries taken as a whole: provided, however, that any such effect resuhing from any j change in law, rule, or regulation promulgated by (1) the United States Congress, (ii) the SEC with respect to the PUHCA, (iii) the Pennsylvania State Legislature or the PAPUC or (iv) the FERC, or any interpretation

' 37 i

i I l

. - . . - -- - - - -_. . ._ _~ - - - - - - - - -

of any such law, rule or regulation, or the application of the Pennsylvania Restructuring Ler uion, t:.at affects both DQE and its Subsidiaries, taken as a whole, and APS and its Subsidiaries, taken a_ ,, whole, is considered only when determining if a Material Adverse' EfTect has occurred to the extent that such effect on one such party exceeds such efTeet on the other party.

Conduct of Business Pending the Merger; Certain Cmenants; Acquisition Proposals interim Operations The Merger Agreement provides that during the period of time from the date of the Merger Agreement until the EfTective Time, unless approved in writing by the other party or unless expressly contemplated by the MerFer Agreement, the Stock Option Agreement, the respective budgets of DQE and APS (which have been submitted to the other party), or as required by applicable Law: (i) each of DQE and APS will conduct its and its Subsidiaries' businesses in the ordinary and usual course and, to the extent consistent therewith, each of DOE and APS will use its and its respective Subsidiaries

• best efTorts to preserve its business organization and maintain its existing relations and goodwill with customers, suppliers, creditors, regulators, lessors, employees and business associates; (ii) each of DQE and APS will not ( A) issue, sell, pledge, dispose of or encumber any capital stock owned by it in any of its respective Subsidiaries; (H) amend its articles of incorporation, charter or bylaws; (C) split, combine or reclassify its outstanding shares of capital stock; (D) declare, set aside or pay any dividend payable in cash, stock or property in respect of any capital stock other than dividends from its direct or indirect wholly ouned Subsidiaries, other than (x) in the case of DQE, regular quarterly cash dividends not in excess of $0.34 per share of DQE Common Stock (which amount may, at the election of DQE, be increased by not more than 6.5% per year beginning in the 1997 fiscal year of DQE) and regular quarterly cash dividends on the preferred and preference stock of its Subsidiaries and (y) in the case of APS, regular quarterly cash dividends not in excess of 50.43 per share of APS Common Stock (which amount may, at the election d APS, be increased by not more than 6.5% per year beginning in the 1997 fiscal year of APS) and regular quarterly cash dividends on the preferred shares of Subsidiarie of APS; or (E) repurchase, redeem or otherwise acquire (except for (x) mandatory sinking fund obligations existing on the date of C Merger Agreement and (y) redemptions, purchases, acquisi: ions or issuances required by the respective terms of any DQE Stock Plans, in the case of DQE, or APS Stock Plans, in the case of APS, or any dividend rei-c " plans in effect on the date of the Merger Agreement in the ordinary course of the operation of such w permit any ofits Subsidiaries to purchase or otherwise acquire, any shares of its capital stock or any 4 .cs cavertible into or exchangeable or exercisable fcr any shares of its rapital ttoch (iii) each of DQE and APS will not and will not perrnit any ofits Subsidiaries to ( A) issue, sell, pledge, dispose of or encumber any shares of, or securities convertible into or exchangeable or exercisabic for, ar options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock of any class or any other pronerty or assets (other than (x) in the case of DQE, shares of DQE Common Stock issuable pursuant to opuons outstanding on the date of the Merger Agreement under the DQE Stock Plans or upcn conversion of the Preferred Stock of DQE (the " Preferred Shares") and additional stions or rights to acquire shares of DQE Common Stock required by the terms of any DQE Stock Plan as in effect on the date of the Merger Agreement in the ord' ary course of the operation of such DQE Stock Plan, (y) in tbc case of APS, shares of APS Common Stock issuable pursuant to options outstanding under the APS Stock Plans and additional options or rights to acquire shares of APS Common Stock required by the terms of any APS Stock Plan as i, efTect on the date of the Merger Agreement in the ordiriary course of the operation of such APS Stock Plan, and (z) issuances of securities in connection with grants or awards of stock based compensation made in accordance with the terms of the Merger Agreement); (B) other than in the ordinary and usual course of business, and except for long-term indebtedness incurred in connection with the refinancing of existing indebtedness either at its maturity or at a lower ccs: of funds, transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of or encumber any other property or assets (including capital stock of any of its Subsidiaries) or incur or modify any material indebtedness or other liabi ity; (C) make any commitments for, make or authorize any capital expenditures other than (x) capital expenditures not in excess of $25,000,000 in the aggregate incurred in connection with the repair or replacement of facilities destroyed or damaged due to casualty or accident (whether or not covered by insurance), (y) as required by Law, or (z) in amounts less than 55,000.000 individually and $15,000,000 in the aggregate; or (D) make any acquisition of, or investment 38

,m

in, assets or stock of any other person or entity in execss of $15,(KO,(K0 in the agg eate; t" ) Nither DQE nor APS or any of their respective Subsidiaries will terminate, establish, adopt, enter ink uake any new grants or awards of stock based compensation or other benefits under, amend or otherwise tr adify any Campensation and Benefit Plans or increase the salary, wage, bonus or other compensation of any directors, oflicers or employees except ( A) for grants or awards to its or its respective Subsidiarict directors, oflicers and

employees under existing Compensation and Benefit Plans in such amounts ar.d on such terms as are consistent with past practice, (B) in the normal and usual course of busiacss (which shall include normal 4 periodic performance reviews and related compensation and benefit increases, annual reestablishment of 4

Compensation and Benefit Plans and the provision of individual Compensation and Benefit Plans consistent with past practice for newly hired or appointed officers and employees and the adoption of Compensation and

{ Benefit Plans for employees of new Subsidiaries in amounts and on terms consistent with past practice) or

' (C) for actions necessary to satisfy existing contractual obligations under Compensation and Benefit Plans existing as of the date of the Merger Agreement; (v) each of DQE and APS will consult with the other prior to settling or compromising, or permitting any of their respective Subsidiaries to settle or compromise, any material claim or litigation, and neither DQE nor APS or any of their respective Subsidiaries will, except in the ordinary and usual course of business, modify, amend or terminate any of its material contracts or waive, release or assign any material rights or claims: (vi) neither DQE nor APS or any of their respective Subsidiaries will make any tax election or permit any insurance policy naming it as a beneficiary or loss-payable payce to be canceled or terminated except in the ordinary and usual course of business; and (vii) neither DOE nor APS or any of their respective Subsidiaries will take any action or omit to take any action that would prevent the Merger from qualifying for

• pooling of interests" accounting treatment or as a

" reorganization" within the meaning of Section 368(a) of the Code or that would cause any of their respective representations and warranties in the Merger Agreement to becor,a untrue in any material respect.

Ara 6 ~ ion Proposals The Merger Agreement provides that, except as contemplated by the budgets submitted by DQE to APS and ( aPS to DQE and except as expressly contemplated by the Merger Agreement, neither DQE nor APS or any of their respective Subsidiaries will, at.d DQE and APS will not authorize or p:rmit their ollicers, directors, employees, agents o, other representatives retained by them or any of their Subsidiaries, respec-tively, to (i) solicit, initiate or encourage, or take any other action desiened to facilitate, directly or indirectly, any inquiries or the making of any Acquisition Proposal or (ii) participate in any discussions or negotiations relating to any Acquisition Proposal or Acquisition Transaction. The Merger Agreement does not prohibit either DQE or APS, at any time prior to the obtaining of the necessary vote of the DQE stockholders to effectuate the Merger, in the case of DQE, or the necessary vote of APS stockholders to etTectuate the Merger, in the case of APS, from (i) furnishing information with respect to it and its Subsidiaries to any person pursuant to a customary confidentiality agreement (as determined by the party receiving such Acquisition Proposal after consultation with its outside counsel) and (ii) participating in negotiations regarding such Acquisition Proposal,if the DQE Board or the APS Board, as applicable, determines in good faith, based on the advice of outside counsel, that it is necessary to do so to avoid a breach of its duties under state corporate Law applicable to the conduct of directors of DQE or APS, as applicable,in response to an Acquisition Proposal which was not solicited by it or which did not otherwise result from a breach of these provisions of the Merger Agreement, subject to such party's compliance with the pro'isions v of the Merger Agreement which relate to disclosure of Acquisition Proposals, which are discussed in the third succeeding pragraph below, in addition, the Merger Agreement provides that, except as expressly permitted by the Merger Agreement, neither the DQE Board nor the APS Board, as applicable, or any committee thereof, will (i; withdraw or modify, or propose publicly to withdraw or modify,in a manner adverse to the other party to the Merger Agreement, the approval or recommendation by such board of directors or such committee of the Merger or the adoption and approval of the matters relating to the Merger to be considered at the DQE Meeting,in the case of DQE, and the APS Special Meeting,in the case of APS, (ii) approve or recommend, ,

or propose publicly to approve or recommend, any Acquisition Proposal other than the Merger, or (iii) cause or permit DQE or APS, as applicable, to enter into any Acquis; tion Agreement, related to any Acquisition 39

)

, Proposal, Notwithstanding the provisions of ths Merger Agreement described in the presious sentence,in the esent mat prior to the obtaining of the necessary vote of the stockholders of DQE to ellectuate the Merger,in 1

the case of DQL, or the necessary vote of the stockholders of APS to etTectuate the Merger, in the case of

}

4 APS, there exists a Superior Proposal (as dehned below) and the DQE Iloard or.the APS lloard, as

. applicable, determines that there is not a substantial probability that the necessary vote of the stockholders of i

DQE to effectuate the Merger or the necessary vote of the stockholders of APS to efTectuate the Merger, as applicable, will be obtained due to the existence of such Superior Proposal, the DQE llaard or the APS Iloard, as applicable, may, subject to the terms of the Merger Agreement described in this and the following j

sentences, withdraw or modify its approval or recommendation of the Merger or the approval of the matters to

, be considered at the DQB Meeting,in the case of DQE, and the APS Special Meeting,in the case of APS, 3

and the DQE Board or the APS lloard, as applicable, may (subject to the terms of the Merger Agreement j

described in this and the following sentences) approve or recommend such Superior Proposal or terminate the i Merger Agreenient, but only if (a) the party seeking to terminate is not in material breach of any of the terms of the Merger Agreement (b) the board of directors of the party sceling to terminate authorizes DQE or

APS, as applicable, to enter into a binding written Acquisitian Agreement concerning an Acquisition

[

4 Transaction that constitutes a Superior Proposal and the party seeking to terminate notifies the other party in

' u riting that ;t intends to enter into such an Acquisition Agreement, attaching such Acquisition Agreement to such notice and specifying any material terms and tonditions not included in the Acquisition Agreement and 4

further identifying the party maki g the Superior Proposal, (c) the other party does not make, within lificen business days of receipt of written notification from the party seeking to terminate of such ptrty's intention to enter into a binding Acquisition Agreement for a Superior Proposal, an ofter that the board of directors of such i

party believes, in good faith after consultation with its financial advisors, is at least as favorable, from a

linancial point of view, to its stockholders as the Superior Proposal, aad (d) the party seeking to terminate i

prior to such termination pays to the other party in immediately availabl,: funds any fees required to be paid j pursuant to the provisions of the Merger Agreement Each of DQE and APS has agreed in the Merger i Agreement ( A) that it will not enter into a binding Acquisition Agreement until at least the sisteenth business l day after it has provided the notice to DQE or APS, as applicable, required by the Merger Agreement and i (11) to notify APS or DQE, as applicable, promptly, if its intention to enter into the written Acquisition Agreement referred to in its no;ification changes at any time after giving such notification, t

A " Superior Proposal" is defined in the Merger Agreement to mean, in respect of DQE or APS, as applicable, any proposal made by a third party to acquire, directly or indirectly, for consideration consisting of l

cash and/or securities, more than 50% of the equity securities of DQE or APS. as the case may be, entitled to i

vote generally in the election of directors or all or substantially all the assets of DQE or APS, as the case may be, and otherwisc on terms which the board of directors of such party determines in its good faith judgment l (x) (based on the written opinion of a financial advisor of nationally recognized reputation (which opinion wi'l be provided to the other party)) to be more favorable from a financial point of view to its stockholders after consideration of the Merger and the transactions contemplated by the Merger Agreement and for which

-financing, to the extent required,is then committed, (y) to be more favorable to such party after consideration

[ of the Merger and the transactions contemplated by the Merger Agreement after taking into account any l . additional constituencies (including stockholders) and pertinent factors permitted under the laws of the r Commonwealth of Pennsylvania or the laws of the State of Maryland, as applicable, and (z) to constitute a transaction that is reasonably likely to be consummated on the terms set forth, taking into account all legal, financial, regulatory and other aspects of the proposak The Merger Agreement. also provides that if any party receives an Acquisition Proposal it will

' immediately advise the other party orally and in writing of such Acquisition Proposal, any request for information, the material terms and conditions of such request or Acquisition Proposal and the identi.) of the Person making such request or Acquisition Proposal in addition. DQE and APS have agreed that if either has received un Acquisition Proposal it will keep the other party reasonably informed of the status and details of any such Acquisition Proposak i

! The Merger Agreement further provides that nothing contained in the Merger Agreement will prohibit a i party from taking and disclosing to its stockholders a position contemplated by Rule 14e 2(a) under the 7

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4 Securities Exchange Act of 1934, as amended (the " Exchange Act") with respect to an Acquisition Proposal by means of a tender or exchange otter.

Conditions The respective obligations of DQE, APS und Merger Sub to effect the Merger are subject to the ,

satisfacti on or waiver at or prior to the Effective Time of each of the following conditions: (i) the Merger

- Agreement having been duly appro,ed by holden 'Ishares of DQE Common Stock and by APS as the sole stockholder of Merger Sub and the issuance of APS Common Stock pursuant to the Merger having beca duly approved by the holders of APS Common Stock; (ii) the shares of APS Common Stock issuable to holders of DQE Common Stock pursuant to the Merger Agreement having been authorized for listing on the NYSE i upon ollicial notice of issuance; (iii) the waiting period applicable to the consummation of the Merger under the llSR Act having expired or been terminated and, other than the filing of the Pennsylvania Articles of

Merger, all filings required to be made prior to the EfTective Time by DOE or APS or any of their respective

" Subsidiaries with, and all consents, approvals and authorizations required to be obtained prior to the EfTective Time by DQE or APS, or any of their respective Subsidiatics, from any Governmental Entity (collectively,

" Governmental Consents") in connection with the execution and delivery of the Merger Agreement and the consummation of the transactions contemplat :d by the Merger Agreement having been made or obtained (as

! the case may be) and having become Final Orders (as defmed under "-Termination"), and such Final Orders not, individually or in the aggregate, containing terms that would have, or be reasonably likely to have, a Material Adverse Ellect on DQE or a Material Adverse Effect on APS (excluding, after the EfTcctive Time, DQE and its Subsidiatics); (iv) no court or Governmental Entity of competent jurisdiction having enacted, issued, promulgated, enforced or entered any Order, and no Governmental Entity having instituted any proceeding seeking any such Order; (v) the Registration Statement, of which this Joint Proxy Statement /

Prospectus is a part, having become efTective under the Securities act and no stop order suspending such cffectiveness having been issued and no proceedings for that purpose having been initiated or been threatened

by the SEC; (vi) APS havint received all state securities and " blue sky" permits and other authorizations necessary to consummate the transactions contemplated by the Merger Agreement; and (vii) APS and DQE having received from APS' independent accounting firm a letter to the effect that the Meiger will qualify for

, " pooling of interests" accounting treatment.

In addition, the obligations of APS and Merger Sub to effect the Merger are also subject to the satisfaction

{

or waiver by APS, prior to the Effective Time, of the following conditions: (i) the representations and warranties of DQE set forth in the Merger Agreement being true and correct in all material respects as of the date of the Merger Agreement and as of the Closing Date, including the representation by DQE relating to the absence of

- any change in the financial condition, properties, business or results of operations of DQE that would bc reasonably likely to have a Material Adverse Effect on DQE and its Subsidiaries (except to the extent any such i representation or warranty expressly speaks as of an earlier date), and APS having received a certificate signed on behalf of DQE by an executive officer of DQE to such effect; (ii) DQE having performed in all material 4

respects all obligations required to be performed by it under the Merger Agreement at or prior to the Closing Date, and APS having received a certificate signed on behalf of DQE by an executive officer of DQE to such effect; (iii) DQE having obtained the consent or approval of each person whose consent or approval is reqmred to consummate the transactions contemplated by the Merger Agreement and the Stock Option Agreement under any contract to which DOE or any of its Subsidiaries is a party, except those for which the failure to obtain .

such consent or approvak individually or in the aggregate,is not reasonably likely to have a Material Adverse

+ Effect on DQE or is not reasonably likely to materially adversely affect the ability of DQE to consummate the transactions contemplated by the Merger Agreement; (iv) APS taving received the opinion of Sullivan &

Cromwell to the effect that the Merger will be treated for Fedemt mcome tax purposes as a "rcorganization" within the meaning of Section 368(a) of the Code, and that each of APS. Merger Sub and DOE will be a party i

to that reorganization within the msaning of Section 368(b) of the Code; (v) APS having received a letter from each of DQE's Affiliates, making certain representations and assurances in connection with the resale of APS Common Stock received pursuant to the Merger Agreement and the transactions contemplated thereby (each

, an " Affiliates Letter") from each person identified as an affiliate of DQE m accordance with the provisions of i

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the Merger Agreement; (vi) APS having recched from its independent public accounting Grm and DQE's independent public accounting firm customary " comfort" letters.

I urther, the obligation of DQE to efTect the Merger is also subject to the satisfaction or waiver by DQE, prior to the Effective Time, of the following conditionst (i) the representations and warranties of APS and Merger Sub set forth in the Merger Agreement being true and correct as of the date of the Merger Agreement and as of the Closing Date, including the representation by APS relating to the absence of any change in the ,

financial condition, properties, business or results of operations of APS that would be reasonably likely to have a Material Adverse Ellect on APS and its Subsidiaries (except to the extent any such representation and warranty expressly speaks as of an earlier date), and DQE having received a certificate signed on behalf of APS by an executive ollicer of APS and Merger Sub to such efTect; (ii) each of APS and Merger Sub having performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the Closing Date, and DQE having received a certificate signed on behalf of APS and Merger Sub by an executive ollicer of APS to such efTect; (iii) APS having obtained the consent or approval of each person whose consent or approval will be required in order to consummate the transactions contemplated by the Merger Agreement and the Stock Option Agreement under any contract to which APS or any of its Subsidiaries is a party, except those for w hich failure to obtain such consents and approvals, individually or in the aggregate,is not reasonably likely to have a Material Adverse EITect on APS or is not reasonably likely to matermfly adversely alTect the ability of APS to consummate the transactions contemplated by the Merger Agreement; (iv) DQE having received the opinion of LeBoeuf, Lamb, Greene & MacRae, LL.P. to the efTect that the Merger will be treated for Federal ineome tax purposes as a reorganization within the meaning of Section 36S(a) of the Code, and that each of APS, Merger Sub and DQE will be a party to that reorganization within the meaning of Section 368(b) of the Code; and (v) DOE having received from its independent public accounting firm and APS' independent accounting firm customary " comfort" letters.

Each of the foregoing conditions to the Merger, including the receipt of opinions with respect to the i federal income tax consequences of the Merger, may be waived solely at the discretion of the party waiving l such condition. In the event that any such waiver occurs after the respective stockholders have approved the issuance of APS Common Stock,in the case of APS, or the Merger Agreement,in the case of DQE, at their respective Stockholders Meetings, APS or DQE, as the case may be, may seek to re solicit the approval ofits respective stockholders. If either party waives the condition relating to the receipt of an opinion with respect to the federal income tax consequences of the Merger it will recirculate a revised version of this Joint Proxy Statement / Prospectus to disclose the waiver of this condition, to disclose material risks to its stockholders as a result of the waiver of this condition, if any, and to disclose any related material disclosures. In addition, each party would re-solicit the approval of its respective stockholders in the event that it waived the condition relating to the receipt of an opinion with respect to the federalincome tax consequences of the Merger and the tax consequences of the Merger are, at such time, materially difTerent from the tax consequences described under "Certain Federal Income Tax Consequences of the Merger,"

l l Modification or Amemiment: Waber of Conditions: Extension The Merger Agreement prosides that, subject to the provisions of applicable Law, the parties to the ,

-Merger Agreement may modify or amend the Merger Agreement, by written agreement executed and '

delivered by duly authorized o!!icers of the respective parties. The Merger Agreement also provides that the conditions to each of the parties' obhgations to consummate the Merger are for the sole benefit of such party and at any time prior to the Effective Time such party may waive such conditions in whole or in part or extend the time for the performance of any of the obligations or other acts of the other parties thereto to the extent permitted by applicable Law.

Termination The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the i EITective Time (a) by mutual written consent of DQE, APS and Merger Sub by action of the DQE Board and the APS Board or (b) by action of the DQE Board or the APS Board if (i) the Merger has not been

! consummated by the Termination Date (prmided that the Termination Date will automatically be extended for six months if, on the Termination Date: ( A) any of the conditions relating to regulatory consents has not 42 l

i l

l

been satisfied or waised (11) each of the other conditions to the consummation of the Merger has been satished or waited or can readily be satished, and (C) an> Gosernmental Consent that has not >ct been obtained is being pursued dihpently and in good faith), (ii) any Governmental Consent will have been made or obtained by action by the relevant Governmental Entity that has not been rescrsed. stayed, enjoined, set aside, annulled or susper'Jed, with respect to which any waiting period prescribed by law before the transactions contemplated by the Merger Apresment 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

, (" Final Orders") which contain terms or conditions that would cause any of the conditions relating to 4 regulatory consents not to be satisfied, (iii) any Order permanently restraining, enjoining or otherwise prohibiting the Merger has become final and non appealable (iv) the necessary vote of DQE's stockholders to 1 efTectuate the Merger has not been obtained at the DQE Meeting, including any adjournments thereof, or i (v) the necessary vote of APS' stockholders to efTectuate the Merger has not been obtained at the APS j Special Meeting, including any adjourn.nents thereof The Merger Agreement provides that the right to terminate the Merger Agreement pursuant to clause (i), (ii), (iv) or (v) above will not be available to any party that has breached in any material respect its obligations under the Merger Agreement in any manner i- that has contributed to the failure of the Merger to be consummated.

Further, the Merger Agreement may be terminated and the Merger may be abandoned at any time prior

to the EfTectisc Time by action of the DQE Board: (a) subject to and in accordance with the termination provisions of the Merger Agreement relating to Acquisition Proposals (see "The Merger Agreement-Conduct of Business Pending the Merger; Certain Covenants: Acquisition Proposals- Acquisition Propos-j als"); or (b) if (i) the APS Board has withdraw n or adversely modified its approval ur recommendation of the Merger Agreement or failed to reconfirm its recommendation of the Merger Apecment after a written request i

by DQE to do so, (ii) there has been a material breach by APS or Merger Sub of any representation, warranty, covenant or agreement contained in the Merger Agreement that is not curable or, if curable,is not cured within 30 days after written notice of such breach is given by DQE to the party committing such breach, or tiii) APS or any of its afliliates, representatives or agents takes any of the actions that would be proscribed by certain provisions of the Merger Agreement which restrict APS'sonduct with respect to Acquisition Proposals (see "The Merger Agreement-Conduct of Business Pending the Merger; Certain Covenants; Acquisition Proposals- Acquisition Proposals").

l In addition, the Merger Agreement may be terminated and the Merger may be abandoned at any time i prior to the EfTective Time by action of the APS Board: (a) subject to and in accordance with the termination I provisions of the Merger Agreement relating to Acquisition Proposals (see "The Merger Agreement-j Conduct of Business Pending the Merger; Certain Covenants: Acquisition Proposals- Acquisition Propos-

als"); or (b) if (i) the DQE Board has withdrawn or adversely modified its approval or recommendation of the Merger Agreement or failed to reconfirm its recommendation of the Merger Agreement after a written request by APS to do so, (ii) there has been a material breach by DQE of any representation, warranty, 4 covenant or agreement contained in the Merger Agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by APS to the party committing such breach, or (iii) DOE or any ofits affiliates, representatives or agents takes any of the actions that would be proscribed by l ,

certain provisions of tue Merger Agreement which restrict DQE's conduct with respect to Acquisition 5_ Proposals (see "The Merger Agreement -Conduct of Business Pending the Merger; Certain Covenants; Acquisition Proposals - Acquisition Proposals"),

in the event of termination of the Merger Agreement and the abandonment of the Merger, the Merger Agreement (other than certain provisions of the Merger Agreement relating to expenses and confidentiality and other than as described _below under "The Merger Agreement - Certain Termination Fees") will become soid and of no efTect with no liability of any party thereto (or any of its directors, oflicers, emplo3ces, agents, legal and fmancial advisors or other representatives); provided. hou rver, except as otherwise provided 3

in the Merger Agreement, no such termination will relieve any party thereto of any liability or damages resulting from any breach of the Merger Agreement l

4 0 i

Certain Termination Fm The Mergcr Agreement provides that in the event that it is terminated (a) by DQE pursuant to the provisions of the Merger Agreement permitting DQE 't'o terminate the Merger Agreement under certain circumstances when a Soperior Proposal exists, (b) by APS following (i) the DQE iloard having withdrawn or adversely modified its approval or recommendation of the Merger Agreement or failing to reconfirm its recommendation of the Merger Agreement after a written request by APS to do so, or (ii) DQE or any ofits alliliates, representatives or agents having taken any the actions that would be proscribed by certain provisions of the Merger Agreement which restrict DQE's conduct with respect to Acquisition Proposals, or (c) by DQE or APS pursuant to the provisions of the Merger Agreement permitting them to terminate if the necessary vote of the stockholders of DQE to effectuate the Merger has not been obtained at the DQE Meeting, then DQE will promptly pay APS in addition to any amount, not to exceed $20,000,000, paid and/or payable by DQE to APS pursuant to the Stock Option Agreement, a termination fee (the "DQE Initial Termination Fee") equal to the sum of (x) the charges and expenses incurred by APS or Merger Sub in connection with the Merger Agreement and the Stock Option Agreement and the transactions contemplated by the Merger Agreement and the Stock Option Agreement up to a maximum amount of $10,000,000 and (y) an amount equal to $50,000,000 less the sum of (1) the amount paid pursuant to clause (x) above and (11) the amount not to exceed $20,000,000 paid and/or payable by DQE to APS pursuant to the Stock Optior.

Agreement The Merger Agreement provides that in no event will the amount payable pursuant to the previous sentence exceed $50,000,000, in addition,if the Merger Agreement is terminated ( A) at a time when '

the DQE Initial Termination Fec is payable to APS or (D) at a time when the approval of DQE stockholders hs not been obtained at the DQE Meeting and at any time within two years after such termination DQE consummates a Material Acquisition Transaction (as defined below) with any person other than APS or a Subsidiary of APS, then DQE will pay APS an additional termination fee (the "Further Termination Fee") of

$50,000,000. For a discussion of the terms of the Stock Option Agreement, see "Certain Related Agree-ments - Stock Option Agreement "

A " Material Acquisition Transaction"is defined in the Merger Agreement to mean, with respect to APS or DQE, any Acquisition Transaction or senes of related Acqtisition Transactions involving a merger or consolidation of such party or forty percent or more of its voting power, equity interests or assets (in each case directly or indirectly).

The Merger Agreement also provides that in the event that it is terminated (a) by APS pursuant to the provisions of the Merger Agreement permitting APS to terminate the Merger Agreement under certain circumstances when a Superior Proposal exists, (b) by DQE following (i) the APS Daard having withdrawn or adversely modified its approval or recommendation of the Merger Agreement or failing to reconfirm its recommendation of the Merger Agreement after a written request by DQE to do so, or (ii) APS, or any ofits afliliates, representatives or agents having taken any of the actions that would be proscribed by certain provisions of the Merger Agreement, which restrict APS' conduct with respect to Acquisition Proposals, or l

(c) by DQE or APS pursuant to the provisions of the Merger Agreement permitting them to terminate if the necessary vote of the stockholders of APS has not been obtained at the APS Special Meeting, then APS will promptly pay DQE in addition to any amount, not to exceed $20,000,000, paid and/or payable by APS to DQE pursuant to the Letter Agreement, a termination fee (the "APS Initial Termination Fe:") equal to the sum of (x) the charges and expenses incurred by DQE in connection with the Merger Agreement and the Stock Option Agreement and the transactions contemplated by the Merger Agreement and the Stock Option Agreement up to a maximum amount of $10,000,000 and (y) an amount equal to $50,000,000 less the sum of (1) the an.ount paid pursuant to clause (x) and (II) the amount, not to exceed $20,000,000, paid and/or payable by APS to DQE pursuant to the Letter Agreement.The Merger Agreement provides that in no event will the amount payable pursuant to the previous sentence exceed $50,000.000. In addition, if the Merger Agreement is terminated ( A) at a time when the APS Initial Termination Fee is payable to DQE or (B) at a time when the approval of APS' stockholders has not been obtained at the APS Special Meeting and at any time within two years after such termination APS consummates a Material Acquisition Transaction with any person other than DQE or a Subsidiary of DQE, then APS will pay DQE the Further Termination Fee, For a discussion of the terms of the Letter Agreement, see "Certain Related Agreements- Letter Agreement."

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' Ftpenses

< The Merger Agreement provides that except as provided therein with respect to certain expenses

' described below and except as provided with respect to expenses in the event of termination of the Merger Agreement, the Surviving Corporation will pay all'chtges and expenses, including those of the Exchange

Agent,in connection,with(ne exchange of shares; and APS has agreed to reimburse the Surviving Corporation i for such charges and expenses.1The Merger Agreement also provides that, whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger Agreement and the Stock Option Agreement and the Merger and the other transactions contemplated by the Merger Agretment and the l ,

Stock Option Agreement will be paid by the party incurring such expense, except that expenses incurred in ,

I connection with the filing fee for the filings under the llSR Act, the Registration Statement of which this Joint Proxy Statement / Prospectus forms a part and printing and mailing this Joint Proxy . State-I -

ment / Prospectus and such other expenses as the parties may agree will be shared equally by APS and DQE.

j Stock Options Pursuant to the Merger Agreement, at the Effective Time each outstanding DQE Option under the DQE Stock Plans, whether vested or unvested, will be deemed to constitute an option to acquire, on the same terms

{ and conditions as were applicable under such_DQE Option, the same number of shares of APS Common l Stock as the holder of such DQE Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time (rounded down to the nearest whole number), at a price per share of APS Common Stock (rounded up to the nearest whole cent) equal to (y) the aggregate exercise price for the shares of DQE Common Stock otherwise purchasable pursuant to such DQE Option divided by (z) the number of full shares of APS Common Stock deemed purchasable pursuant to such DQE Option, in addition, pursuant to the Merger Agreement, APS has agreed to assume, cliective as of the Effective Time, each DQE Option in accordance with the terms of the DQE Stock Plan under which it was issued and the stock option agreement by which it is evidenced.

Nuclear Matters The Merger Agreement provides that, at least quarterly prior to the Effective Time, DQE, upon request by APS,'will cause its President - Generation Group and its Chief Nuclear Officer to attend a meeting of the APS Board and provide APS' directors with such. oral and written information concerning the Nuclear Facilities and DQE's nucicar generation program as such directors and/or the Chief Financial Officer of APS

' may acasonably request / ir.cluding, but not limited to, information relating to safety matters,; regulatory matters, refueling plans, outages, planned and pending capital expenditures and DQE's relations with co-ewners of the Nuclear Facilities. In additien, prior to the Effective Time, APS will be entitled to' designate one -

person who will be a director of APS or will be a person expert in nuclear matters reasonably acceptable to DQE, to attend and participate in each meeting of the Nuclear Review Committee of the DQE Board.

Certain Regulatory Provisions Pursuant to the Merger Agreement, DQE and APS cach have agreed to, and to cause their respective

. subsidiaries to, discuss with each other any changes in its or its re.pective subsidiaries' regulated rates or charges (other than pass-through fuel rates or charges), standards of service or accounting from those in effect on the date of the Merger Agreement, and to consult with the other prior to making any filing;(or any amendment thereto), or effecting any agreement, commitmentcarrangement or consent, whether written or oral; formal or informal, with respect thereto, other than in connection with rate filings pending as of the date

. of the Merger Agreement.

In addition, pursuant to the Merger Agreement, DQE and APS have agreed that neither DQE nor APS will, nor will DQE or APS permit any of their respective subsidiaries to, take any action that would impair the ability of APS to obtain the approvals under the PUllCA for the transactions contemplated by the Merger Agreement.

= Further, pursuant to the Merger Agreement, DQE and APS have agreed that they will cause their respective Pennsylvania utility subsidiaries to file in a timely manner with the PAPUC a restructuring plan to 45 A

implement direct acccw to a competitive market for electric generation pursuant to the Pennsylvania Restructuring Legislation.

New York Stock Exchange Listing; De Listing of DQlk Common Stock APS will file a listing application with the NYSE covering the shares of APS Common Stock to be issued in connection with the Merger. The obligations of APS and DQE to consummate the Merger are subject to the condition that the shares of APS Common Stock to be issued to the holders of DQE Common St connection with the Merger be approved for listing on the NYSE, subject only to omeial notice of issuance.

DQE Common Stock will be delisted from the NYSE, the CSE and the PilSE and deregistered under the Exchange Act as soon as practicable following the EfTective Time.

CERTAIN REGULATORY MNITERS IISR Act Under the llSR Act and the rules promulgated thereunder, certain transactions, including the Merger, may not be consummated unless certain waiting period requirements have been satisfied. APS and DQE cach will file a Notification and Report Form pursuant to the HSR Act with the DOJ and the FTC. At any time before or after the Effective Time, the FTC, the DOJ or others could take action under the antitrust laws with respect to the Merger, including seeking to enjoin the consummation of the Merger, to rescind the Merger or to require divestiture of substantial assets of APS or DQE. There can be no assurance that a challenge to the Merger on antitrust grounds will not be made or,if such a challenge is made, that it would not be successful.

Fed" " Power Act 1203 of the Power Act provides that no public utility shall sell or otherwise dispose of the whole of 4

. ubject to the jurisdiction of the FERC or directly or indirectly merge or consolidate its facilities

. those of any other person or purchase, acquire or take any security of any other public utility without first having obtained an order authorizing it froin the FERC. The approval of the FERC is required to consummate the Merger, Under Section 203 of the Power Act, the FERC will approve a merger ifit finds the merger to be

" consistent with the public interest." The FERC may grant its order on such terms and conditions as it finds necessary or appropriate to secure the maintenance of adequate service and coordination in the public facilities subject to its jurisdiction. In December 1996, the FERC issued a policy statement which updated and clarified its procedures, criteria and policies concerning public utility mergers wr the purpose of providing greater certainty and expedition in its analysis of mergers. The FERC announced that it would generally take into account three factors in analyzing proposed mergers: the etTect on competition, the effect on rates and the effect on regulation. DQE and APS will file a join: application before the FERC seeking approval of the M erger.

PUllCA APS is registered as a holding company under the PUllCA. Pursuant to Section 3(a)(1) of the PUllCA, DQE is a holding company exempt from all of the provisions of the PUHCA except for Section 9(a)(2) thereof. APS is required to obtain SEC approval under Section 9(a)(1) of the PUHCA in connection with the Merger. DQE is not required to obtain SEC approval. An application for approval of the Merger will be filed by APS.

Under the applicable standards of the PUllCA, the SEC is directed to approve the Erger unless it finds that (i) the* Merger would tend towards interlocking relations or a concentration of .ontrol which is detrimental to the public interest or the interest of invenors or consumers, (ii) the consideration to be paid in connection with the Merger is not reasonable or does not bear a fair relation to the sums inzested in or the carning capacity of the utility assets underlying the securities to be acquired, (iii) the Merger would unduly complicate the capital structure of APS' holding company system or would be detrimeatal to the proper l functioning of APS' holding company system or (iv) the Merger would be unlawful pursuant to an appropriate l 46 k

state law. 'lo apprme the Merger, the SEC must also hnd that the Merger would tend towards the economical and etlicient development of an integrated pubin utility spiem and would otherwise conform to the PUllCA's integration and corporate simplification standar.ls.

Following the Merger, APS will continue to be a registered holding company under the PUllCA and therefore, following the Merger, stockholders of DQE uill own stock in a regulated holding company pursuant to the PUliCA. The PUllCA imposes restrictions on the operations of registered holding company systems.

Among these are requirements that certain securities issuances, as well as acquisitions of securities, sales and acquisitions of utility assets and acquisitions of interests in any other business. be approved by the SEC. The PUllCA also limits the ability of registered holding companies to engage in non-utility ventures and regulates holding company system service companies and the rendering of services by holding company aniliates to the system's utilities. The SEC has authority under the PUllCA to preclude the payment of dividends by APS and the payment of dividends by DQE to APS under certain circumstances. DQE and APS recognize that the divestiture of certain of the existing nonutility operations of DQE is a possibility, but APS will request in its PUllCA application that it be allowed to retain the nonutility operations of DQE, or,in the alternative, that the question of dhestiture be deferred. If divestitare is ultimately required, the SEC historically has allowed companies sullicient time to accomplish divestiture in a manner that protects stockholder value. Following the Merger, DQE will no longer be exempt as a public utility holding company under the PUllCA.

In June 1995, the stalT of the SEC published a report which recommended changes to the PUllCA, including a recommendation to Congress to repeal the entire act. Bills were introduced in the last Congress to repeal the PUllCA, but did not pass. Similar bills have been inuoduced in the 105th Congress. llowever, neither APS not DQE can predict what changes, if any, will be made to the PUllCA as a result of these activities.

Nuclear Regulatory Comtniwion Duquesne Light owns a 13.74% interest in Perry Unit 1, a 47.50% interest in Beaser Valley I and a 13.74% interest in Beaver Valley 2. Pursuant to agreements with the co-owners. a subsidiary of Duquesne Light operates Beaver Valley I and Beaver Valley 2. Duquesne Light holds NRC licenses with respect to its ownership interests in and operating responsibilities for these nuclear units. The AEA currently provides that licenses may not be transferred or in any manner disposed of, either voluntarily or involuntarily, directly or indirectly, unless the NRC finds that such transfer or disposition is in accordance with the AEA and consents in writing. Pursuant to the AEA, Duquesne Light will seek approval from the NRC to the full extent required to reflect that, after the Merger, Duquesne Light, although continuing to own the identical pre-Merger shares of the Nuclear Facilities, will become un indirect operating subsidiary of APS.

Pennsyl ania Public Utility Commission DQE is a Pennsylvania corporation and is the parent corporation of Duquesne Light, a Pennsylvania public utility providing electric service to the public in Pennsylvania. APS' subsidiaries own significant generating units in Pennsylvania. APS' subsidiary West Penn is a Pennsylvania public utility providing electne service to the public in Pennsylvania. Pursuant to the laws of Pennsylvania. anproval of the PAPUC is required for any public utility to be acquired by or to be transferred to any person or corporation, including a transfer by way of merger. The PAPUC will approve transfers if the PAPUC finds or determines that such transfer is necessary or proper for the service, accommodation, convenience or safety of the public. In addition, under the Pennsylvania Restructuring Legislation, the PAPUC may investigate the etTect of mergers on the proper functions of a competitive retail electricity market. Duquesne Light and West Penn Power Company will file appropriate applications seeking any required or necessary approval of the PAPUC.

In connection with the Pennsylvania Restructuring Legislation, APS and DOE will each file restructuring plans with the PAPUC. Each such plan will set forth proposals for the transition to customer choice and recovery of stranded costs.

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T Maryland Public Senice Commission APS is a Maryland corporation. The MPSC is granted general authority to supervise and regulate public utility operations in the State of Maryland. The issuance'of APS Common Stod may require the approval of the MPSC. The MPSC will authorire an issuance of stock if the issuance is reasonably required for the acquisition of property by the issuing company. If appropriate or necessary, APS will file an application for approval of the MPSC.

Other Regulatory Matters in uddition to Pent,sylvania and Maryland, APS has public utilities subsidiary operations in Ohio. West Virginia and Virginia. Certain of these states may contend that they havejurisdiction over the Merger and that their consent to the Merger is required. Amendment of certain aHiliate agreements which may occur in connection with the Merger will require the approval of the State Corporation Commission of Virginia and the Public Service Commission of West Virginia. Other than with respect to the amendment of these affiliate agreements, APS does not believe that any of these states has jurisdiction with respect to the Merger, Power Suppl3 Agreement APS' subsidiaries currently intend to either amend the Power Supply Agreement, dated January 1,1968, among Monongahela, Potomac Edison and West Penn, as amended, or climinate such agreement and in lieu thereof may (a) organize a new subsidiary or subsidiaries of APS, (b) cause APS' utility srbsidiaries to transfer or lease certain of their respective generation or transmission assets end liabilities to such subsidiary or Subsidiaries and (c) cause such new subsidiary or Subsidiaries to sell APS' utility subsidiaries' generation and generation services and/or transmission and transmission services as appropriate or as required. These transactions may require regulatory approvals. Any required approvals will be sought by APS and its subsidiaries as soon as practicable following the decision to engage in any of these transactions.

Effects of Certain Regulatory Trends SFAS No. 71 in accordance with SFAS No. 71, " Accounting for the EfTects of Certain Types of Regulation," the regulated entities' financial statements reflect assets and liabilities issued on current cost-based ratemaking regulation. Once the transition to full retail competition is completed in Pennsylvania, APS' wholly owned subsidiary operating in Pennsylvania, West Penn, and Duquesne 1.ight may not meet the criteria for applying SFAS No. 71 to their respective generation operations and assets. In that event, any remaining generation related regulatory assets and liabilities, if any, would be written otT, and any generation related long-lived fixed and intangible assets would need to be evaluated for impairmem under the provisions of SFAS No.121,

" Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The result could be an extraordinary noncash charge to operations that could be material to the financial position and results of operations of APS or DQE, as the case may be. Because of the provisions in the Pennsylvania Restructuring Legislation related to stranded cost recovery, APS and DQE do not believe any significant write-olTs or charges should be required.

Stranded Cost Recovery Stranded costs can generally be described as mandated costs (such as regulatory assets and obligations under PURPA contracts) and costs of generation that could be recovered in a regulated environment but cannot be recovered in a competitive environment because they are in excess of market. The Pennsylvania Restructuring Legislation permits recovery of both types from customers through a competitive transition charge ("CTC"), subject to PAPUC approval, with the provision that utilities have an obligation to mitigate stranded costs to the extent practicable. Over the CTC recovery neriod, which can be up to nine years, all Pennsylvania utilities are permitted a CTC charge to recover costs in excess of market. Generally, because West Penn has a lower per unit cost of operation, its CTC charge for costs in excess of market may be less than other utilities. Duquesne Light by comparison has certain higher cost per unit operations which would 48 l

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provide it with a higher charge for costs in excess of market. West Penn und Duquesne Light will cach file its restructuring plan on August 1,1997 in which it will address this issue.

Emcrging issues Task Force Members of the Emerging issues Task Force of the Financial Accounting Standards Board (the " Task Force") have discussed issues related to the impact of changes in the regulatory environment for electric utilities. These changes have resulted from initiatives which are intended to ultimately change the pricing of the generation of electricity (but not of its transmission or distribution) to competitive pricing. Although the arrangements vary from state to state, the regulators are expected to provide (or are providing, such as in the Per.nsylvania Restructuring Legislation) for r, transition period for the generation of electricity from a fully regulated to a competitive environment. During these transition periods, mechanisms are being provided for a utility to recover certain assets and other costs associated with its generation operations prior to (and, in some cases, subsequent to) the change, while at the same time the price of electricity generated after the change will be based on market rates During this transition period and thereafter, for the foreseeable future, the transmission and distribution portions of a utility's operations are expected to continue to be cost of service based rate regulated.

The Task Force is considering how to identify the regulatory assets attributahic to that portion of a business which under SFAS 101 would require write-ofi, assuming SFAS 71 is no longer applicable to the generation portion of a utility's operations. The Task Force is also considering a threshold question of whether application of SFAS 71 to the generation facilities of a utility is appropriate during the transition period, or whether SFAS 101 requires that regulatory accounting principles no longer be applied.

There can be no assurances as to how 'he Task Force will resolve these issues. As disclosed above under

-SFAS No. 71," a determination that SFAS No. 71 is inapplicable would have significant adverse consequences to West Penn and Duquesne Light.

INTERESTS OF CERTAIN PERSONS IN Tile MERGFR Certain members of the management of DQE and the DQE Board who have interests in the Merger that are in addition to their interests as holders of DQE Common Stock have participated in the negotiation of the terms of the Merger Agreement and the transactions contemplated thereby.

Directors and Officers The Merger Agreement provides that from and after the EfTeuive Time, the APS Board will be composed of 13 directors and that immediately prior to the EfTective Tin e, DQE will designate six of such directors, and APS will designate nine of such directors, and that all such designated directors will be the directors of APS from and after the Effective Time until their successors have been duly elected or appointed and qualified or until their earlier death, resignatior or removal in accordance with the APS Charter and the APS Bylaws. Although as of the date hereof, neither DOE nor APS has determined who it will designate to be directors of APS following the EfTective Time, each of DQE and APS currently intends to nominate persons from among the members of its respective boards of directors at the EfTective Time. In addition, the Merger Agreement provides that four of the six directors of APS designated by DQE pursuant to the Merger Agreement will be the chairmen of the following committees of the APS Board: Nuclear Review; New Business; Finance; and Employee and Community Relations, and that four of the nine directors of APS designated by APS pursuant to the Merger Agreement will be the chairmen of the following committees of the APS Board: Audit; Management Review; Nominating; and Benefits.

Seterance Agreements DOE and its afliliates have entered into severance agreements (the "DQE Severance Agreements") with David D. Marshall, Victor A. Roque, Gary L. Schwass and James D. Mitehell, and <ith nine other officers of DQE or its aflitiates. providing benefits upon a Change in Control (as defined below). The DQE Severance 49

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Agreements provide for paymet,t> and certain other benefits to the oflicer if the officer's employment is terminated by the otlicer after a Constructive Discharge (as defined below), or is terminated by DQL for any-reason other than death, disabilPy or cause at any time during the period that begins on the date of a Change of Contrul and ends 36 months after the closing of the transactions giving rise to such Change in Control. The payment will be a lump sem amount equal to (i) three times the officer's current annual base pay and target bonus opportunity at the t!me of the termination, (ii) an amount intended to compensate the officer for the loss of long term incentive benefits, and (iii) the amount of forfeitures,if any, and expected contributions for

. the 36 months following th( termination und:r DQE's 401(k) Plan. In addition, the officer will receive a lump sum payment equal to the acmarial value of the excess of (x) the benefits payable to the oflicer under the Retirement Plan of DQE and the Supplemental Executive Retirement Plan of DQE (the " Retirement Plans"), assuming three additional years of participation by the oflicer in the Retirement Plans, over (y) the actual benefit payable to the omeer under the Retirement Plans. Medical, disability and life insurance benefits also wiil continue for the same 36-month period. The officer also is entitled to such payments and benefits if the empoyec voluntTrily terminates his or her employment in the thirteenth month following the closing of the transact on giving rise to the Change in Control, provided that the 36 rnonth payment mi benefit period would be reJuced to 21 months and payments and benefits would be reduced,if necessar), to avoid the excise tax under Section 49W of the Code.

The ollicer wnl also be entitled to a tax gross up payment if (i) it is determined that any payment (and the value of any benefits) received or to be received under his or her DQE Severance Agreement would be subject to the cuise tax imposed by Section 4999 of the Code and (ii) the payments (and the value of any benefits) to be received in excess of 300% of the base amount (as that term is defmed in Section 280G of the Code) exceeds 10% of the total payments and benefits due pursuant to the DQE Severance Agreements.

Otherwise, the payments and benefits received or to be received pursuant to the DQE Severance Agreements will be reduced to an amount which will not be subject to such excise tax.

" Change in Control"is defined in the DQE Severance Agreements as, among other things, the public announcement of a transaction approved by the DQE Board involving a merger of DQE other than a merger ia which the outstanding voting securities of DQE immediately prior to the merger continue to represent at

, least 80% of the outstanding voting securities of DQE or the surviving entity immediately after the merger.

The Merger constitutes such a merger and therefore the public announcement of the DQE Board's approval of the Merger constituted a Change in Control for purposes of the DQE Severance Agreements, unless and until the Merger is abandoned " Constructive Discharge"is defined in the DQE Severance Agreements as, among cther things, (i) a requirement that the officer be based at any oflice or location more than 50 miles from Pittsburgh, Pennsylvania, other than an oflice or location within 35 miles of DQE's or Duquesne Light's principal executive oflices; (ii) the reduction of the officer's compensation or benefits, unless part of a reduction for all executive omeets of DQE, Duquesne Light or any parent thereof; (iii) the material failure of DQE to comply with the terms of the oflicer's DQE Severance Agreement; or (iv) prior to the closing of the transaction giving rise to the Change in Control, a material decrease in the employce's positions, titles, authority or duties.

If the employment of all officers with DQE Severance Agreements had been terminated as of the date of this Joint Proxy Statement / Prospectus, the aggregate cost to DQE under the DQE Severance Acreements uould not exceed $20,000,000.

DQE, Inc. Long. Term incenthe Plan The DQE, Inc. Long Term Incentive Plan (the " Incentive Plan") provides long term incentive compensation in the form of stock options (with or without stock appreciation rights and dividend equivalents). Several ollicers of DQE have been awarded options pursuant to the incentive Plan, some of which are not currently exercisable and/or subject to forfeiture. Under the terms of the incentive Plan, upon the occurrence of certain events, including the adoption of the Merger Agreement by the holders of DQE Common Stock, all stock options and stock appreciation rights become immediately exercisable. In addition, an option holder w hose employment is terminated within one year of such stockholder approval, for any reason 50

other than disabihty, retirement or death, has a period of three months following such termination to exercise Such option (but in no event later than the original expiration date of such option),

if all such stock optiorn and stock appreciation rights become immediately exercisable after the DQE Meeting, the aggregate benefit to the holders of all such stock options and stock appreciation rights based on current values would not exceed $$00,000 Director and Ollicer Indemnification and Insurance Pursant to the Merger Agreement, APS has agreed that, from and after the EITective Time, it will indemnify and hold harmless each present and former director and ollicer of DQE or any of its Subsidiaries (when acting in such capacity), against any costs or expenses (including reasonable attorneys' fees),

judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim. action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent that DQE or such Subsidiary is permitted to indemnify such person under the law ofits jurisdiction of incorporation and the DQE Articles and DQE lhlaws in efTect on the date of the Merger Agreement. In addition, the Merger Agreement provides that the Surviving Corporation will maintain DQE's existing D&O Insurance for a period of six years after the EITective Time so long as the annual premium therefor is not in excess of 200% of the Current Premium; provided. however that if the existing D&O Insurance expires or is terminated or canceled during such six year period, the Surviving Corporation

, will use its reasonable efTorts to obtain as much D&O Insurance as can be obtained for the remainder of such period for a premium not in excess (on an annualized basis) of 200% of the Current Premium.

ACCOUNTING TREATMENT Consummation of the Merger is conditioned upon the receipt by each of APS and DQE of a letter from APS' independent public accountant stating that the Merger, in its opinion, will quahfy as a " pooling of interests" for accounting purposes,it being understood that APS' independent accounting firm may rely on a letter from DQE's independent accounting firm with respect to the eligibility of DQE and its subsidiaries for such accoanting treatment. See "The Merger Agreement - Conditions" and "Unaudited Pro Forma Combined Financhl Information of APS and DQE."

APS and DQE believe that the Merger will qualify as a " pooling ofinterests" for ac ounting and financial reporting purposes, and have been so advised by Price Waterhouse LLP and Deloitte & Touche, their respective independent public accountants, based on information through the date hereof. Under this method of accounting, APS will restate at ihe EITective Time its consolidated financial statements to include the assets, liabilities, stockholder >' equity and results of operations of DQE. It is anticipated that upon consummation of the Merger, the fiscal year of the combined company will be the calendar year.

i RESALE OF APS COMMON STOCK

- The shares of APS Common Stock issuable to stockholders of DQE in connection with tne Merger have been registered under the Securities Act. Such shares may be traded freely and without restriction by those

.tockholders not deemed to be "aflitiates" of APS or DQE as that term is defined in the rules under the Securities Act. " Affiliates" are generally defined as persons who control, are controlled by or are under common control with DQE at the time of the DQE Meeting. Shares of APS Common Stock received by those stockholders of DQE who are deemed to be "alliliates" of DQE may be resold without registration as provided for by Rule 144 or 145, or as otherwise permitted, under the Securities Act. This Joint Proxy Statem:nt/ Prospectus does not cover any resales of APS Common Stak received by afliliates of DQE, or by certain of their family members or related interests.

< Pursuant to the Merger Agre: ment, each of DOE and APS have agreed to deliver to the other a letter 4

identifying all persons whom such party believes to be, as of the date of their respective Stockholders Meetings,"alliliates" of such party for purposes of Rule 145 under the Securities Act. Each of DQE and APS 51 l

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has agreed to use its best clIorts to cause cach per>on who is identified as an "uthliate"in the letter referred to abose to deliver to APS prior to the date of their respective Stockholders Meetings a.i Albliates Letter prmiding that each such person will agree not to sell, pledge, transfer or otherwise dispose of the shares of APS Common Stock to be received by such person in the Merger except in compliance with the applicable provisions of the SecurMies Act and, if the Merger qualifies for " pooling of interests" acccunting treatment, until such time as financial results covering at least 30 days of combined operations of APS and DQE shall have been published.

DIVIDENDS 11 is presently anticipated that, following the Effective Time, the current $1.72 annual dividend per share of APS Common Stoch will be maintained or increased, subject to enluation from time to time by the APS Board based on APS' results of operations, financial condition, capital rcquirements, future business prospects, regulatory emironment and such other considerations as the APS Board deems relevant. However, no assurance can be giver that such dividend will be maintained or increased.

DQE's current annual dividend is equal to $1.36 per share of DQE Common Stock it has been DQE's practice to limit its dividend payout such that dividends do not exceed 60% of carnings. Pursuant to the Merger Agreement, DQE has agreed to coordinate with APS the declaration, setting of record dates and payment dates of dividends on DQE Common Stock so that hviders of DQE Common Stock do not receive dividends on both DQE Common Stock and APS Common Stock received in the Merger in respect of any calendar quarter, or fail to receive a dividend on either DQE Common Stock or APS Common Stock received in the Merger h respect of any calendar quarter.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF Till: MERGER The following summary discusses the material federal income tax consequences of the Merger. The summary is based upon the Code, applicable Treasury Regulations thereunder and administrative rulings and judicial authority as of the date hereof. All of the fwegoing are subject to change, possibly with retroactive efTect, and any such change could afTect the continuing validity of the discussion. The diset.:,sion assumes that holders of shares of DQE Common Stock hold such shares as a capital asset. Further, the discussion docs not

' address the tax consequences that may be relevant to a particular stockholder subject to special treatment

'mder certain federal income tax laws, such as dealers in sceurities, banks, insurance companies, tax-exempt organizations, non-United Siates persons, stockholders who acquired shares of DQS Common Stock through the exercise of options or otherwise as compensation o, through a tax qualified retirement plan, and holders of options and performance :, hare units granted under DQE's benefit plans. This discassioa does not addren any consequences arising under the laws of any atate, tocality or foreign jurisdiction, nor does it address the eficet of the Merger on DOE or APS in respect of any asset as to which unrealized gain is required to be recognized for U.S. federal income tax purposes at the end of each taxable 3 ear under a mark to-market system.

Neither DQE nor APS has requested a ruFng from the Internal Revenue Service ("lRS") with regard to

.ny of the federal income tax consequences of the Merger, and the opinions of counsel as to such federal income tax consequences referred to below will not be binding on the IRS.

r General As of the date hereof, it is intended that the Merger will constitute a " reorganization" pursuant to Section

368(a) of the Code and that for federal income tax purposes no gain or loss will be recognized by APS, DOE l or Merger Sub.The respective obligations of the parties to consummate the Merger are conditioned on (i) the l receipt by APS of an opinion of Sullivan & Cmmwell dated the Closing Date confirming that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code and that each of APS. DQE and Merger Sub will be a party to the reorganization within the meaning of Section 368(b) of the Code, and (ii) the receipt by DQE of an opinion of LeBoeuf, Lamb, Greene & MacRae, L.LP. dated the Closing Date confirming that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code

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and that each of APS, DQE and Merger Sub will be a part) to the reorganization withm the meaning of Section %8(b) of the Code. These conditions may be waived at the sole discretion of the party waiving the condition. Such opinions will be based upon, among other things, (i) representations of DQE, APS and

certain stockholders of DQE customarily given in trahsactions of this type and (ii) the assumption that the Merger will be consummated in accordance with the terms of the Merger Agreement. DQE and APS e pect to receive such opinions prior to closing, but have not yet received such opinions. If either party waites the condition relating to the receipt of an opinion with respect to the federal income tax consequences of the Merger it will re-circulate a revised version of this Joint Proxy Statement / Prospectus to disclose the waiver of i this condition, to disclose material risks to its stockholders as a result of the waiver of this condition,if any, and to disclose any related material disclosures. In addition, each party would re solicit the approval of its respective stockholders in the event that it waived the condition relatmg to the seceipt of an opinion with respect to the federalincome tax consequences of the Merger and the tax consequences of the Merger are, at such time, materially difTerent from the tax consequences of the Merger described below.

The discussion below summarizes the respective opinions of Sullivan & Cwmwell and Lellocuf, Lamb, Greene & MacRae, LLP, with respect to the material federal income tax consequences of the Merger, and is subject to the significant assumptions contained in such opinions. Such assumptions are set forth in the respective opinions of Sullivan & Cromwell and LeBoeuf, Lamb, Greene & MacRae, LLP. which are set forth respectively as Exhibits 8-a and 8 b to the Registration Statement of which this Joint Proxy Statement / Prospectus forms a part. Stockholders are urged to read such opinions in their entirety.

Consequences to DQE Stockholders Under the reorganization provisions of the Code, no gain or loss will be recognized by holders of DQE Common Stock with respect thereto as a result of the surrender of their shares of DQE Common Stock in exchange for shares of APS Common Stock pursuant to the Merger (except as discussed below with respect

, to cash received in lieu of fractional shares). The aggregate tax basis of the shares of APS Common Stock l received in the Merger (including any fractional shares of APS Common Stock deemed received) will be the

same as the aggregate tax basis of the shares of DQE Common Stock surrendered in exchange therefor in the i Merger. The holding period of the shares of APS Com non Stock received (including the holding period of 4 fractional shares of APS Common Stock deemed received) will include the holding period of shares of DQE Common Stock surrendered in exchange thercior.

l Fractional Shares if a holaer of shares of DQE Common Stock receives cash in lieu of a fractional share interest in APS Common Stock in the Merger, such fractional share interest will be treated as having been distributed to the holdct, and such cash emount will be treated as received in redemption of the fractional share interest. Under Section 302 of the Code, if such redemption is "r at essentially equivalent to a dividend" after giving etTect to the constructive ownership rules of the Code, th: hMder will generally recognize capital gain or loss equal to the cash amount received for the fractional share of APS Common Stock reduced by the portion of the holder's tax basis in shares of DQE Common Stock surrendered that is allocable to the fractional share interest in APS Common Stock. Under these rules, a minority stockholder of DQE should recognize capital gain or loss on the receipt of cash in lieu of a fractional share interest in APS Common Stock. The capital pain

. or loss will be long term capital gain or loss if the holder's holding period in the fractional share interest is more than one year.

Consequences to DQE, APS, Merger Sub and lloiders of APS Common Stock None of DQE, AP" or Merger Sub or the holders of APS Common Stock will recognize gain or loss as a result of the Merger.

Tile PRECEDING DISCUSSION DOES NOT PURPORT TO HE A COMPLETE AN ALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO Tile MERGER TilUS, DQE STOCl(IlOLDERS ARE URGED TO CONSULT TilEIR OWN TAX ADVISORS AS TO Tile 53

1 SPECillC TAX CONSLQUENCLS 'IO lilEM OF Tilt MERGER, INCL.UDING TAX RETURN REPORTING REQUIREMEN1S, Tile APPilCAHILITY AND EFFl:CT OF l'EDI:RAl. STATE, LOCAL, AND _ OTilER APPLICADLE TAN LAWS AND Tile EFFECI' OF ANY PROPOSED CllANGES IN Tilt TAX IAWS.

CERTAIN RElATED AGREEMENTS Stock Option Agreement in connection with the Merger Agreement and the Merger, APS and DQE entered into the Stock Option Agreement, pursuant to which DQE granted to APS the Option entitling APS to purchase up to 15,379,007 shares of DQE Common Stock (the " Option Shares") under the circumstances described below at un initial cash price per share of DQE Common Stock equal to $27.350 (such price as adjusted as provided in the Stock Option Agreement, the " Option Price"). The Stock Option Agrcement provides that in no event will the number of shares of DQE Common Stock for which the Option is exercisable exceed 19.9% of DQE Common Stock issued and outstanding at the time of exercise.

APS may cxercise its Option, in whole or in part, if, but only if, a Triggering Event (as defined below) _

will have occurred prior to the occurrence cf an Exercise "Ictmination Event (as defined below); provided that APS sends DQE a written notice of such exercise within 180 days following the first such Triggering Event.

As defined in the Stock Option Agreement, a " Triggering Event" means the occurrence of any event which could cause the Merger Agreement to be terminable: (x) by DQE subject to and in accordance with the termination provisions of the Merger Agreement relating to Acquisition Proposals (See "The Merger Agreement-Conduct of Business Pending tbc Merger; Certain Covenants; Acquisition Proposals-Acquisition Proposals"); (y) by APS if the DQE Board has withdrawn or adversely modified its approval or

- recommendation of the Merger Agreement or failed to reconfirm its recommendation of the Merger Agreement after a written request by APS to do so or if DQE or any ofits atliliates, representatives or agents takes any ef the actiors that would be prosenbed by certain provisions of the Merger Agreement which restrict DQE's conduct with respect to Acquisition Proposals (See "The Merger Agreement- Conduct of Busin:ss Pending the Merger; Certain Covenants; Acquisition Proposals - Acquisition Proposals"); or (z) by APS or DQE if the necessary vote of DQE's stockholders to efTectuate the Merger has not been obtained at the DQE Meeting, including any adjournments thereof.

As defined in the Stock Option Agreement, an "Exercisc Termination Event" means (i) the Effective Time; (ii) the termination of the Merger Agreement in accordance with the provisions thereof if such termination precedes the occurrence of a Triggering Event; or (iii) the first anniversary of the date of termination of the Merger Agreement if suwh termination follows, or occurs at the same time us, the occurrence of a Triggering Event, or, if on such anniversary date the Option cannot be exercised by reason of any applicable judgment, decree, order, law or regulation,30 business days after such impediment to exercise is removed or becomes final and not subject to appeal, but in no event under clause (iii) later than April 5, 1999.

The Stock Option Agreement provides that in the event that any additional shares of DQE Common Stock are issued or otherwise become outstanding after the date of the Stock Option Agreement, the aggregate number of shares of DQE Common Stock purchasable upon exercise of the Option (inclusive of shares, if any, previously purchased upon exercise of the Option) will automatically be increased so that, after such issuance,it equals 19.9% Any such increase shall not affect the Option Price. Further,in the event of any change in the outstanding shares of DQE Common Stock by reason of stock dividend.., split ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares or the like, the type and number of shares of DQE Common Stock purchasable pursuant to the Option will be appropriately adjusted.

Whenever the number of shares of DQE Common Stock purchasable upon exercise of the Option is adjusted as described in the preceding sentence, the Option Price will be aojusted by multiplying the Option Price by a fraction, the numerator of which is equal to the number of shares of DQE Common Stock purchasable prior to 54

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l the adjustment and the denominator of which is equal to the number of shares of DQE Common Stock purchasable after the adjustment The Stock Option Agreement also provides that APS may require that DQE repurchase the Option from APS, The Stock Option Agreement provides that upon the occurrence of a Triggering Event that occurs prior to an Exercise Termination Event, (i) at the request of APS, delivered in writing within IM days of such occurrence (or such later period as provided in the Stock Option Agreement under certain circumstances in connection with the obtaining of regulatory approvals or avoidance of liability under Section 16(b) of the Exchange Act) DQE will repurchase the Option from APS, as a whole or in part, at a price (the " Option Repurchase Price") equal to the number of shares of DQE Common Stock then purchasable upon exercise of the Option multiplied by the amount by which the market / ofter price (as defined below) exceeds the Option Price and'(ii) at the request of APS, delivered in writing within 180 days of such occurrence (or such later pc.riod as provided in the Stock Option Agreement under certain circumstances in connection with the obtaining of regulatory approvals or avoidance of liability under Section 16(b) of the Exchange Act), DQE will repurchase such number of Option Shares from APS as APS shall designate at a price (the " Option Sharc Repurchase Price") equal to the number of shares designated multiplied by the market / ofter price. The term "marketloffer price"is denned in the Stock Option Agreement to mean the nighest of (x) the price per share of DQE Common Stock at which a tender or exchange ofter for DQE Common Stock has been made, (y) the price per share of DQE Common Stock to be paid by any third party pursuant to an agreement with DQE and (r) the average closing price for shares of DQE Common Stock on the 10 consecutive trading days on the NYSE immediately preceding the delivery of the written notice stating that APS elects to require DQE to repurchase the Option and/or any Option Shares in accordance with the Stock Option Agreement (each such notice, a " Repurchase Notice"), in the event that a tender or exchange ofter is made for DQE Common Stock or an agreement is entered into for a merg r or cc..sohdation involving consideration other than casn, the value of the securities or other property issuable or deliverable in exchange for DQE Common Stock will be determined by a nationally recognized investment banking firm selected by DQE.

In the event that APS requests the repurchase of the Option in part, DQE will deliver with the Option Repurchase Price a new Stock Option Agreement evidencing APS' nght to purchase that number of shares of DQE Common Stock purchasable pursuant to the Option at the time of delivery of the Repurcl ase Notice minus the number of shares of DQE Common Stock represented by that portion of the Option then being repurchased.

The Stock Option Agreement provides that the Total Profit of APS will not exceed $20,000,000 and,ifit otherwise would exceed such amount, APS, at its cole election, will either (a) reduce the number of shares of DQE Common Stock subject to the Option, (b) deliver to DQE for cancellation Option Shares previously purchased by APS, (c) pay cash to DQE, or (d) any combination thereof, so that APS' actually realized Total Proftt does not exceed $20,000,000 after taking into account the foregoing actions.

As defined in the Stock Option Agreement, the term " Total Profit" means the aggregate amount (before taxes) of the following: (i) (x) the amount rece;ved by APS pursuant to DQE's repurchase of the Option (or any portion thereof) or any Option Shares pursuant to the Stock Option Agreement,less,in the case of any repurchast of Option Shares, (y) APS' purchase price for such Option Shares, as the case may be,

. (ii) (x) the net cash amounts received by APS pursuant to the sale of Option Shares (or any other securitics into which such Option Shares are converted or exchanged) to any unatliliated party, less (y) APS' purchase price of such Option Shares, and (iii) any Notional Total Paolit (as deimed below).

The term " Notional Total Profit" with respect to any number of shares as to which APS may propose to exercise the Option shall be the Total Profit determined as of the date of sucn proposal assuming that the Option was exercised on such date for such number of shares and assuming that such shares, together with all other Option Shares held by APS and its afliliates as of such date, were sold for cash at the closing market price for the Common Stock as of the close of business on the preceding trading day (less customary brokerage commissions), ,

55

_ . . . . - . . _ _ -._m .- ~ _ _ _ _ . _ . _ . _ _ _ _ - . . _ _ _ _ - _ _ _ _ . _ _ _ . _ - - . _ _ . . . _

I citer Agreement APS and DQE hat e also entered into the Letter Agreement in connection with the hierger Agreement.

The Letter Agreement prmides that in the event that the hierger Agreement is terminated (x) by APS pursuant to provisions of the hierger Agreement permitting APS to terminate the hierger Agreement under certain circumstances when a Superior Proposal exists, or (y) by DQE following (i) the APS 11oard having withdrawn or adversely modified its approval or recommendation of the hierger Agreement or failing to reconfirm its recommendation of the hierger Agreement after a written request by DQE to do so, or (ii) APS or any ofits affiliates or representatives or agents having taken any of the actions that would be proscribed by certain provisions of the hierger Agreement which restrict APS' conduct .with respect to Acquisition Proposals, or (z) by DQE or APS pursuant to the provisions of the hierger Agreement permitting them to terminate the hierger Agreement if the necessary vote of the stockholders of APS to efTectuate the hierger nas not been obtained at the APS Special hiceting, then APS will pay to DQE the amount,if any, by which (1) 0.199 multiplied by the number of shares of APS Common Stock outstanding at the close of busicass on

- the business day immediately prior to such termination (such date, the " Determination Date") multiplied by the average dady closing price of APS Common Stock on the NYSE on the ten NYSE trading days ending on the Determination Date, as reported in the New York City edition of The ll'all Strcri Journal, exceeds (2) $719,100A22; prorldcd that the amount payable pursuant to the Letter Agreement will not exceed

$20,000,000.

I 56

UNAUDITI:D l'RO l'ORMA COMillNI:D l'INANCIAl. INI'ORMATION Ol' Al'S AND DQi' The fvdowirg unaudited pro forma financial information combines the historical consolidated balance sheets and statements of income of APS and DQE,i,cluding their respective subsidiariss, after giving elTect to the Merset. The unaudited pro forma combined balance sheet at March 31,1997, set forth below, gives efTect to the Merger as if it had occurred at March 31,1997. The unaudited pro forma combined statements of income for the three months ended March 31,1997, and each of the 3 years ended December 31,1996,1995 and 1994 give etTect to the Merge' as if it had occurred at January b 1996,1995 and 1994, respectively, and

, the unaudited pro forma combined statement of income for the three months ended March 31,1997, gives effect to the Merger as if it had occurred on January 1,1997 These statements are prepared on the basis of accounting for the Merger as a " pooling ofinterests" and are based on the assumptions set forth in the notes thereto, The following pro forma financial information has been prepared from, and should be read in conjunction with, the historical consolidated financial statements and related notes thereto of Al'S and DQE, incorporated by reference herein. Thc following information is not necessarily indicative of the f;nancial position or operating results that would have occurred had the Merger been consummated on the dates, or at the beginning of the periods for which the Merger is being given elTect, nor is it necessarily indicative of future financial position or operating results. See "Available Information" and " incorporation of Certain Information by Reference."

a 57

- APS and DQE UNAUDITED PRO FORMA COMBINED BAl.ANCE SilEET (e),(f)

- At March 31,1997 (in thousands of $)

Al'S DQE 't etat Reclassirwd Reclannined I're i+tma Adjusted Balance (d) Holence(d) Adjust ment.

Hau nce _

sASSETS.

Current Aswis:

Cash and temporary cash investments . . . . . . . . $ 24,804 $ 386,857 $ - $ 411,661 Receivables:

Electric customer accounts receivable, net . , , , . . . . . . . . . . . . . . . . ,

290.237 77,786 :38,426(a) 406,449 Other receivables . . . . . . . . . . . . . . . . . . . . . . 14,692 50,999 - 65,691 Total Receivables - Net . . . . . . . . . . , , 304,929 128,785 38,426 472.140 Materials and supplies (at average cost):

Coal / Fuel. ..................... ..... 73,2h9 19,114 - 92,403 Operating and construction ... . .. .... 83.744 51,778 -

135.522 4

- Total Materials and Supplies . , . . . . . . . 157,033 70,892 - 227,925 Prepaid taxes . , . . . , .................... 68,119 468 - 68,587

- Deferred income taxes . . . . . . . . . . . . . . . . . . . . 52,129 - - 52,129 Other current assets . . . . . . . . . . . . . . . . . . . . . , 14,840 6,630 - 21,470 Total Current Assets. . . . . . . . . . . . . . , $ M1,854 $ 593,632 $38,426 $ 1,253,912 liong-Term imestments:

Benefit plans' investments , , , , , , , , , , . . . . . . . . $ 65,670 $ l.332 -

$ 67,002 AITordable housing . . . . . . . . . . . . . . . . . . . . . . - 155,662 -

155,662 Leveraged leases . . . . . . . , ............ , 193,654 193,654 Other leases . . . . . . . . . . . . . , , ........... 87,119

- - 87,119

- Gas reserves . . . . . . .., , ..... ........ -

77.855 - 77,855 Other investments . . . . . . . . . . . . . . . . . . . . . . 19.525 _ _ _ _ 61.209

- 80,734 Total l.ong-Term investments; ...... 3 85,195 5 576,831 -

$ 662,026

. PropertyiPlant and Equipment:

At original cost property, plant and equip acnt $ 8,243,825 $ 4,799,655 - $13,043,480 Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . (2.976.531) (2.018,710) -

(4,995,241)

- Total Property, Plant and Equipment - -

Net . . . . .... ...... ,, ....... . $ 5,267,294 $ 2,780,945 - S 8,048,239 Other Non-Current Assets:

Regulatory assets . . . . . . . . . . , . , . . . . . . . . . . . $ 551,674 $ 541,359 $(9,228)(b) $ 1,083,805 Unamortized loss on reacquired debt . . . . .,,. 52,440 83,807 - 136,307 O t h e r . . . . . . . . .. . . . . . . . . . . . . . . . . . ... 39.128 45,948 -

85.076 Total Othe Non-Current Assets . . . . . . $ - 643.242 $ 671,174 ' S(9,228) $ 1,305.188 Total Assets . . .

............ $ 6.617,585 $ 4.622.582 529,198 511.269,365 See Notes to Unaudited Pro Forma Combined Financial infermation 58

4.

{ APS AND DQl:

F -

UNAUDITED l'HO l'ORMA COMillNED llALANCE SilECT(e),(f)- ,

At March 31,1997 .

(in thousands of $)'.

Al'S DQI' Total -

Reclaulned Reclanihed _ l*ro Forma Adjusted flalance(d) llalance(d) Adjustments llalance

LIAlllLITil'S AND cal'ITAllZATION I

, . . Current Liabilities:

Current maturities and sinking fund

. - requirements . . . . . . . . . . . . . . . . . . . . . . . , $ 95,400 $ 107,146 - $ 202,546 Short te rm debt . . . . . . . . . . . . . . . . , ....... 133,746- 930 - 134,676 r

2. A ccou n ts payable . . . . . , , , . . . . . . . . . . . 123,745 73,919 - 197,664

' Accrued liabilities . . . . . . . . . . . . . . . . . . . . . , - 27,689 13.213(b) 40.902 Dividends declared . .......... ........ - 28,709 - 28,709-4- Taxes accrued:

. Federal and state income tax. . . . . . . . . . . . 46.182 (7,102) -

39.080

Olher........................... 41,909 694 - 42,603

! Interest accrued. . . . . . ... ....... ... 43,44l 26,550 -

69.991 De ferred sw er costs , , . . . . .. . . . . . . . . .. . . 23,937 1,903 - 25,840 l

' 39,296 39,296 Restructuring liability . . . . . . . . . . . , .. - -

O the r . . . . . . . . .. .., ........... .... 69,674 949 -

70.623

Total Current Liabilities. . . . . . . . . . . $ 617,330 $ 261,387 $ 13,213 $ 891.930

{ Non Current Liabilities:

]; Deferred income taxes - net, , , , , , , , , , ,,, $1,013,995 $ 768,258 $ (9,313)(b) $ 1,788.887 15,947 (c)

_ Deferred investment tax credits. . , , , . . ,, , . , 139,468 104,096 243.564

j. Capital ime obligations . . . . . . . . . . . . . . . . . 3,781 24,150 - .27,931 i Regulatory liabilitics . . . . . . . . . . , , . . . . . . ,

92,093 - - 92,093

'. De fe rred income . . . . . . . . . . , . . . . . . . . . . . . - 180,835 -

180.835 Other........,............,,,,... 71,395 248.687 - 320,082 Total Non-Current Liab;11 tics . . . . . . . $ 1,320,732 $ 1,326,026 $ 6,634 $ 2,653,392 Commitments and Contingencies . . . . . . . . . . . . -- - - -

Capitalization:

Long term Debt and QUIDS . . . . . . . . . . . . $2,307,107 $1,402,280 - $ 3,709.393 Preferred and Preference Stock of.

Subsidiaries:

Preferred and Preference Stock . . . . . . . . . . 170,086 242,605 -

412.691 Deferred ESOP benefit . . . . . . . . . . . . . . . . . . - (18,931)- -

( 18.931 ) _.

Total Preferred and Preference Stock of Subsidiaries . , . . . . . . . . . . . . . 170,086 223,674 -

393.760-Common Stockholder $' Equity:

.- - Common stock . . . . . . . , . . . . . . . . . . . . . . , $- 152,639. $ -

$ -- $ 152,639 Other paid.in capital, .................. 1,035,825 987.413 - 2,023.238 Retained earnings . .. .. .... ,. 1,013,866- 796,429 (13.128)(b) 1,819,646 22,479 (c) -

Treasury stock (at cost) . 4 . . . . . . . . .....

- (374,613) -

(374.633)

Total Common Stockholders' Equity . .. $2.202.330 $1.409.209 $ 9.351 $ 3.620,890

' Total Capitalization . . . . . . . . . . ,, $4,679,523 $3.035.169 $ 9.351 $ 7.724.043 -

Total Liabilities and Capitalizatiod . . . . $6.617.585 $4.622,582 $ 29.198 $ 11.269.365 See Notes to Unaudited Pro Forma Combined Financial Information 59

APS and DQE UNAUDITED l'RO FORStA COMillNj'.D INCONIE STATI:b1ENT(e),(f)

For the three months ended March 31,1997 (in thousands of $)

Al'S DQl:

Reclawilied Reclaulfied l'rn l'orma Adjuded Italance(d ) flalance(d ) Adjustments 'l ot al Operating Reienues Sales of Electricity:

Residential . . .. ........ . . .. . $ 257,913 $ 104.322 $(7,092) $ 355,143 Commercial . ... ......, . . ...... 123,886 114,523 - 238,409 Industrial . . . ...... . , ,, ,, ..., i S2.270 47,597 - 229,867 Wholesale and other . . . . . . . . . . . . .... 19.940 202 - 20,142 Ilulk power transactions, net . . . . . . . . . , . . 18,683 8.731 - 27,414 Total Sales of Electricity . . .. . 602,692 275,375 (7,092) 870,975 Other . ... . ., . .. . ,,.... 12.288 25.556 -

37.844 Total Operating. Rsvenues. . . 614,980 300,931 (7,092) 908,819 Operneing Expenses Fuel and purchased power . , , .. , $ 191,048 $ 51,654 $ - $ 242,702 Other operating . .. . . .. . .. 72.825 80.603 - 153,428 Maintenance . .. . . . ... ..... ... 61,480 17,749 (686)(b) 78,543 Dcferred power costs, net. . . , . .... (2.083) (124) -

(2,207)

Depreciation and amortization. . . . .... 68,782 55,174 - 123,956

, Taxes ether than income . ....... ,,. 48.656 20.558 -

69.214 Total Operating Expenses . . . . . , . . 440,708 225.614 (686) 665,636 Operating income , , .. .... .... $ 174,272 $ 75.317 $(6,406) $ 243,183 Other income, net . . ,, .. . . .. 1,802 20?01 - 21,803 Interest and other charges . . . . . .. .. .

_ 48.549 28.680 - 77,229 income before income taxes . . .. 127,525 66,638 (6,406) 187,757 income tases . 49,934 21,541 (2.943)(a) 68.817 285 (b)

Net income . . , , S 77.591 $ 45.097 $ 118.940

$(3.748)

Average Number of Shares of Common Stock Outstanding (Thousands of Shares) . . .. 121,843 77.287 9.274 208,404 Earnings Earnings per share of common stock . . $ 0.64 5 0.58 $ 0.57 Disidends Dividends dedared per share of common stock . $ 0.43 $ 0.34

$ 0.38 (h)

See Notes to Unaudited Pro Forma Combined Financial Information 60

- . - . , - . ~ - _ . . - . ~ . . . . - - - - - . . - ._-. - - _. - - .. - - -

a l Al'S and DQE UNAUDITED PRO FORMA COMHINED INCOME STATEMENT (e),(f):

For the tent ended. December 31.1996

. (in thousands of $)

J APS DQl:

3 y . ., ,

Reclaulfied . Recludned Pro Forme- Adjusted

, Pslance(d) Halance(d) Adjustments *10tal Operating Revenues , ,.

, Sales of Electricity:

Re side n tial . . . . . . . . , . . . . . . . . . . . . . . . . . . . . $ 932,235 $ 404.183 $ 3,905 (a).$1,340,323 Com me rcial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492,726 486,666- - 979,392 I n d u st ri al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752,905 189,527 - 942,432 Wholesale and other . . . . . . . . . . . . . . . . . , . . . 74,260 857 .-' 75,117 Bulk power transactions, net . , . . . . . . . . . . . ; 74 90 58.046 -

132,836 Total Sales of Electricity . . . . . . . . . . . 2,326.916 1,139,279 3,905 3,470,l00 Other................................,. 2,068 73.994 - 76.062 Total Operating Revenues . . . . . . . . . . $2.328,984 $1,213,273 $ 3,905 $3,546,162 Operating Expenses .

Fuel and purchaud power . . . . . : . . ....... $ 698,902 $ 236,678 - $ 935,580 Other operating . . . . . . . . . . . . . . . . . . . . , . . . . 299,817 291,829 _

- 591,646

- M ainte nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243,314 78,386 $(4.566)(b) 318,657 1,523 (c)

Deferred power costs, net . . . . . . . . . . . . . . . . . . 15,621 (4,528) - 11,093 Resvucturing charges and asset write-olT. . . . . 103,865 - -

103.865

-. Depreciation and amortization. . . . . . . . . . . . 263,246 222,928 -.- 486,174

- Taxes other than income . . . . . . . . . . . . . . . . . . 185.373- 85,974 - 271,347 ,

~

. Totat Operating Expenses . . . . . . . . . . . $1,810,138 $ 911,267 $(3,043) $2,718,362 Operating Income . . . . . . . . . . . . . . : . . . . , , . . . . . $ 518,846 $ 302,006 $ 6,948. .. $ 827,800

, Other income, net , , , , , . . . . . . . . . . . . . . . . . . . 9,882 74,790 - 84,672

Interest and other charges , . . . . . . . . . . . . . . 188.334 110,270 - 298,604 Income before income taxes .. . . , . . . . . . . . , < 340,394 266,526 6,948 613,868 Income taxes . . . . . . . . . . . . . . . . . , , , , ... 130,347 87,388 _l,621 (a) 220,645 1,895 (b) l (606)(c)

Net i ncome . . . . . . . . . . . . . . . [ . . $ 210,047 - $ 179,138 $ 4,038 $ 393,223 *

. Average Number of Shares of Common Stock -

Outstanding (Thousands of Shares) . . . . . . . . 121,141 77,349 9,282 207,772 Earnings .

, ~ Earnings per share of common stock ......... $ _. 1.73 $ . 2.32 , $. 1.89 Dividends , _ _

Dividends declared per share of com mon stock . . . , . . . . . . . . . . . . . . . . . . . . . . $  !.69 $ 1.30 $ 1.47(h)

See Notes to Unaudited Pro Forma Combined Financial Information 61 1

d Al'S HECIASSIWING IIAl;ANCE Sill'ET (d)

At March 31,1997 (in thousands of S)

APS Reclawltied hNorical Reclaulhendons Italance ASSETS Current Assets: .

Cash and temporary cash investments , ,. .. . $ 24,80.; $ - $ 24,804 Receivables:

Electric customer accounts receivable, net . . . . . . . 290,237 - 290,237 Other receivables . , , . . . . . . . . . . . .. . ,

14.692 - 1,t.692 Total Receivables - Net . . . ...., ... 304,729 - 304,925 Materials and supplies (at average cost):

Coal / Fue; , . . . . . . . . . . . ,, , 73,289 - 73,289 Operating and construction . . . , . , -

83.744 83 244 Total Materials and Supphes . .. . . , , 157,033 - 157,033 l' repaid taxes . .... , , ..... . , 68,119 - 68,119 Deferred income taxes . . .. . .. . 52,129 - 52,129 Other current assets . , .. .. .., . . . 14.840 - 14,840 Total Current Assets , . . . . . .. , S 621,854 - $ 621,854 Long-Term imestments:

Subsidiaries consolidated- excess of cost over book equity at acquisition . . . . . . , . ,,. . . $ 15,077 $(15.077) $ -

Benefit plans' investments . . .. . ,, .. , ,, 65,670 - 65,670 Other.., , ... . ,, , ,,, ,, . . .. 4.448 15.077 19,525 l

i Total Long-Term Investments . . . . . . .. S 85,195 -

$ 85,195 l'roptrty, I'lant and Equipment:

At original cost property, plant and equipment . ., ... $ 8.243,825 - $ 8,243,825 Less: Ac,:umulated derreciation and amortization .,..

(2.976.531) -

(2.976.531)

Total Property, Plant and Equipment - Net . . $ 5,267,294 - $ 5,267,294 Other Non Current Assets:

Regulatory assets , , , , . .... . $ 551,674 -

$ 551.674 Unamortized loss on reacquired debt . . ., ,, ,, .. 52,440 - 52,440 Other. , . . . . . . ,, 39.128 - 39,128 Total Other Non-Current Assets. .. . $ 643.242 -

$ 643.242 Total Assets . .. . . .. . . $ 6.617.585 -

$ 6.617.585 l

l 1

64

)

1

Al'S RECI ASSilTING llAI ANCE SilEET (d)

At March 31,1997 (in thousands of $)

Al'S Reclanified (historical) Reclaul4 cations Halsace LIABILITIES AND cal'ITAllZATION

. Current Liabilities:

Current maturities and sinking fund requirements . . . . . . $ - $ 95,400 $ 95,400 133,746 - 133,746 Short term debt . . . . . . . .. ..... .. . . . . .., ,

. Long term debt due within one year. , , , . . . .. 95,400 (95.400) -

Accounts payable. . . . .. . ,, .. .. . , 123,745 - 123,745 Taxes accrued:

Federal and state income tax . , . .. . .. . . . , 46.182 - 46,182 Other. . . .. .. .. . .. ,, 41,409 - 41,909 4

Interest accrued . .., ...., , .... 43,441 - 43,441 Deferred power costs. . . . . . ... . .. . 23.937 - 23,937 Restructuring liability . . . . , , . . 39.296 -

39.296 69,674 69,674 Other. . . . .

Total Current Liabilities . . . . .. . . ,, . $ 617,330 $ - $ 617.330 Non Current Liabilities:

$1,013,995 $ - $1,013,995 Deferred income taxes - net . . . .. .. . . ,

Deferred investment tax credit, .. .. . . .

- 139,468 139,468 3,781 3,781

Capital lease obligations , . ........ . .

' (139,468) -

Unamortized investment credit . . . ., ,. . . . , 139.468

'r2,093 - 92,093 Regulatory liabilities . . . ... ..., .. ,, .

75.176 (3.781) - 71,395 Other. . . .. . . . .

$ 1,320.732 $ - $1,320.732 Total Non Current Liabilities .

Commitments and Contingencies . . . . . , - -

Capitalization:

Long-term Debt and QUIDS . . .. . . . . . $2,307,107 - $2,307,107 170,086 - 173,086 l' referred Stock . .. , , ..

Common Stockholders' Equity:

152.639 - 152,639 Common stock. . ,, . , , , .. ..4 .

Other paid-in capital. .. . . . .. . .

1.035,825 - 1,035,825 1.013.866 - 1,013.866 Retained earnings . . . , . ... . , ..

Total Common Stockholders' Equity . .. . . $2,202.330 -

$2.202.330

$4.679,523 $4.679,523 Total Capitalization . . . . . . . . . .

-Total Liabilities and Capitalization . .. . . $6.617.585 $ - $6.617.585 65

Al'S RIX IASSIFYING INCOME STATEhlENT (d) l'or the three months ended Alarch 31,1997 (in thuusands of $)

Al*S Rectanified (historica] Reclaulf. cations Italance Operating Resenues Sales of Electricity:

Residen tial . . . , . . . . . . . . . . . . . ... .. ...... $257,913 525*l,'J 13 Commercial .... ........ . .. .... ..... 123,886 - 12',886 Industrial .. . .. .. . ... . . ... . .. , 182,270 -

182.270 Wholesale and other . .. .... . . . .,

20.235 (295) 19.940 Bulk power transactions, net . . . . . ,, . . . . 30.676 (11.993) 18.681 Total Sales of Electricity . . . . . . ., . . .. . 614.980 (12,288) 602,692 Other.... . . .. . , .. .. -

12.288 12,288 Total Operating Reve..ucs . ...... .. . . 5614,980 $ -

$614.980 Operating Expenses Fuel . , , . .. . .. $140,465 5(140/ 65) $ -

Purchased power . . . . . . . . .... . .. ... ... 50,583 (50,583) - -

Fuel and purchased power . .. ... ,. . . .. 140.465 191,048

' 50,583 Other operating . . .. .. ... ... . . 72,825 - 72,825 hiaintenance. . . . .. . ,. .. .. . . .. , 61.480 - 61,480 Deferred power costs, net . . . .. .. ... (2,083) - (2,083)

Depreciation and amortization , , .... .. .. .. 68,7S2 - 68,782 Taxes other than income . . .... . ... 48,656 - 48,656 Federal and state income taxes . . . . . . . . . ..., 50.178 (50.178) -

Total Operating Expenses. , . . . . , , . . $490.886 $ (50,178) 5440,708 Operating income . .. . . .. . . $124.094 5 50,178 $174.272 Other income, net . . . 896 906 1.802 Allowance for other than borrowed funds used during construction . .. . 1.150 (1,150) --

Total Other income and Deductions. .. 2.046 (244) 1.802 Interest and other charges . - 48,549 48,549 Interest on long term debt ., ... , ,. 43,380 (43.380) -

Other interest . ., , . ....... .. . . 3.833 (3,833) -

Allowance for borrowed funds used during construction. .

(965) 965 -

Dividends on preferred stock of subsidiaries .. . . 2,301 (2.301) -

Total Interest Charges and Preferred Dividends ... 48.549 -

48.549 income before income taxes. . . , ... 77,591 49,934 127.525 income taxes . . . -

49.934 49.934 Net income . . . S 77.591 5 -

$_ _77.591 66

_ _ ..-__ _m_ _ _ _ - . _ , . _ _ . _ _ _ _ - - . - . _ _ . _ . . . _ _ _ . _ _ _ . _ _

T Al'S

[ .,

$- RECIISSIFYING INCOME STATEMENT (d)-

4 For the yest ended December 31.1996 (in thousands of $)

i i APS Reclanified (hidorical) Reclanifications Halance Operating Retenues Sales of Electricity:

R eside nt ial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 932,235 - $ 932,235 1,

492,726 - 492,726 1 Co m me rci al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

j i ndustrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752,905 -

752.905 I Wholesale and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74,260 -

74.260 -

i 74.790

Bulk power transactions, net . . . . . . . . . ............. 75.523 $ (733) 1 Total Sales of Electricity . . . . . . . . . . . . . . . . . . . . . . 2,327,649 (733) 2.326.916

- 2,068 2.068 Other. . . . . . .....,....................... ,,.. .

l- $2.327,649 1,335 $2,328,984 Total Operating Revenues ... ................ $

[ Operating Expenses Fuel............................................ $ 513.210 $(513,210) $. -

Pu rchased powe r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,357 (184.357) -

1 Fuel and purchased power . . . . . . . . . . . . . . . . . . . . . . . . . . . - 513,210 698,902 j_ l84.357 i 1,335 e 299.817 Other operating . . . , , . . . . . . . . . . . . . , , . . . . . .. 299317 -

. M aine na n ce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243,314 - 243.314 15,621 - 15,621 Deferred power costs, net . . ................ ......

Restructuring charges and asset write-off . . . . . . . . . . . . . . . 103,865 --

-103.865 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 263,246 - -

263.246 .

185.373. - 185,373 Taxes other than income . . . . . . . . . . . . . . . . . . . . . . . . .

Federal and state income taxes . . . . , . . . . . . . . . . . . . . . . -127,992 (127,992) -

Total Operating Expenses. .. ........ ...... $ 1,936,795 $(126,657) $1,810,138 Operating Income . . . . . ........... ..,. . .... $ 390,854 5 127,992 - $ 518,846

- Allowance for other than borrowed funds used during construction . . . . . . . . . . , . . . . ....... .. ... 3,157 . (3,157) --

Other income, net , ..., , ..... ... ......... ... 4.370 5.512 9.882

- Total Other lacome and Deductions. . . . . ..... 7.527 2.355 9.882

. interest and other charges . . . . . . . . . . . . ............. .- ;188,334 - 188,334 Interest on long term debt . .. ....... . ... .., .. 166,387 (166.387) L Other inte rest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 15,398 (15,398) --

Allowance for borrowed funds used during construction. . (2,731) 2,731 -

Dividends on preferred stock of subsidiaries ' . . . ,, . . . 9.280 (9.280) -

Total Interest Charges and Preferred Dividends .. 188.334 -- 188.334 income before income taxes . . ........ ........... 210,047 -.130.347 340.394 Income taxes ... ... ... ........ ... .... .. -- -130.347 130.347 Net income .. ... .... .. . ....... . .... 5- 210.047 $ -

$ 210.047 67

APS 1(ITI ANSilTING IN00.%)l: STNI1:MI.NT (d) l'or the 3 cat ended December 31,1993 (in thouunds of $)

A l's. 6tn amu.s ,

0:istorimi) linimHintions limlanet j Operating l{cienuen Sales of L., ' city -

1(esidential . . . . . . . . . . . ....... ............. ... $ 926,966 -

$ 926,966 Com me r ci a l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493.696 - 493,696 i n d u s t ria l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 770,251 -

77v 251 Wholchale and other . . .. ... ...... .... ,. . 66.147 -

66.147 Itulk power tranuetioru, net ....... ... ... ... ... 58,131 -

sk.151 Total Sale > of lilectricity '315.211 - 2.315,211 Olhef... ....... ..... .......... ... . . . ... - - -

Total Operatinp itet enues . . . . . . . . .. .. $2.315,211 - $2,315.2 l l Operating 1:spenses l'uel . . . . . .. . .... .. ... . . .. . $ 508.533 (508.533) $ -

Pu rchased pow er . . . . . . . . . . . . . . .., . .. . 178.103 (178.103) -

l'oel and pehused power , . . . . {

..... .. .. . - 508,533 686,636 l 178.103 Other opei..ing . . . . .. . .. . ........ 290.501 - 290,50)

Maintenance. . . . . .. ., .. ... .... . . 249.477 - 249,477 Deferred power costs, net . . . .. ...... .....,. .. 47.796 - 47,796 ltestructuring charpen and usset write off. . . . . . . . . . . . 23.440 - 23,440 Depreciation and arnortiration . . . ... .. ....... .. 256,316 - 256,316 Tases other than income . . . . . . . . . . . . . . . . . . . . . . . . . . 184,729 - 184,729 7ederal and rtate income lases . . . . . . . . . ..... ... .. 154.203 $( 154.203) -

Total P,,erating lupenses . . . . . . . . . . . . . . . . $ 1.893,098 $(154.203) $ 1.738,895 Operating income . . . ............ ... ...... ... , 5 422.113 $ 154.203 $ 576.316 Allowance for other than borrowed funds used during construction ........... . ..................... 4,473 (4.473) -

Other income, nel . . . . . . . . . . . , ...., . ... .. ... 6.224 7.146 13.370 Total Other income and Dedue' ions. . i0.697 2.67J 13,370 Interest and other charpes . ...... . ........, -

193.118 193,118 Interest on long term debt . . . . ... . .......,. 167,199 (167,199) -

Other interest . . . . . . . . . .., .. .. .. . . 14,417 (14,417) -

Allowance for borrowed funds used durinF construction (3.713) 3,713 -

Dividends on preferred stock of subsidiaries . . . . . 15.215 (15.215) -

Total Interest Charpes and Preferred Dividends . 193. l i k -

193.118 income before income ta\es . . ..... .......... .... 239,692 l $6.876 396,568 Income tases ,, ,, ......... ... ...... -

156.876 156.876 Nel income . . , , . .. ..... $ -

5 23 _0.692 m $ 239_.6_92 6b

Al'S IllTI ANNilTING INCON11: STATl311:NT (di l'or the . scar ended licccmber 31, 1994 (in thoudnds of $)

Atw sori swwa fidunttrull gla.jbranlans lintante Operating }{cienues Sales of I lectricity

' .... . .. . ...... .... $ 863.725 -

$ h63.725 llesidential . . . . . . . . . . . . 459,303 Commercial . . . . . .. . . . .... . ......... ... 459.303 -

. . . . .. 728.009 - 728.009 I nd ust ri al . . . . . . . . . . . . . . . . . . . . . . .

65.795 - 65.795 Wholesale and other . . . . . . . . . . . . . . . .. ... . ,

llulk power transactions, net . . . , . .... .. . . . 67.797 - 67.797 2,184,629 - 2,184.629 Total Sales of Liectricity . . . . . . . . . . . . ......

Other . . . . . . . , . . ... ......... ... ...... .

52,184.629 - $2,184.629 Total Operating itetenues .. ..... ....... .

Operating lipenses Fuel...,... .. 4 ......... . . . .. ..... $ $47.241 (547,241) $ -

Purchased power . . . . . . . .. ....... ....... . 173.825 (173.825)

- 547.241 721,066 I?uel and purchased power .. .... .. . . .........,

173.825 285.007 - 285.007 Other operating ...... ..... .. .. . . .

M aintenance . . . . . . . . . . . . , . .. . .. .......... 241,913 - 241.913 l)cierred power costs, net . . . . ........ ........ . 11.805 - 11.805 ltestructuring charpes and asset write ofi. . . . . ..... 9.178 - 9.178 l>epreciation and amortiration . . . ..., ...... .. ... 223.k83 - 223.k83 183.066 - 183.060 Tases other than income . . . . . . .. .........

Federal and state inco.nc tasen . . .. ... ........... 125.913 $(125.913) ,,

$1,801,825 $(125.913) $1,675.912 Total Operating thpenses. . .. ..... ........

Operating income . . , . . . . . . . . . . . . . . ..... ... .. . $ 382.804 $ 125.913 $ 508.717 Allowance for other than borrowed funds used during construction .. . . .... ...., , ... ....... .. 11,966 (ll,966) -

Other income, net . . . , .... .. . ... . .......... . 1.509 41.633 43.142 13.475 29.667 43.142 Total Other income and Deductions. . . . . . . ..

- 176.528 176,528 Interest and other charpes . . . . . . . . . . . ........... ...

Interest on long term debt . . . . . . . .. .... ... 153.668 (153.668)

Other interest , ...... ,,,,.... , . .. .. 10.3/4 (10,391) -

Allowance f;r borrowed funds used during construction. (7.630) 7.630 -

Di idends on prefe~ed Itock of subsidiaries . . . . . . . . 20.096 (20.096) -

Total Interest Charpes and l' referred Dividends 176.528 - 176 $28

• - Income 1.cfort income tasci, and cumulative elTect of accou n ting change . . . . . . . . . . . . . . . , . . . . . . . . . . . 219,751 155.580 375.331

- 155.580 155.580 Income taxes . . , . .. .. .. ... ...... . ..

Income before cumulative clTect of accounting change . . 219,751 - 219,751 Cumulative cITect of accounting change, net . . . . . . . . . . . 43.446 - 43.446 Net income . . . . . . . ........., . . $ 263.197 $ -

$_ _26_?.19,.7 hh

i DQl:

Id:Cl.ASSilTING llAlANCI: SilEET (d)

At March St.1997 (in thousands of $)

IlQl Reclassihed thltti,titel) Nttistnirstalleht Halshre I ASSETS Current Assets:

Cash and temporary cash investments . . . . . . . . . . . . . . . $ 386.857 -

$ 386.857 Receivables:

Electric customer accounts receivable, net . . . . . . . . . . 47,655 (19,869) 77,786 Other utility receivables . . . . . . . . . . . . . . . . ..... 16.534 (16,534) -

Othe r receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.465 16.534 $0.999 Less: Allowance for uncollectible accounts . . . . . . . . . (19,869) 19.869 -

Total Receivables - Net . . . . . . . . . . . . . . . . . . . 128,785 -

128.785 Materials and supplies (at average cost):

Coal / Fuel . . . . . . . . . . . ........................ 19,114 - 19,114 Operating and construction . . . . . . . . . . . . . . . . . . . . . 51.778 -

51.778 Total Materials and Supplies . . . . . . . . ........ 70,892 -

70.892 l'cepaid taxes . . . .............................. -

468 468 Other cu rrent asset s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.430 (1.800) 6.630 Total Current Assets . . . . . . . . . . . . . . . . . . . . . $ 594.964 $ (1,332) $ 593.632 Long Term iniestments:

!!cnefit plans' inv-siments . . . . . . . . . . . . . . . . . . . . . . . . $ -

$ 1,332 5 1,332 Affordable housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,662 - 155,662 Leveraged leases . . . . . . . . . . . . . ............ ...... 193.654 - 193,654 O t h e r le ases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,119 - 87,119 G a s re se n e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,855 - 77,855 Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , " 209 -

61.209 Total Long Term Investments . . . . . . . . . . . . . . . $ 575,499 $ 1,332 $ 576,831 Propetty, Plant and Equipment:

At original cost Property, plant and equipment . . . . . . $ -

$ 4.799.655 5 4.799,655 Electric plant in senice ... ........ . ... .. 4.285,761 (4.285,761) -

Construction work in progress . . . ..... .. .. .. 44.340 (44,340) -

Property held under capital leases . . . . . . , ........ 100.036 (100,036) -

Property held for future use . . . . . . . . . . . . . . . . . . . . . . 190,824 (190,824) -

Other. ...

. ................ ...... . ...... 178.694 (178,694) -

Gross property, plant r.nd equipment . . . . , , . . . . . , , . . . $ 4,799,655 $ -

S 4.799.655 Less: Accumt. lated deprecia' ion and amonization . . . . . _(2.018.710) -

(2.018.710)

Total Property, Plant and Equipment - Net . . . . $ 2,780.945 $ - $ 2,780.945 Other Non Current Assets:

Regulatory assets . . . . $ 625,226 (83,$ 57)

... ... . . .. .. . . $ $ 541.359 Unamonised loss reacquired debt . . . . . . . . . . . . . . . . . . - 83,867 83.667 Oth er. . . , . . . .. .. .... .. ..... ..... ..... 45.948 - 45.948 Total Other Non. Current Assets . . . .. . S 671.174 $ -

$ 671.174 Total Assets . . . . . . . . . . . . . . .. . . $ 4.622.581 $ - $ 4.622.582

.=a e

70

DQl Hl:Cl.ASSilTING llAl ANCl: Sill:l:T (d)

Al March 31.1997 (In thousands of 5) livi: Huia. sir,a o.isu.th ah H a le **llic H keni __Hatante LIAlllLITil:S AND CAPITALI',ATION /

Current 1. labilities:

Notes payable . . . ...... .... . .... ..... 5 930 $ (930) 5 -

Current maturities and sinking fund requiremerits . . 10'146 -

107.146 Short term dCbt . ... .......... . .. ... ..

- 930 930 Accounts payable, . . .. . .. . .. . 80,626 (6,707) 73.919 41,124 (13,435) 27,689 Acerued liabilities . . . .. .... ... .. .. . . ..

Dhidends declared . . .. . .. . .. . .... .. 28.709 -

28.709

) Tuses accrued:

l'ederal and state income tus . . .. . . .

- (7,102) (7,102)

Other. . ... . .... . . .. ... .

- 694 694 Interest accrued . , .... . .. .. . . ...

26.550 26,550 1,903 1,903 Deferred power costs. . . ...... .. ... , .. .

2.852 (1.903) 949 Other. . ...... . .. .. . .. ... . .

Total Current Liabilities . . .... ... . . . 5 261,387 5 - 5 261,387 Non Current Liabilitles:

5 768.258 5 - 5 768,258 Deferred income lases - net . . . .

Deferred investment tas credits. . . ., , . 104.096 -

104.096 24.150 - 24,150 Capital lease obligations . ..... . . . .

180.835 - 180,835 Deferred income . . . . ..... , .

Other....................... . . . , . . ,, 248.6k7 -

248.687, Total Non Current Liabilities . . . . . . . . . . . . 51,326,026 5 -

$ 1.326.026 Commitments and Contingencies . . . . . . .. . .. ..

Capitallration:

51,402.286 5 - 51,402.286 Long term Debt and QUIDS . . . . . . . ...... ,, . ,

l' referred and Preference Stock of Subsidiaries:

Preferred and preference stock, - 242.605 242.605 Non redeemable preferred stock .. . . 213,608 (213.608) -

Non redeemable preference stock . . . . , . . 28.997 (28.997) -

Total preferred und preference stock before deferred employee stock ownership plan (ESOP) benefit . . . .. 242.605 -

242.605 Deferred ESOP beneht. ... . . .. (18.$) -

(18.931)

Total Preferred and Preference Stock of Subsidiaries . .. . ... . . 5 223,674 5 -

5 223.674 Common Stockholders' l: quit.n Common stock . , , . . . . , . . , 5 987,413 5(987.413) 5 -

- 987,413 987.413 Other paid in capital . . . . . . .. . .. .. ,,

Retained earninp .

.. . 796A29 -

796.429 (374.633) - (374,633)

Treasury steel (at cost) (32.318,774 shares) .

Total Common Stockholder >' Equity .. $1 A09.209 5 - 51.409.209 Total Capitalization . . . . .,

53.035,169 5 - 53.035.169 Total Liabilities and Capitalization . , 54.622.582 5 -

54.622.582 71

DQl:

Hl:( I ASSilTING INCOMI: STATEMI:NT(d)

Ior lhe three months ended March 31,1997 (in thousands of 5)

DQl: Restassihed 61starknu glassihennons stehnte Operating Hetenues Sales of Electricity:

R eside n t ial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... $ 104.356 $ (34) $ 104.322 Com m e rcial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114.781 (258) 114,523 Industrial . ........ ... ...... .... 47.631 47,$97

. .... ... (34)

Provision for doubtful accounts (2,750) 2.750 -

Wholesale and other . . . . . ..... .. . ....... . . -

202 202 Ilulk power transactions, net . . . .. .. ... ... ... - H,731 8.731 Customer Revenues. . . . ....... ......... .. 264,018 II.357 275.375 Electricity sales to other utilitlen . . . . . . . .. .., . 8,731 ( H,731 ) -

Total sales of electricity . .. .. ...... . 272.749 2.626 275.375 Other.................. ... . ... . 29.335 (3.779) 25.556 Total Operating Revenues ... ..... .. , $ 302.084 $ (1,153) $ 300,931 Operating thpensen 17uct and purchased power . . . . . . . . .... .... .. $ $1.654 $ - $ 51,654 Other operating . . . ... ... . .. ........ 31.632 (1,029) 80.603 Maintenance. . . . . ... ....... .... ....... 17,749 - 17,749 Deferred power costs, net . .............. . ..., .. -

(124) (124)

Depreciation and amortization . . . . . . . . . . ... . .... 55,174 - 55,174 Taxes other than income . . . . . . . . . . . . . . . . . . . . . . . 20.558 -

20.558 Total Operating Expenses. . . . . ..... ........ $ 226.767 $ (1,153) $ 225.614 Operating income . ... .. .. ....... . ..... ... $ 75.317- $ -

$ 75.317 Other income, net . . .. .... ..... ........ 20,001 -

20.001 Interest and other charges ...... ...... . .. . .... 28.680 - 28,680 income before income tuses . ... ,,... ..... 66,638 - 66,638 income tuses . . . . . . . . . . . ., .. .. 21.541 -

21.541 Net locome ... .. ... .. ..,... $ 45.097 $ -

$ 45.097..

A I

72

l)Ql'.

ItlTlassilTING INCOMI: STNil:MI:NT(d) l'or the , scar ended December 31,1996 (in thousands of $)

DQl: Rettaulfwd (him.rirati Ret taunhretions , Italente _

Operating lleienues Sales of lilectricity:

ilesidential . . . . . . . . . . .. ..... ... .... ...... $ 405.392 $ (1,209) $ 404.183 Commercial . . . . . .. ...... ......... ... .. .. 489,646 (2,980) 486.666 190.723 (1.196) 189,527 I n d u st rial . . . . . . . . . . . . . . . . . . . . . . . . . 4 . .. ......

10.$82 -

Provision for doubtful uccounts . . . . . . . . (10.$82)

Wholesale and other . . . . . . . . , ,. ..

~ $$7 $$7 llulk power transactionh. net . .., . ..

- $8,046 $8,046 Customer Revenuen. . . . ....... . .... .... 1,075.179 64,100 1.139,279

!~.lectricity sales tu other utilities . . . . .. . .. .... $8,292 ($8.292 ) -

Total sales of electricity . . ..... .... .. ... 1.133.471 $,808 1,139.279 Other.................... . . . .... 41.724 (17.730) 73.904 Total Operating itevenues . . . . .. .. $1.225.195 $(11,922) $1.213.273 Operating ihpenses I uci und purchased power . . . . . . . . ... . .. .... $ 236,924 5 (246) $ 236.678 Other operating . ... ..... ... .. . . .... 298.977 (7.148) 291.829 M aintenance . . . . . . . . . . . . . . . . . . . . .... ... . . 78.386 -

78.386 Deferred power costs, net . . . . . . ... . . . . . ...

(4 $28) (4.528)

Depreciation and amortitation . . . . . . . ..... . ... . 222.928 - 222,928 Tases other than income . ........ .. . . . . ... 85.974 -

85.974 Total Operating ihrenses. . . . . . .. $ 923.189 $(11,922) $ 911.267 Operating income . . . . . . . . . . . . . .. . . ...... $ 302,006 $ - $ 302,006 Other income, net . . , ., ....... . .. ..... 74.790 -

74.790 Interest and other charges . . . . . . . . . . . . . .... .. ..... 110.270 - l 10.270 Income before income taxes . . . . . . . . . . . . . . . . . 266.526 - 266.526 Income taxes . . . . ...... .. ,, .. . 87.388 ,,_,

- 87.388 Net income . . . ... . . ... . .. . $ 179.138 $ - $ 179.138

_ = _

73

DQl:

1(1:Cl.ASSilTING INCONil: STATEhll:NT (d) l'or the 3est ended 1)ccember 31.1995 (in thousands of $)

I;.W Hectnelhed

_( hish rkell Ret la stihrallont _ liniante Operating ltrienues Sales of Electricity:

lt e sid e n t ia l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 414,291 $ l.6$$ $ 41$.946 C o m m e rci al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491,789 1.991 493.780 I n d u s t ri al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 190.689 1.$$$ 192.274 Pron ision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . (13.430) 13.430 -

Whole sale and ot her . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -

85$ $$5 Ilulk powe r transactions, net . . . . . . . . . . . . . . . . . . . . . . . - 51,117 51.117 Cu st omer lle ven ues . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.083.339 70.633 1.1 $ 3,972 Electricity sales to other utilities . . . . . . . . . . . . . . . . . . . . . . . 55.963 __( $5,963)

Total Sales of Electricity . . . . . . . . . . . . . . . . . . . . . 1,139.302 14.670 1,1 $3.972 Other............................................ 80.860 (15.703) 65,157 Total Operating iteten ues . . . . . . . . . . . . . . . . . . . . . $1,220.162 $1,219.129

$ (1.033)

Operating thpenses Fuel and purchased power . . . . . . . . . . . ............. . $ 231.968 5 (4,846) $ 227.122 O t he r ope ra ti ng . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . 292.997 290,724 (2.273)

Maintenance. . . . . .... .. ......... .......... ... 81,516 -

81.516 Deferred pow er costs, net . . . . . . . . . . . . . ............... - 6,086 6.086 Depreciation und amortization . . . . . . . . . . . . . . . . . . . . 202,558 - 202,558 Taxes other than income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88.658 -

88.658 Total Operating Expenses . . . . . . . . . . . . . . . . . . . $ 897.697 $ (1.033) $ 896,664 Operating income . . . . ,, .... ....... . .... ....... . $ 322,465 $ -

1 322.465 O t he r income, ne t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,314 -

$2.314 Interest and other charges . . . . . . . . . . . . . . . . . . . . . . . , , 107.555 -

107.555 heome before income taxes . ......... . . . 267.224 -

267.224 Income taxes .. . . . . . ................ .. 96.661 - 96.661 Net income ..... ........ .....,....... .... $=170.563 $ -

$ 170.563

=._.__

74 p = , , , v.-. - . . - .

9 a,. . . . . - . - ,

., y .-.,p. .--,,

i f

l DQE Hl:CIANSilTING INCOME S1 ATEhll:NT (d) l'or the year ended December 31.1994 (in thoukands of $)

t>Ql: kertasuhed (historical) Steclassif canons llatant-e Operating I cienues Sales of Electricity:

$ 401,246 (3,270) $ 397.976 Reside ntial . . . . . . . . . . . . . .. ........ . ............ . $

Co m me rc ial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490.3D9 (6.111) 484,198 I n d u s t ri a l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195.852 (2,754) 193,098 l'rovision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . (11,890) 11.890 -

Wholesale and othe r , , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -

845 845 Ilulk power transactions, net . ..... ... .....'........... - 57,732 57.732 Cu stome r Reve n ues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.075.517 58,332 1.133,849 Electricity sales to other utilities . . . . . . ................. 58.295 (58.295) -

Total Sales of Electricity . . . . . . . . ............. . 1.133.812 37 1.133.849 Other....................................... .... 90.098 (11.403) 78.695 Total Operating Revenues . . . . . . . . . . . . . . . . . . . . . . $1,223.910 $ (11.366) $1.212,544 Operating Expenses Fuel and pu rchased power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 244.135 $ (563) $ 243.572 Other operating . ... .. . ...... .... .......... . 329.177 487 329.664 M ai n t e n a n c e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,488 - 79,488 Deferred power costs, net . . . ... ........................ - (11,290) (11.290)

Depreciation and amortization . . . . . . . . . . , . ............ 165.912 -

165.912

• Taxes other than ircome . . . . . . . . . . . . . ..... . ..... . 88.331 - 88.331 Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . $ 907,043 $ (t 1,366) $ 895.677 Operating income .... . ............. . .. . ... ... $ 316,867 $ - $ 316,867 Other income, net . . . . ., . .. .. . .............. . 42.924 - 42,924 Interest and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110.002 - 110.002 Income before income taxes . . . . . . . . . . . . . .... ... . 249,789 - 249,789 Income tases . . . ... . , .... . .

92.973-

- 92.973 Net income . . . . . . . .. . .. . .. . $ 156.k16 5 -

$ 156.816 a=

75

NOTI:S *10 UNAUDi'll:D PRO I ORM A COMillNI:D l'INANCIAl,INI ORMATION (a) Represents the effect of recording unbilled revenue by DQll APS shanged its method of accounting for unbilled revenue in 1994. *

(b) Represents the effect of accruing for nuclear refueling outages by DQE during the periods leading up to the outage. DQE, historically, would defer the costs incurred and amortire them during the period (s) between outages.

(c) Represents the effect of accruing for major turbine-generator inspection outages by APS during the periods leading up to the outage. APS, historically, has recorded such cost as incurred. APS believes accruing for such outages during the periods leading up to the outafe is preferable to recording such cost as incurred and is con istent with DQE's method of accounting for such costs. The effect of the

' ~a djustment for the three months ended March 31,1997, was not material and, accordingly, no pro forma adjustments were made to climinate such transactions.

(d) The revenues, expenses, assets, liabilities and equity of APS and DQE have been reclassified where appropriate to conform to the presentation expected to be used by the combined company in the future.

(c) Intercompany transactions between APS and DQE during the periods presented were not material and, accordingly, no pro forma adjustments were made to climinate such transactions.

(f) The allocation between APS and DQE and their customers of the estimated cost savings resulting from the Merger, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. Transaction costs are estimated to be approximately $24 million (including fees for financial advisors, attorneys, accountants, consultants,lilings and printing). None of these estimated cost savings, the costs to achieve such savings or transaction costs have been reflected in the pro forma financial statements.

(g) Represents the reversal of the cumulative effect of adopting unbilled revenues by APS in 1994. All periods presented include the impact of unbilled revenues.

(h) APS expects, but cannot assure, that the dividend rate of $1,72 per share will be maintained or increased following the Merger. See " Dividends."

i e

76

lil'.SCl(IPTION Ol' APS CAPI 1 Al. SlOCK The following description of certain terms of the stak of APS does not purport to be complete and is quahhed in its entirety by reference to the APS Charter incorporated herein by reference.

The authoriecd $tock of APS currently consists of 260,(KKuxK) authoriicd shares of APS Common Stock.

As of June I,1997, there were outstanding 122.111.567 shares of APS Common Stock.

APS Common Stock

{

Escept in connection with clections to the APS lloard, the holders of APS Common Stock are entitled to one vote per share for cach share held of record on matters voted on by stockholders and are entith:d to participate equally in dividends when and as such dividends may be authorited by the APS Iloard out of assets leguHy available therefor. The APS Charter provides for cumulatise voting in the cicetion of directors, whereby cach stockholder entitled to vote for the election of directors is entitled to the number of votes equal to the number of shares of such <tock held by him multiplied by the number of directors to be elected, and such votes may be cast for a single director or may be distributed among any two or more of the directors standing for claction. As a Maryland corporation, A i subject to statutory limitations on the authoritation und payment of dividends, in the event of a liquidation, dissolution or uinding up of APS, holders of APS Common Stock husc the right to a rutable portion of assets remaining after sathfaction in full of the prior rights of creditors,-including holders of APS' indebtedness, all liabilities and the argrepute liquidation pafer:necs of any outstanding shares of APS Preferred Stock. The holders of APS Common Stock have no conversion or redemption rights. if the APS Iloard authorites the issuances of new or additional shares of APS Common Stock, or any security convertible into APS Common Stock, for money and other than by a public offering of all such shares, or through underwriters or investment bankers who shall have agreed promptly to make a public olTering of such shares, such new shares must hrst be olTered pro rata to the then outstanding shares of APS Common Stock upon terms no less favorable to the purchaser than those olTered to persons other than the holders of APS Common Stock.The period of time during which such pre emptive rights may be esercised may be limited by the APS Board, but in no event for a period of time less than 10 days after the mailing of the notice announcing the availability of such rights. All catstanding shares of APS Common Stock are, at.d the shares of APS Common Stock to be issued in the Merger will be, validly issued, fully paid and non ussessahic. As of June 1,1997, there were $6,082 holders of record of APS Common Stock.

Tranzfer Agent The transfer agent and registrar for APS Common Stock is ChaseMcIlon Shareholder Services L.L.C.

COh1PARISON OF CERTAIN Itl gilts OF Till; ilOI.Dl:RS Ol' APS COMMON STOCK AND DQE COMMON STOCK General As a result of the Merger, holders of DQE Common Stock will become holders of APS Common Stock and the rights of all such former holders of DQE Common Stock will thereafter be governed by the APS Charter, the APS B, slaws and the MGCL. The rights of the holders of DOE Common Stock are presently governed by the DQE Articles, the DQE Bylaws and the PDCL. The following summary, which does not purport to be a complete statement of the material differences in the rights of the stockholder > of DOE and APS, sets forth certain difTerences between the MGCL and the Pir' s tween e the APS Charter and the DQE Articles and between the APS D> laws and the DOE Hylaws. TF 1ary is qualified in its entirety by reference to the full test of cach of such documents, the MGCL un hTCL. For information as to how such documents mcy be obtained, see "Available information."

77

Slic and Claulheation of the llourd of Directors AlW Ewept u here a curloration has no outstanding siwk'or has fewer than three stockholders, Section 2102 of the h1GCL provides that every corporation shall base at least three directors, the precise number of directors to be specified in the corporationi charact until such number is changed by the corporationi bylaws.

The APS Charter provides that the number of directors of APS may be changed from time to time in the manner provided by the APS ll> law 5. The APS ll3l aws provide that the number of directors of APS may be changed from time to time by the APS lloard, but in no event will tbc APS Iloard be composed of more than l$ members or less than three members. As of the date of this .loint Prosy Statement /Prmpectus, APS has nine directors. At the Effectisc Time, the APS !!aard will be composed of 15 mernbers.

All of the directors of APS serve until the nest annual meeting of stockholders and until their successors are duly elected and qualified.

1)(ll:

The DQE Articles provide that the number of directors of DQE will be determined from time to time by the DQE Board by a resolution adopted by a majority vote of the Disinterested Directors (as defined below under "- Election and Removal of Directors; Filling of Vacancies on the lloard of Directors - DQE").

The DQE Articles also provide that the DOE Board is divided into three classes, with each director serving for a term of three years. Each year, the term of one class of the DQL lloard expires. As of the date of this Joint Prosy Statement / Prospectus, DQE has nine directors, of whom four had been elected for terms expiring in 1997, three had been elected for terms expiring in 1998, and two had been elected for terms expiring in 1999 Election and Hemmni of Directorst filling of Vacancies on the lloard of Directors Al$

The APS Charter provides for cumulative voting in the election of directors. whereby each stockholder entitled to vote in the election of directors is entitled to the number of votes equal to the number of sha*cs of such stock held by him multiplied by the number of directors to be elected, and such soles may be cast for a single director or may be distributed among any two or more of the directors standing for election.

Pursuant to Section 2 406 of the h1GCL, subject to certain restrictions, stockholders may remove directors either with or without cause by the aflirmative vote of a majority of all the votes entitled to be east in the election of directorr However, if a corporation has cumulativt voting for the election of directors, and less than the entire board of directors is removed, a director may not be removed without cause if the sotes cast against his removal would be suflicient to elect him if then cumulatively soled at an election of the entire board of directors. Pursuant to Section 2 407 of the h1GCL, stockholders of a corporation may elect a successor to fill a vacancy on a beard resulting from the removal of a director, As provided in the APS Dylaws, vacancies, except for vacancies caused by an increase in the number of directors, may be filled by a majority of the remaining directors, whether or not sufficient to constitute a quorum; vacancies resulting from an increase in the number of directors may be tilled by a majority of the APS Iloard. Under the A1GCL, a director elected by a board of directors serves until the next annual meeting of stockholders and until a successor is elected and qualities.

1)()E Section 1758(c) of the PBCL piovides for cumulative voting in the election of directors.

Section 1726 of the PBCL provides that, unless otherwise provided in a bylaw adopted by a corporation's l stockholders. any director or all of the directors of a corporation may be remmed frem oflice without cause by the vote of the stockholders entitled to elect directors, unless the board of directors is classified and such classification was efTected by a bylaw adopted by the stockholders. The PitCL provides that, unless a 78 i

._ m_, _ . . _ _ . . __ _ _ . ~ _ . _ -, _ _ ._ _. . _ _ _ _ _ _ . . _ _ . - - -

corporation's articles proide otherwise, if the board of direuors is so classihed - as is the l>Qli Itoard - an3 director or all of the ducetors may be remosed from otlice only for cause by a ,ote of the sto5Lholders entitled to wie thereon. Stockholders may also remme the entire b-d of directus by the unanimous consent or wie of stockholders entitled to vote in such mattet. .

Pursuant to the DQE Articles, so long as removal without cause is permitted under the PilCL, any director, any class of directors, of the entire DQE Iloard may be removed from ollice without cauke only if stockholders entitled to cast at least 80% of the voter, which all stockholders would be entitled to cast at an annual election of directors vote in favor of such removal. The DQE Articles also provide that,if the power to remove without cause is not mandated by statute, directorri may be removed from oflice only for cause and only if such removal is approved by the aflirmative vote of at least a majority of the voting power of the outstanding shares of capital stock of DQE entitled to vote Fenerally in an annual election of the directors of DQl; ("DQE Voting Stock") which are not beneficially owned by any person or entity (other than DQE or a subsidiary (as defined in the DQE Articles) or an employee benefit plan of DQE or a subsidiar> ) that is the beneficial owner, directly or indirectly, of 10% of the voting power of the outstanding DQE Voting Stock (a "DQE Interested Stockholder"),

Pursuant to Section 1726 of the PilCL, unless otherwise provided in a bylaw adopted by the stockholderr.,

a board of directors may remove any director who has been convicted of an ollense punishable by imprisonment for a term of more than one year or been judicially declared of unsound mind, or for any other proper cause enumerated in a corporation's bylaws. The DQL ll> laws do not state any such cause.

Section 1726 further allows any stockholder or director to petition a court to remove one or more directors for reasons of fraudulent or dishonest acts, for pross abuse of authority or discretion with respect to the corporation or for any other proper cause.

Under Section 1725 of the PilCL, escept as otherwise provided in a corporation't, bylaws. vacancies on a corporation's board of directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority of the remaining directors, although less than a quorum, or by a sole remaining director, and any such person so selected will be a director and serve for the balance of the unexpired term, unless the corporation's bylaws provide otherwise.

The DQE Ilylaws provide that vacancies in the DQE Iloard will be filled in the manner provided in the DQE Articles, which state that a vacancy may be filled only by a majority vote of the Disinterested Directors then in ollice, even if less than a quorum, and provide that all such directors elected to fill vacancies shall hold office for the remainder of the term for the class of directors to which they have been elected.

A " Disinterested Director"is defined in the DQE Articles to mean a director of DQE who is not a DQE Interested Stockholder or an afliliate, associate or representative of a DQE Interested Stockholder and either (i) was a director of DQE immediately prior to the time the DQE 1rierested Stockholder attained such status or (ii) is a successor to a Disinterested Director and is recommended or elected to succeed a Disinterested Director by a majority of the Disinterested Directors.

Duties of Directors APS Section 2 405.1 of the MGCL requires a director of a Maryland corporation to perform his duties in Food faith, in a manner he reasonably believes to be in the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. A director in performing his duties is entitled to rely on any information, opinion, report or statement prepared or presented by- (i) an officer or employee of the corporation whom the director reasonably belines to be compe?cnt in the matter prnented, (ii) a lawyer, public accountant, or other person, as to matters the director reasonably believes to be within that person's professional competence, or (iii) a committee of the corporation's board on which the director does not serve as to a matter within its designated authority, if the director reasonably believes the committee to merit confidence, 79

I)(JL in dncharging their liduciar) duties. the directors of a corporation individually, committees of the board.

and the board of directors as a whole may, pursuant to Section 1715 of the PilCL, in considering the best interests of the corporation, considct to the estent they deem appropriate: (i) the ellects of any action on the corporation's shareholders, employees, suppliers, customers, creditors and the communities in which the corporation is located, (ii) the short term and the long term interests of the corporation and the possibility that such interests may be best served by the independence of the corporation, tiii) the resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation, and (iv) all other pertinent factors. Section 1715 further relieses the board of directors from any duty to regard any interest (including any corpotute interest) as dominating or controlling, and explicitly states that the borrd of directors need not render inapplicable or make a determination under the prosisions of the PitCL relating to (i) control acquisitions, (ii) business combinations, (iii) control share acquisitions, or (is) disgorgement following attempts to acquire control of the corporation. With respect to an acquisition or [wtential or proposed acquisition for control of a corporation, Section 1715 esplicitly states that actions by directors are subject to the same standard of conduct for directors that is applicable to all other conduct, and also establishes a presumption that actions with respect to an acquisition, or a potential or proposed acquisition of control, to which a majority of disinterested directors shall have assented, satisfy the directors' standards of care under the PilCL unless it is proved by clear and convincing evidence that the " disinterested directors" (as defined in the PilCL) did not auent to such action in good faith after reasonable invesugation.

Meetings of Stockholders Al'S Pursuant to inc APS li> laws, special meetings of the stockholders may be called for any purpose by the Chairman of the APS Doard, the President, the APS Board or the Executise Committee of the APS Iloard, and must be called by APS' Secretary President or any director at the written request of stockholders holding a majority of the issued and outstanding stock of APS entitled to vote at the meeting. Any request by the stockholders must state the purpose or purposes of the meeting. On June 5,1997, the APS Ilylaws were amended to provide that unless the APS lloard or the Executive Committee of the APS Iloard determine otherwise, the business of any special meeting will be limited to the purpose or purposes for which such special .

mseting is called, and no other proposals or matters will be considered. The APS Charter and the APS Ilylaws bot'i provide that a quorum consists of the presence, in person or by prosy, of a rnajority of the issued and outstanding shares entitled to vote at the meeting, except as otherwise provided by law or the APS Bylaws.

The APS Charter provides that, notwithstanding any other provision of law requiring action to be taken or authorized by the aflirmative vote of the holders of a majority or other designated proportion of the shares of APS, action taken by APS will be valid if taken or authorized by the aflirmative vote of the holders of a majority of the total number of shares outstanding and entitled to vcte thereon.

DQl' Section 1755 of the PDCL allows special meetings of shareholders to be called at any time by the board of directors, by shareholders entitled to cast at least 20'1 of the votes that all shareholders are entitled to cast at such special meeting (unless the corporation's articles of incorporation provide otherwise) or by such officers or other persons as may be authorized by the corporation's bylaws. The DQE Hylaws provide that special meetings of the stockholders may be called at any time by the Chairman of the DQE Board, the President or by the DQE Board, and (to the extent permitted by the PBCL) shall be called at the written request of stockholders owning at least 20% of the shares of DOE capital stock entitled to be voted nt the meeting (which request shall state the purpose of the proposed meeting). Other than as provided in Section 1755 of the PHCL, under Section 2521 of the PBCL, the stockholders, with the exception of an

" interested stockholder" (as that term is dermed in Section 2553 of the PBCL with respect to meetings the purpose of which is to approve certain business combinations), of a Registered Corporation (defined in the P9CL generally vs a don.cstic corporation that has a class or series of shares entitled to vote generally in the 1

80

-, - - ~ _ -- _ __ __ _ _ _ , u_ a.

.. -.- ~ - _ - _- - - . . . - - - . ~ - - - - . - - _ - -_- . - _-

election of directors of the corporation registered under the lhchange Act) do not have the night to call a ,

special meeting, j

, Section 17% of the PliCL provides that, unless otherwige stated m a bylaw adopted by the stockholders. i a quorum consists of the presence of stockholders entitled to cast at least a majority of the votes that all stockholders are entitled to cast on a particular matter, llowever, pursuant to Section 2523 of the PDCL, the board of directors of a Registered Corporation may adopt or change a bylaw related to a quorum. The DQL Dylaws provide that the presence, either in person or by proxy of a majority of outstanding shares of capital t

etock entitled to vote constitutes a quorum. ,

Action by Written Content

{

APS a Under Section 2405 of the MGCL, stockholders may take any action required or permitted to be taken 3

at a meeting without a meeting only by unanimous written consent signed by each stockholder entitled to vote on such matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the 2

meeting but not entitled to vote at it. The APS Charter provides that a change in the terms of any of the outstanding APS Common Stock may be made upon the consent in writing, or by vote at a meeting of stockholders called for that purpose, of the holders of a majority of the outstanding APS Common Stock.

l D(>f f

Under Section 2521 of the PSCL, the stockholders of a Registered Corporation may act without a meeting by less than unanimour. written consent if such action is permitted by such corporation's articles of incorporation.The DQ9 Articles provide that any action that could be taken at a meeting of stockholders may be taken without a meeting by toe written consent of stockholders who would have been entitled to cast the j minimum number of votes that would be necessary to authorize the action at a meeting at wh:.h all stockholders entitled to vote thereon were present and voting.

Stockholder Proposals and Stockhulder Nominations of Directors APS The APS D> laws provide that stockholder proposals and nominations for election of directors may be made at any annual or special meeting of stockholders only if advance notice of the proposal has been timely given in accordance with the APS Bylaws, and such proposals or nominations are otherwise proper for

co.1 sideration under applicable Law, the APS Charter and the APS Bj, laws. The APS Bylaws provide that a stockholder must deliver notice of any proposal or the name of any person to be nominated for election as a director of APS to APS' Corporate Secretary at APS' principal executive oflice not less than 60 nor more than 4

90 days prior to the date of the meeting. In the event that the date of the meeting is first publicly a1nounced or

! disclosed less than 70 days prior to the date of the meeting, such notice must be given not more than ten dap after the date of the announcement or disclosure. Public notice will be deemed to have been given more than f 70 days in advance of the annual meeting of APS if APS has previously disclosed, in the APS Bylaws or 4

otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the APS Daard determines to hold the meeting on a ditTerent date. With respect to a proposal, the stockholder must 1 deliver with the notice of the proposal the text of the proposal to be presented, a brief written statement of the reasons why such stockholder favors the proposal and must ret forth such stockholder's name and address, the number and class of all shares of each class of stock of APS beneficially owned by such stockholder and any material imerest of such stockholder in the proposal (other than as a stockholder). With respect to a 1 nomination of a person for the APS Board, the stockholder must deliver with the notice a written statement setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of APS beneficially owned by such person, the information regarding such person required by certain sections of Regulation S-K adopted by the SEC (or the corresponding provisions of any regulation subsequently

< adopted by the SEC applicable to APS), such person's signed consent to serve as a director of APS if elected, and such stockholder's name and address and the number and class of all shares of each class of stock of APS bl E w w y- me--, mge- +" ,s v - ---- y-w'-y- y -- - w- v-

benehtially owned b) such stockholder, 'the Chairman of the rnectmp will have the riphi to determine whether such notice has been duly given and. if it has not, may direct that proposuh and nominees not be considered. For information with respect to presenting matters at special meetings see "- Meetings of Stockholders - APS."

DQE Pursuant to the DOE Articles, any stockholder of record entitled to sote in un election of directors may nominate a candidate for election as a director of DQE upon written notice of the nomination to the DQE a l Corporate Secretary not later than 120 dap in advance of the meeting at which the election udl be held, such

)

notice setting forth: (a) the name and addren of the stockholder who intends to make the nominaden and of l

the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of DQE entitled to vote ut such meeting and intends to appear in person or by proxy at the meeting to nominute the perr.on or persons specified in the notlec; (c) a description of all arrangements or understandings between the stockholder und each nomince and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the prosy rules of the SEC, had the nominec been nominated by the DQL lloard, und (c) the consent of each nominec to serve as a director of DQE if so elected.

Amendment of Charter and it) laws APS l'nder Section 2404 of the MGCL, an amendment of a corporate charter requires a resolution by the board of directors setting forth the proposed amendment and declaring it udvisable, and approval by the stockholders of the corporation by the aflirmative vote of two thirds of all votes entitled to vote on the matter; unless the charter provides otherwise The APS Charter provides that any action by the stockholders of APS requires approval b, the holders of a majority of the outstanding shares of APS. See "- Meetings of Stockholders - APS."

Section 2109 of the MGCL provides that the power to adopt, alter and repeal a corporation's bylaws shall be vested in the stockholders, except to the extent that a corporation's charter or bylaws confer this power on the corporation's board of directors. The APS Chaner provides that a majority of the APS Iloard has the power to make, alter and repeal the APS Dylaws, except that the power to ulter the APS Hylaws to divide the board into separate classes having difTerent tenures is reserved to APS' stockholders.

DQE Under Section 1910 of the PBCL, amendments to a corporationi urticles of incorporation may be proposed for adoption either by a resolution of the board of directors setting forth the proposal or, unless otherwise provided by the corporation's articles ofincorporation, by petition of the stockholders entitled to cast at least 10% of the votes that all stockholders are entitled to casi on the proposal. The right of the stockholders to propose an amendment to a corporation's articles of incorporation does not apply to a llepistered Corporation. In either case, any proposal to amend the articles of incorporation must be approved by the afbrmative vote of a majority of the votes cnt by all stockholders entitled to vote on such proposal, unless the articles ofincorporation or the PBCL t qmm approval by a greater proportion of votes. Further,if a proposed amendment would authorire a board of directors to determine the relative rights as between series of preferred or special classes of stock, adversely alter the preferences, limitations or special rights (other than preemptive rights or the right to vote cumulatively) of the -hares of a class or series, authorire a new class or series of shares with a preference as to dividends or assets senior to an existing class of shares, or increase the number of authorized shares of any class or series havi ng a preference as to dividends or assets which is senior to another class or series of shares, then the holders of the outstanding shares of the class or series shall have the right to vote as a class in respect of the amendment, the bylaws or articles ofincorporation of the corporation notwithstanding, and the araendment must be approved by a majority of votes cast in cach such class sole.

C

Under Section 1914 of the pitCL, stockholder approvalis not required for (criain >pecined amendments to the articles of incorporation that do not adscracly aficci the rights of stockholders.

The DQE Articles provide that,in addition to any other allirmatise sole required by applicable law, the DQE Articles or otherwise, any amendment, alteratidn, change or repeal of Articles 7 and 8 of the DQE Articles (which provide for (i) supermajority stockholder approval of certain business combinations, and (ii) the definitions of terms used in the DQE Articles), requires ( A) the vproval of at least 80% of the voting power of all then outstanding shares of DQE Yoting Stock, voting together as a single class, and (11) the holders of at least a majority of the voting power of the then outstanding shares of DQE Voting Stock. which are not beneficially owned by any DQE Interested Stockholdtr, voting together an a single clan, llowever, the supermajority requirement to amend Articles 7 and 8 does not apply if a majority of the Disinterested Directors recommends the pwposed action und the Disinterested Directors at the time of the recommendation constitute at least a majority of the full DQE lloard, exclusive of any directors elected by the hoh'ers of any class of stock having preferences over the DQE Common Stock as to dividends or uncts.

The DQE Articles also provide that the DQE lloard, by vote including a majority of the DQE Disinterested Directors, may adopt, repeal and amend the DQE ll> laws, except with respect to such matters as are reserved by statute to the stockholders. Stockholders of DQE may repeal, amend and adopt the DQE li> laws only if,in addition to any other aflirmative vote required by law, the DQE Articles or otherwise, such action is approved by the aflitmative vote of (i) the holders of at least b0% of the voting power of all then outstandmg shares of DQE Voting Stock, voting together as a sinF le Cla55, and (ii) the holders of at least a majonly of the voting power of the then outstanding shares of DQE Voting Stock which are ,mt beneficially owned by any Interested Stockholder, voting teFether as a single class. Ilowever, the riupermajority requirement does not apply if a majority of the Disintercated Directors recommends the proposed action and the Disinterested Directors at the time of the recommendation constitute at least a majority of the full DQE Iloard, exclusive of any directors elected by the holders of any class of stock having a preference over DQE Common Stock as tv tidends or assets. The DQE ily!aws provide that, except as provided by the DQE Articles or by statute, the power to amend the DQE Ilylaws is exclusively vested in the DQE Iloard.

Itequired Vote for Authortration of Certain Actions APS Under Section 3105 of the MGCL, in order for a corporation to metre, consolidate, transfer all or substantially all of its assets or engage in a share exchance, the corporation's board of directors must adopt a resolution declaring that the proposed transaction is advisable on substantially the terms and conditions set forth or referred to in such resolution and direct that the proposed transaction be submitted for stockholder consideration at either an annual or a special meeting of stockholdert To be approved, the proposed transaction must receive the aflirmative vote of two-thirds of all the votes entitled to be cut on the matter, unless the charter provides otherwise. In certain cases (e.g. merger of a 90%-owned subsidiary into itt, parent),

no vote of the stockholdert, is required. The APS Charter requires that a merger, consolidation, transfer of assets and share exchange be approved by the holders of a majority of the total number of shares outstanding and entitled to vote thereen of APS. See "- Meetings of Stockholders - APS." No approval of the Merrer by the stockholders of APS is required pursuant to the ApS Charter or the MGCL. Ilowever, approval of the issuance of APS Common Stock in the Merger is required pursuant to the rules and regulations of the NYSE, DQE Under Section 1924 of the PilCl., for a plan of merger to be adopted, a corporation's board of director >

must adopt a resolution approving such plan of merger and must direct that the plan of merger be submitted to a vote of the stockholders entitled to vote thereon at a regular or special meeting of the stockholders. The plan of merger must be approved by a majority of the votes cast by all stockholders entitled to vote thereon and,if any class or series of shares is entitled to sote thereon as a class, by a majority of the vctes cast in each class vote. Unless otherwise 'equired by a corporation's bylaws, a plan of merger does not require stockholder approval if: (i)( A) the surviving or new corporation is a domestic corporation whose articles of incorporation 83

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are identical to the unicles of incorporation of such constituent corporation, prmided that, the articles of incorporation need not be identical to the estent that stockholder approval would not be required to amend the cotivration's articles of incorporation pencrally; (11) each share of such constituent corporation outstanding immediately prior to the merger or consolidation will continue as, or be converted into (escept as otherwise agreed to by the holder thereof), an identical share of the surviving or new corporation; and (C) such plan provides that the stockholders of such constituent corporation 9111 hold in the upptegate v es of the surviving or new corporation having a majority of the votes entitled to be cast generally in an ocction of directors; (ii) prior to the adoption of such plan, another corporation that h a party to such plan owns 80% or more of the outstanding shares of each class of such constituent corporation so long us,in the case of a Registered Corporation, the adoption h consistent with the provisions of the PilCL relating to businers combinations with interested stockholders, or (iii) no shares of the constituent corporation have been issued prior to the adoption of the plan of merper by the board of directort, pursuant to Section 1922 of the PilCL (relating to a plan of merger), in certain circumstances, to approve a " business combination" (as defined in the DQE Articles), the DQE Articles require the aflitmative vote of (i) the holders of at least 80% of the DQE Voting Stock and .

(ii) a majority of the voting power of DQE Yoting Stock not benencially owned by a DQE Interested l Stockholder, voting together as a i. ingle class. See "-I air Price and AntbGreenmail Provisions in the Chaner Documents - DQE."

Apprahal and Dhsenters' Rights APS Under Section 3 202 of the MGCL, a stockhoider of a Maryland corporation has, subject to certain limitations, the right to demand and receive the fair value of such stockholder's stock from the corporation if:

(i) the corporation consolidates or merges with another corporation; (ii) the r,tockholder's stock is acquired in a share exchange; (iii) the corporation transfers all or substantially all of its aucts in a manner that requires corporate action under Section 3105 of the MGCL (relating to mergers, consolidations, transfers of assets and share exchanges)t (iv) unless permitted to do so by its charter (which the APS Charter does), the corporation amends its charter t.o as to alter the contract rights, as expressly set forth in the charter, of outstanding stock and substantially adversely affects the stockholder'ri rights; or (v) the transaction involves a business combination between the corporation and an interested Stockholder (defined generally in the MGCL as any person that is the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting stock of the corporation). Unless the transac' ion involves a business combination between the corporation and an interested stockholder, the right to receive fair value does not exist ( A) if the stockholder's stock is listed on a national securities exchanpc or is designated as a national market system securuy on an interdealer quotation system by the National Association of Securities Dealers. Inc., or (11) if the stock i: that of a successor in a merger, unless, among other things, (x) the merger alters the contract rights of the stock as expressly sct forth in the corporation's charter, without such charter reserving the right to do so, or (y) the stock is to be changed or converted ir.to something other than either the stock in the successor or cash, scrip, or other rights or interests arising out of provisions for the treatment of fractional shares of stock in the succeuor.

D(IE Section l$71 of the P!3CL provides that stockholders of a corporation have appraisal rights with respect to specihed corporate actions, including: (i) a plan of merger, consolidation, division. share exchange or conversion; (ii) certain amendments to its articles of incorporation in u hich disparate treatment is accorded to the holders of shares of the same clan or series; and (iii) a sale or transfer of all or substantially all of such corporation's nuets However,in no event are apprait,al rights alTorded to the holders of shates that are either listed on a national securities exchange or held of record by more than 2,000 stockholders unless ( A) shares converted by a plan are not converted solely into shares of the acquiring, surviving, new or other corporation and cash in lieu of t'ractional shares; (11) the shares are a preferred or special class of stock unless the articles ofincorporation of such corporation, the plan, or the terms of the transaction entitle all holders of the shares of such clan to sote thereon and require for the adoption thereof the attirmative vote of a majority of the votes 84

cast by all stockholders of such cle or (C) il such sharch constitute a group of a clau or series uhich are to recche special treatment in the corporate action under consideration, the holders of auth group are not entitled to vote us a special clau in ter ;t of such corporate action.

State Anti Takemer Statutch Al'S Under Sections M01 to 3+03, inclushe, of the MGCL, certain " business combinations" (including a f merger, consolidation, sharc exchange or, in certain circumstances, an auct transfer or inuance or reclauification of equity securitics) between a Maryland corporation and any person (other than the corporation or a subsidiary of the corporation) w ho beneficially owns 10 percent or more of the voting power of the corporation's shares or an afliliate or anociate of the corporation who, at any time within the two year period prior te the date in question, was the benclicial owner of ten percent or more of the voting power of the then outstanding voting stock of the corporation (an "MGCL Interested Stockholder") or an afliliate of such an MGCL In. crested Stockholder are prohibited for five years ulter the most recent date on w hich the MGCL Interested Stockholder becomes an MGCL Interested Stockholder. Thereafter, any such husiness combina.

tion must be recommended by the board of directors of such corporation and approved by the aflitmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation, voting together as a single voting group, and (b) two thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the MGCL Interested Stockholdes who will (or w hose alliliate will) be a party to the business combination or by an affiliate or anociate of the MGCL Interested Stockholder, voting together as a single voting group, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the MGCL Interested Stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the MGCL Interested Stockholder becomes an MGCL Interested Stockholder.

Under Sections 3 701 et seq. of the MGCL," control shares" of a Maryland corporation acquired in a

" control share acquisition" have no voting rights except to the extent approved by a vote of two thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employces of the corporation. " Control Sharcs" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquitor or in respect of which the acquitor is able to exercisc or direct the exercise of voting power (except solcly by virtue of a revocable proxy),

would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one fifth er more but leu than one third, (ii) one third or more but less than a majority, or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of h' wing previously obtained stockholder approval. A " control share acquisition" means the acquisition of control shares, subject to certain exceptions.

A person who has inade or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the sharcs. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person. statement as required by the MGCL, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquitor or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders rnay exercise appraisal rights. The fair value of the shares as determined for 85

purpov of such appraimi rights may not be Icw than the highest pric.: per share paid by the acquit ithe contr$ hare acquisition.

T he control share acquisition statute does not apply *(u) to shares acquired in a merger, consolidation or share exchanpc if the corporation is a party to the transaction or (b) to acquisitions spproved or exempted by the charter or bylaws of the corporados provh/nl, homrr, that the charter or bylaw provision was adopted before the acquisit!on of the shares.

Neither the APS Charter nor the APS II)lawa contains a provision exempting from the control share acquisition statute any acquintions by any person of shares of stock of APS. There can be no auurance that such a provision will hot be added at any time in the future.

D(E Chapter 25 of the PilCL contains several unti takeover provisions that apply to itegistered Corporations.

Section 25.4 of the PilCL provides that if (i) a stockholder of a 1(epistered Corporation (together with others acting jointly or in concert therewith and alliliates thereof) is to be a party to a merger or consolidation, a share exchange or certain vles of ancis involving such corporation or a subsidiary thereof; (ii) a slot kholdet is imolved in a transactior 4 which such stockholder will receive a disproportionate amount of the securities resulting from a division of such corporation; (iii) a stockholder, other than certain dissenting stockholders, is to be treated dilTerently from others holding shares of the same clau in a voluntary diuolution oc winding up of such corporation; or (iv) in a reclassification, a stockholder's percentage of voting or economic snare interest is materially increased relative to substantially all other stockholders, then the transaction being pmposed must be approved by the allitmative vote of stockholders representinF at least a majority of the votes that all stockholders are entitled t i cast with respect to such transaction, excluding all such sharch which the stockholder w ho is interested in ti e transaction is entitled to cast. The approvah required by Section 2538 ute in addition to any other approvals , .luired by Subpart 11 of Part 11 of the PitCL, the corporation's articles of incorporation or bylaws or otherwi c. Such kpecial voting requirement does not apply to a transaction ( A) that has been approved by a majority of such corporation's board of directors, excluding directors who are oflicers or directors of, or have a material equity interest in, the interested stockholder or who were nominated for election as a director by the interested stockholder and first clected as a director within 24 months of the vote on the proposed transaction; (11) in which the consideration to be received by the stockholders for shares of any class of which shares are owned by the interested stockholder is not leu than the highest amount paid by the interested stockholder in acquiring shares of the same clast or (C) that has been approved by the directors of the corporation and involves an 80% or more stockholder.

Sections 2545 and 2546 of the PilCL, which are part of the Pennsylvania Control Transactions Statute, provide that, subject to certain limited exceptions, in the event of the acquisition by any person or group of persons acting together that has voting power over voting shares of a llegistered Corporation that entide the holders thereof to at least 20% of the voting power of the voting shares of such corporation (a " controlling person or group" for purposes of Sectio % 2545 and 2546 of the PliCl.): (i) such controlling person or group must give prompt notice to all stockholders of record of such corporation that such ncquisition has occurred; and (ii) any stoelholder may make written demand on such controlling person or group for pa) ment of the fair value, to be determined in the manner prescribed by the PilCL (the minimum of which must be the highest price paid per share by the controlling person during the prior 90 days), of the voting shares held by such stockholder, and upon receipt of any such demand, such controlling person or group must pay such fair value to such stockholder in accordance with the procedures set forth in the PilCL, w hich include proceedings that would require such Hockholder to present such stockholder's shares to a court for a determination of the fait value thereof. If the Control Transactions Amendment is approsed at the DQE meeting, DQE will have authoriecd opting out of the Pennsylvania Control Transactions Statute.

Section 2555 of the PliCL applies to transactions between a llegistered Corporation and a 20%

stockholder thereof (an " interested stockholder" for purposes of Section 2555 of the PilCL), notwithstanding that Section 2538 of the PilCL is also applicable. Section 2555 prohibits a llegistered Corporation from engaging in a business combination with an interested stockholder unless: (i) such busineu combination or b6-b

the asquiution of shares causing such interested stodbolder to become such was approsed by the board of directors el such corporation prior to the interested stockhohler's whate acquisition, or where the purchase of shares made by the interested shareholder had been approved by the board of directers of such corporation prior to tha interested shareholder's share acquisition gate; (ii) such businen combination is apprmed by the j

allitmative vote of t!,e holders of sintes representing at icast a majority of the voteri entitled to be cast in an election of directors, escluding voting shares beneficially owned by such interested Stockholder or its alliliates or associates, and the meeting at which such businen combination is approved is held at least three months after the time the interested stockholder became the bencheial owner of at least 80% of the shares entitled to vote in an election of directors and the consideration to be olTered to stockholders in connection with such

, business combination meets specihed fait price standards (iii) such business combination is unanimously approved by the holders of all outstanding common shares of such corporation; (iv) such busmess combination is approved by the allirmative vote of the holders of shares entitling such holders to cast a majority of the veien that all stockholders would be entitled to cast in an election of directors of the corporation, excluding any voting shares beneficially owned by the interested stoelholder or any afliliate or associate of the interested stockholder, at a meeting called for such a purpose no earlier than live years after the date of the interested shareholder's share acquisition; or (v) such business ( . hinulon is approved at a stockholder's meeting callet for such a purpmc no earlier than live years after the date of the interested r.tockholder's share acquisition and that satishes specified fair price standards.

Section 2564 of the PitCL provides that PilCL Control Shares (as denned below) of a corporation will have their voting rightr. taken away. Such voting rights may only be restored by the alhrma:he vote of (i) the holders of a majority of the disinterested shares (as defined in the PilCL) and (ii) a majority of the voting peer of the outstanding voting shares of such corporation. In addition, under certain circumstanc a, a Registered Corporation is permitted to redeem PliCL Control Shares. "PitCL Control Shares" are delined as the number of soting shares which, upon acquisition by any person or group, results in a "PitCL Controb Share Acquisition," w hich is defined as an acquisition of such number of voting shares as, when added to the voting shares already held by such acquiring person or group, would entitle such person or group to exercise voting power for the hrst time within any of the following three ranges: (i) at least 20% but leu than 33%%t (ii) at least 33%% but less than 50%; or (iii) $0% or more. PilCL Control Shares also include voting shares acquired within 180 days of the occurrence of a PilCL ControbShare Acquisition or acquired with the intention of making a PilCL ControbShare Acquisition. Under a provision of the DQE Ilylaws, DOE has opted out of the provisions of Section 2564 of the PilCL.

Section 2575 of the PilCL pmvides that any profit realired by a "comrolling person or group" (as defined above) Imm the disposition of any equity security of a Registered Corporation is reemerable by such corporation if (i) such profit is realized by such vontroliing person within 18 months after the controlling person became such and (ii) the equity security so disposed of was acquired by such controlling person within 24 months prior to or 18 months after such controlling person became such. Subject to certain exceptions,

" controlling person or group" includes any person or group w ho (i) nequired, ofTered to acquire or, directly or indirectly, publicly disclosed or caused to be publicly disclosed its intention to acquire, power to vote at least 20% of the voting shares of such corporation or (ii) publicly discloaed or caused to be publicly discimed that h

, ma) seek to acquire control of such corporation through any means. Under a provision of the DQE Bylaws, DQE has opted olt of the provisions of Section 2575 of the PilCL.

Pursuant to Section 1713 of the PDCL, except in the case of obligations imposed by criminal statutes and a director's liabihty to pay federal, state and local taxes, if a corporation's bylaws w provide, its directors may not be held personally liable for monetary damages for any action taken, unless the director's actions constitute Self dealing, willful mi> conduct or recklessnen or the director has failed to perform the duties of his ollice under the PilCL lloth the DQE Articles and the DQE ilylaws provide that, to the maximum extent provided by Penn9 1vania law, no director of DOE will be personally liable for monetary damages for any act or omission taken as a director.

87

indernniheation of Otherrs and liirret, AlW Section 2 418 of the MGCL requires u corporation (unless its charter provides otherwise, which the APS Chaner does not) to indemnify a director or ollicer who has been successful, on the merits or otherwise,in the defense of any proceeding to which he is made a party by a reason of his senice in that capacity. Section 2 418 permits a corporation to indemnify its preser t and former directo s and ollicers, among others, against judgments, penalties, fines, settlements and reasonabic cxpenses (including attorney's fees) actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or ollicer was material to the matter giving rise to the proeceding and (i) was committed in bid faith or (ii) was the result of active and deliberate dishonesty, (b) the director or oflicer actually received an improper personr' benclit in money, property or services or (c) in the case of any criminal pnieceding, the director or ellicer had reasonable cause to believe that the act or omission was unlawful. Ilowever, under the MGCL, a Maryland corporation 1 may not indemnify for an adverse judgment in a suit by or in the right of the corporation or in which the director was found to have received an improper personal benefit, unicss a court so orders and then only for expenses. In addition, the MGCL permits u corporation to udvance reasonable expenses to a director or ollicer upon the corporation's receipt of (a) a written allirmation by the director or ollicer of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation as authorized by the MGCL and (b) a written statement by or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met.

The APS ll> laws provide that APS will indemnify any person w ho was or is a party or is threatened with being made a party to any action, suit, or proceeding, includmg appeals (other than an action, suit or proceeding by or in the light of APS), by reason of being a director, olliccr or employee of APS or serving at the request of APS in a similar capacity for another entity, against expenses (including utionneys' fees),

judgments, decrees, fines, penalties and amounts paid in settlement actually and reasonably incurred by the person in connection with such proceeding if the person acted in good faith and in u manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that the conduct was unlawful The APS liylaws s

further provide hut APS will indemnify any person who, by reason of being a director, ollicer or employee of APS or serving at the request of APS in a similar capacity for another corporation, is or was a party or is threatened with being made a party to any action, suit or proceeding, including appewis, by or in the right of APS to precure a judgment in its favor, against all expenses actually and reasonably incurred (including attorneys' fees) in connection with the defense or settlement of such action, suit or proeecding. APS will also indemnify such person for any amounts paid in settlement of such action, suit or proceeding, up to the amount that would have reasonably been expended in such person's defense, if such action had been prosecuted to conclusion, llowever, indemnification in the case of an action brought by or in the right of APS will be made only if the person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of APS and no such indemnified party shall have been fmally adjudged to be liable for negligence or misconduct in the performance of his duty to APS, except that a court may order indemnifica-tion despite an adjudication of liability if it eteems such indemnification proper in view of all the circumstances. Other provisions of the APS Charter provide for indemnification as permitted by the MGCL.

Consistent with Section 2 405.2 of the MGCL and Section 5449 of Courts and ,ludicial Proceedings Article, the APS Charter provides that directors and oflicers are not liable to APS or its stockholders for monetary damages for breach of their fiduciary duties, provided that director and oflicer liability is not climinated (i) to the extent that it is proved that the person actually received an improper benefit or profit in money, property or services, to the extent of the improper money, property or services actually received, or (ii) to the extent that a judgment or final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was the result of active and deliberate l dishonesty and was material to the cause of action adjudicated in the proceeding, i

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DQC Sections 1741 and 1742 of the PitCL permit a corporation, unless otherwise restricted by its b> laws, to indemnify a person who was or is a part) or is threatened to be made a party to (i) any action or proceeding, whether civil, criminal, administrative or in estigative, not on behalf of such corporation, against expenses (including attorneys' fech), judgments, penalties, hnes and settlement amounts incurred by reason of such person's being or having been a representative of such corporation or having served at the request of the corporation as a representative of another entity, if such person acted in good faith and reasonably believed ,

that his actions were in or not opposed to the best interests of such corporation and, with respect to any criminal proceeding, had no reasonable cause to believe that his conduct w as unlawful, or (ii) any action by or in the right of the corporation to procure a judgment in its favor upainst expenses (including attorneys' fees) incurred by reason of such person *> being or having been a representative of such corporation or having served at the request of the corporation as a representative of another entity,if such person acted in good faith and reasonably believed that his actions were in or not opposed to the best interests of such corporation and, with respect to any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. To the extent that a representative of a corporation has been successful on the merits or otherwise in the defense of a third party or derivative action, indemnification for expenses incurred (includinF attorneys' fees) is mandatory.

Section 1746 of the PDCL provides that its provisions on indemnihcation will not be deemed exclusive of any other rights to which a person may be entitled under any bylaw, aptccment or otherwise, provided that indemnification shall not be made in the case of willful misconduct or recklessness. Section 1745 of the PBCL provides that a corporation may pay espensen in advance, provided that the person undertakes to repay the amount if it is ultimately determined that he is not entitled to be indemnihed by the corporation.

The DQE liylaws provide that directors and oflicers will be entitled to indemnification for any reasonable expense (including attorneys fees) or liability paid or incurred in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or otherwise, w hether by or in the right of DQE or otherwise, by reason of such person serving in such capacity or, at the requer,t of DOE,in a similar capacity with another entity, and such indemnification includes the right to have expenser, paid in advance,in compliance with applicable law. The right to receive indemnification does not apply in suits by directors or ollicers against DQE, other than suits to obtain indemnification.

Pursuant to Section 1713 of the PBCL, except in the case of obligations imposed by criminal statutes and a director's liability to pay federal, state and local tases, if a corporation's bylaws so provide, its directors may not be held personally liable for monetary damages for any action taken, unless the director's actions constitute self dealing, willful misconduct or recklessness or the director has failed to perform the duties of such director's office under the PDCL. Both the DQE Articles and the DQE Bylaws provide that, to the maximum extent provided by Pennsylvania law, no director of DQE will be personally hable for monetary damages for any act taken or omission made as a director.

Fair Price and Anti Greenmail Prmisions in the Charter Documents APS Neither the APS Charter nor the APS Bylaws contain any " Anti Greenmail" or " Fair Prici" pousions, which would, respectively, prevent APS from repurchasing shares of APS from a potential acquh < t APS, and paying a premium for those shares,in order to prevent an acquisition of APS by such potential acquitor, and require that transactions with specified stockholders meet certain price criteria.

DQE Neither the DQE Articles nor the DQE Bylaws contain any " Anti-Greenmail" provision.

The DQE Anicles provide, among other things, that (i) business combinations with; (ii) issuance of securities of DQE to; (iii) adoption of a plan for the liquidation or windmg up of the DQE affairs proposed by or on behalf of: or (iv) any transaction, recapitalization or stock reclassification having the result ofincreasing the amount of outstanding shares of DQE owned by, a DQE Interested Stockholder or an alliliate or associate 89

+

of a DQL Interested Stockholder, requires the approval of b0% of DQL Yoting Stock, soting together as a single claw, and the approval of a maiority of the shares of DQl. Voting Stock, other than those benaficially owned by DQL Interested Stockholders, soting as a cla lloweser, if (O the transaction is approved by a majority of Disinterested Directors, or (ii) the per. share consideration received by holders of common stock natishes the fait price criteria specified in the DQE Articles, the approval described above is not required, and such transaction will require only such anirmative vote, if any, as may be required by law, by any other provision of the DQE Articles or by any agreement with any national securities exchange, Conflict.of interest Transattlons A/W Undet Section 2~llv of the htGCL, a contract or transaction between (i) a corporation und any of its directors, or (h) a corporation and any other entity in which any of its directors has a material hnancial interest, is not void or voidable valely because of a common directorship or interest, the presence of the director at the meeting of the board or a committee of the board that authorires the contract or transaction or the countint of the vote of the director for the authoritation,if (s) the fact of the common directorship or interest is known or disclosed and cither (A) a majority of the disinterested directors on the board or committee upprove the contract or transaction, or (11) the majority of the shares entitled to vote, other than those owned of record or bencheially owned by the interested director, upptove the contract or transaction, or

()) the contruct or transaction is fair and reasonable to the corporation.

The APS Charter provides that, in the absence of fraud, the fact that u director has an interest in a transaction or contract with APS or an interest in any entity that enpapes in a transaction or enters into a contract with APS, will not affect or invalidate the contract if authorized, ratihed or approved by the APS Iloard or the stoelholders of APS, The APS Charter further provides that a director will not be liable to account to APS for any profit made on any such contract or transaction if the contract or transaction has received the authoritation, approval or ratiheution of the APS Iloard or the stockholders of APS, DQE Under Section 1728 of the PitCL, unless the bylaws of the corporaun preside otherwise, transactions between a corporation and one or more of its directors or omeets or between u corporation and any other entity in which one or more directors or oflicers has a financial interest are not void or voidable, solely due to the chistence of such relationship, the presence at or participation in the meeting of the board of directors that authorites that transact'an or the counting of such persons' votch,if: (i) the material facts are disclosed as to the relationship or interest or are known to the board of directors and a maiority of the disinterested directors approves the transaction: (ii) the material facts are disclosed as to the relationship or interest and the transaction is specincally apprmed in good faith by a vote of the stockholders; or (iii) the contract is fair to the corporation at the time authorized Tile APS CilAltTI:lt Ah1ENDNil'NT The APS lloard has determined that the Charter Amendment is advisable for APS whether or not the hierper is cirectuated. The APS Itoard believes that the name " Allegheny Energy, Inc " more accurately  ;

describe; the focus of the combined company and the path that APS will take whether or not the hierper is 1 consummated The APS lioard believes that Allegheny Energy, Inc. is a more accurate description of a (

wmpany that intends to provide its customers with a wide array of energy products and services. Stockholders of APS should not be affected in any way by this change of name, Assuming the Charter Amendment is ,

, approved at the APS Spaial hiceting, stockholders of APS will not be required to take any further action to 1 l cfTect the Charter Amendment; stock certificates representing shares of APS Common Stock will not need to  !

be exchanged for new stock certificates. The APS Iloard unanimously recommends that the holders of APS Common Stock sole l'Olt the Charter Amendment, 90

AMI:NDMINI IO lill I Ql: A KilCl.l:S The DQL lloard has determined that the Control'Iransactions Amendment, which would amend the DQL Articles to male the Penns)hania Control"Iramactions Statute inapplicable to DQL,is advisable for DQU. DQE does not believe holders of DQE Common Stock would be entitled to any rights under the Pennsylvania Control Transactions Statute as a result of the Merper, but because there is no controlling precedent interpreting this portion of the Pennsylvania Control Transactions Statute, DQE is recommending the Control Transactions Amendment in order to remove an) possible uncertainty or legal challenge. If the Penn9 tvania Control Transactions Statute were applicable to the Merper, holders of DQE Common Stock uould have the right following the Merger to demand pa3 ment for the fair valte of their DQE Common Stock as determined in accordance with the Pennsylvania Control Transactions Statute. Such payments could adversely alrect the ability of APS and DQL to account for the Merper as a " Pooling of interests" for accounting purposes. Notwithstanding the approval of the Control Transactions Amendment by the stock-holders of DQE, DQE will not file the Controllransactions Amendment until all of the conditions to the Merger have been satisfied or waived. Therefore, even if there is stockholder approval of the Control Transactions Amendment,if the Merper does not occur, tne Control Transactions Amendment will not have become cilective, and DQE will remain subject to the Pennsylvania Control Transactions Statute. A copy of the form of the Control Transactions Amendment is attached as Appendix E to this Joint Proxy State-ment / Prospectus.The HQl: llourd unanimousl3 recommends that the holders of DQl: Common Stock note l'Olt the Control Treinattions Amendment, The operation of the Pennsylvania Control T ransactions Statute is described under "The Merger-Appraisal itights." The text of the Pennsylvania Control "Irausactions Statute is attached hereto as Appendix D.

OTill:lt INI'OllMNilON l'Olt Till: DQl: MEl: TING There were 77,408,M7 shares of DQE Common Stock outstandmp and entitled to vote at the close of business on June 16, 1997, the DQE Itecord Date. Euch stockholder is entitled to one vote for cach whole share held on all matters to be soted upon at the DOE Meeting and,in addition, has cumulative voting rights with respect to the election of directors.

Confidentiality: It is the policy of DQE that proxies, ballots, and voting tabulations that identify iridividual stockholders are kept confidential, except in a contested proxy solicitation or as may be necessary to meet applicable legal requirements. Proxies, ballots, and other voting documents are available for examination only by the judges of election and those associated with proecssing proxy cards and tabulating the vote, who must agree to comply with t? k policy of confidentiality.

Wesley W, von Schack resigned as Chairman. President, and Chief Executive Ollicer of DQE in August of 1996. In February of 1997, the DQE Iloard elected Dasid D. Marshall, President and Chief Executive Otheer. Mr. Marshall had been sening as interim President and Chief Executive Oflicer since August of 1996.

- In August of 1996, the DQE iloard aho elected Robert P. Ilonone and William II. Knocll to serve as Lead Directors, The Lead Directors alternately chair DQE lioard meetings and perform other functions of a Chairman not delegated to the President und Chief Executive Otlicer of DQE.

DQE appreciates the outstanding leadership, wisdom, und dedication that Mr. von Schack provided during his tuche years o rdistinguished service to DQE and his significant contributions to the community.

DQE has a mandatory retirement age of 70 with an exception to allow directors who reach the are of 70 while sening as directors to complete their terms. In 1996 the DOE 11ylaws were amended to proside for the roution of " Lead Director" and to provide that directors serving as Lead Directors are not subject to the mandatory retirement are of 70. As a result, William II. Knocli uill be eligible to be a nomince for reelection at thir Annual Meeting and has been unanimously nominated by the DQE Iloard. Lead Directors chair meetings of the DQL lloard or stockholders (under certain circumstances) and advise the Company on matters of DQE iloard and corporate povernance.

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l l'lection of I ireclors l'our direttors are to be elected by the stockholders of DQE at the DOE Meeting. Unless the Merrer is I

consummated, they will continue to ser e until the Anntral Meetmp of DQE in the year 20(X) and thereaf ter I

until their suteenvra are chosen and qualified. It is intended that prosies soNied on behalf of the DQE Iloard will be soted for the nominees named below, if, because of esents not presently known or anticipated, any l nomince is unable to sene or for good cause will not sene, the prosies voted for the election of that director may be voted (in the discretion of the holders of the proxies) for other nominees not named below. Unless I

otherwise indicated, the business positiens have been held for the past live 3 cars.

l Nominees for Dirretors l Terms brinng hs L.c l' car 2(W j

Daniel lierg, Arc 68 Director of DQE since 1989. Institute Professor and Acting Director, Services 1(esearch and Education Center, of itennelaer Polytechnic Institute.

A director of Duquesne Light,Ily Tech Machine, Inc. (manufacturer of specialty parts and equipment), and Joachim Machinery Company, Inc. (distributor of machine tools). l j , und Chairman of the Academic Advisory lloard of the National Academy of l l

N Engineering. j Itobert P. Iloiroce. Arc 63, Director of DQE since 1990. Elected to be a i cad Director

, in August of 199t> Vice Chairman of Allegheny Teledyne, Inc. (specialty metals ,

! . production) since its krmation through the merger of Alleghen) Ludium Corporation and Tcledyne, Inc in A gust 1996. l'ormerly Vice Chairman from 1994 1996 and

, President and Chief ExecuGvc Ollicer from 1990-1994 of Allegheny I udium. Aho a l director of Duquesne Light and Allegheny Teledyne, Inc., a trustee of liensselaer Polytechnic Institute, a life member of ASM International (engineenny technical society), and a board member of the Greater hitsburgh Council-lloy Scouts of America, The Salvation Army, and Catholic Charities, Also former Chairman of the l s httsburgh liranch of the l'ederal iteserve llank of Cleveland. l i

g, William 11. Knocli, A e F 72. Director of DQE since 1984. Elected to be a Lead Director  !

j' in August of 1996. Itetired Chairman of the lloard and Chief Executive Ollicer of

, Cyclops Industries, Inc. (basic and specialty steels and fabric: ted steel products, i indus 'al and commercial construction). Aho a director of Duquesne Light, Cabot Oil

) & Gas Corporation and St. Clair Memorial llospital and a life trustee of Carnegie l Mellon University.

Thomas J. Murrin, Age 68. Director of DQE since 1991, Dean of the A. J. Palumbu School of Ilusiness Administration of Duquesne University since 1991. Prior to that,

, Deputy Secretary of the U.S. Department of Commerce and President of the Enerp3 i and Advanced Technology Group of Westinghouse Electric Corporation. Also a director of Duquesne Light and Motorola, Inc. (manufacturer of electronic equipment and 4' components) and a member of the Executive Committee of the U.S. Council on i Competitivenen and Chairman of the District Esport Council.

, The DQE Ilourd unanimously recommends that DQE stockholders apprme the election of the nominees l

, for director,  !

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l l, - . - _ - - - - - . - . . - . -

- . . . _ . - - . - - - - - - - . - - - - - - - - -----,~v

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%tunding Dirtttors j 1he othei members of the DQL lloard currently serving terms expiring as hoted are as follows.

' l Term.< Caparing in 199&

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- Doreen l'.. Iloye, Age 63, Director of DQE since 1989. President of the lluhl l

...' Foundation (charitable institution for educational and pubhc purposes). Also a director 1 of Duquesne Light Microbac Laboratories, Inc., Orbeco Analytical Systems, ine, and l Dollar llank, i ederal Savings llank and a trustee of Frankiin & Marshall College.

Daild D. Marshall, Age 45. Director of DQE since 1995. President und Chief Executive Ollicer of DQE and Duquesne Light since August of 1996. Previously Executive Vice l President of DQE and President and Chief Operating Ofliccr of Duquesne Light since l 1995. Vice President of DQE from 1989 to 1995, and Executive Vice President of Duquc>ne Light from 1992 to 1995. Also a director of Duquesne Lipht, United Way of Allegheny County, and Southwestern Pennsylvania industrial 1(esource Center (eco-nomic development), and Trustec, Vice President, and Secretary of Penn's Southwest Association (cconomic development).

Itobert Mehrabian, Age 55, Director of DQE since 1991 President Emeritus and

>' Professor of Material Science and Engineering at Carnegie Mellon University. Distin-guished Visiting Profenor at the University of California, Santa liarbara. Also a director of Duquesne Light, Allegheny Tcledyne, Inc., PPO Industries Inc., Mellon llank Corporation, Mellon llank, N.A., and 11El Electronics, Inc. (develops sysiems and sensors for satellites, aircraft, medical devices and automobiles), an cuollicio trustee of g Carnegic Mellon University and a member of the Alcoa Science & Technology Council.

1 1 Terms E1piring in 1999:

Sigo l'alk, Age 62, Director of DQE since 1989. Management of personaliucstments.

, Chairman of The Maurice Falk Medical Fund and Leon Falk Family Trust and a director of Duquesne Light. Also Chair of the Chatham College lloard of Trustees and a board member of the llistorical Society of Western Pennsylvania and the Allegheny i

l Hs ,

Land Trust.

1:ric W. Springer, AFe 68, Director of DQE since 1989. Partner of Ilorty, Springer &

Mattern, P.C. (attorneys at law). Also a director of Duquesne Light, a trustee of the l

' . Maurice Falk Medical Fund, a Trustec Emeritus of Presbyterian University llospital and the University of PittsburFh Medical Center, and Past President of the Allegheny l ,

l U* , County 13ar Association.

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Diredors' lies and Plans Directors of DQl! uhu are not emplo>ces are compensated for their I)QE iloard senice by a comhmation of DQE Common Stock and cash. They receive an annual retainer of $15,000 in cash for service to DQE and its alliliates, payabic in Iw cite monthly installments, and 250 shares of DQE Common Stock, payable in April i of each year Each director also receives a fee of $1,000 for each DQE livard and committee meeting 1 attended. For service as Lead Directors in 1996, Messrs. Iloitone and Knoell cach received 263 shares of '

DQE Common Stock and $$,021 in cash. Dr.11 erg reccited a fee of $1,000 per meeting for three meetings he attended as a director of Chester Engineers, Inc., which at the time was an afliliate of DQE, Directors uho are crnployees of DQE or any of its athliates do not tcccive fees for their services as directors.

In February of 1996, the DOE iloard authorized a study of outside director pension programs, After a full review, the Duquesne Light iloard voted to terminate the Duquesne Light Outside Directors' Retirement Plan (the " Directors' Retirement Plan") for individuals who become non emplo)ce directors after August 27,1996 and to frecre the plan for current non employee directors of DQE an of December 1,1996. Directors of DQE and Duquesne Light who retired prior to August 27,1996 will continue to receive their monthly benclits under the Directors' Retiremem Plan uhich are equal to the month'y retainer in clicct at the time of retirement from the DQB lioard for a period equal to the total months of service on the DQl! Iloard and the board of directors of Duquesne Light but no longer than 120 months. As a result of the termination of the Directors' Retirement Plan, new non employee directors will not be entitled to benefits under that plan, and current non employee directors of DOE and Duquesne Light will accruc no additional retirement benefits for services after December I,1996. In full satisfaction of their accrued benclits under the Directors' Retirtment I"an, current directors of DOE received, as of DecemScr 31,1996, shares of DQE Common Stock and cash equalin value to the actuarial value of such accrued benefits. Such actuarial value was determhied assuming a $% per annum increase in the annual retainer, future unnual increases in the value of DQE Common Stock of 6.5% a dividend yield of 4.5% and an after tax discount rate of a.5% per annum, in the case of current directors with less than ten 3 cars' service, all or a portion of the shares received are subject to a vesting schedule. The vesting schedule lx the same as the vesting schedule to which benefits under the Directors' Retirement Plan were subject, I.c.,50% vesting after five 3 ears of service plus an additional 10% vesting in years six through ten, in order to increase directors' stock based compensation and thus strengthen the link between directors' compensation and stockholder interests, the DQE lloard adopted a new stock plan under which new non-employee directors of DQE will cach receive up to 1,150 shares of restricted DQE Common Stock that will vest at the rate of 50% after live years of service as a director plus an additional 10% per year in years six through ten. Unvested shares are forfeited if the recipient ceases to be a director, Each director of buquesne Light under the age el 72 who it. not an employee may elect under a directors' deferred compensation plan to defer receipt of a percentage of his or her director's remuneration until after termination of service as a director. Deferred compensation may be received in one to ten annualinstallments -

commencing. with certain exceptions, on the 15th day of January of the year designated by the director.

Interest accrues quarterly on all deferred compensation at a rate equal to a specified bank's prime lending rate.

Dr. Berg and Mr. Mehrabian ciected to participate in the plan for 1996.

As part of its overall program to promote charitable giving. DQE and Duquesne Light have a Charitable Giving Program for all directors funded by life insurance policies on the directors owned by Duquesne Light.

Directors of DOE are raired. and upon the death of the second of the two directors DQE will donate up to five hundred thousand dollars cach to one or more qualifying charitable organizations recommended by cach of the two directors and reviewed and approved by the Employment and Community Relations Commitice of the DQE Board. A director of DOE must have service of 60 months or more on the DQE Board in order to quahf) for the full donation amount, with service of less than 60 months qualifying for an incremental donation. The program does not result in any material cost to DQE.

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DQl; provides liusiness Trasci insurance to its non empleyce directers as part of its liusiness 'Itasci Insurance plan for hianagement Emplo)ees. In the event of accidental death or dismemberment, benehts of l up to $4(0,(KO per individual are provided. The program does not result in any material cost to DQE.

, 't he DQl'. Iloard and its Committees i

! There were twelve regular meetings and four special meetings of the DQE iloard during 1996 Attendance by the directors at DQE Iloard meetings and committee meetings in 1996 averaged 98.9%. No >

director failed to attend at least 75% of the DQE Iloard meetings and committee meetings of the DQE lloard.

The DQE Iloard has standing committees which meet periodically. including the Audit, Compensation, and Nort nating Committees of the DQE Iloard which are described below and a Finance Committee.

5 j Actions taken by any committee of the DQE Iloard are reported to the full DQE Iloard.

Audit Commillec

! The Audit Committee of the DQE Iloard is composed of four directors uho are not employees of DQE.

i hiembers are Drs. Iterg and hich*abian and hiessrs. lionone and Springer. The principal responsibilities of I the Audit committee of the DQE !!oard include recommending the independent public accountants and j reviewing the DQE financial statements and the related report of the independent public accountants; the results of the annual audit performed by the accountants; the DQE system of internal accounting control; und the adequacy of the internal audit function. The Audit Committee of the DQl lloard met four times during i 1996.

Compensation Committee i The Compensation Committee of the DQE Iloard, composed of three non.cmployee directors, makes j recommendations to the DQE Iloard regarding compensation and benefits provided to executive aflicers and j members of the DQE Iloard and the establishment or amendment of various employee benefit plans. The i members of the Compensation Committee in 1996 were Dr, lloyee and hiessrs, lionone and Falk. The l Compensation Committee of the DQE Iloard met three times during 1996.

l Nominating Committee

~

! The Nominating Committee of the DQE Iloard recommends to the DQE iloard DQE candidates for i election and reelection to, or to fill vacancies on, the DQE Iloard. The Nominating Committee of the DQE

!!oard considers nominees recommended to it in writing by stockholders and sent to the Corporate Secretary f> of DOE. hiembers of the Nominating Committee of the POE iloard are hiessrs. Falk, Knoell, and Springer.

The Nominating Committee of the DQE lioard met once during 1996.

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j lienetaul Ownership of Sect rities of DQE

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The following table shows all equity securities of DQE beneficially owned, directly or indirectly, as of June 16,1997, by each director und by each current executive ollicer named in the Summary Compensation Table:

Shares of DQl; Common 1otal Shares of Stwk/ I'ercer. of I)_Ql: Common Stock Nature of Omnership(O Clan D aniel Berg . . . . . . . . . . . . . . . . . . . . . . 6,939 5,289 VP, IP

• I,650 Joint SVP SIP

• Doreen E. 4Aoyce . . . . . . . . . . . . . . . . . 5,994 5,994 VP, IP

• Robert F. Ilonone . . . . . . ... .. . 18,945(2) 8.870 VP, IP 7,000 VP, iP '

3,075 VP Sigo Falk . . . . . . . , ... . .. 7,895(3) 6,395 Y P, IP '

I,500 SVP, SIP Williarr. H. Knocli . . . . ..... . . 7,537(4) 6,502 VP, IP

• 1,035 SVP, SIP David D. hlarshall . . . . . .. ... . 80,941(5)(6) 5,200 VP '

66 YP, IP 18,708 Joint, SVP SIP '

Robert htchrabian. ...... . .. .

7.164(7) 2,282 YP,IP

• 3,382 VP 1,500 SVP, SIP I Thomas J. hturrin., ... ... ... .. 6,079(8) 2,143 VP, IP

• 3.186 VP 750 Joint, SVP SIP Eric W. Springer. . . .., 8,071(9) 7,169 VP, IP

• Gary L. Schwass. . . .. .. 106,730(5) 20.829 VP, IP

• Victor A. Roque . . .. ... 23,962(5)(6) 200 VP

• 417 VP, IP 3,988 Joint, SVP, SIP James D. hiitchell . . . ... 2S,432(5)(6) 20') VP '

772 V P, IP 5.067 Joint, S VP, SIP Wesley W. von Schack . 308,451(10) 21.744 VP, IP

• Directors, Nominees and Executive OfIicers as a Group (16 persons) . . . 633,161

• None of the individuals named in the table abave owned beneficially more than 1% of the outstanding shves of DQE Common Stock. The directors ano execeive ofIicers of DQE as a group beneficially owned 0.818% of the outstanding shares of DQE Common Stock as of June 16.1997.

(1) The term " Joint" means owned jointly with the person's spouse. The initials "VP" and "lP" mean sole '

voting power nr.c sole investment power, respectively, and the initials "SVP" and " SIP" mean shared voting power ar.d snared investment power, respectively.

(2) 7,000 of these shares are held by a foundation e..ablished for charitable purposes, for which hit. Bozzone is the trustee bat not an inceme beneficiary. 3,075 shares were granted under the DQE IW6 Stock Plan for Non Employee Directors to vest over four years.

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(3) 1,500 of these shares are held by a trust in which Mr. l~alk is an income bencheiary but not a trustec.

(4) 1.035 of these shares are held by a trust in which Mr. Knocll is a truuee and the ince aeneficiary.

(5) The amounts shown as owned by Messr>. Marshall Schwass, Roque, Mitchell and t 1 *. :L include shares of DQE Common Stock which they have the right to acquire within 60 days v anc 16,1997 through the exercise of stock options granted under the Long-Term incentive Plan in the following amounts: 56,967; 85,901; 19,357; 22,393; and 285,608, respectively, and all executive onicers as a group:

h 478,826 shares.

(6', The amounts shown as being owned by Messrs. Marshall, Roque and Mitchell include 200 shares of re;tricted stock that each was awarded as part of consideration for the signing of Noncompetition and Conndentiality Agreements and are subject to forfeiture for a period of onc ) car from the date of such agreement, and 5,000 shares of restricted stock grarted to Mr. Marshall which are subject -

performance vesting for a three year period.

(7) 1,500 of thcsc sharee are held in an IRA for which Wilon Hank, N.A. is the trustec; Dr. Mehrabian is the beneficiary. 3,382 shares were granted under th: JOE 1996 Stock Plan for Non-Employee Directors to vest over five years.

(8) 3,18'i shares were granted under the DQE 1996 Stock Plan for Non Employee Directors to vest oser three ) cars.

(9) 902 of these shares are held by Mr, Springer's wife. Mr. Sp*inger disclaims beneficial ounership of such shares.

(10) 166 of these shares are held in an IRA for which The Dreyfus Corporation is the trustec, and Mr. von Schack is the bene'iciary.1,099 of these shares are held in an IRA by Mr. von Schack's wife. Mr. von Schack disclaims benc6cial ownership ef these shares.

Messrs, Marshall, Schwass, Roque and Mitchell also beneficially own 715, 717, 239 and 357 shares, respectively, of the Preference Stock, Plan Series A, of Duquesne Light.The preference shares are held by the Duquesne Light Employee Stock Option Plan trustee for Duquesne Light 9 401(k) Plan o., behalf of the Executive Offi; cts of DQE, who have voting but not investment power.The preference shares are redeemable for DQE Common Stock or cash on retirement, termination of employment, death, or disability. Shares outstanding as of June 16,1997 for the Preference Stock, Plan Series A, of Duquesne Light, are 811,807.

Mr. Roque is not vested in these preference shares.

The directors end executive 00icers of DQL do not own any shares of Preferred Stock of Duquesne Light.

Compensation Committee Report on Executi e Compensation All components of compensation for senior managcment are approved by the Compensation Committee of the DQE Board and ratified by the DQE Board based on the recommendations of the Compensation Committee of the DQE Hoard, which is composed entirely of non-employee directors of DQE.

. On Decamber 20, 1995, the internal Revenue Service issued final regulations under Code Section 162(m) linsting the deductibility of executive compensation for oflicers of public companies. DQE believes that all compensation p.:id by DOE and its Subsidiaries in 1996 was fully tax deductible, it is the present intention of the Compensation Committee of tne DOE Board 1, :ek to ensure that all compensation that is otherwise tax deductible will continue to be tax deducuble. The amendments to the incentive Plan, which were approved by the stockholders in 1906 were designed to allow the Compensatica Committee of the DQE Board, in its discretion to grant stock op ions that comply with the final regulations. Ilowever, the Compensation Committee of the DQE Board reserves the right to take whatever action with respect to senior management compensation that n deems appropriate and in the best interest of DQE and its stockholders.

The primar) objective of the Compensation Committee of the DQE Board is to ensure that the DQE senior management compensation programs and strategies are designed and ac' ministered to attract, retain, and motivate fersons required to achieve the DQE overall mission of creating and enhancing value for its stockholders, customers, and employees, as well as fcr the community in which it operates.

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Throughout the development and administration of the DQE strategic compensation plans, the La npen-sation Committee of the DQE Board has adhered to a results based approach b) linking a significant percentage of total compensation to performance. The Compensation Committee of the DQE Hoard has purposely placed an emphasis on the at risk elements of compensation for the DQE Chief Executive Ollicer and other senior ollicers, The DQE awards under these incentive programs are tied to corporate and individual

_ performance. The accomplishment of goals and objectises is at the center of the Compensation Committee of the DQE Hoard's decision to make awards under these incentive programs and strengthens the relationship between stockholder interests and ultimate total compensation. The Compensation Committee of the DQE Board exercises n degree of discretion in administering these incentive plans which the Compensation Committee of the DQE I oard believes encourages continual focus on building long-term stockholder value.

An independent outside consultant with indestry expertise has determined that a greater percentage of the DQE senior management's total coinpensation is variable and placed at risk, when benchmarked against a comparative industry panel of energy service companics of similar operating revenue site. All stock options are performance based and are granted under the incentive Plan, which was approved by the stockholders of DQL.

Annually, the Compensation Committee of the DQE Board reviews and determines base salary levels, annual incentise compensation, and long-term performance-based stock option vesting, based on competitive pay levels, individual performance and potential, and changes in duties and responsibilities. Base salaries are competitively benchmarked with the averages of comparative utility and general industry panels of companies of similar revenue and operating characteristics, reflecting the diversification of DQE's business operations.

Some of the utility companies in the utility industry panel are also included in the Standard & Poor's Electrie

- Companies index used in the performance graph. See "- Performance Graph." DQE entered into employment agreements with Messrs. Schwass and Marshall and Ms. Green pun,uant to which the minimum annual base salary is specified. See " Interests of Certain Persons in the Merger" and "- Employment and Change of Control."

In addition to the industry panel comparison, the Compensation Committee of the DQE Board considered results in the areas of customer service icvels, cost cfTective management, and operational performance (including, for example, generating plant performance and system reliability) in determining w hether a base salary increase, as well as annual or long-term awards, u cre tranted in 1996. Messrs. Marshall, Schwass, and von Schack received increases in base salary in 1996.

If a predetermined corporate financial performance threshold is met, there is an opportunity to earn ant ual ush and stock option performance awards by meeting short-term operating and financial goals. The threshold recommended by the Compensation Committee of the DQE Hoard and approved by the DQE Board for 1996 related to DQE Board earnings per share. DQE met this goalin 1996. At the beginning of each ,

year, individual _ objectives also are established for each otlicer and approved by the Compensation Committee .

of the DQE Board, The DQE Chief Executive Ollicer's performance is evaluated for annual and long-term awards on the basis of the overall performance of DQE, the performance of the other members of his management team and, as discussed in more detail below, his leadership in developing and implementing

1. operating and strategic plans to further the DQE long term corporate objectives. The 'ompensation Committee of the DQE Board reviews individual results and the corporate performance with the full DQE Eoard. The DOE Board, upon the recommendation of the Compensation Committee on DQE, approves the amount of annual performance awards granted to cach ollicer based on the achievement of corporate and individual objectives.

Specilie individual annual objectives considered by the Compensation Commitice of the DQE Board in determining the annual performance compensation awards support one or more of live major corporate objectites of DQE, including maximizing long term stockholder value; providing quality service and superior-customer satisfaction; managing assets cost e!Tectively; maintaining excellent operational performance; and provHing leadership in the community.

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in the aggregate, annual incentives ranged from hiteen to thirty hve percent of bas salary in 1996. The actual percentaFe of annual cash incentive awards varies, depending upon the degree to which performance objectives are met. See " Summary Compensation Table" for the annual cash incentive compensation awards carned. As former Chief Executive Omcer of DQE, Mt; von Schack received a pro rated annual cash award for his performance.

The _ number of performance stock options awarded annually from the prior year's annual grants is' determined by use of a cash incentive performance multiplier. The size of the multiplier is based on the amount ofincrease in earnings per share of DQE Common Stock.The Compensation Committee of the DQE Board awarded annual performance options for 1996 in the amount of 33,861 to Mr. Marshall: 28,985 to Mr. Schwass; 17,391 to Mr. Roque; 12,919 to Mr. Mitchell; and 15,503 to Ms. Green. Additional options were not earned because not all of the established annual performance objectives were achieved (see footnote 4 to the " Summary Compensation Table"), Fifty percent of the annual stock options arzarded in 1996 vested upon award, and there is a one year wait before the omcer is able to exercise the remaining fifty percent, in recognition of his performance over the past twelve years and his overall contributions to DQE,65,590 annual performance options were awarded to Mr. von Schack to vest upon award.

Performance-based stock options awarded in 1996 pursuant to the incentive Plan were granted under the provisions of a three year plan approved and recommended by the Compensation Committee of the DQE Board and approved by the DQE Board. Three-year strategies were developed by each individual, and annual milestones designed to enhance the general well being of DQE were established by the Chief Executive Omcer of DQE and approved by the Compensation Committee of the DQE Board. The long-term strategies were designed to support the long-term corporate objectives of maximizing stockholder value; providing quality service and superior customer satisfaction; managing assets cost elTectively; maintaining excellent operation-.! performance; und providing leadership in the community. Through a performance-based award schedule, there is an opportunity to carn a percentage of the three year grant annually. The award opportunity is up to thirty percent in thi. first year, up to sixty percent in the second year, and up to one hundred percent in the third year. In recognition of his performance over the past twelve years and his contributions to DQE, all of the options previously granted to Mr. von Schack were awarded.

Under the leadership of Mr. Marshall, DQE's management team continued to achieve excellent resuhs with respect to DQE's long-term corporate objectives. In 1996, DQE continued to demonstrate a solid track record of financial and operational performance. Erenings per share increased over 5% in November, an increase of eight cents (6.25%) in the annual dividend was declared beginning in January 1997, As shown under "- Performance Graph," DQE's common stock has had a total return which exceeded the S&P Electric Companies over the same period. A full report on DQE's financial performance can be found in its 1996 Annual Report to Stockholders. These results are consistent with the objective to achieve measurable and meaningful increases in the value of DQE's stockholders' investment.

Customers continue to rate the quality of service provided by Duquesne Light's representatives higher than the national utility average, according to independent surveys. Duquesne Light's customers u!so

. experience senice restoration among the top U.S. utilities. Duquesne Light's current reliability perforrvnce provides senice that is available approximately 99.9er of the time. Duquesne Light was one of the first eiestric utilities in the United States to offer comprehensive senice guarantees. Since service guarantees were inaugurated in early 1995 Duquesne Light's error rate has been only 0.007% out of more than 37 million guaranteed performance transactions with customers.

Customers have seen the average price of electricity drop 13Er since August of 1991 as a result of rate reductions in 1993 and 1994 while inflation raised the price of other goods and Lenices by 181 In 1996, the PAPUC approved a Duquesne Light proposal which included a commitment that rates would not increase through the year 2000. With intiation expected to increase 13.6% through the 3 car 2000, the average cost of other products and services will have increased 50% relative to the price of electricity by the end of the decade.

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Duquesne Light continues to be widely recognized as an environmental leader. Some examples of re environmental accomplishments include successfully n,wting all of the objectives and goals of Du Light's Environmental Strategic Plan: complying throughont 1996 with all federal, state, and local envir mentaliaws and regulationst developing a comprehensive compliance plan through the year 2000 for efTe control of SO, and NOx; installing reasonably available control technology for NOx emissions on all coal fired generating units; and implementing a DQE wide pollution prevention program to plan, docu clean utility and innovative and forward-thinking in environmental matters,and in terms of awards and recognition, three of Duquesne Light's environmental projects were selected for national recognition by the National Awards Council for Environmental Sustainability, a coalition of 60 environmental, community, government, and business organizations, by inclusion in Renew America's 19 Environmental Success Index. The 1996 Index includes Duquesne Light's environmental awareness a educational programs for youth; the Brunot Island Wildlife liabitat Enhancement Project; and Duque Light's itinovative disposal of fly ash in abandoned mines. Duquesne Light was also awarded the 199 Governor's Award for Environmental Execilence for " Outstanding Achievement in Technology innova related to Duquesne Light's research and development of cost elTective low NOx burner technolog patented technology, developed for the Eirama Power Station,is readily transferable to numerous other coal during 1996, including, for the fourth consecutive year, the Nationa Electric Utility Award for outstanding participation in the National Night Out and the Edison Electric Institute Marketing Achievement Award for managing an electric vehicle transportation project u electric shuttle bus at the Pittsburgh International Airport. In addition, Duquesne Light received the 199 Edison Electric Institute Minority Business Development Corporation of the Year Award.

Duquesne Light's lunchtime seminar program," Work and Family issues," earned it membership first class of the U.S. Department of Labor's " Working Women Count!" Honor Roll. The honor r out policies and programs that respond to improving pay and benefits; building a family-friendly wo and valuing women's work through training and advancement.

Robert P. Bozzone, Chairman Doreen E. Boyce Sigo Falk 4

100

i Section Ib(a) lieneficial Ownership licporting Compliance Section 16(u) of the Exchange Act requires directors and executive ollicers of DQE, and any persons who beneticially own more than ten percent of DQE Common Stock, to file with the SEC initial reports of ownership and reports of changes in ownership of DQE Common Stock. Such persons are required by SEC regulations to furnish DQE with copies of all Section 16(a) forms they file.

To DQE's knowledge, during the year ended December 31.1996, based solely on review of the copies of such reports furnished to DQE and written representations that no other repons were required, all such Section 16(a) filing requirements were met except that a grant of restricted stock that we, unissu*d was inadvertently excluded from the initial Form 3 Report of Jack E. Saxer, Jr., Vice. President. The l'oim 3 was later amended.

Compensation Committee Interlocks and Insidct l'articipation The members of the Compensation Committee of the DQE Board are Dr. Boyce and Messrs. Ilozzone and Falk. No member of the Compensation Committee of the DQE Board was at any time during 1996 or at any other time an oflicer or employee of the DQE Iloard.

No executive oflicer of DQE served on the board of directors or compensation committee of any entity which has one or more executive oflicers serving as a member of the DQE Board or the Compensation Committee of the DQE Board.

i 101 t

Performance Graph

- Tbc following graph represents a priorniance comparison of cumulative total return on DQE Common Stock as coinpared to the S&P Electric Companies and the S&P $00 index for the period of five fiscal scars commencing December 31,1991 and ending on December 31,1996.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN DQE, S&P ELECTRICS AND S&P 500 INDEX 350

-O- DOE 300 -c- S&P Electrics 250 + S&P 500 Index M

O k 200 p

,., e 3

^

8 100

,,,,,,, cx 4V- "-"

50 "

0 i i e i i i 1991 1992 1993 1994 1995 1996 1991 1992 1993 1994- 1995 1996 DOE 100 111 124 113 184 182 S&P Electrics 100 106 118 104 136 136 S&P 500 lndex 100 108 119 120 165 203 Assumca $100 invoted on Deecmber 31,1991,

• Total retarn numes a reinvestment of dividendt 102-

I l

Compensatlun i The following Summary Compensation Table sets forth certain information as to cash and noncash compensation earned and either paid to, or accrued for the benefit of, the current President and Chief Executive Oflicer of DQE the four other highest-paid executive o0icers of DQE. and the former Chairman of the lloard, President and Chief Executive OHicer of DQE, who resigned clTective August 9,1996, for services rendered in all capacities to DQE and its Subsidiaries during the years indicated.

SUMMARY

COMPENSATION TAllt.I' Annual Compensation long lerm Compenssilon Awards Pat outs (s) (le) (c) (d) (c) (f) (g) (h) (1)

Other Securities Otl er Restricted tinderlying All Annual Stock Performance  !!!'lP Other Name and Principal Satary llanus Compensation Award (s) Optines/S ARs Payouts Compensa i n Positinn Year (5) ($HI) (%)(2) (5H3) (o H4) (5) (5H2H7)

D, D Mmhall . . . . , , , 1996 2 k9.486 101,367 65,2b4 I41,250t 5) 56,645 0 7.375 Prc>ident und Chief 5.725(6) t'necutive Othccr 1995 233,333 k6,750 27,9 t h 0 63,555 0 4,291 (Lficc0ve h19196) 1994 191,667 4 h,4 50 7,M l 4 0 52,813 0 4,504 G . l .. Sc h e ,m . 1996 250JNN) 87,500 124.191 0 6k,964 0 4.458 Exes, Vice Prcs IW5 2 t 6,667 76,7$0 60.63k 0 61,539 0 4.44x and ChicI l~ manual 1994 191,667 57.000 21,299 0 52,813 0 4,430 Olhccr D. L Green , 1996 195.0lW1 46.htW) 13.86n 5,650(6) 54,76h 0 7,622 Senior Vwe 1995 l b4.000 51,900 44,268 0 2h,954 .0 4.460 President (9) 1994 166,333 49,500 16,319 0 35,469 0 4.4x2 V. A. Roque . , ,,, 1996 175,000 52,500 0 5.540(6) 17,391 0 7,3x8 Vice President and 1995 175,000 52,500 2 t 5,097 0 31.DI o 4,490 Gcncrs Counsel J D. Mitchell. 1996 130.000 39,000 0 5.650(6) 17,k83 0 6.002 Vwe President 1995 130.(KX) 39.000 0 0 25,500 0 2.50h 1994 128,b47 25.391 0 0 10.000 0 1,923 W. W. von Schack 1996 276.975 120,42R 572.603 0 91,459 0 1,528(8) l'ormer Chairman, 1995 440,M 0 194,700 174.853 0 166,385 0 4.448 President and CLO 1994 440,000 163,240 173.652 0 155.000 (' 4.490 (IIl/96 _8/9/96)

(1) The amount of any bonus compensation is determined annually based upon the prior year's performance and either paid or deferred (via an eligible participant's prior election) in the following year, The amounts shown for each year are the awards earned in those years but established and paid or deferred in the subsequent years. Mr. von Schack's bonus was prorated for his months of service before his resignation, (2) Amounts of Other Annual Compensation are connected to the funding of non-qualified pensbn benefit accruals for Messrs. Marshall, Schwass, and von Schack and Ms, Green (recently deceased). Amounts of Other Annual Compensation for Mr. Roque represent reimbursement for moving expenses, including sale of residence and income taxes. Amounts of All Other Compensation shown are DQE matching contributions during 1994,1995, and 1996 under the Duquesne Light 401(L) Retirement Savings Plan for Management Employees and compensatory tax payments on restricted stock, (3) The awards listed are the only restricted stock holdings of the named ollicers.

(4) Includes total number of stock options granted during the fiscal year, with or without tandem SARs and

- stock-for-stock (reload) options on option exercises, as applicable, whether vested or not. See table

" Option /SAR Grants in Last Fiscal Year." The stock options are subject to vesting (exercisabilitv) based on DQE and individual performance and achievement of specified goals and objectives. Of the amount of 1994 stock options granted, Messrs, Marshall and von Schack have lost 2.673 and 3,988 stock options, respectively. Of the amount of 1995 stock options granted, Messrs. Marshall and wn Schack have lost 347 and 1,524 stock options, respectively. Of the amount of 1996 stock options granted, M'.. Green lost 3,876 stock options (5) Vesting of this award is based on the achievement of performare goals for a three-vear period. Dividends will be accrued and paid after the end of the three-year period on the shares carned.

(6) Represents the value of 200 shares of DQE Common Glock awarded as part of the consideration for the signing of a Non-Competition and Confidentiality Agreement Dividends are paid quarterly, 103

(71 in 1996, premiums in the amount of $95.950 were paid by DQL for split dollar hfe insurance for Mr. von l S: hack This amount was refunded to DQL in full in 1996 in connection with his resignation.

(8) includes a payment of $401 to cover one month's health care premium pursuant to Mr. von Schack's resignation.

(9) Deceased April 1997, Su;y,1cmental Tables The following tables provide information with respect to option to rurchase DQE Common Stock and tandem stock appreciation rights in 1996 under the incentive Plan.

Option grants are structured to align compensation with the creation of value for common stockholders.

l'or example, should DQE stock risc 50% in value over the ten year option term (from $29.00 per share to

$43.50 per share), stockholder value would increase an estimated $1,120.458.775, while the value of the grants to the individuais listed below would increase an estima>ed three tenths of one percent ($3,460,403) of the total gain realized by all stockholders.

OPTION /SAll GitANTS IN 1.AST FISCAL YEAll Indhidual Grants (a) (h) tc) (d) (e) (O humbei of 'fe of Total Securities OptiondS A R s E.serche Grant Underlying Granted in or lisw Date OptiondSARS I mployees Price limpiration Present Name Granted ( a n in Fiscal iear ($/Sh)(3) Date Wh.e($)(4)

D. D. Marshall . 28,986(l) 6.7% 30.1875 02/26/06 127,538' 13,139(2) 3.0% 26.4375 02/18/02 37,709' 619(2) 0.1 % 30.0000 02/18/02 2,037' 13,901(2) 3.2% 30.0000 08/29/04 49,210' G. L. Schwass 28,986(1) 6.7% 30.18'.5 02/26/06 127,538' 18,229(2) 4.2% 27.5625 07/22/01 54,140' 748(2) 0.2% 27.5625 08/29/04 2,438' 21h01(2) 4.8% 29.7500 08/29/04 70,143' D. L. Green (6) 19,379(1) 4.5% 30.1875 02/26/06 85,268' 15,133(2) 3.5% 30.3125 07/31/98 41,313' l.535(2) 0.4% 28.8125 07/31/98 3,653' 18,721(2) 4.3% 28.8125 07/22/01 54.104*

V. A. Roque . , 17,391(1) 4.0% 30.1875 02/26/06 76,520' J. D. Mitchell. , 12,919(1) 3.0% 30.1875 02/26/06 56,844' 751(2) 0.2% 30.8750 08/29/04 2,839' 1,435(2) 0.3% 27.0625 0S/29/04 4,563' 2,778(2) 0.6% 29.9375 08/29/04 9,751' W. W. von Schack 20,297(2) 4.7% 30.7500 08/08/97 47,292*

5.572(2) 1.3% 30.7500 08/08/97 12,983*

65,590(1)(5) 15.1% 30.1875 08/OS/97 150,201' The actual value, if any, an executive may realize will depend on the ditTerence between the actual stock price and the exercise price on the date the option is exercised. There is no assurance that the value ultimately realized by an executive, if any, will be at or near the value estimated.

(1) These grants represent performance stock options with tandem stock appreciation rights and stock-for-stock (reload) options. If the performance conditions are met and the granted option is awarded,50% of the award vests immediately, and the remaining 507c vests one year later.

(2) These grants represent mock-for-stock (reload) options receised upon exercise of stock options by the applicable officer electing to use previously owned DQE stock to exercise the options and/or pa) 104

)

l

withholding taxes under the terms of the incentise Plan. These options include tandem sioek appreciation rights, dividend equivalent accounts, and stock for stock options.

(3) The exercise price of the options is the fair market value of DQE Common Stock on the date neh options were granted. The exercise price may be payable in cash or previously owned shares of DQE Common Stock held for at least six months.

(4) The grant date present value shown in column (f) gives the theoretical value of the ortions listed in column (b) on the grant dates using the Black Scholes option pricing model, modified to account for the payment of dividends. The theoretical value of the option was calculated assuming an option life equal to the time period between the grant date and expiration date (i.e., from 1.45 to 10.00 years); a periodic risk-free rate of return equal to the yield of the U.S. Treasury note having a similar maturity date as the option expiration date, as reported by Bloomberg Financial h1arkets on the grant date (l.c., from 4.86% to '

6.65%); the most recent initial quarterly dividend as of the option grant date (i.e., from 50.32 to $0.34),

with an expected growth rate of 5.57c per year as estimated by "Value Line Ratings and Reports", dated December 13,1996; and an expected stock price volatility as reported by Bloomberg Financial h1arkets over the same length of time as the option life as of the month of the grant (i.e., from 12.96% to 17.94%).

No adjustments to the grant date present values have been made with respect to exercise restnetions, forfeiture, or early exercise.

(5) Vested upon award.

(6) Deceased April 1997.

AGGREGATED OPTION /SAR EXERCISES IN lAST FISCAL-YEAR AND FISCAL YEAR-END Ol' TION /SAR val.UES (a) (b) (c) (d) (c)

Number of Securities Underl)tng Value of Uneserciwd Number of Uneserciwd in-t he-M oney Securities Options /SARs at OptionVSARs at Underlying Fiwal icar End(se)(6) \ ear-End ($)(ti)(7)

OptiondSARs Value Realised Esercisable/ Esercisable/

Name Esercised( s ) ($)t5) Unesercisable Unesercisable D. D, hlarshall . 38,012(1) 271,938 40,839/84,525 190,809/328,803 31,177(2) 271,720 18.511(3) 159,715 23,422(4) 302,532 G. L Schwass . 108,089(1) 950,779 38,549/89,161 103.558/315,273 45,884(2) 441,865 D. L Green (8) . . . 20,897(1) 151,937 73,921/65,6'2 511,022/194,314 43,989(2) 690,645 V. A. Roque 12,115(1) 83,542 11,500/38,507 103,500/157,349 2,000(4) 15,625 J. D. hiitchell 5,975(2) 53,419 9,711/33.697 67,996/I33,998 9,000(3) 62,062 5.000(4) 48,229 W. W. von Schack 233,709(1) 2,105.058 549,608/0 3,974,516/0 34,369(2) 656,493

1) Stock appreciation rights exercised for stock and cash.

(2) Stock options exercised for stock by tendering shares of previously-owned DQE Common Stock.

(3) Stock appreciation rights exercised for cash.

(4) Stock options exercised for stock by tendering cash.

105

4 (5) Represents the difference between the exercise price of the options or SARs and the fair market value of

DQE Common Stock on the NYSE on the date of exercise.

(6) The numbers set forth include options /SARs previously granted (including those granted in 1996) but not yet earned. The number to be earned will be based on individual performance and could range from zeta to the following numbers for the named officers, respectively: 49,986 ($181,998); 49,986

($181,998); 33,379 ($102,686); 26,391 ($68,499); 21,919 ($67,999); and 0 ($0). These options may be earned by the officer over future periods from one to three years as established with each option grant.

(7) Repn.sents the difference between the exercise price of the options or SARs and the fair market value of DQE Common Stock on the NYSE on December 31,1996.

(8) Deceased April 1997, Retirement Plan DQE and its Subsidiaries maintain tax-qualified and non qualified defined benefit pension plans and arrangements that cover the named executive ollicers, among others. The following table illustrates the estimated annual straightlife annuity benefits payable at the normal retirement age of 65 to management employees in the specified earnings classifications and years of service shown:

PENSION PLAN TABLE liighest Consecutine ibe Year Average Compensation $ 10 15 20 25 30 35

$125,000 $10,000 $ 20,000 $ 31,000 $ 41,000 $ 51,000 $ 59,000 $ 65,000

$150,000 $12,000 $ 25,000 $ 37,000 $ 50,000 $ 62,000 $ 72,000 $ 79,000

$175,000 $15,000 $ 29,000 $ 44,000 $ $9,000 $ 74,000 $ 85,000 $ 93,000

$200,000 $17,000 $ 34,000 $ 51,000 $ 68,000 $ 85,000 $ 98,000 $108,000

$300,000 $26,000 $ 52,000 $ 78,000 $ 104,000 $130,000 $149,000 $165,000

$400,000 $35,000 $ 70,000 $105,000 $140,000 $175,000 $201,000 $221,000

$500,000 $44,000 5 88,000 $132,000 $176,000 $220,000 $252,000 $277,000

- $600,000 $53,000 $106,000 $159,000 $212,000 $265,000 $3N,ts00 $334,000

$700,000 $62,000 $124,000 $186,000 $248,000 $310,000 $356,000 $391,000

$800,000 $71,000 $142,000 $213,000 $284,000 $355,000 $407.000 $447,000

$900,000 $80,000 $160,000 $240,000 $320,000 $400,000 $459,000 $504,000

$950,000 $85,000 $169,000 $253,000 $338,000 $422,000 $485,000 $532,000 Compensation utilized for pension formula purposes includes salary and bonus reported in columns (c) and (d) of the Summary Compensation Table and stock option compensation prior to March 1,1994, An errployee who has at least five years of service has a vested interest in the retirement plan. Benefits are received by an employee upon retirement, which may be as early as age 55. Benefits are reduced by reason of retirement if commenced prior to age 60 or upon election of certain options under which benefits are payable to survivors upon the death of the employee. Pension amoun:s set forth in the above table reflect the integration with social security of the tax-qualified retirement plans. Retiremen; benefits are also subject to ofTset by other retirement plans under certain conditions.

The credited years of service for Messrs. Marshall and Schwass, and Ms. Green (recently deceased),

are 19,22 and 17, respectively. The current five-year covered compensation and current years of credited service of Messrs. Roque, Mitchell, and von Schack, respectively, are $199,231 and 4; $138,241 and 16; and

$853.396 and 32.

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1:mpl%,wnt and Change of Control DQE has three year employment agreements with Messrs. Marshall and Schwass Ea,;h agreement is subject to automatic one year renewals unless prior written notice of termination is given by the ollicer or DQE, The agreements provide, among other things, that each serve in his present pdtion at an annual base salary of at least $190,000 for each of Messrs. Muxhall and Schwass, subject to periodic review, and for the participation of cach in executive compensation and other employee benefit plans of the companies, if any of the oflicers is discharged other than for cause or resigns for good reason, then,in addition to any amounts carned but not paid as of the date of termination, he would receive in a cash lump sum the balance of his base salary for the remaining term of the agreement, a bonus amount with respect to the remaining term of the agreement calculated at a rate equivalent to his prior year's bonus and the actuarial equivalent of the additional pension he would have accrued had his service for pension purposes continued until the expiration of the agreement. In addition, the oflicer would be entitled to immediate vesting (or the redemption in cash) of all of his stock based awards. Pursuant to the Severance Agreements with Messrs. Marshali and Schwass, these three-year employment agreements have been terminated subject to reinstatement if the Merger is abandoned.

Du-ing 1996, the DQE Board authorized and DQE entered into non-competition and confidentiality agreements with Messrs. Marshall, Roque and Mitchell. The agreements provide that these individuals will h not disclose confidential information about DQE or its aflitiates; compete directly or indirectly with DQE or any of its affiliates in a specified geographic area; solicit the business of certain customers and supplicts of DQE; or induce any employee of DQE or its affiliates to leave his current employment, each for specified periods of time following the termination of his or her employment with DQE. Consideration for these agreements was 200 shares of DQE Common Stock subject to a one-year transfer restriction plus sufficient-ca.sh to pay federal, state, and local taxes on the shares and an increase in the severance benefits payable to the executive to one and one half times the severance benefits,if any, to which the individualis otherwise entitled with a minimum of six months and a taa.imum of one year of severance pay. If, however, an executive is a party to an employment agreement which provides greater severance benefits than are pr,2vided under the non-competition and confidentiality agreements, the employment agreement shall control.

in connection with the August 1996 resignation of Mr, von Schack as Chairman, President, and Chief Executive OSicer of DQE, DQE, Duquesne Light, and Mr. von Schack entered into a letter agreement pursuant to which Mr. von Schack was paid a prorated bonus in the amount of $120,428 and his coverage under the medical benefits program was continued for a period of one month. All of the stock options granted to and currently held by Mr. von Schack were fully awarded. vested, and made exercisable. Mr. von Schack -

agreed, among other things, not to disc'ose confidential ir.iormation about DQE and its affiliates; compete directly or indirectly with DQE or any of its aflitiates in a specified geographic area; solicit the business of customers and suppliers of DQE; or induce any employee of DQE or its affiliates to leave his or her current employment, each for specified periods of time. Mr. von Schack also released DQE from liability for claims arising from and during his employment and his Employment Agreement with DQE was terminated. All of Mr. von Schack's retirement benefits were fully vested and nonforfeitable and will be distributed in accord with the terms of the retirement plans.

Options and alternative stock appreciation rights granted under the DQE, Inc. Long Term Incentive Plan become immediately and fully exercisable upon occurrence of certain change-in-control events. See " Interests of Certain Persons in the Merger."

Approval of Appointment of Independent Public Accountants Action is to be taken at the DQE Meeting to approve the appointment, by the DQE Board, of independent certified public accountants to audit the books of DQE and its Subsidiaries for the year ending 107

i December 31,1997. The DQE lloard recommends the approval of the appointment of Deloitte & Touche as I independent certified public accountants for 1997.

Deloitte & Touche pmvided a variety of professional services for DQE and its Subsidiaries during 1996, included were the audit of the annual f:nancial statements of DQEt reviews of quarterly financial statements; services related to filings with the SEC and the FERC: audits of certain employee benefit plans; and consultations on matters related to accounting and financial reporting. Non audit services also were provided during 1996, including advice and technical assistance relating to corporate tax matters.

Representatives of Deloitte & Touche will be present a, the DQE Meeting and have the opportunity to make a statement if they desire t.nd will also be available to respond to appropriate questions from stockholders in attendance.

DQE is submitting the appointment of independent public accountants for approval by the stockholders, although approvalis not required. if approvalis not obtained, the DQE Board w;11 reconsider its appointment of Deloitte & Touche. >

The DQE Iloard unanimously recommends that stochholders approie the appointment of Deloitte & Touche as independent accountants, Proposal of a DQE Stockholder Annual Election of All!)irectors Approval of the Stockholder Proposal requires the aflirmative vote of a majority of the votes cast by all stockholders entitled to vote. If a stockholder abstains from voting certain shares or a broker indicates on a proxy that it does not have discretionary authority to vote certain shares, those shares will not be considered as votes cast with respect to this proposal and will not have the same legal efTect as a vote "Against" the proposal.

Approval of the Stockholder Proposal would be advisory only and would not efTect a change in the length of terms of the directors. Actual replacement of the thn.e-year terms with a one-year term would require an .

amendment to the DQE Articles. If the proposal receives the aflitmative vote of over 50% of the votes cast by all stockholders entitled to vote in 1997, the DOE Board will consider an amendment to the Anicles to be submitted to stockholders for approval at the 1998 Annual Meeting. Under the DQE Articles, if the DQE Board agreed with the amendment,it would require the aflirmative vote of over 50% of the votes cast by all stockholders entitled to vote. If the DQE Board did not agree with the amendment, it would require the affirmative vote of the holders of at least 80% of the then outstanding shares for approval.

An individual stockholder has informed DQE that he intends to present the following proposal at the DQE Meeting. The name and address of the proponent and the number of:, hares he holds will be furnished by DQE to any person, orally or in writing as requested, promptly upon the receipt of any oral or written request to Stockholder Relations, DQE, P. O. Box 65, Pittsburgh, PA 15230-0068 (telephone number:

412-393-6167).

"Rexlved that stockholders Board action to eliminate (after current director terms expire) three year director terms and set one year as the term for each director.

" Reasons:

(1) Corporate experience has shown that staggered three year terms are almost a totally italTective defense against takeovers.

(2) DQE's director vacancies (recently 3) are abnormally low in relation to other NYSE-listed firms.

10S I

(3) Recently several corporations (locally and nationally) have adopted (or readopted) singic9 ear terms.

(4) institutional investors, fmancial and union pension fund administrators, many analysts, and specialist in corporate governance now }irefer single year terms.

($) Opposition to annual election now generally gives a perception of non-responsive management.

1

- (6) DQh's stockholder and public images would improve if management ceased opposing one-year terms.

. " Discussion:

" Sources within the College Equities Retirement Fund have advised the proposer is the least elTective of

- any anti-takeover provisions adopted during the '80s and '90s. The respected UAW (United Auto Workers) investment strategist has publicly reiterated that staggered terms are useless as anti-takeover defense.

- Classical opponents of staggered boards agree. And managements under investor pressure for poor perform-ance (Westinghouse, etc.) have not opposed a switch to single-year terms, institutional investors and pension fund managers have increasingly used the stockholder resolution mechanism to promote single year it.rms.

Examples-UAW at Tenneco (1996) CREF, CALPERS (California Public Employees Retirement System) with several corporations, and the vote totals in favor have steadily increased from the mid 20% range to the mid-40% level recently (In the Ichan motivated turmoil just prior to the split of U.S. Steelinto USX.

Marathon and USX U.S. Steel, a single-term resolution received 51% of the vote recorded on a very low number of total shares voted because of an excessively delayed proxy statement). In previous votes at DQE, the last (1993) was slightly over 30.9%.

"At the time of submission of this proposal (November,1996), the proponent does not know what management's action may be. There are three choices open:

(a) recomtuendation against (b) no recommendation (c) recommendation of support "About 1970, a supporting recommendation actually occurred at ATT, Mr. John De Butts, then chairman, asked his stafT to try and find one stockholder resolution that was meritorious and that management could support. One was found, and the sote in favor was a landslide. De Butts' action spiked the "Always-Agin-It' unless it was management's origination.

"Please vote your shares by marking the "FOR" box on DQE's ballot card or on the instruction form to your broker or pension plan. Remember, failure to mark a box is a vote "against" if management exercises its established right to count blank boxes as it wishes. Otherwise, still vote - good management is promoted by a large share turnout.

"Thank you."

Management's S:atement in Opposition The DQE Board of recommends that stockholders note AGAINST the adoption of the stockholder's proposal.

The main advantage of a staggered board is time - time to negotiate prior to a hostile takeover.

The DQE Board believes that stockholders are not the victims, but are,in fact, the main beneficiaries of the use of a staggered board since a corporate raider could not takeover DQE immediately Keeping a staggered board forces a raider to negotiate with DQE, which means all stockholders of DQE should have an opportunity to receive the best stock price in a takeover. Use of a staggered board also provides the DQE Board with time to negotiate the efTect of a business combination on the DQE employees, customers, region, 109

and other aflected constituencies. Even in light of the Merger Agreement, the staggered board remains ncessary. The consummation of the Merger is not guaranteed, and the initialmn of a hostile bid could deprive stockholders of the value of the Merger by creating undae confusion if the DQE Board is replaced.

A staggered board also protects stockholder value since it provides director continuity and stability by ensuring that at least some experienced directors are on the DQE Board and preventing the sharp changes in policies, strategies, and operations which could occur in a hostile takeover.

See the chart under "- Performance Graph" for a comparison of DQE's five year cumulative total return. DQE has continued to outperform the industry as represented by the S&P Electrics index and has achieved a very respectable performance as mea.;ured against the outstanding performance of the S&P 500 Index.

Because of their value, staggered boards are still in common use in utilities and other companies in Pennsylvania and other states.

A staggered board has worked well for DQE over the years. It was first approved by Duquesne Light stockholders in 1987, ten years ago. It was originally passed by DQE stockholders in 1989 and was reaflirmed

~

in 1992 and 1993 when this same stockholder proposal was defeated on two separate occasions.

The DQE Board has considered the merits of the stockholder proposal and, on balance, believes stockholders are better served by keeping a staggered board.

The DQE Board asks for your support to keep this protection for your stock value in place.

Other Matters Any person uho is a holder or beneficial holder of DQE Common Stock on the Record Date will receive, free upon request, a copy of DQE's Annual Report on Form 10-K for the year ended December 31,1996 (the "DQE 10-K") as filed with the SEC. Requests must be made in writing to the Corporate Secretary of DQE, Box 68, Pittsburgh, PA 15230-0068, Note that the Audited Financial Statements and the Notes to the Audited Financial Statements from the DQE 10-K are embodied in DQE's 1996 Annual Report to Shareholders, which was previously mailed to all holders of DQE Common Stock.

EXPERTS The consolidated financial statements of APS at December 31,1996 and 1995 and for each of the three years in the period ended December 31, 1996, incorporated by reference in this Joint Prosy State-ment / Prospectus and the fmancial statement schedules incorporated by reference in the Registration Statement have been so incorporated in reliance on the report of Price Waterhouse LLP, independent public accountants, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements and schedules of DQE as of December 31,1996 and 1995 and for the yetts ended December 31,1996,1995 and 1994, incorporated by reference in this Joint Proxy Statement / Prospectus have been audited by Deloitte & Touche LLP, independent auditors. Such financial statements are incorporated herein by reference in reliance upon such reports given upon their authority as experts in acccanting and auditing.

VALIDITY OF SIIARES The validity of the APS Common Stock to be issued pursuant to the Merger will be passed upon for APS by Sullivan & Cromwell.  ;

110 i

\

l 1

l

l STOChilot.DI:It l'HOl'OSAl.S The date by which stockholder proposals must be received by APS for inclusion in the proxy materials relating to the 19'.'3 annual meeting of stockholders of Al'S is December 5,1997. The date by which stockholder proposals must be received by DQE for inclusion in the proxy materials relating to the 1998 annual meeting of stockholders of DQE, which is currently expected to be held on April 28,1998, is November 17,1997.

111 i

Al'I'l:NDlX A i

i

(

i AGREEMENT AND PLAN OF MERGER i

Among i

i DQE, Inc.,

i

! Allegheny Power System, Inc.

and

] AYP Sub, Inc.

Dated as of April 5,1997 I i i

l 1

a

I TAlli.E OF CONTI:NTS I- !m RECITALS . . . . ..... ..,.......... ...........o..... . ......, .. .. .... ,. A1 ARTICLE I The M erfer; Closing; EITective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A1 1.1, M e rge r S ub; The M e rge r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A1 1.2. C ! osi n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... .. .. A2 1.3. E fTe c t is c Ti m e . . . . . . . . . . . . . . . . . . . . . . . . . ........... ...... ... A2 ARTICLE 11 Certificate of incorporation and By Laws of the Surviving Corporation . . . . . A2 2.1. The Certificate of incorporation . . . . .. ........ ... .. . ... .. .. .. A2 2.2. The Bylaws . . . . . ........... . ...... . . .. .... ... A2 ARTICLE Ill Ollicers and Directors of the Surviving Corporation , . . . . . . ,. ... A2 3.1. Directors. . . ., .. .. ..... . . ........ .......... .. .. A2 3.2. Ollice rs . . . . . . . . . . . .. .. .. ......... . . .. ........ ... ... A2 ARTICLE IV EITect of the Merger on Capital Stock; Exchange of Certificates . . . . . . . A2 4.1. EITect on Capital Stock . . ..... ...... .... ...... .. .. A2 (a) Merger Consideration . .. .. ... , .. . . ... A2 (b) Cancellation of Shares . . . . .. .. , .... .. ,, A-3 (c) Merger Sub . . . . . .. ... . . .. .. .... . . A3 4.2. Exchange of CertiCcates for Shares .. . .. ... . ... A-3 (a) Exchange Agent . . .., . .. . . . ......... . .. A3 (b) Exchange Procedures ...... ... .. .. . .. ...... . A3 (c) Distributions with Respect to Unexchanged Shares; Voting . .. A4 (d) Transfers . . . . .. .. ... ......... .. . . ... A-4 (c) Fractional Shares . .. . . . . ..... . ........ . A-4 (f) Termination of Exchange Fund. . . . .............. . ... .. A-4 (g) Lost, Stolen or Destroyed Certificates . .... . .. . ... ... , , A-4 (h) Alliliates . . . . . . . . . .. ...... ....... . . A-5 4.3. Dissenters' Rights . . . ...... . . . .. .. A5 4.4. Adjustments to Prevent Dilution. . .. ..... . . ... A-5 ARTICLE V- Representations and Warranties . . ... ... ,, .. , .. A-5 5.1. Representations and Warranties of the Company and Parent . .. ... A-5 (a) Organization. Good Standing and Qualification . . . . . . ... A5 (b) Capital Structure . . . . . . . . . .. . . . . .. .. . ... . A-6 (c) Corporate Authority; Approval and Fairness . . .. .. .... . ... .. A7

. (d) Governmental Filings; No Violations . . .. .. . ... . .. . , A-8 (c) Reports: Financial Statements. . . ..... ..... . A8 (f) Absence cf Certain Changes . .. . .............. .. . A-9 (g) Litigation and Liabilities .... . ... .. ..... .... . A9 (h) Employee Benefits. . .. . .. . .. .. . . .. A-9 (i) Compliance with Laws; Permits . ...... ..... .. . . . A-Il (j) Takeover Statutes . . .. .. . . ....... A ll (L) Environmental Matters. . . .. . .. . . . A-l l (1) Accounting and Tax Matters. . . , . . .. . .. A-12 (m) Taxes .. . , ..,.. . . . ... . A-12 (n) Labor Matters . , , , .. . . A-13 A-i se

1*E!.

(o) Insurance . . . . . . . . . . . ..... . .. . .. . . ...... . ..... .. A 13 (p) I ntellect ual Prope rty . . . . . . . . /. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , A 13

( q ) B rokers a nd Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 15 (r) Regulation as a Utility. . . . . . . . . . . . . . . ... .... ..., .. ... .. A 15 (s) Operations of Nuclear Power Plants . . . . . . . . . . . . .... ............ A 15 (t) Afliliates of the Company . . . . . . . . . . . . . . . . ... ........., ..... A 16 (u) Ownership of Other Party's Common Stock . . . . . . . . . . . . . . . . . A 16 ARTICLE VI Co v e n a n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 16 6.1. - I n terim Opera tions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 16 6.2. Acquisition Proposals . . . . . . . . . . .... .. ...... . ........ ...... .... A 18 6.3. Information Supplied . . . . . . . . . . . . . . . . . . . .......... ... . . .. . A 19

-6.4. Stockholders Meetings . . . . . . . . . . . . . .. .... ...., ...... ... ... ... A- 19 6,5. Filings; Other Actions: Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 20 6.6. Taxation and Accounting . . . . . . . . . . . . ... . ..... . ..... . ..... A 21 6.7, Access........................................................ A 21 6.8. Affiliates . . . . . . . . . . , . . . . . ................ . . ....... .. , A 21 6.9. Stock Exchange Listing and De-listing ........ . ........... ... .. A 22 6.10. Publicity . . . . . . . . . . . . . . . . . . . . . . ..... ......... .......... . .. A-22 6.11. B e n e fi t s. . . . . . . . . . . . . . . . . . . . , ... . ..... ............ .. ... A 22 (a) Siack Options . . . . . . . . . . . . . . . . . . . . . . . . ............... .... A 22 (b) Directors of Parent . . . . .... . ... ... ....... . .. A 23 (c) Oflicers of Parent. .... ... ... ..... .. .. .... ..... . ... A 23 (d) Parent Board Committees . . . . . . . . . ... .. .. . .... .... . A 23 (c) Corporate l icadquarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 23 6,12. Expenses . . . . . . . . . ... ,........................., ... ...... A 23 6.13. Indemnification: Directors' and Officers' Insurance . . . . ..., ... .. . A 24 6.14. Other Actions by the Company and Parent . . . . . . . ,'. . . . . . . . . . . . . . .... A-24 (a) Takeover Statute . . . . . ... . .... . . . . . ........... . A 24 (b) Dividends . . . . . . . ..... .... . . , .............. . .... A 25 6.15. Parent Vote ,

, , ..... . . ...... ,,, . ............. . . A 25

- 6.16.- Rate Matters , , , .. .. . .... .. .... ,, . A 25 6.17 PUHCA . . . . . . . . .... ..... ... . ... . ... .... . ... A 25 6.18.- Pennsylvania Restructuring Legislation . . . .... ., . .. . ., . A-25 6.19 Nucicar Matters . ..... ... . .. . , , , ,. .. .. .. . A 25 ARTICLE Vil Conditions . . . . . , . . . . .. . ... . .. . ... .. , ,. A 26 7.1. Conditions to Each Party's Obligation to Effect the Merger. ..... A 26 (a) Stockholder Approval .. . .., . ...... . .. . . A 26 (b) NYSE Listing .. ... .,..... ... .. . ......... A-26 (c) Regulatory Consents . . .. . . ... ...... ... ... .. . . A-26 (d) Litigation . . . .. .. ,,. . , ... . , , .. .. . .. A 26 (e) S-4... ...... . ...... . . .. ... .. . .. .. . A 26 (f) Blue Sky Approvals , ,. .. .. . . . . ..... .. .... . . . A 26 (g) Pooling Letter ..... . . .. . .... , . ... . .. A-26 7.2. Conditions to Obligations of Parent and Merger Sub. , , . A-26 (a) Representations and Warranties. , . . . , . .. . .. .. A-26 (b) Performance of Obligations of the Company . . . .. A-27

' (c) Consents . . . . , . . .. .. .. . . . , , , A-27 (d) Tax Opinion . . .

A 27 A-il

l'oce (c) Alliliates Letters ... . .... . ... .. .... . .. . . . .. . A 27 (f) Comfort Leiiers . .. .. . .... . .... . . ... .., A-27 7.3. CondiAns to Obligation of the Conipany . . . . . . . .. ....... ... ... ... A 27 (a) ih presentations and Warrantics . . . . . . . . . . . . . . . . . . . . ........... A 27 (b) Performance of Obligations of Parent and Merger Sub . . . . . . . . . . . . . . . A 27 (c) Consents . . ... .. . .... ... .. . ..... .......... . .... A 27 (d) Tax Opinion . . . ..... ... .... . .. . ... .. . ... ... . A-28 (c) Comfort Letters . . . . . . . . ...,.. .. . . ... .. ... . ... A 28 ARTICLE Vill Te rm i n a t ior. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... .... A 28 8.1. Termination by M utual Consent . . . . . . . . . . . . . . ........ ... ..... ,. A 28 l

8.2. Termination by Either Parent or the Company. . . . . . ....... ,. . A 28 8.3. Termination by the Company .. ... .... . .. . ..... .. . A 28 8.4. Termination by Parent . . ... . . .. .... .... ....... ....., . A 29 8.5. EITect of Termination and Abandonment. . . . . . . . ... ...... . . A 29 ARTICLE IX Miscellaneous and General . . .. ....... . . , ...., ... . . A 30 9.l. Survival . ... . . . ... . . . .. .. . . ,. A 30 9.2. Modification or Amendment . . . . .... .. .. .., . .. ..... . . . A-30 9.3. Waiver of Conditions; Extension . . ... . ... . ..... . .. A-30 9.4. Counterparts . .. . ..... ...... .... . ... . .. .. .. A 31 9.5. GOVERNING LAW AND VENUE: WAlVER OF JURY TRIAL .. .... A 31 9.6. Noticcs . . . , .. .. .... .. ......... .. ..... . ......... .... . A-32 9.7. Entire Agreement . . . . .. ... ....... . ...... . .. ........... .A 32 9.8. No Third Party llencliciaries . . . . . . . . . . . . . . . . . . . . . .. ... .. ... A 32 9.9. Obligations of Parent and ef the Company . . . ,,, , , , . ... ... A 33 9.10. Severability. . . . . . . . . . . . . , . .. .. , ......, .. . , ....... , A 33 9.11. Interpretation , . . . . . ....... ... . ...... ... . .... ..... ..... . A 33 9.12. Assignment ........... , .. . ..... .. ... . . ..... A 33 A-iii

SCilEDU).E OF DEFINED TEltMS tierined 'lerm Parc Acquisition Agreement . . . . . . . . . . . . . . . . . , . .................... ,, . ............ A 18 A c q u isi t ion Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 18 A cq u i si t io n Tra n s a c tio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 18 AEA....................................... ....... ......... . .. ........... A-8 Afillietes Letter . . .............................. ....... ................... . A 21 Agreement . . . . . . .., ............... ......... ... . .. . . ......... . . A1 Audit Date . . . . . . . . . . . . . . . . . . ... . ....... ,, . ...... ........... .. . A8 Bankruptcy and Equity Er cepen . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. A7 B u dge t s . . . . . . . . . . . . . . . . . . . . .... .. .................. . .......... ........ . A9 Byla ws . . . . . . . . . . . . . . . . . . . . . . . ...... ............ . ... ............ . . . A2 Certificate . . . . . . . . . . . . . . ....... .... ......... ...... .. . . .. ...... ..... .. . A-3 Charter . . . . .. .............. . . .... ................. . ..... . .. ... A2 Closing . . . . ..... ......... .. .. ........... , .... .. . . . ...,... .. A2 Closing Date .. . ......... .... . . ... ,,........... ... . ..... .. ... A2 Code . . . . . . . . . ,, .............. .... ..... ............ ... ..... ,... ..... A1 Company . . . . . . . . . . . . . . . .. .... . . .... , .... .. ........ .... . ........ . A1 Company Budget . , ..... ... ....... . .............. ... ... ........ ... . . A9 Company Disclosure Letter ..... .... ... ... ..................... ... .. ... ,, A5 Com pany Option . . . . . . . . . . . . . . . . . . . . . . . . . ........... . . ... ,. .. . ......, . A-6 Com pany Requisit e Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . , , , . . . . . . . . . . . . . . . . . . . . .. A-7

. Compensation and Benefit Plans . . . . , . . . . . . . . . . . . . . . ... ..... ..... .. ... . A-9 Confidentiality Agreement . . . . ... .. . ......... ..... ........... ...... . . A 32 Constituent Corporations . . . . . . . . . . . . . . ,, , .... .. .... . ,, ..... . , ... A1 Contracts . . . . . . . . . . . . . . ............ .. ......... .. ....... ... .... A8 Conversion Ratio . . .. ........ .......... . ....., .. ..... . ...... .... . . .. A-3 Costs . . . . . . . . ..... , ... ,, . ...... .. ...., . . .. . .. . . A 24 Current Premium . . . . , .... .. .... . .. . .. .. .. ,,, . ... . . A-24 D&O lnsurance . . , , . . ,, ,,, ..... ....... ..... ., , . . . ... . . ...... A 24 Disclosure Letter. ....., ... , , .......... . .. .. .... . ., . A-5 EITective Time . . . . . . . . . . .. ,,. .. .. . .... . . .. .... . .. .. ,,......, .... A-2 Environmental Law . . . . . ............. .. .. ..... . . . ....... ... . . .. . A-12 E RIS A . . . . . . . . . . . . ,, . . ,, ,, ,, .. .. , ... A-10 ERISA Afliliate. ... . . ....., . ... ... . , . ..... .. . . ,.... A Il ERISA Afliliate Plan . , . , , . . . . .. . .. . . ,, , , .. A-l i Exchange Act . . . . . .. .. ..., ... . . . ..... .. .... .. . . .. . .. . . A-8 Exchange Agent . . . ... .. . .... , .. ... . . .., .. . . ..... . . A3 Exchange Fund . . ... . . .. . .. . .. . . . . . .. A3 Excluded Shares . , ,. . ,, , .. .. . . , , A2 FERC., .. .. ...... ... ... .. ....... , , .. .. . ,, . .. A6 Final Order. . . ............. .. .. .. . .., .. . . . ...... ... . A-26 GAAP..... . .... ... .. . . ,, ... . . . , , , ... A-9 Governmental Consents .. , ,,,, . .. .. .. . . .. A 26 Governmental Entity. ., ,, .. . . .... ... .. . . . . A-8 i Hazardous Material . , , . . . . . . . . . .. .. . . . . . . . A 12 HSR Act

.. . .. . ... . .. . . . . . ... , A-8 l l

Indemnified Parties . .... . .. . . . . , .. , . A-24 ,

Intellectual Property Rights . . .. .., ... . .. .. A-15 l

1RS. .. . . .. . . . .. . . , . A-10 Law / Laws . . .. ... . , ,, . . . . . . A-11 Material Acquisition Transaction. . .. A-29 A-iv

t u ard lera -

l' ore hiaterial Adverse LITect . . . .. ..... ,. . . . .. . . ............. ...... ..... .... A5 hierger .... ............ .... ... .. ... .. . ..... .. . ... ... .... A1 hi e rg e r C o n sid e ra t ion . . . . . . . . . . . . . . . . , . . . . . . . .' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A3 hi e rS e r S u b . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... ..... ............ ............ ....... A1

- Nuclear Facility / Nuclear Facilities . . . . . , , . ..... .... ................................ .A 15 Nuclear Review Committee . . . . . . . . . . . . . . . . . . . . . . . . .... .. ..... . ... . ... A 25 b.YSE.......................... .. . .. . .... .. . . ....... ................ A 22 O rde r . . . . . . . . . . . . . . . . . . ................ .. . . . . . ....... ..... . . . . ... A 26 Pa re n t . . . . . . . . . . . . . . . . ..... . ... . . .. . ... .. ........... ........ .... .. . A1 Parent liudget . ....... .. ........... ....... . ...... . . ... . . . .. . A9 Parent Common Stock . . . .. . .... ... .... .. . . .. ..... . ............ A 3-Parent Companics . . . . . . . . . . . . . .. .... ... ..,... .. ................... A2 Parent Disclosure Letter. . ,. ..... . .. . . . . . . .. . . ..... .. A5 Parent Requisite Vote . . .. ., . . . . ..... ... . . . .. .... ..... . . A7 Parent Stock Plans . . . .... .... ........ ... . . . . .,.. .. . . ,. ... A-6 Parent Stockholders hiceting . . . . ..... .......... .... . ..... .... ... , .. .... A 19 Parent Voting Debt . , . . . . .. ... . .. ... .... . . ... .. . .... .. ..... .... A7 P il C L . . . . . . . . . . . . . . . . . . . . . ..... . .. . . , ..... . .. . ... A1 Pennsylvania Articles of Merger . . ... .. ........... .... ........ A-2 Pennsylvania Restructuring Legislation. . . . .. . . .. . . .. . . .. . A 25 Pension Plan. . . . . . . . . . .... .... . ... . . .. .. . . .... . . , , . ... A ll Permits . . . . .......... . . . ... . ...... ... .... . ........ A-11 Person . . . . . . , . ... .... ..... .... . .... ... . ... .... . .. .. A-4 Pooling A!Tiliates Letter . . . . . . . . . . . . . . ... . .. .. .. .. .. ..... ..... ... A 22 Power Act .. .... .... .. . . .... .. .. . . . ., ,. ... .. .. ,. . ... A-8 Preferred Shares ......, . .. . . ... .. .. ...... ...... . .. .. ., . .... . A-6 Prospectus / Proxy Statement ...... . ,. . .... ... , , . . ..... A 19 PUHCA... . . . .. . .... .... .. ..... .. .. ... . . .... . .. . A-6 Reports . . . . . . . .... . .. . . ,,, . . . .. ............. ., . .. A8 Representatives ... .. ., , . . .. , . - A 21 S 4 Registration Statement , .. . . . . . , . . .., . , .. .... A-19 SEC ... . . . . . . .... . . . . . . . .. . A-6

- Securities Act . ... . . . ... . . . . . . ... . .. .. .. .. . A-8 States . . . . . . . . . ... . . . . . .......... ..... ....... A2

, Stock Option Agreement . . . ,,. . . .. .. .. . .. . . . . ... A1

-Stock Plans . . ... .... ., . . A-6 Stockholders Meeting . . . . .. . .... . .. . .. . . . . A 19

. Subsidiary . . . . . . . . . . . . . . . . . . . . . . . .. . .... . . .. ... .. .. .. . A-5 Superior Proposal .. . ... . . . . . . .. . . . . A-19 Suniving Corporation . . . . . . A-1 Takeover Statute , ,. . . . . .. .. . . . . A-I l Tax / Taxes / Taxable , . . . . , ,, . . . . .. A-14 Tax Return . . . . . . . . . . . . A 14 Termination Date . . .. .. . . . . . . . . .. . ... A 28 Third-Party Intellectual Property Rights . . . .. . . A 15 Voting Debt . . .. . . A-6 Av

i AGREEMENT AND P!AN Ol' MI RGl:R AGREEMENT AND PLAN OF MERGER (hereinafter called this " Agreement"), dated as of April $.

1997, among DQE, ine., a Pennsylvania corporation (the " Company"), Allegheny Power Sptem, Inc., a Maryland corporation (" Parent"), and AYP Sub, Inc., a Pennsylvania corporation to be organized as a w holly owned subsidiary of Parent ("Alerger Sub." the Company and MerEer Sub sometimes being hereinafter collectively referred to as the " Constituent Corporations.")

RECITALS WilEREAS, Parent and the Company have determined to engage in a strategic business combination; WilEREAS, in furtherance thereof, the respective boards of directors of each of Parent and the Company have approved this Agreement, which contemplates the merger of Merger Sub with and into the Company (the "Alcrger") whereby the Company will become a wholly owned subsidiary of Parent, and have approved the Merger upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, it is intended that, for federal income tax purposes, the Merger shall qualify as a reorganization under the provisions of Section 368(a) of the Internal Resenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the "Codc");

WllEREAS, for financial accounting purposes, it is intended that the Merger shall be accounted for as a

" pooling-of interests;"

WilEREAS, contemporaneously with the execution and delivery of this Agreement, as a condition and inducement to Parent's willingness to enter into this Agreement, the Cmpany is entering into a stock option agreement with Parent (the " Stock Option Agreement"), pursuant to which the Company has granted to Parent an option to purchase Shares (as defin-d in Section 4.l(a)) under the terms and conditions set forth in the Stock Option Agreement; and WHEREAS, the Company and Parent desire to make certain representations, warranties, covenants and l agreements in connection with this Agreement.

NOW,TilEREFORE,in consideration of the premises, and of the representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows:

ARTICLE 1 The Merger; Closingt EITecti e Time 1.1. Alerger Sub; The A/crger. (a) As promptly as practicable following the execution of this Agreement and receipt of any required regulatory approvals, Parent shall cause Merger Sub to be incorporated under the laws of the Commonweahh of Pennsylvania. The Articles of Incorporation and Bylaws of Merger Sub shall be m a customary form. The authorized capital stock of Merger Sub shall consist of 1,000 shares of common stock, $0.01 par value per share, all of which shall be issued to Parent at a price of $1.00 per share following the receipt of any required regulatory approvals. As promptly as practicable following the issuance of such shares, Parent shall cause Merger Sub to authorize, execute and deliver this Agreement and to assume its obligations as a party hereto.

(b) Upon the terms and subject to the conditions set forth in this Agreement, at the EfTective Time (as defined in Section 1.3), Merger Sub shall be merged with and into the Company and the separate corporate existence of Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the " Surviving Corporation"), and the separate corporate existence of the Company with all its rights, privileges, immunities, powers and franchises shall continue unafTected by the Merger, except as set forth in Article 111. The Merger shall have the efTects specified in the Pennsylvania Business Corporation Law, as amended ("PBCL").

A-1

1.2. C/ ming. 'The closing of the Merger (the " Closing") shall take place (i) at the oflices of Sullivan & Cromwell.12511 road Street, New York, New York at 9.00 A.M. on the fifth business day after the day on which the last to be fulfilled or waived of the c'onditions set fonh in Article Vil (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions) shall be satisfied or waived in accordance with this Agreement or (ii) at such other place and time and/or on such other date as the Company and Parent may agree in writing (the " Closing Date"),

1.3. Efectirc Timec As soon as practicable following the Closing, the Company and Parent will cause an Articles of Merger (the "Pennsy/rania Artic/cs ofMerger") to be executed and filed with the Department of State of the Commonwealth of Pennsylvania as provided in Section 1927 of the PBCL The Merger shall become efTective at the time when the Pennsylvania Articles of Merger has been duly filed with the Department of State of the Commonwealth of Pennsylvania (the " Effective Time").

ARTICLE !!

Certificate of Incorporation and Ily-Laws of the Sunbing Corporation 2.1. The Certificate of Incorporation. The anicles of incorporation of the Company as in efTect immediately prior to the EITective Time shall be the articles of incorporation of the Surviving Corporation (the " Charter"), until duly amended as provided therein or by apr6 cable law, except that Article V of the Charter shall be amended to read in its entirety as follows: "The aggregate number of shares that the Corporation shall have the authority to issue is 1.000 shares of Common Stock, par value $0.01 per share",

2.2. The Bylaws. The by-laws of Merger Sub in efTect at the EITective Time shall be the by-laws of the Surviving Corporation (the " Bylaws"), until thereafter amended as provided therein or by applicable law.

ARTICLE III Ofheers and Directors of the Suniting Corporation 3.1. Directors. The directors of Merger Sub at the EtTective Time shall, from and after the EfTective Time, be the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Charter and Bylaws, 3.2. Of4cers. The officers of the Company at the EfTective Time shall, from and after the EtTective Time, be the officers of the Suniving Corporation unt'l their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Charter and Bylaws.

ARTICLE IV Eticet of the Merger on Capital Stockt Exchange of Certificates 4.1. Effect on CapitalStocL At the EfTective Time, as a result of the Merger and without any action on the part of the holder of any capital stock of the Company:

(a) Merger Consideration. Each share of the Common Stock, without par value, of the Company (the " Shares") issued and outstanding immediately prior to the EfTective Time (other than Shares owned by Parent. Merger Sub or any other direct or indirect subsidiary of Parent (collecFvely, the

" Parent Companies") and Shares that are owned by the Company or any direct or indirect Subsidiary of the Company, in each case not held on behalf of third parties, and which are not Shares held by the Company's utility Subsidiary to provide for redemption of such Subsidiary s preference shares pursuant to the terms of such Subsidiary's 401(k) plan or to provide benefits under another employee benefit plan of such Subsidiary (collectively, " Excluded Shares")) shall, subject to Section 4.2(e) of this Agreement.

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be converted into, and become exchangeable for 1.12 (the " Comer 3 ion Ratio") shares of Common Stock, par value $1.25 per share, of-Parent (" Parent Common SIM"), except as such merger consideration may be adjusted pursuant to Section.4.4 (as so adjusted, the "Aferger Consideratiem"). At j the EfTective Time, all Shares styll no longer be outstanding and shall be cancelled and retired and shall cease to exist, and each cenificate (a " Certificate") formerly representing any of such Shares (other than Excluded Shares) shall thereafter represent only the right to receive the Merger Consideration and the

right, if any, to receive pursuant to Section 4.2(e) cash in lieu of fractional shares into w hich such Shares )

have be;n converted pursuant to this Section 4.l(a) and any distribution or dividend pursuant to i Section 4.2(c).

j (b) Cancellation ofShares. Each Excluded f%re shall, by virtue of the Merger and without any i

= action on the part of the holder thereof, cease to be outstanding, shall be cancelled and retired without I

- payment of any consideration therefor and shall cease to exist, (c) Aterger Sub. At the Effective Time, each share of Common Stock, par value $0.01 per share,

of Merger Sub issued and outstanding immediately prior to the EfTective Time shall be converted into one share of common stock of the Surviving Corporation.

4.2. Exchange of Certipcates for Shares.

(a) Exchange Agent. As of the Effective Time, Parent shall deposit, or shall cause to be deposited.

} with an exchange agent selected by Parent with the consent of the Company (the " Exchange Agent"),

which consent shall not be unreasonably withheld, for the benefit of the holders of Shares, certificates representing the shares of Parent Common Stock and, after the EfTective Time,if applicable, any cash,

dividends or other distributions with respect to the Parent Common Stock to be issued or paid pursuant to the last sentence of Section 4.l(a) in exchange for outstanding Shares upon due surrender of the i Certificates (or aflidavits of loss in lieu thereof) pursuant to the provisions of this Article IV (such certificates for shares of Parent Common Stock, together with the amount of any dividends or other distributions payable with respect thereto, being hereinafter referred to as the " Exchange Fund").

d (b) Exchange Procedurcs. Promptly after the Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail to each holder of record of Shau (other than holders of Excluded

Shares) (i) a letter of transmittal specifying that delivery shall be effected, and risk of loss and title to the 1 Certificates shall pass, only upon delivery of the Certificates (or aflidavits of loss in lieu thereof) to the Exchange Agent, such letter of transmittal to be in such form and have such other provisions as Parent and the Company may reasonably agree, and (ii) instructions for use in effecting the surrender of the Certificates in exchange for (A) certificates representing shares of Parent Common Stock and (B) any l unpaid dividends and other distributions and cash in lieu of fractional shares. Subject to Section 4.2(h),

upon surrender of a Cenificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, the holder of such Cenificate shall be entitled ta receive in exchange therefor (x) a certificate representing that number of whole shares of Parent Common Stock that such holder is

.cntitled to receive pursuant te this Article IV, (y) a check in the amount (after giving effect to any l , _

required tax withholdings) of ( A) any cash in lieu of fractional shares plus (B) any unpaid non-stock dividends and any other dividends or other distributions that such holder has the right to receive pursuant to the provisions of this Article IV, and the Cenificate so surrendered shall fonhwith be cancelled. No interest will be paid or accrued on any amount payable upon due surrender of the Certif; cates. In the event of a transfer of ownership of Shares that is not registered in the transfer records of the Company, a certificate representing the proper number of shares of Parent Common Stock, together with a check for l any cash to be paid upon due surrender of the Certificate and any other dividends or distributions in ,

respect thereof, may be issued and/or paid to such a transferee if the Certificate formerly representing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and efTect such transfer and to evidence that any applicable stock transfer taxes have been paid. If any

, certificate for shares of Parent Common Stock is to be issued in a name other than that in which the 4

Certificate surrendered in exchange therefor is registered,it shall be a condition of such eschange that the Person (as defined below) requesting such exchange shall pay any transfer or other taxes required by i A3 s

l 2

! I d.

i reason of the issuance of certificates of shares of Parent Common Stock in a name other than that of the registered holder of the Certificate surrendered, or.shall establish to the satisfaction of Parent or the Exchange Agent that such tax has been paid or is not applicable, 3 For the purposes of this Agreement, the term " Person" shall mean any individual, corporation-(including not for profit), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization Governmental Entity (as defmed o section 5.l(d)) or other entity of any kind or nature.

(c) Distributions with Respect to UnexchangedShares: Voting. (i) All shares of Parent Common Stoc* :o be issued pursuant to the Merger shall be deemed issued and outstanding as of the EITective l Time and whenever a dividend or other distribution is declared by Parent in respect of the Parent Common Stock, the record date for which is at or after the Effective Time, that declaration shallinclude i dividends or other distributions in respect of all shares issuable pursuant to this Agreement. No dividends or other distributions in respect of the Parent Common Stock shall be paid to any holder of any unsunendered Certificate until such Certificate is surrendered for erchange in accordance with this Article IV. Subject to the efTect of applicable laws, following surrender of any such Certificate, thi: shall

! be issued and/or paid to the holder of the certificates representing w hole shares of Parent Common Stock l issued in exchange therefor, without interest ( A) at the time of such surrender, the dividends or other

distributions with a record date after the Effective Time theretofore payable with respect to such whole j shares of Parent Common Stock and not paid and (B) at the appropriate payment date, the dividends or' l other distributions payable with respect to such whole shares of Parent Common Stock with a record date after the EITective Time but with a payment date subsequent to surrender.

(ii) Holders of unsurrendered Certificates shall be entitled to vote after the EfTective Time at any j meeting of Parent stockholders the number of whole shares of Parent Common Stock represented by such Certificates, regardless of whether such holders have exchanged their Certificates.

[ (d) Transfers. After the EITective Time, there shall be no transfers on the stock transfer books of

the Company of the Shares that were outstanding immediately prior to the EfTective Time.

(e) reactional Shares. Notwithstanding any other provision of this Agreement, no fractional j shares of Parent Common Stock will be issued and any holder of Shares entitled to receive a

fractional share of Parent Common Stock but for this Section 4.2(e) shall be entitled to receive a cash payment in lieu thereof, which payment shall represent st.ch holder's proportionate interest in a share of Parent Common Stock based on the closing price of e share of the Parent Common Stock, j as reported in The Wall Street Journal, New York City edition, on the trading day immediately prior to the Effective Time.

(f) Termination ofEachange Fund. Any portion of the Exchange Fund (including the proceeds of any investments thereof and any Parent Common Stock) that remains unclaimed by the stockholders of the Company for 180 days after the EITective Time shall be paid to Parent. Any stockholders of the Companyyho have not theretofore complied with this Article IV shall thereafter look only to Parent for paymeni of their shares of Parent Common Stock and any cash, dividends and_other distributions in respect of the Parent Common Stock payable and/or issuable pursuant to Section 4.1 and Section 4.2(c) upon due surrender of their Certificates (or aliidavits of loss in lieu thereof), in each case, without any interest thereon. Notwithstanding the foregoing, none of Parent, the Surviving Corporation, the Exchange Agent or any other Person shall be liable to any former holder of Shares for any amount pruperly

] delivered to a public oflicial pursuant to applicable abandoned property, escheat or similar laws.

(g) Lost. Stolen or Destroyed Certificates. In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and if required by Parent, the posting by such Person of a bond in customary amount as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent willissue in exchange for such lost stolen or destroyed Certificate the shares of Parent Common Stock and any cash payable and any unpaid dividends or other distributions in respect of Parent

[ A-4 i

i i

Common Stock pursuant to Section 4.2(c) upon due surrender of and deliverable pursuant to this Agrcement in respect of the Shares to which such Certificate relates.

(h) 1]Tiliates. Notwithstanding anything herein to the contrary, Certificates surrendered for exchange by any "alliliate" (as determined pursuant to Section 6.8) of the Company shall not be exchanged until Parent has receised a written agreement from such Person as provided in Section 6.8 hereof, 4.3. Disscnices' Rights. in accordance with Section 1571 of the PilCL, no appraisal rights shall he available to holders of Shares in connection with the Merger.

4.4 eldjustments to Prevent Dilution. in the event that Parent changes the number of Shares or shares of Parent Common Stock or securities convertible or exchangeable into or esercisable for Shares or shares of

. Parent Common Stock issued and outstanding prior to the EfTective Time as a result of a reclassification, stock split (including a reverse split), stock dividend or distribution, recapitalization, merger, subdivision, issuer tender or exchange offer, or other similar transaction, the Merger Consideration shall be equitably adjusted.

3 i l

ARTIC11 Y l

\

itepresentations and Warranties 1 5.l. Representations and it'arrantics of the Company and Parent. Except as set forth in the corresponding sections or subsectic'is of the disclosure letter, dated the date hereof, delivered by the Company to Parent or by Parent to the Company (each a "Disclosurc Letter", and the " Company Disclosurc Leticr"and the " Parent Disclosurc Lcticr", respectively), as the case may be, the Company (except for subpara-

graphs (b)(ii), (b)(iii), (c)(ii), (c)(iii), (q)(ii), (r)(iii) and (u)(ii) below and references in subparagraphs (a) and (h)(i) below to documents made available by Parent to the Company) hereby represents and warrants to Parent, and Parent (except for subparagraphs (b)(i), (c)(i), (j), (q)(i), (t)(ii), (s), (t) and (u)(i) below and references in subparagraphs (a) and (h)(i) below to documents made available by the Company to Parent and the reference in subparagraph (h)(i) below to items to be included in the Company Disclosure Letter), hereby represents and warrants to the Company, that

(a) Organi:ation. Good Standing and Quahfication. Each of it and its Subsidiaries is a corpora.

tion duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and has all requisite corporate or similar power and authority to own and operate its properties and assets and to carry on its business as presently conducted and is qualiSed to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of its properties or conduct of its business requires such qualification, except where the failure to be so qualified or in good standing, when taken together with all other such failures, is not reasonably likely to have a Material Adverse EfTect (as defined below) on it. It has made available to Parent,in the case of the Company, and to the Company, in the case of Parent, a complete and correct copy of its and its Subsidiaries' certificates or articles of incorporation, as the case may be, and by-laws, each as amended to

, date. Such certificates or articles of incorporation, as the case may be, and by-laws as so made available are in full force and etTect. Section 5.l(a) of the Disclosure Letters contains a correct and complete list of each jurisdiction where the Company,in the case of the Company Disclosure Letter, and Parent, in the case of the Parent Disclosure Letter, and in each case, each ofits Subsidiaries is organized and qualified to do business.

As used in this Agreement, the term (i) " Subsidiary" means, with respect to the Company, Parent or Merger Sub, as the case may be, any entity whether incorporated or unincorporated, in which the Company, Parent or Merger Sub, as the case may be, owns, directly or indirectly, at least a madrity of the outstanding voting securities or other equity interests having the power to elect a majority of the directors, or otherwise direct the management and policies, of such entity and (ii) "Materialetdrerse

. Eficci" means, with respect to any Person, a material adverse efTect on the financial condition, properties, operations, business or results of operations of such Person and its Subsidiaries taken as a whole; provided. however, that any such c!Tect resulting from any change in law, rule, or regulation promulgated A-5

by (i) the United States Congress (ii) the Securities and Exchange Commission (the "S/?C") with respect to the Public Utility lloiding Company Act of 1935, u amended (the "PU//CA "), (iiil the Pennsylvania State Legislature or the Pennsylvania Public Utilitics Commission or (iv) the Federal Energy lleputatory Commission (the "FERC"), or any interpretation of any such law, rule or regulation, or the application of the Pennsylvania itestructuring Legislation (as defined in Section 6.18), which afTects both the Company and its Subsidiaries, taken as a w hole, and Parent and its Subsidiaries, taken as a whole, shall only he ransidered when determining if a Material Adverse Effect has occurred to the extent that such clicci on one such party exceeds such efTect on the other party.

(b) Capital Structure. (i) The authorired capital stock of the Company consists of 187,500,000 Shares, of w hich 79,318,011 Shares were outstanding as of the close of business on April 3, 1997, and 4,000,000 shares of Preferred Stock, without par value, of w hich no shares wcre outstanding as of the close of business on April 3,1997 (the " Preferred Shorcs") All of the outstanding Shares have been duly authoriecd and validly issued and are fully paid and nonassessable. The Company has no Shares or Preferred Shares reserved for issuance, except that, as of April 3,1997, there were 1,5S4.285 Shares reserved for issuance pursuant to the Company's Long Term incentive Savings Plan, the Dividend lleinvestment and Stock Purchase Plan, the 1996 Stock Plan for Non Employee Directors and the Performance incentive Program for the Company and its Subsidiaries (the "StocA r/ans"). The Company Disclosure 1.etter contains a correct and complete list of cach outstanding option to purchase Shares under the Stock Plans (each a " Company Option"), including the holder, date of grant, exercise price and number of Shares subject thereto.

Each of the outstanding s! arcs of capital stock or other securitics of each of the Company's Subsidiaries is duly authorized, validly issued and is fully paid and nonassessable and owned by a direct or indirect wholly owned subsidiary of the Company, free and clear of any lien, pledge, security interest, claim or other encumbrance. Except as set forth above, there are no preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements or commitments w hich obligate the Company or any ofits Subsidiaries to issue or sell any shares of capital stock or other securities of the Company or any of its Subsidiaries or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire from the Company or any of its Subsidiaries, any securitics of the Company or any ofits Subsidiaries, and no securities or obligations c"dencing such rights are authorized, issued or outstanding. The Company does not have outstanding any bonds, debentures, notes or other obligations the holders of w hich have the right to vote (or are convertible into or exercisable for securitics having the right to vote) with the stockholders of the Company on any matter ("I'oring Dcht").

(ii) The authorized stock of Parent consists of 260,000,000 shares of Parent Common Stuck, of which 122,111,567 shares were outstanding as of the close of business on April 3,1997 All of the outstanding shares of Parent Common Stock have been duly authorized and validly issued and are fully paid and nonassessabic. Parent has no Parent Common Stock reserved for issuance, except that, as of April 3,1997, there wcre 1,692,310 shares of Parent Common Stock reserved br issuance pursuant to the

- Allegheny Power Employee Stock Ownership and Savings Plan and the Allegheny Power System Performance Share Plan (the " Parent Stock Plans"), cach of the outstanding shares of capital stock of each of Parent's Subsidiaries is duly authorized and vahaly issued and is fully paid and nonassessable and owned by a direct or indirect wholly owned subsidiary of Parent, free and clear of any lien, pledge, security interest, claim or other encumbrance. Except as set forth above, there are no preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements or commitments which obligate Parent or any of its Subsidiaries to issue or to sell any shares of capital stock or other secuntics of Parent or any of its Subsidiaries or any securities or obligations convertible or exchangeable into or exercisable for, or giving i any Person a right to subscribe for or acquire from Parent or any of its Subsidiaries, any securitics of Parent or any of its Subsidiaries, and no securities or obligations evidencing such rights are authorized.

issued or outstanding. Parent does not have outstanding any bonds, debentures, notes or other obligations A-6

the holders of which hate the right to vote (or are comertible into or esercisable for sec1rii'an having the right to u te) with the sto.iholders of Parent on an) matter ("farrnt l'oling /kht").

(iii) The othoriied capi'al stock of hhrter Sub shall consist of 1,000 shares of Common Stock, par value $0401 per share, all of which shall be validly issued and outstanding at the Effective Time. At the Effective Time, all of the inued and outstanditt capital stock of Merger Sub will be owned by Parent and there shall be (i) no other voting securities of Merger Sub, (ii) no securities of Merger Sub convertihte into or etchangeable for sharcraf capital stock or voting $ccurities of Merger Sub and (iil; no options or other rights to acquire from Merger Sub, and no obligations of Merger Sub to luuc, any capital stock, soling securities or securities convertible into or exchangeable for capital stock or voting securities of Merger ' .ib At the Effective Time Merger Sub shall not have conducteu any business, end shall have no, assets, liabilities or obligations of unf nature, other than those incident in its formation and pursuant

, to this Agreement and the Merger and the other transactions contemplated by this Agreement.

(c) (ortware Authority; Approval and Tattness. (i) The Compat,y has all requisite corporate power and authority und has taken all corporate action necessary in order to execute, deliver and perform its obligations under this Agreement and the Steck Option Agreement and to consui,imate, subject only to approval of this Agreement by the holders of a majority of the votes cast by Shares entitled to a sote on approval of this Agreement (the " Company Requisite Pole"), the Merger, This Agreement und the Stock Option Arreement have been duly executed and delivered by the Company and, anuming the due authontation, execution and delivery hereof and thereof by the other signatories hereto and thereto, constitute valid and bindire agruments of the Company enforceable against the Company in accordance

- with theit -tmn, subject to t nkruptcy, insolvency, fraudulent transfer, reorganization, morMorium and similar of general applicability relating to or affecting creditors' rights and to general equity principle "BanAruptry and Equity Derptlon"b The teard of directors of the Company (A) has approved. Agreement ard the Stock Option Agreement and the Merger and the other transactions contemplated hereby rod thereby and (11) has necived the opinion of its hnancial advisor Credit Suisse l'irst Doston Corporation to the efTect that, as of the date of this Agreement, the Conversion Ratio is fair to the holders of Shares from a financial point of view.

(ii) Parent has all requisite corporate power and authority and each has taken all corporate action necess,try in order to execute, deliver and perform its obligations under this Agreement and to consummate, subje;t onh7 to any stockholder cpproval necersary to permit the issuance of Parent Common Stock required to be issued pursuant to Article IV (the " Parent Requis/tc Vo'r"), the Merger.

This Agreement has been duly executed and delivered by Parent and, assuming the due authorizatio9, i execution and delivery hereof by the Company, constitutes a valid and binding agreement of Parent, enforceable against Parent in accordance with its terms, subject to the llankruptcy and Equity Execotion.

At the EfTective Time, Merger Sub shall have all requisite corporate authority and shall have takena 'll corporate action necessary in order to execute, deliver and perform its obligations under this Agreement and to consummate the Mergcr, At the EfTective Time, this Agreement shall have been duly executed and delivered by Merger Sub and, assuming the due authoritation, execution and delivery hereof by the

. Company, shall constitute a valid and binding agreement of Merger Sub, enforceable against Merger Sub in accordance with its terms, subject to the ihnkruptcy and Equity Exception. The Parent Common Stock, w hen issued, will be validly issued, fully paid and nonassessable, and no stockholder of Parent will

, have any preemptive right of subscription or purchase in respect thereof.The floard of Directors of Parent

( A) has appro<cd this Agreement, the Merger and the transactions contemplated hereby and (D) has received the opinion of its tmancial advisors Merrill Lynch & D. to the effect that the consideration io be paid by Parent to the holders of the Shares in ne Merger is fair to Parent from a financial point of view.

(iii) Parent has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under the Stock Option Agreement. The Stock Option Aprement has been ddy executed and delivered by Parent, and, assuming the due authorization, execution and delivery thereof by the Company, constitutes a valid and binding agreement of Parent, enforceable against Parent in accordance with its ternu, subject to the Bankruptcy and Equity Exception, A7

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ll (d) GenrinmentalD/inge;No l'iolathmt (i) Other than the filings notices and/or approvals ( A) pursuant to Section 1.3, (11) under the llatt Scott.Rodmo AntStust imprmcments Act of 1976, as amended (the "#SR Art"), the Securities Exchange Act of 1934, as amendco (the "fuhange Act")

and the Securities Act of 1933, as amended (the "Scruttilr.t Act"), (C) to compl3with state securitics or "bluc4k)" laws. (D) of the SEC pursuant to the l'UllCA, the I'liRC pursuant to the l ederal Power Act, as amended (the "/bwer <trt") and the NRC pursuant to the Atomic linergy Act, as amended (the "AEA"). (E) of federal of state regulatory bodies pursuant to Environmental Laws (un dermed in Section 5.l(L)), and (F) of the state public utility commlulons or similar $ tate regulau .y indles identined in the respective Disclosure Letter pursuant to applicable state laws regulating the c!cc4ic utility busincu, no notices, report 3 or other filings rec required to be made by it with, nor are any consents, registrations, approvals, pernsits or authorizations reyulted to be obtained by it from, any governmental or regulatory l authority, agency, comminion, body or other governmental entity ("GmnnmrinalI;nti,/"), in connce.

tion with the execution :md dehvery of thh Ayrccment and the Stock Option Agreement by it and the consummation by it of the Mercer and the other transactions contemplated hereby and thereby, except those that the failure to make or obtain are not, individually or in th apprepate, < :awnably likely to have a Material Adverse EITect on it or prev il, materially delay or malcrially impair the ability of it to consummate the transactions contemplated by this Aprecment and the Stock Option Agreement.

(ii) The execution, delivery and performance of this Acrecment and the Stock Option Agreement  ;

by it doct not, and the consummation by it of the Merger anu the other transactions contemplated hereby  ;

and therdy will not, constitute or result in ( A) a breach or violation of, or a default under,iticertificate or articles of incorporation or by laws or the comparable po,ctning instruments of any of its Subsidiaries, (11) subject to the tcccipt of ell requirvi waivers and consents n described in Section $,1(d)(i) or the ,

last $cntence <d this subsectiom a breach or violation of, or a default under, the accclcration of any oblipations or the creation of a lien, pledge, security interest or other encumbrance on the assets of it or '

any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to any agreement, lease, contract, note, mortgage, indenture, arranyment or othu obligation ("Contrarts") binding upon it or any ofits Subsidiaries or any Law (as defined in Section 5a (1)) or governmental or non povernmental permit or license to which it or any of its Subsidiaries is subject or (C) any chanpc in the rights or obligations of any party under any of the Contracts, except, in the case of clause (111 or (C) above, for any breach.

"iolation, defuult seccleration, creation or change that, mdividually or in the aggregate,is not teamnably likely to have a Material Adverse EITect on it or prevent, materially delay or materially impair its ability ,

to consummate the transactions contemplated by this Agreement and the Stock Option Agreement. 'lhe Company Disclosure Letter, with respect to the Company, and the Parent %sebure Letter, with respect

, to the Parent, contains a correct and complete list of Contracts of the Company, in the case of the Company Disclosnre Letter, and of Parent,in the case of the Parent Disclosure Lett.r and its respectisc Subsidiaries pursutnt to which consents or waivers are or may be required prior to consummation of the transactions contemplated by this Agreement and the Stock Option Agreement (whether or not subject to the exception set forth with respect to clauses (B) and (C) above).

(c) Reports; AnancfalStarrmcatt The filings required to be made by it and hs Subsidiaries since December 31,1993 under the PUHCA, the Power Act, the AEA and state law, and under regulations applicabic to public utilitics, have been made with the relevant Governmental Entitics, and each ofit and its Subsidiaries has complied in all material respects whh such laws and regulations, except for such .

failures as are not reasonably likely to have a Material Adverse Effect en it. It has delivered to the other party each registration Statement, report, proxy statement or information statement prepared by it or its Subsidianes and filed with the SEC since December 31,1996 (the " toda Darr"), including its Annual Report on Form 10 K for the year ended December 31,1996 in the form (including exhibits, annexes and any amendments thereto) filed with the SEC (colketively, including any such registration statement, report, proxy statement or information statement filed subsequent to the date hereof. the " Reports"). .As of their respective dates, the lleports did not, and any Reports filed with the SEC subsequent to the date hereof will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to male the statements made therein, in the light of the circumstances under which they were made, not mideaoing. Each of the consolidated balance sheets included in or r A8

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incorporated by referenec into the 1(cports (indud ng the related notes and schedules) fairly presents, or will fairly present, the conwlidated I nancial position of it and its Subsidiatics as of its date and each of

.he conwhdated statements of income and of changes in hnancial position included in or incorporated by reference into the Reports (including any related notes and schedu'es) fairly presents, or wih fairly present, the results of operations, retained carnings and changes in financial position, as the case may he, of it and its Subsidiatics for the periods $ct forth therein (subject,in the case of unaudited statements, to notes and normal year.cnd audit adjustments that will not be material in amount or cliect), in each case in accordance with generally accepted accounting principles ("GAAP") consisuntly applied during the periods invohcd, except as may be noted therein.

(f) Akence of Certain Changes. Except as disclosed in the Reports filed prior to the date hereof,

! or as expressly contemplated by this Agreement or as exptc551y contemplated by the DQB, Inc,1997 Irive l . Year Plan, a copy of which has been provided to, and accepted by, Parent (the " Company fludget") or I the Allegheny Power l'inal Operating, Cash and Capital Iludget for Year 1997 and Forec6st Years 1998 through 2001, a copy of w hich has been pmvided to, and accepted by, the Company (the 7 Parent Budget" and, collectivel) with the Company lludget, the "Budgers"), since the Audit Date it and its Subsidiatics have conducted their respective businesses only in, and ha$e not engaged in any material transaction other than according to, the ordinary and usual course of such businesses and there has not been (i) any change in the financial condition, properties, business or results of operations of it and its Subsid; aries or any development or combination of developments a!Tecting it of which its management has knowledge that, individually or in the aggregate,is reasonably likely to have a hinterial Adverse EfTect on it; (ii) any material damage, destruction or other casually loss with resnect to ar.y material asset or property owned, leased or otherwise used by it or any of its Subsidiaries, whether or not covered by insurance; (iii) an>

declaration, setting aside or payment of any dividend or other distribution in respect of its capital stock, except for dividends or other distributions on its capital stock publicly announced prior to the date hereof and except as expressly provided for herein; or (iv) any change by it in accounting principles or material accounting practices or mythods. Since the Audit Date, except as provided for herein or as disclosed in the Reports filed prior to the date hereof, there has not been any increase in the compensation payable or that could become payable by it or any of its Subsidiaries to officers or Ley employees or any amendment of any of the Compensation and Benefit Plans (as defined in Section 5,1(h)) other than increases or amendments in the ordinary course.

(g) LirIgation and LlabIlirles~ Except as disclosed in the Reports filed prior to the date hereof, there are no (1) civil, criminal or administrative actions, suits, claims, hearings, investigations or proceedings pending or, to the knowledge of its executive oflicers, threatened against it or any of its AITillates or (ii) obligations or liabilities, wh_ ether or not accrued, contingent or otherwise and whether or not required to be disclosed. including those relating to matters iraciting any Environmental Law (as defined in Section 5.ItL)) or any other facts or circamstances of which its executive oflicers have _

knowledge that could result in any claims againsi, or obligations or liabilities of, it or any of its Afliliates, that, individuall) or in the aggregate, arc reasonably likely to have a hinterial Adverse EfTect on it or prevent or materially buiden or materially impair the ability of it to consummate the transactions contemplated by this Agreement and the Stock Option Agreement.

(h) Employer Beneprt

-(i) With the exception of documents as to which Parent is bound by a confidentiality agreement (w hich pertain to arrangements w hich are not, individually or in the aggregate, material),

a cop > _ of each bonus, deferred compensation, pension, retirement, profit sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock option, employment, termination, sescrance, compensation, medical, health or other plan, agreement, policy or arrange-ment that covers employees, directors, former employees or former directors of Parent, the Company or their respective Subsidiaries (its "Compensarmn and Benef r Plans") and any trust agreement or insuranec contract forming a part of such Compensation and Benefit Plans has been made available to the other party prior to the date hereof and each such Corrpensation anj Denefit Plan is listed in Section 5.l(h) of the applicable Disclosure Letter, Any " change of control" or similar provisions in A9

the Comper en ard tieneht Plans are specihcally identified in Section 5.l(h) of the applicable Disclosure thr.

(ii) All Compensation and llenclit Plans are in substantial compliance with all applicable law, including the Code and the Employec Retirement income Security Act of 1974, as amended

("ERISJ"). Each Compensation and licnclit Plan that is an "cmployce pension benefit plan",

within the meaning of Section 3(2) of ERISA (a "Trns/on Plan") and that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the internal Revenue Service (the "lRS") for "TRA" (as defined in Rev. Proc. 93 39), or the remedial amendment period for such Pension Plan has not yet espired, and it is not aware of any circumstances likely to result in revocation of any such favorable determination letter, There is no pending or, to the hnowledge of its executive ollicers, threatened material litigation relating to the Compensation and lienefit Plans. Neither it nor any of ;ti Subsidiaries has engaged in a transaction with respect to any Compensation and tienef t Plan that, assuming the taxable period of such transaction expired an of the date bercof, would be reasonably expected to subject it or any of its Subsidiari-s to a material tax or penalty impmed by either Section 497$ of the Code or Ecction 502(i) of LRISA.

(iii) As of the date hereof, no liability under Subtitle C or D of Title IV of ERISA hus ken or is expected to be incurred by it or any of its Subsidiaries with respect to any ongoing, froren or l terminated " single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by it or any of its Subsidiaries, or the single employer plan (an "ER/SA Af/// late Plan") of any ern.ty which is treated as a single employer with it or any of its Subsidiaries under Section 414 of the Code (an "ERISA Affiliair"). It and its Subsidiaries have not incurred and do not czpect to incur any withdrawal liability with respect to any "multiemployer plan", within the meaning of Section 400l(a)(3) of ERISA. under Subtitic E of Title IV of ERISA (including withdrawalliability as a result of actions of ERISA Alliliates). No notice of a " reportable event", within the meaning of Section 4043 of ERISA, for which the 30-day reporting requirement has not been waived, has been required to be filed for any Pension Plan or ERISA Afliliate Plan within the 12 month period ending on the date hereof or will be required to be filed in connection with the transaction contemplated by this Agreement and the Stock Option Agreement.

(iv) All contributions required to be made under the terms of any Compensation and llenefit Plan as of the date hereof have been timely made, Neither any Pension Plan not any ERISA Affiliate Plan has an " accumulated funding deficiency" (whether or not uaived) within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither it nor its Subsidiaries has provided, or is required to provide, security to any Pension Plan or to any ERISA Afliliate Plan pursuant to Section 401(a)(29) of the Code, (v) Under each Pension Plan which is a single-employer plan and ERISA Afliliate Plan, as of the last day of the most recent plan year ended prior to the dait hereof for which an actuarial valuation has been completed, the actuarially deterrrin:d present value of all " benefit liabilitics",

within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the Pension Plan's or ERISA Afliliate Plan's most recent actuarial valuatiin), did not exceed the tlyen current value of the assets of such Pension Plan or ERISA

-Aflitiate Plan, and there has been no material change in the financial condition of such Pension Plan ainee the last day of such most recent plan year, The potential withdrawal liability of it and its Subsidiaries and ERISA Afliliates under each multiemployer plan to which each such entity contributes or had an obligation to contribute, determined as if a " complete withdrawal" (within the meaning of Section 4203 of ERISA) has occurred as of the date hereof, would not reasonably be expected to have a Material Adverse Effcet on it.

(vi) Neither it nor its Subsidiaries have any obligations for retirre health and life benehts under any Compensation and Benefit Plan. It or its Subsidiaries may amend or terminate any such plan under the terms of such plan at any time without incurring any mate *ialliabili:y thereunder.

A 10 l

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- ,- -.- ~w w - e r-e--m-r----,r--

(vii) The consummation of the Merger und the other transactions wntemplated by this Agreernent or the Stod Option Aprecruent would not, directly or indirectly (including as a result of any Compensation and tienefit Plans providing for sescrance as a result of termination of employment within a specified time period folicwing a change in control of the Company)

(s) entitle any employees of it or its Subsidiaries to severance pay, (y) accelerate the time of payment or vesting or trigger any payment of compensation or benehts under, increase the amount payable or trigger any other material obligation pursuant to, any of the Compensation or llenclit Plans or (z) result in any bre ich or violation of, or a default under, any of the Compensation and tienefit Plans.

(viii) AU Compensation and Itenclit Plans covering current or former non U.S. employees or former employees of it and its Subsidiaries comply in all material respects with applicable local law.

it and its Subsidiaries have no material unQnded liabilities, as determined under local funding requir:ments, with respect to any Pension Plan that covers such non U.S. employect (i) Compliamr with laws! Permits. Except as $ct forth in the Iteports filed prior to the date hereof, the businesses of each of it and its Subsidiaries have'not been, and are not being, conducted in violatisn of any law, ordinance, regulation, judgment, order, decree, arbitration award, license or permit of

^ any Governmental Entity (each a " Law" and collectively. " Laws"), except for violations or possible l

violatiorit that, individually or in the aggregate, are not reasonably likely to have a Material Adverse -

! EITect on it or prevent or materially hurden or materially impair its ability to consummate the transactions contemplated by this Agreement and the Stock Option Agreement. Except as set forth in the Reports filed prior to the date hercef no investigation or review by any Governmental Entity with respect to it or any M its Subsidiaries is pendmg or, to the knowledge of its executive officers, threatened, nor has any Governmental Entity indicated an intention to conduct the same, except for those the outcome of which are not,indiviooally or in the aggregate, reasonably likely to have a Material Adverse EITect on it or prevent or materially burden or matcrially impair the ability of it to consummate the transactions contempla.ed by this Agreement and the Stock Option Agreement. To the knowledge of its executive otheers, no material change is required in its or any of its Subsidiaries' processes, properties or procedures

!h connection with nny such Laws, and it has not received any notice or communication of any material noncompliance with any such Laws that has not been cured as of the date hereof. Each of it and its Subsidiaries has all permits, licenses, trademarks, service marks, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals (collectively, " Permits") necessary to conduct its business as presently conducted except those the absence of which are not, individually or in the aggregate, reasonably likely to have a Material Adverse EfTect on it or prevent or materially burden or materially impair its ability to consummate the Merger and the other transactions contemplated by this Agreement and the Stock Option Agreement.

(j) Takeover Statutes. The lioard of Directors of the Company has taken or will take all appropriate and necessary action such that each of PliCL ( 2551 et seq. and Article Vil of the Company's charter will not hase any clicet on the Merger or the transactions contemplated by this

, Agreement or the Stock Option Agreement. No other " fair priec," " moratorium," "enntrol share acquisition" or other similar anti-takeover statute or regulation, including, without limitation, PilCL {

2541 et irq. (each, a "Talrmer Staturc") or any applicable anti takeover provision in the Companyi articles of incorporation and by laws is, or at the EfTcetive Tirne will be, applicable to the Company, the Shares, the Merger or the other transactions conten:rlated by this Agreement or the Stock Option Agreement.

(k) EnvironmentalMatters. Except as disclosed in the Reports f led prior to the date hereaf, and except for such matters that, individually or in the aggregate, are not reasonably likcly to have a Material

~

Adverse EITect on it; (i) it and its Subsidiaries have complied with all applicable Environmental Laws; (ii) the properties currently owned or operated by it (including soils, grour.dwater, surface water, buildings or other structures) are not contaminated with any llazardous Material; (iii) the properties formerly owned or operated by it or any of its Subsidiaries were not contaminated with any llazardous Material uuring the period of ownership or operation by it or any of its Subsidiatics; (iv) neither it not its A ll

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a_ _ _ . _ _ _ _ _ _ _ _ _ _

Subsidiaries are subject to liability for any liarardous hinterial disposal or contamination or, any third party property; (v) neither it nor any Subsidiary has,been associated with any release or threat of release of any liarardous hiaterial; (vi) neither it nor any Subsidiary has received any notice, demand, letter, claim or requcst for information alleging that it or any of its Subsidiaries inny be in violation of or liable under any 1:nvironmental Law; (vii) neither it nor any ofits Subsidiaries is subject to any orders, decrees, injunctions or other arrangements with any GovNmental Entity or is subject to any indemnity or other agreement with any third party relating to llanility under any Environmental Law or relating to any llazmdous Material; and (viii) there are no circumstances or conditions involving it or any of its Subsidiaries that could reasonably be expected to resuh in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property ofit pursuant to any Enviror, mental Law, As used herein, the term " Environmental Law" shall mean any local, state or federal statute, rule, ripulation, order, consent decree, agreement with any Governmental Entity, common law standard of conduct, directive or ordinance pertaining to: ( A) the protection of health, safety or the indoor or outdoor environment; (II) the use, development and control of land; (C) the conservation, management or use of natural resources and wildlife; (D) the protection or use of surface water and ground water; (E) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, release, threatened release, abatement, removal, remediation, or handling of, or exposure to, any liarardous Material or waste (including, without limitation, ash, coal residues and radioactive wastes and contaminated inaterials); or (F) pollution (including any release or threat of release to air, land, surface watcr and ground water); and includes without limitation, the following federal statutes (and their implementing regulations and the analogous state statutes and regulations): the Comprehensive Environ-mental Renwnse, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986,42 U.S.C. i 9601 ciscq.; the Solid Waste Disposal Act, as amended by the Resource Coriservation and Recovery let of IrM6, as amended by the llazardous and Solid Waste Amendments of 1984,42 U.S.C. 6 6901 rt seq.; the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977, as amended 33 U.S.C. $ 1251 et seq.; the Toxic Substaraes Control Act of 1976, as amended, l$ U.S.C. { 2601 ci seq.; the Emergency Planning and Community Right to Know Act of 1986,42 U.S.C. } 11001 et seq.; the Clean Air Act of 1966, as amended by the Clean Air Act Amendments of 1990,42 U.S.C. { 7401 et scq.; the Occupational Safety and 11ealth Act of 1970, as amended,29 U.S.C. { 651 et seq.; the Rivers and liarbors Act of 1899, as amended,33 U.S.C. Q 40) et seq; the Endangered Spxies Act of 1973, as amended,16 U.S.C. I 1531 et seq.; the Atomic Energy Act, as amended,42 U.S.C. ( 2014 et seq.; the Occupational Safety and llealth Act of 1970, as amended 29 U.S.C. 6 651 er seq.; and the Safe Drinking Water Act of 1974, as amended,42 U.S.C, { 300(f) rt seg.

As used herein, the term "//a: ardour Morerial" shall mean any substance, chemical, compound, product, solid, gas, liquid, waste, by product, pollutact, contaminant, or material which is hazardous or to. sic, and includes without limitation, asbestos or any substance containing asbestos, polycnlorinated biphenyls, radioactive m terials, petroleum (including crude oil or any fraction thereof), and any hazardous cr toxic waste, material, or substance regulated under any Environmental Law.

(1) Accounting and Tax M.mers. As of the date hereof, neither it nor any ofits Afliliates has taken or agreed to take any action, nor do its executive officers have any knowledge of any fa :t or circumstance, that uould prevent Parent from accounting for the business combination to be effected by the Merger a< a

" pooling of-interests" or present the Merger and the other transactions contempiated by this Agreement 4.

from qualifying as a "rcorganization" witi.in the meaning of Section 368(a) of the Code.

(m) Tarcs Except for such matters that, individually or in the aggregate, will not have a Material Adverse EfTect on it: (i) it and each of its Suksidiaries (as approprirte) (x) have prepared in good faith and duly and timely filed Oaling into account any applicable extensions) all Tax Returns (as defmed below) that they were requited to file (whether separately or on a combined or consolidated basis) and all such Tas Returns are complete and accurate in all material respects; (y) have timely paid in full all Taxes (as dehned below) they were or are required to pay and duly and timely withheld and paid over to the appropriate recipient all Tases that they were or are obligated to withhold from amounts paid or A 12

- =

[

owing to an) cmplo)ce, creditor of third party, and (t) huic not waised or agreed to w aine an) statute of limitations with respect to Taxes or agreed to any extension of time with respect to the assessment or collection of any ' lax (unican such waiver or egtcnsion is not currently eficctitc); (ii) no audits, examinations, investigations, asst ants or proposed assessmerits of deficiencies, refund claims or other proccedings relating to the Taxes on it or any ofits Subsidiaries are pending or, to the knowledge of any of its executige olliccrs, threatened; (iii) there are t.ot, to the knowleds of its executive olliccrs, unresolved actual claims concerning its or any of its Subsidiaries' Tax liability; (iv) all Taxes due with respect to completed and settled examintalons or concluded litigation relating to it or any of its Subsidiaries have been timely paid in full; (v) it has made available to the other party true, correct and complete copics of all United States federal income Tax lleturns (incitding all consolidated Tax iteturns) filed by it or any of its Subsidiaries with respect to the taxable periods ending on or after December 31,1992, together with true, correct and complete copies et any audit or other examination reports and any notices or proposed notices of deficiency relating to such Tax Returns; (vi) neither it nor any of its Subsidiaries has t ny liability with respect to necrued but unpaid Taxes (whether or not assessed or shown as due on any

• lax Return) in excess of the reserves therefor reflected in the financial statements included in the most recently filed Reports (as adjusted for any time clapsed since the date of such Reports in accordance with the past customary practice of it and its Subsidiatics); (vil) no liens or other security interests have been imposed on any of its assets or any assets of any of its Subsidiaries in connection with any failure (or alleged failure) to pay any Tax: (viii) neither it nor any of its Sulwidiaries is a party to any hx allocation or sharing agecement,is or has ueen a member of an affiliated group filing a consolidated or combined Tax Return (other than a group of which it or one of its Sub>idiaries is or was the common parent) or other*isc has any liability for Taxes other than its Taxes or Taxes of one of its Subsidiatics; (ix) neither i; not any ofits Subsidiatics has filed a consent under Section 341(f) of the Code; or has made or is a party to any agreement under which it is or may become obligated to make any payments that will be nondeductible under Section 2800 of the Code (assummg it cannot be established that any such payments are " reasonable compensation" within the meaning of Section 2ROG(ll)(4) of the Code);

(x) it and cach ef its Subsidiaries has complied (and until the Ellective Time will comply) in all material respects with the provisions of the Code relating to the payment and withholding of Taxes, including without limitation the withholding and reporting requirements under Sections 1441 through 1464,3401 throup 3406, and 6041 and 6049 of the Code, as well as similar provisions under any other laws; (xi) the statute oflimitations for the assessment of all Taxes has expired for all applicable Tax Returns ofit and each of its Subsidiaries for taxable years ending on or before the date three years before the date of this Agreement; ( Ali) no power of attorney currently in force has been granted by it or any olits Subsidiaries concern:ng any Tat matter; (xiii) no property ofit or any ofits Subsidiaries is pronerty that it or any such Subsidiary or any party to this transaction is or will be required to treat as being owned by another person pursuant to the provisions of Section 16S(f)(8) of the Code (as in efTect prior to its amendment by the Tax Reform Act of 19b6) or is tavexempt use property within the meaning of Section 168 of the Code:

(xiv) neither it not any of its Subsidiaries is required to include in income any adjustment pursuant to Section 48t (a) of the Code by reason of a voluntary change in accounting method initiated by it or an> of its Subsidiatics, and to the best of the knowledge of its exceutive ollicers, the IRS has not proposed any such adjustment or change in accounting method; (xv) it and its Subsidiaries have or had substantial authority (within the meaning of Section 6661 of the Code for Tax Returns filed on or before December 31,1990, and within the meaning of Section 6662 of the Code for Tax Returns filed after December 31,1990) for all transactions that could give rise to an understatement of federal income tax (within the meaning of Section 6661 of the Code, for Tax Returns filed on or before December 31,1990, and within the meaning of Section 6662 of the Code, for Tax Returns filed after December 31,1990);

. (xvi) as of December 31,1995,it and its Subsidiaries had net operating loss carryovers available to oliset futurt income as disclosed in the relevant Disclosurc Lettcr; (xvii) such Disclosure Letter discloses the amount of and year of expiration of each company's net operating loss carrynvers; (xviii) it and each ofits Subsidiaries had tax credit carryovers available to offset future tax liability as disclosed in the relevant Disclosure Letter; (xix) such Disclosurc Letter discloses the emount and year of expiration of each company's tax credit carryovers; (xx) no election under Section 338 of the Code (or any predecessor provision) has been made by or with respect to it or any ofits Subsidiaries or any of their respective assets A 13

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within the meaning of Section 279(b) of the Coder an engaged in any intercompany transactions within the meaningas of Treasury R whichTime, Effective any inconw or pain will remain unrecognired as of the o the close of the l

" Tarn" and "TaraNc") includes all federal, state, local and fo

, profits, franchise, gross receipts, environmental, customs duty, capital stock, severances, stamp, ,

t other taxes, duties or assenments of any nature wha additions imposed with respect to such amounts and any interest in respec

' additions, and (ih the term " Tax Return" indudes all returns ons, and reports (i declarations, disclosures, authority relating to Taxes. schedules, estimates and information oaTax returns) req (n) Labor Manen.

collective bargaining agreement, contract or other agreem '

organization, not, as of the date hereof, is it or any of its Subsidiaries a the f,u proceeding asserting that it or any ofits Subsidiaries 1.as committed an to compel it to bargain with any labor union or labor organization g or, to nor the is there pendin dianute, walkout, work stoppage, slow down ,

es. It has

e. or lockou  ;

i bargaining agreements to w hich it or uny ofits Subsi bound, se In) /nrurance, liability, and sprinkler ed water damage insurance policies m re with reputable insurance carriers, provide full and adequate coverage o the for allins business of it and its Subskharies and their respective properties and asse amount at least equivalent to that carried by persons engaged in similar busines same or similar perils or hazards, except for any such failures to maintain insuran individually or in the aggregate, are not reasonably likelyonto have a Material Adv it. Neither or termination w it nor any ofits Subsidiaries hns received any notice of cancellation materialpolicies.

enforceabk insurtnce policy thereof All material insurancerespect policies to any of it and its Sub (p) inscHectualProperty.

t

__ (1) It and/or each of its Subsidiaries owns, or is licensed or otherwise posse legally enforceable rights to use, all patents, trademarks, trade names, sen ,

any applications thercfor, technology, know hew, computer software programs or a tensible or intangible proprietary information or .nsterials that ,

are currently used (or respect to trademarks, tradenames and service marks, have been used n its and its within the 14 fac yea in the aggregate, are not reasonably likely to have a biote .

likely to have a blaterial Adverse EfTect on it:(ii) Except as disclosed in l

the perbrmance ofits obligationa hereunder,in ,

o er violation palmts, trademarks, service marks, copyrights, trade A 14

information and computer sof tware programs and applications (" Third Parir /ntrllectual Propert> Rights");

(11) no claims with respect to the patents, registered and material unregistered trademarks and service marks, registered copyrights, trade names and any applications therefor, technology, know how, proprietary information and computer software programs and applications owned or used by it or any its Subsidiaries (the "/ntellectual froperty Rights"), any trade secret material to it or its Subsidiatics, or Third Party intellectual Property Rights to the extent arising out of any use, reproduction or distribution of such Third Party Intellectual Property Rights by or through it or any of its Subsidiaries, are currently pending or, to the knowledge of its executise oflicers, are threatened by an) Person; (C) it doa not know of any valid grounds for any bona fide claims (i) to the eflect that the manufacture, sale, licensing or use of any product or service as now used, sold or licenwd or proposed for ut.e, sale or license by it or any of its Subsidiaries infringes on any copyright, patent, trademark, service mark, or trade f.ecret; (ii) against the use or license for use by it or any of its Subsidiaries, of any trademarks, trade names, trade secrets, copyrights, patents, technology, know.how, proprictury information or computer software programs and applications used in the business of it or any of its Subsidiaries as currently conducted or as proposed to be conducted; (iii) challenging the ownership, validity or efTectiveness of any of its Intellectual Property Rights or other trade secret material to it; or (iv) challenging the license or legally enforceable right to the use of the Third Party intellectual Rights by it or any ofits Subsidiaries; (D) to t eh knowledge ofits executive ollicers, none of the Intellectual Property Rights has been legally declare,i invalid and all patents, registered trademarks and service marks, and copyrights held by it are valid, caforceable and subsisting; and (E) to the knowledge of its executive ofliccrs, there is no material unauthorized use, infringement or misappropriation of any of its intellectual Property Rights by any third part),

including any employee or former employee of it or any of its Subsidiaries, and no third party has applied to register any intellectual property which may infringe upon it'. Intellectual Property Rights.

(q) BroActs and finders. Neither it nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the Merger or the other transactions contemplated in this Agreement it the Stock Option Agreement except that (i) th: Company has retained Credit Suisse first iloston Corporation as its financial advisor, the arrangements with which have been disclosed in writing to Parent prior to the date hereof and (ii) Parent has employed Merrill Lynch & Co. as its (mancial advisory, the arrangements with which have been disclosed in writing to the Company prior to the date hereof.

(r) Regulation as a Utility.

. (i) Neither it nor any"sebsidiary company" or "atliliate" of it (such terms having the meaning ascribed to such terms in the PUllCA) is subject to regulation as a public utility or public service company (or simila 4:signation) by any state in the United States or any foreign country. Section 5.l(r) of its Disclosure Letter sets forth each " affiliate" and each " subsidiary company" of it which may be deemed to be a "public utility company" or a " holding company" within the meaning of the PUllCA.

(ii) The Company is an exempt holding company under Section 3(a)(1) of the PUllCA.

(iii) Parent is a registered holding company under the PUliCA.

(s) Operations of Nuclear Power Plants. The operations of Ileaver Valley Power Station Unit 1, licaver Valley Power Station Unit 2, and Perry Nuclear Power Plant Unit I (each, a " Nuclear facility" and, collectively, the "Nuc/ car facilities") owned by Duquesne Light Company (together with The Cleveland Electric illuminating Company, Ohio Edison Company, r>cnnsylvania Power Company and A 15 l

______o

The Toledo Edison Company) are and have at all times been conducted in compliance with applicable health, safety, regulato y and other legal requirements, execpt for such failures to comply as are not, individually or in the aggregate, reasonably likely to have a Material Adierse EITect on the Company. To the knowledge of tie Company, the Nuclear Facihtics cach maintain (i) emergency plans designed to respond to an unplanned release therefrorn of radioactive materials into the environment and (h) insurance coverages consistent with industry practice, all of which coverages are listed in Section 5.l(s) of the Company Disclosure Letter. To the knowledge of the Company, plans for the decommis-sioning of each of the Nuclear Facilitics and for the short term storage of spent nuclear fuel conform with the requirements of applicabic law, and such plans have at all times been funded consistently with reasonable projections for such plans.

(t) Apihates of the Company. Section 5.l(t) of the Company Disclosure Lciter sets forth the name and every line of business conducted by each " affiliate" of the Company as that term is defined in Section 2(a)(ll) of the PUllCA, l (u) Owner,thip of Other farty'.i Comm<m St<d. (i) 'Ihe Company does not " beneficially own" ,

(as such term is defined in llule 13d 3 under the Exchange Act) any shares of Parent Common Stock.

(ii) Parent ducs not " beneficially own" (as such term is defined in Rule 13d 3 under the Exchange l Act) any Shares.

A R TI Cl.l: Y i Cmenants 6.l. Interim Opciations. The Company and Parent each covenants and agrees as to itself and its Subsidiaries that, after the date hereof and until the Effective Time (unless Parent or the Company, as the case may be, shall otherwisc approve in writing and except as otherwisc expressly contemplated by this Agreement, the respective Disclosurc Letter, the Stock Option Agreement, the Company Budget sr the Parent lludget, or as required by applicable Law):

(a) the business of it and its Subsidiaries shall be conducted in the ordinary and usual course and, to the extent consistent therewith, it and each of its Subsidiaries shall use its best efTorts to preserve its business organization intact and maintain its existing relations and goodwill with customers, supplicts, creditors, regulators, lessors, employees and business associates; (b) it shall not (i) issue, sell, pledge, dispose of or encumber any capital stock owned by it in any of its Subsidiaries; (ii) amend its articles of incorporation, charter or by laws; (iii) split, combine or reclass;fy its outstanding shares of capital stock; (iv) declare, set aside or pay any dividend payable in cash, stock or t,roperty in respect of any capital stock other than dividends from its direct or indirect wholly owned Subsidiaries and other than (A) in the case of the Company, regular quarterly cash dividends not in excess of 50.34 per Sharc (which amount taay, at the election of the Company, be increased by not more than 6.5% per year, beginning in the 1997 fiscal year of the Company) and regular quarterly cash dividends on the preferred and preference stock of its Subsidiaries and (B) in the case of Parent, regular quarterly cash dividends not in excess of $0.43 per share of Parent Common Stock (w hich amount may, at the election of Parent, be increased by not more than 6.5% per year, beginning in the 1997 fiscal year of t'arent) and regular quarterly , ash dividends on the preferred shares of subsidiaries of Parent; or (v) repurchase, redeem or otherwise acquire (except for (A) mandatory sinking fund obligations existing on the date hereof and (B) redemptions, purchases, acquisitions or issuances required by the respective terms of any Stock Plans,in the case of the Company, or Parent Stock Plans,in the case of Parent, or any dividend reinvestment plans as in effect on the date hereofin the ordinary course of the operation of such plans) or permit any ofits Subsidiaries to rutchase or otherwise acquire, any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock:

A 16

(c) neither it nor any of its Subsidiaries shall (i) issuc, sell. pledge, distee of or encumber any abarcs of, or accurities conver,ibt into or exchangeable or exercisable for, or options, warrants, calls, commitments or richts of any kind to acquire, any , shares of hs capital stock of any class or any other property or assets (other than (x) in the case of the Company, Shares issuabic pursuant to options outstanding on the date hereof under the Stock Plans or upon conversion of the Preferred Shares and additional options or rights to acquire Shares required by the terms of any Stock Plan as in effect on the date hereof in the ordinary course of the operation of such Stock Plan, (y) in the case of the Parent, shares of Parent Common Stock issuable pursuant to options outstanding under the Parent Stock Plans and additional options or rights to acquire Parent Snares required by the terms of any Parent Stock Plan as in elTect on the date hereof in the ordinary course of the operation of such Parent Stock Plan, and (r) issuances of securities in connection with grants or awards of stock based compensation made in accordance with Section 6.l(d) hereof); (ii) other than in the ordinary and usual course of business, and except for long term indebtedness incurred in connection with the refinancing of cristing indebtedness either at its maturity or at a lower cost of funds, transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of or encumber any other property or assets (including capital stock of any of its Subsidiaries) or incur or modify an) material indebtedness or other liability; (iii) make any commitments for, make or authorire any capital expenditures other than (x) capital expenditures not in excess of $25,000,000 in the appregate incuned in connection with the repair or r placement of facilities destroyed or damagcd duc to casuahy or accident (whether or not covered by ins arance), (y) as required by Law, or (z) in amounts less than $5,000.000 individually and $15,000,000 it the aggregate, prurided, howercr. that if cither party proposes to make any capital expenditure which requires the written consent of the other party pursuant to this Section 6.1, such other party shall not unreasonably withhold such consent; or (iv) make any acquisition of, or investment in, assets or stoc( af any other Person or entity in excess of $15,000,000 in the eggregate; (d) neither it nor any of its Subsidiaries shall terminate, establish, adopt, enter into, make any new grants or awards of stock based compensation or other benefits under, amend or otherwise modify any Compensation and lienefit Plans or increase the salary, wage, bonus or other compensation of any directors, officers or employees except (i) for grants or awards to directors, otlicers and employees of it or its Subsidiaries under existing Compensation and lienefit Plans in such amounts and on such terms as are consistent with past practice, (ii) in the normal and usual course of busincts (which shallinclude normal periodic performance review $ and related compensation and benefit increases, annual reestablishment of Compensation and lienefit Plans and the provision of individual _ Compensation and llenclit_ Plans contistent with past practice for newly hired or appointed officers and employees and the adoption cf Compensatiori and tienefit Plans for employees of new Subsidiaries in amounts and on terms consistent with past practice) or (iii) for actions necesury to satisfy existing contractual obligations under Compensation and lienefit Plans existing as of the date hereof; (c) caeh of the Company and Parent shall consult with the other prior to settling or compromising, or permitting any ofits Subsidiaries to s-itle or compromise, any material claim or litigation, and neither

. it not any of its Subsidiaries shall, except in the ordinary and usual course of business, modify, amend or terminate any of its material Contracts or waive, release or assign any material rights or claims:

- (f) neither it nor any ofits Subsidiaries shall make any Tax clection or permit any insurance policy naming it as a beneficiary or loss payable payce to be cancelled or terminated except in the ordinary and usual course of business; (g) neither it not any of its Subsidiaries shall take any action or orr.it to take any actien that would prevent the Merger from qualifying for " pooling of interests" accounting treatment or as a "rcorganira-tion" within the meaning of Section 368(a) of the Code or that would cause any ofits representations and warranties herein to become untrue in any material respect; and

- (h)- neither it nor any of its Subsidiaries will authorize or enter into an agreement to do any of the foregoir:g.

A 17

I l

6.2. Arqubition Proposah. (a) Escept as contemplated by the Company liudget or the Parent Iludget and escept as expressly contemplated by this Agreement, neither the Comp, ny nor Parent sht.ll, not shall it permit any of its Subsidiaries to, nor shall it' authorite or permit any of its officers, directors or employees or any investment banker, financial advisor, attorney, accountant, agent or other representathe retained by it or any of its Subsidiaries to, directly or indirectly through another person, (i) solicit, initiate or encourage (including by way of furnishing information), or take any other action designed to facilitate, directly or indirectly, any inquiries or the making of any proposal with respect to a merger, reorganitation, share eschange, consolidation or similar transaction invohing, or, other than in the ordinary course of business.

- any purchase of all or any significant portion of assets or any equity securities, of the Company or Parent, as applicable, or any of its Subsidiaries (any such proposal or offer being hereinafter referred to as an "Arquhitton Proposal"and any such transaction or purchase being hereinafter referred to as an "Arquhirion Transacr/on") or (ii) participate in any discussions or negotiations relating to any Acquisition Proposal or Acquisition Transaction; provided, howcrer, that if, at any time prior to the obtaining of the Parent Requisite Vote, in the case of Parent, or the Company Requisite Vote, in the case of the Company, the board of directors of the Company or Parent, as applicable, determines in good faith, based on the advice of outside counsel, that it is neecssary to do so to avoid a breach of itr> duties under state corporate Law applicable to the conduct of directors, the Company or Parent, as applicable, may, in response to an Acquisition Propos d w hich was not solicited by it or which did not otherwise result from a breach of this Section 6.2(a), and subject to such party's compliance with Section 6.2(c), ( A) furnish information with rerpect to it and its Subsidiaries to any person pursuant to a customary confidentiality agreement (as deterrnined by the party receiving such Acquisition Proposal after consultation with its outside coun .c!), the benefitr of the terms of which, if more favorable to the other party to such confidentiality agreement than those in place with the other party hereto, shall be estended to the other party hereto, and (11) participate in negotiations regarding such Acquisition Proposal, (b) Execpt as expressly permitted by this Section 6.2, neither the board of directors of the Company or Parent, as applicable, nor any committee thereof shall (i) withdraw or modify, or propose publicly to withdraw or moefy,in a manner adverse to the other party hereto, the approval or recommendation by such board of directors s r such committee of the Merger or the adoptbn and approval of the mattert, to be considered at the Stockholders Meeting (as dc5 ined in Section 6A),'in the case of the Company, and the Parent Stockholders Meeting (as dermed in Section 6.4),in the case of Parent, (ii) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal other than the Merger, or (Hi) cause or permit the Company or Parent, as applicable, to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement or understanding (each, an "Arquisition Agrrrment") related to any Acquisition Proposal. Notwithstanding the foregoing,in the event that prior to the obtaining of the Company Requisite Vote,in the case of the Company, or the Parent Requisite Vote,in the case of Parent, there exists a Superior Proposal (as defined he'ow) and the board of ditc: tors of the Company or Parent, as applicable, determines that there is not a substantial protability that the Company Requisite Vote or the Parent Requisite Vote, as app!! cable, will be obtained due to the existence of such Superic>r Proposal, the board of directors of the Company or Parent, as applicable, may, subject to this and the following sentences, withdraw or modify its approval or recommendation of the Merger or the approval of the matters to be considered at the Stockholders Meeting,in the case of the Company, and the Parent Stockholders Meeting,in the case of Parent, the board of directors of the Company or Parent, as applicable, may (subject to this and the following sentences of this Section 6.2(h)) approve or recommend such Superior Proposal or terminate this Agreement (and, subject to Article Vill hereof, concurrently with such termination, if it so chooses, cause the Company or Parent, as ,

applicable, to enter into an Acquisition Agreement with respect to such Superior Proposal), but only if (i) the party seeking to terminate is not in material breach of any of the terms of this Agreement, (ii) the board of directors of the party seeking to terminate authorizes the Company or Parent, as applicable, to enter into a binding written Acquisition Agreement concerning an Acquisition Transaction that constitutes a Superior Proposal and the party seeking to terminate notihes the other pany in writing that it intends to enter into such an Acquisition Agreement,- attaching tuch Acquisition Agreement to such notice and specifying any raaterial terms and condNons not included in the Acquisition Agreement and further identifying the party making the Superior Proposal, (iii) the other party does not make, within hfteen buuness days of receipt of written A 18

- - =

- - ==

notibcation from the pan > seeking to termmate of such pany's intention to enter into a binding Acquisition Agreement for a Superior Proposal, an offer that the board of directors of such party believes,in good faith after consultation with its financial adiisors, is at least as fevorable, from a f nancial point of view, to its

stockholders as the Superior Proposal, and (iv) the parti seeking to terminate prior to such termination pays l to the other party in immediately available funds any fees required to be paid parsuant to Secti n 8.5. The Company and Parent each agrees (i) that it will not enter into a bindmg Acquisition Agreement referred to in clause (ii) above until at least the sixteenth business day after it has provided the notice to Patent or the Company, as applicable, required thereby and (ii) to notify Parent or the Company, promptly,if its intention to enter into the written Acquisition Agreement referred to in its notification shall chanFe at any tirne after giving su6 notification. For purposes of this Agreement, a " Superior Proposal" means in respect of the Conynny or Patent, as applicabic, any proposal made by a third puty to acquire, directly or indirectly, for ceasideration consisting of cash and/or $ccurities, more than $0% of the equity securities of the Company or

. Parent, as the case may be, entitled to vote generally in the election of directors or all or substantially all the assets of the Company or Parent, as the case may be, and otherwise on terms which the board of directors of such party determines in its good faith judgment (x) (based on the written opinion of a financial advisor of nationally recognited reputation (which opinion shall be provided to the other party hereto)) to be more favorable froin a financial point of view to its stockholders after consideration of the hierter and the transactions contemplated hereby and for which financing, to the extent required,is then committed, (y) to be more favorable to such party after consideration of the hierger and the transactions contemplats hereby af ter taking into account any additional constituancies (including stockholders) and other pertinent factors peimitted under the laws of the Commonwealth of Pennsylvania or the laws of the State of blaryland, as applicable, and (r) to constitute a transaction that is reasonably likely to be consummated on the terms set forth, taking into account all legal, firuncial, regulatory and other aspects of the proposal.

(c) in addition to the obligations of the parties set forth in paragraphs (a) and (b) of this Section 6.2, any party that has received an Acquisition Propossl shallimmediately advise the other party hereto orally and in writing of such Acquisition Proposal, any request for information. the material terms and conditions of such request or Acquisition Proposal and the identity of the Person making such reques' or Acquisition Proposal.

Any party that has received an Acquisition Proposal will keep the other party hereto reasonnoly inforiaed of the status and details (iaciuding amendments or proposed amendments) of any such Acquisition Proposal.

(d) Nothing contained herein shall prohibit a party from taking and disclosing to its stockholders a position contemplated by Rule 14e 2(a) under the Exchange Act with respect to an Acquisition Proposal by means of a tender or exchange ofter, 6.3, InformatIon Supplicd. The Company and Parent each agrees, as to itself and its Subsidiaries, that none of the information supplied or to be supplied by it or its Subsidiaries for inclusion or incorporation by reference in (i) the Registration Statement on Form S 4 to be filed with the SEC by Parent in connection with the issuance of shares of Parent Common Stock in the hierger (including the joint proAy statement and prospectus (the "frosprous/Prov Statement") con'titutinF u part thereof) (the "S4 Registration Statr-ment") will, at the time the S 4 Registration Statement becomet. effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein,in the light of the circumstances undet which they were raade, not mideading, and (ii) the Prospectus / Proxy Statement and any amendment or supplement thereto will, at the date of mailing to stockholders and at the times of the Stockholders hiceting and the Parent Stockholders hiccang. contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or neceuary in order to make the statements therein, in the light of the circumstances under whah they were made, not misicading.

6 4. Stockholders Alectings. The Company will take,in accordance with applicable law and its articles I

of incorporation and by laws, all action necessary to convene a taceting of holdets of Shares (the

" Stockholders Alecting") as promptly as practicable after the S-4 Registration Statement is declared effective to consider and vote upon the opproval of this Agreement. Parent will take,in accordance with applicable law l and.its char 1er and by laws, all action necessary to convene a meeting of holders of Parent Common Stock

, (the "farent Stockholders Alecting") as promptly as practicable after the S-4 Registration Statement is A 19 I

i

declared effectise to consider and sote upon the approval of the issuance of Parent Common Stock in the hierger. Subject to obligations under applicable Law, each of the Company's and Parent's board of directors shall recommend such approval and shall take all lawfut action to solicit such approval. Notwithstanding the foregoing, Parent may delay the Parent Stockholders hiceting and the Company may delay the Stockholders hiceting by action ofits respective lloard of Directors after written notice of such dela) to the other party if such floard of Directors shall determine that a Person has made a Superior Proposal and there is not a reasonable probability that the Company Requisite Vote,in the case of the Company, or the Parent Requisite Vote,in the case of Parent, will be obtained without such delay; provided, that such Stockholders hiceting or Parent Stockholders hiceting, as the case may be, shall be held at the earliest time at which there is a reasonable probability of obtaining the Company P.cquisite Vote or Parent Requisite Vote, as the case may be.

If a party determines to delay its stockholders meeting pursuant to the prior sentence the other party may (but need not) delay its stockholders meeting. J 6.5. Filinp; other Act/hns/ Not(fication. (a) The Company and Parent shall promptly prepare and file with the SEC the Prospectus / Proxy Statement, and Parent shall prepare and file with the SEC the S-4 Registration Statement as promptly as practicable. The Company and Parent each shall use its reasonable efTorts to have the S 4 Registration Statement declared efTective under the Securities Act as promptly as practicable after such filing, and, unless the Parent Stockholders hiceting or Stockholdera hiceting has been .

delayed pursuant to Section 6.4, promptly thereafter mail the Prospectus / Prosy Stateme.it to the respective stockholders of each of the Company and Parent, if the mailing is delayed it shall be completed as promptly as is practicable after the parties have determined to hold their respective stockholders meetings. Parent shall also use its best efforts to obtain prior to the effective date of the S 4 Registration Statement all necessary state securities law or " blue sky" permits and approvals required in connection with the hierger and to consummate the other transactions contemplated by this AFreement and the Stock Option Agreement.

(b) The Company ar'd Parent each shall use its best reasonable efforts to cause to be delivered to the other party and its directors a letter of its independent auditors, dated (i) the date on which the S-4 Registration Statement shall become effective and (ii) the Closing Date, and addressed to the other party aad its directors, in form and substance customary for "cornfort" letters delivered by independent public necountants in connection with registration statements similar to the S 4 Registration Statement.

(c) The Company and Parent naall cooperate with each other and use (and shall cause their respective Subsidiaries to use) all commercially reasonable clTorts (i) to take or cause to be taken all actions, and do or cause to be donc all things, necessary, poper or udvisable under this Agreement, the Stock Option Agreement and applicable Laws to consummate and make effective the hierger and the other transactions contemplated by this Agreement and the Stock Option Agreement as soon as prarticable (including using their respective best efTorts to prepare and file as promptly as practicable all documentation to effect all necessary applications, notices, petitions, filings and other documents) and (ii) to obtain as promptly as practicable all permits, consents, approvals and authoritations (including, without limitation, the expiration or earlier termination of an) t,pplicable waiting period under the llSR Act) necessary or advisable to be obtained from any third party and/or any Governmental Entity in order to consummate the hierger or any of the other transactions contemplated by this Agreement and the Stock Option Agreement. Subject to applicable Laws relating to the exchangt of information, Parent shall have the right to review and approve in advance all characterizations of the information relating to Parent and its Subsidiaries, and the Company shall have the right to review ad approve in adsance all characterizations of the information relating to the Company and its Subsidimes, and each will consult with the other to the extent practicable with respect to all such information,in caeh case that appears in any filing made with, or written materials submitted to, any third party and/or any Governmental Entity in connection with the hierger and the other transactions contemplated by this Agreement and the Stock Option Agreement. In exerching the foregoing right, each of the Company and Parent shall act reasonably'and as promptly as practicable.

(d) The Company and Parent each shall, upon request by the other, furnish the other with all information concerning itself, its Subsidiaries, directors, oflicers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Prospectus / Proxy Statement, the S 4 Registratipn Statemeni or any other statement, filiag, notice or application made by or on behalf of Parent, the A 20

Company or any of their respective Subsidiaries to an3 third party and/or any Gmernmental Entity in connection with the hierter and the transactions contemplated by this Arreement and the Stock option Agreement.

(c) The Company and Parent each shall keep the other apprised of the status of matters relatini to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notice or other communications received by Parent of the Company, as the case may be, or any of its Subsidiaries, from any third party and/or any Gosernmental Entity with respect to the hierger and the other transactions contemplated by this Agreement and the Stock Option Agreement. The Company and Parent each shall give prompt notice to the other of any change that is reasonably likely to result in a hinterial Adverse Effect on it.

6.6. Tasarlon and Accounting. Subject to Section 6.2, neither Parent nor the Company shall take or cause to be taken any action, w hether before or after the Lilective Time, that would disqualify the hierger as a

" pooling ofinterests" for accounting purposes or as a "rcorganitation" within the meaning of Section 368(a) of the Code.

63. Accres. Upon reasonable notice, and escept as may otherwise be required by applicable Law, the Company and Parent each shall (and shall cause its Subsidiaries to) atTord the other's ollicers, employees, counsel, accountants and other authorized representatives ("Reprocnia Irn") access. during normal business hours throughout the period prior to the Lficctive Time, to its properties, books, contracts and records and, during such period, each shall (and shall cause its Subsidiaries to) furnish promptly to the other all information concerning its business, properties and personnel as may reasonably be requested,provided that no investigation pursuant to this Section shall atTect or be deemed to modify any representation or warranty made by the Company Parent or hierter Sub, and provided. further, that the foregoing shall not require the Company or Parent to permit any inspection, or to disclose any information, that in the reasonable judgment of the Company or Parent, as the case may be, would result in the disclosure of any trade sectsts of third parties or violate any of its obligations with respect to confidentiality to third parties if the Company or Parent, as the case may be, shall have used reasonable efTorts to obtain the consent of such third party to such inspection or disclosure All requests for information made pursuant to this Section shall be directed to an executive oflicer of the Company or Parent, as the case may be, or such Person as may be designated by it. All such information shall be governed by the terms of the Confidentiality Agreement, including without limitation all such information disclosed in the Disclosure Letters, and the Company and Parent, and each of their respective Subsidiaries, shall use their respective best reasonable efforts to maintain the confidentiality of all such infermation disclosed in the Disclosure Letters.

6.8. Afsliates. (e) Parent shall deliver to the Company a list of names and addresses of those Persons -

who are,in the opinion of the Parent, as of the time of the Stockholders hiceting," affiliates" of the Company within the meaning of Rule 1,15 under the Securities Act and for the purposes of applicable interpretations regarding _ the pooling of interests me: hod of accounting. The Company shall provide to Parent such information and documents as Parent shall reasonably request for purposes of preparing such list. There shall be added to such list the names and addresses of any other Person subsequently identified as a Person who may be deemed to be such an afliliate of the Company; provided. hewerct, that no such Person identified by ,

Parent shall be added to the list of afliliates of the Company if Parent shall receive from the Company, on or before the date of the Stockholders hiceting, an opinion of counsel reasonably satisfactory to Parent to the etTect that such Person is not an attiliate. The Company shall exercise its ben efforts to deliver or cause to be delivered to Parent, prior to the date of the Stockholders hlecting, from each aflitiate of the Cornpany identified in the foregoing list (as the same may be supplemented as aforesaid), a letter dated as of the Closing Date substantially in the form attached as Exhibit A 1 (the " Affiliates Leuct"), Parent shall not be required to maintain the efTectiveness of the S-4 Registration Statement or any other registration statement under the Securities Act for the purposes of resale of Parent Common Stock by such afliliates received in the hierger and the certificates representing Parent Common Stock received by such alliliates shall bear a customary legend regarding applicable Securities Act restrictions and the provisions of this Section.

A 21

(b) Prior to the date of the Stockholders Meeting, Parent shall dekset to the Company a hst of names and addresses of those Persons who were, in the opinion of the Parem, at the time of the Stockholders Mecting, "aflikates" of Parent for the purpmes of' applicable interpretations reparding the " pooling of.

interests" method of accounting. Parent shall provide to the Company such information and documents as the Company shall reasonably request for purposes cf reviewing such list. There shall be added to such list the names and addrenes of any other Person the Company reasonably identifies (by written not t ee to Paren!

within ten business days after the Company's receipt of such list) as bsing a Person w ho may be deemed to be such an affiliate of Parent: prm ided. how ever, that no such Person identihed tiy the Company shall be added to the list of aflitiates of Parent if the Company shall icccive from Parent, on or before the date of the Stockholders hiceting, an opinion of counsel reasonably satisfactory to the Company to the ellect that such Penon is not an affiliate. Parent shall exercise its best cliorts to deliver or cause to be delivered to the Company, prior to the date of the Stockholders Meeting, from cach of such aflitiates of Parent identilied in the foregoing list (as the same may be supplemented as aforesaid). a letter dated as of the Closing Date substantially in the form attached as Exhibit A 2 (the " Pooling Affdiates Letter"),

(c) If the Merger would otherwise qualify for " pooling of interests" accounting treatment, shares of Parent Common Stock issued to alliliates of the Company in exchange for Shares shall not be transferable until nch time as financial results covering at least 30 days of combined operations of Parent and the Company have been published within the meaning of Section 201.01 of the SEC's Codification of Financial l Iteporting Policies, regardless of whether cach such afliliate has provided the written agreement referred to in this Section 6.8, execpt to the extent permitted by, and in accordance with, SEC Accounting Series Itclease 135 and SEC StafT Accounting Hulkins 65 and 76. Any shares held by any such afliliate shall not be transferabic, regardless of whether such aflitiate has provided the applicable written agreement referred to in this Section 6.8, if such transfer, either individually or in the aggrryate with other transfers by afliliates, would preelude Parent's ability to account for the business combination to be efTected by tbc Merger as a " pooling of interests". The Company shall not regnier the transfer of any Certificate, unless such transfer is made in compliance with the foregoing.  ;

6.9. Stock Eschange Listing and De lhring. Parent shall use its best efTorts to cause the shares of I Parent Common Stock to be issued in the Merger to be approved for listing on the New York Stock Exchange, Inc. (the "N)'SE") subject to official notice of issuance, prior to the Closing Date. The Company shall use its best elTorts to cause the Shares to bc (i) de listed from the NYSE, the Philadelphia Stock Exchange and the Chicago Stock Exchange and (ii) de registered under the Exchange Act as soon as practicable following the EfTective Time.

6.10. Puldirity. The initial press release concerning this Agreement and the transactions contemplated by this Agreement shall be a joint press relcase and thereafter the Company and Parent shall consult with  !

cach other prior to issuing any press releases or otherwise making public announecments with respect to the Merger and the other transactions contemplated by this Agreement and the Stock Option Agreement and prior to making any filings with any third party and/or any Governmciel Entity (including any national' securities exchange with respect thereto, except as may be required by law or by obligations pursuant to any listing agreement with or rules of any national securitics exchange).

6.11. Brnehts.

(a) Stod Option.t (1) At the EITective Time, each Ccmpany Option, w hether vested or unvested, shall be deemed to constitute an option to acqaire, on the same terms and conditions as wecc applicable under such Company Option, the same number of shares of Parent Common Stock as the holder of such Company Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Eflective Time (rounded down to the nearest whole number), at a price per share (rounded up to the nearest whole cent) equal to (y) the aggregate exercise priec for the Shares otherwise purchasable pursaant to such Company Option divided by (z) the number of full shares of Parent Commun Stock deemed purchasable pursuant to such Company Option in accordance with the foregoing; provided, howrver, that in the case of any AC n, , w n .w-. --,,-,,,.,.rry,-w,----..n __.-_..,y,y--,m.m.,mww- -

, ...,w,.. - - , -,~, m_,,,-, -- - - ,-m. m - --. '-.+-% --- e

Compan) Option to which Section 4:2 of thc Code applies, the option prics, the number of shares purchasable pursuant to such option and the terms und conditions of exercise of such option shall be determined in accordance veith the foregoing, subject to such adjustments as are necessary in order to satisfy the requirements of Section 424(a) of the Code. At or prior to the EITective Time, the Company shall make all accessary arrangements with respect to the Stock Plans to permit the assumption of the unexercised Conapany Options by Parent pursuant to this Section.

(ii) Eficctive at the Eficctive Time, Parent shall assume cach Company Option in accordance with the terms of the Stock Plan under which it was issued and the stock option agreement by which it is evidenced. At or prior to the Effective Time, Parent shall take all corporate action necessary to reserve for issuance a sullicient number of shares of Parent Common Stock for delivery upon exercise of Company Options assumed by it in accordance with this Section and, to the extent required under applicable SEC rules, take all corporate actions necessary or appropriate to obtain shareholder approval at a $tockholders' meeting selected by Parent with respect to such Stock Plan to the extent such approvalis required to enabic such Stock Plan to comply with Rule 16b 3 under the Eubange Act. As soon as practicabic after the EITective Time, Parent shall file a registration statement on Form S 3 or Form S4, as the case may be (or any successor form), or on another appropriate form (or shall cause such Company Option to be deemed an option issued pursuant to a Parent Stock Plan for which shares of Parent Common Stock have previously beer, registered pursuant to an appropriate registratio,i form), with respect to the Parent Common Stock subject to such Company Options, und shall _use its best efTorts to maintain the clicctivenest of such registration statements (and maintain the evrrent status of the prospectus or prospectuses contained therein) for so long as such Company Options temain outstanding.

(b) Directors of rurent. From and after the EfTective Time, the board of directon of Parent shall -

consist of 15 directors, immediately prior to the EfTective Time, the Company riball designate $ls of such directon, and Parent shall designate ninc of such directors, and such designated directors shall be the directon of Parent from and after the EITective Time until their successon have been duly clected or appointed and qualified or until their earlict death, resignation or removal in accordance with Parent's charter and bylaws.

(c) O!!ircrs of farent. From and after thw E'Tective Time, the Chairman and Chief Executive Officer of Parent shall bc Alan J, Noia and the President and Chief Operating Olliccr of Parent shall be David D. blarshall. if either such officer is unable or unwilling to serve in such oflice immedirtely after the Effective Time, his successor shall be elected as soon as practicable after the EfTective Time by the dircetors of Parent designated pursuant to Section 6 ll(b), From and after the Effect!ve Time, the individuals appointed by such designated directors shall be the other officers of Parent, and all such officers of Parent shall serve from and after the EfTective Time until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with Parent's charter and by laws.

(d) Parent Board Commitrecs. Prom and after the Eficctive Time, four of the sis directon of Parent designated by the Company pursuant to Section 6.ll(b) shall be the chairman of the following committees of the board of directon of Parent: Nuclear Review; New Ilusiness: Finance; and Employee and Community Relations. From and after the Effective Time, four of the nine directors of Parent designated by Parent pursuant to Section 6.11(b) shall be the chairman of the following committees of the board of directors of Parent: Audit; hianagement Review; Nominating; and Benefits.

(c) Corporate #radquartrrs, From and after the Effective Time, Parent's corporate headquarters shall remain in hiaryland and substantial operations of Parent's Subsidiaries, including the Surviving Corporation, shall remain in the Pittsburgh, Pennsylvania area.

6.12, Openses. Except as provided in this Section 6.12, the Surviving Corporation shall pay all charges and npenses, including those of the Exchange Aycnt,in connection with the transactions contem-plated in Article IV, and Parent shall reimburse the Surviving Corporation for such charps and expenses.

Except as othemise provided in Section 8.5(b), whether or not the hierger is consummated, all costs and A 23

expenses incuned in connection with this. AFreement and the Stock Option Agreement and the Merrer and the other transactions contemplated by this Agreement and the Stock Option Agreement shall be paid by the party incurring such expense, creept that expenses ineu' rred in connection with the filing fee for the fihngs under the llSR Act, the S 4 ltegistration Statement and printing and mailing the Prospectus / Proxy Statement, the S 4 Iteristration Statement, and such other expenses as may be act forth in Section 6.12 of the Parent Disclosure Letter shall be shared equally by Parent and the Company.

6.13. /ndemnllication: Directors' and Officers' Insurance. (a) Prom and after the CITective Time, Parent agrees that it will indemnify and hold harmless each present and former director and ollicer of the Company or any of its Subsidiaries (when acting in wh capacity), determined as of the Efrective Time (the

"/ndemntfied Partles"), against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively " Costs") incurred in connection with any claim, action, suit, proceediag or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or ocentring at or prior to the EITective Time, whethel asserted or claimed prior to, at or after the EITective Time, to the fullest extent that the Company or such Subsidiary is permitted under the law of ita jurisdiction of incorporation and its articles of incorporation and bylaws in elTect on the Jate hereof to indemnify such Person (and Parent shall also advance expenses as incurred to the fullest extent permitted under applicable Law, prov/ded that the Person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such Person is not entitled to indemnification).

(b) Any Indemnified Party wishing to claim indemnification under paragraph (a) of this Section 6.13, upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify Parent thereof,

~

in the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the EITective Time), (i) Parent or the Surviving Corporation shall have the right to assume the defense thereof  ;

and Parent shall not be liable to such indemnified Purtles for any legal expenses of other counsel or any othe: a expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) Parent shall not be liable for any settlement effected without its prior written consent; prorlded, howercr that Parent shall not have any obligation hereunder to any Indemnified Party if and when a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable Law,

-(c) The Surviving C6tpontion shall maintain the Company's existing officers' and directors' liability insurance ("Ddo /nsurance") for a period of six years after ths EfTective Time 50 long as the annual premium therefor is not in excess of 200% of the last annual premium paid prior to the date hereof (the " Current Prrmium"); Prorlded, howcter, that if the existing D&O Insurance expires, is terminated or cancelied during such six year period, the Surviving Corporation will use reasonable efforts to obtain as much D&O Insurance as can be obtained for the remainder of such period for a 14 emium not in excess (on an annualized basis) of 200% of the Current Premium.-

! (d) If the Surviving Corporation or any ofits successors or assigns (i) shall consolidate with or merge l into any other corporation or entity and shall not be the continuing or suniving corpo;ation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then and in each such case proper provisions shall be made so that the successors and assigns of the Suniving Corporation shall assume all of the obligations $ct forth in this Section 6.13.

(c) The provisions of this Section 6.13 are intendcd to be for the benefit of, and shall be enforceable by, each of the Indemnified Parties, their heirs and their representatives.

6.14 Othr? Actions by the Company and Parent.

. (a) Talcover Stature. If any Takeover Statute is or may become applicable to the Merger or the other transactions comemplated by this Agreement or the Stock Option Agreement, each of Parent and the Company and its board of directors shall grant such approvals and take such actions as are necessary so that such transactions may be consummated as promptly as practicable on the terms contemplated by A 24 1

- .,za a 3, -, .- 2 ;;-_- _ _ _._ - . -

-a.,_-_.--,-___,,_-, ,--__- - J

this Agreement or by the Stock Option Artccment, as the case may be, and otherwise act to climinate or minimite the cliccts of such Takeover Statute on such transactions.

(b) thridends. The Company shall coordinate with Parent the declaration, setting of record dates and payment dates of dividends on Shares so that holders of Shares do not receive dividends on both Shares and Parent Common Stock received in the hierrer in respect of any calendar quarter or fail to receive a dividend on either Shares or Parent Common Stock teceived in the hictper in respect of any calendar quarter.

6.15. Parent l'otc. Parent shall vote (or consent with respect to) or canse to bc voted (or a consent to be plven with respect to) any Shares and any shares of common stock of hierrer Sub beneficially owned by it or any ofits Affiliates or with respect to which it or any of its Afliliates has the power (by apreement, prosy or otherwisc) to cause to be voted (or to provide a consent), in favor of the adoption and approval of this Agreenent at any meeting of stockholders of the Company or hierger Sub, respectively, at which this Agreement and the Stock Option Agreement shall be subrnitted for adoti tion and approval and at all adjournments or postnonements thereof (or,if applicable, by any action of stockholders of either the Company or hierger Sub by consent in lieu of a meeting),

6.16. Rarr Mutters. Other than currently pending rate filings, cach of the Company and Parent shall, and shall cause its Subsidiaries to, discuss with each other any changes in its or its Subsidiaries regulated rates

- or charpen (other than pad through fuel rates or chropes), standards of service or accounting from those in effect on the date hereof and consult with the other prior to making any liling (ouny amendment thereto), or cliccting any agreement, commitment arrangement or consent, whether written or oral, formal or informal,

'with respect thereto 6.17, PURCA. Neither the Company nor Parent shall, nor shall the Company or Parent permit any of its Subsidiaries to, take any action that would impair the ability of Parent to obtain the approvals under the PUllCA for the transactions contemplated by th;s Agreement.

6.18. Pennsvi%;.a Restructuring Legislation. The Company and Parent each agrees that it will cause its Pennsylvania utility Subsidiary to file in a timely manner with the Pennsylvania Public Utility Commission

~ a restructuring plan to implement direct access to a competitive market for electric pencration pursuant to the Electricity Generation Customer Choice and Competition Act, 66 Pa. Comm. Stat. p 2?01 et arq. (the

" Pennsylvania Restructuring Legulation").

6.19. Nuclear Matters. (a) At least quarterly prior to the EfTective Time, the Company shall, upon request by Parent, cause its President - Generation Group and its Chief Nuclear Ollicer to attend a meetirp of the Iloard of Directors of Parent and provide Parent's directors with such oral and written information concerning the Nuclear I acilities and the Company's nuclear generation program as such directors and/or the chief fmancial officer of Parent may reasonably request, including but not limited to information relating to safety matt:ts, regulatory matters, refueling plans, o stages, planned and pending capital espenditures and the Company's relatians with co owners of the Nuclear racilities.

(b) Prior to the Effective Time, Parent shall be entitled to designate one person who shall be a director of Parent or shall be a person expert in nuclear matters reasonably acceptable to the Company, to att:nd and 1

-participate (without having any voting rights) in each meeting of the Nuclear lleview Committee of the Board of Directors of the Company (the " Nuclear Review Committer"), and such Parent designee >. hall be given the same notice of meetings and other information as is given each member of the Nuclear Review Committee.

A 25

}'

A R TI Cl.1: Yli Conditions 1.1. ConJirions to Each Party *> Obligation to Epcct the Merger. The respective obligation of each party to clicct the hierger is subject to the satisfaction or waiver at or prior to the EITective Time of each of the following conditions:

(a) Stoc Alm /Jcr Approval. This Agreement shall have been duly approved by holders of Shares co' '.ituting the Company Requisite Vote and by the sole stockholder of hierger Sub in accordance with applicable law and the certificate and by laws of each such corporation, and the issuance of l'arent Common Stock pursuant to the hierger shall have been duly approved by the holders of Parent Common Stock constituting the Parent Requisite Vote, (b) N)'SE Lhting. The shares of Parent Common Stock issunble to holders of Shares pursuant to this Agreement shall have been authorized for listing on the NYSE upon official notice of issuance.

(c) Regulatory Consents, The wailing period applicable to the consummation of the hierrer under the libR Act shall have expired or been terminated and, other than the fihng provided for in Section 1.3, all blings required to be made prior to the EfTective Tinte by the Company or Parent or any of their respective Subsidiaries with, and all consents, approvals and authorizations required to be obtained prior to the EITeetive Time by the Company or Parent or any of their respective Subsidiaries from, any Governmental Entity (collectively, " Governmental Consents") in connection with thc execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained (as the case may be) and become Final Orders (as hereinafter dehned), and such Final Orders shall not, individually or in the aggreg.ite, contain terms or conditions that would have, or he reasonably lit ely to have, a hiaterial Adverse Efut on the Company or a hiaterial Adverse EITect on s

Parent (culuding, after the EfTective Time, the Company and its Subsidiaries). The term "Finat order" shall mean action by the relevant Governmental Ertity that has not been reverseu, stayed, enjoined, set aside, annulled or suspended, with resp,:ct 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.

(d) Litigation. No court or Governmental Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and restrains, enjoins or

= otherwise prohibits consummation of the transactions contemplated by this Agreement (collectively, an

" Order"), and no Governtrental Entity shall have instituted any proceeding seeking any such Order.

(c) S4 The S 4 Registration Statement shall have become clicctive under the Securities Act and no stop order suspending the efTectiveness of the S 4 Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated or be threatened by the SEC.

(f) Blue SAy Approvals. Parent shall have received all state securities and " blue sky" permits and other authoritations neccuary to consummate the transactions contemplated hereby.

(g) PocJmg Letter. Parent and the Company shall have received from Parent's independent accounting firm a letter, dated as of the Closing Date, to the clicct that the 51erger will qualify for "poohng of interests" accounting treatment, it being understood Parent's independent accounting hrm may rely upon a letter of the Company's independent accounting firm with respect to the eligibility of the Company and its Subsidiaries for such accounting treatment.

7.2. Condalons to Obligations of Parent and Merycr Sub. The obligations of Parent end hierger Sub to cITect the hierger are aho subject to the satisfaction or waiver by Peent prior to the EITective Time of the following conditione (a) Reprearntations and li'arranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as A-26

of the Closing Date as though made on and as of the Ciming Date (esecpt to the extent an) $uch representation or warranty espressly speaks as of an earlict datc), and Patent shall have receised a

) certincate signed on behalf of the Company by an pecutive officer of the Company to such cfTect.

(b) Performame of Obhgations of the Cumpany, lhe Company shall have performed in all material respects all obligations required to be performed by it under this Aptrement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of the Company by an executive officer of the Company to such effect.

(c) Consents. The Company shall have obtained the consent or approval of each Person whose consent or approval shall be required in order to consummate the transactions contemplated by this Agreement and the Stock Option Agreement under any Contract to which the Ccmpany or any of its Subsidiaries is a party, cxcept those for which the fa!!ure to obtain such consent or approval, individually or in the appeepute,is not rec.sonably likely to have a hiaterial Adverse Effect on the Company or is not reasonably likely to materially adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement.

(d) Tar opinion. Parent that! have received the opinion of Sullivan & Cromwell, counsel to Parent, dated the Closing Date, to the efTect that the hierger will be treated for i ederal income tax purposes m a reorganization within the meaning of Section 368(a) of the Code, and that each of Parent, hierger Sub and the Company will be a party to that reorganiration within the meaning of Sec.

tion 368(b) of the Code. Such opinion tua) be based on,in addition to the review of such matters of law and fact as Sullivan & Cromwell considers appropriate, (i) representations made at the request of Sullivan & Cromwell by Parent, the Company, stockholders of Parent or the Company, or any combination of such persons, (ii) certificates provided at the request of Sulhvan & Cromwell by officars of Parent vt the Company and other appropriate persons and (iii) assumptions set forth in the opinion with the consent of Parent, which consent shall not be unreasonably withhcid.

(c) Affiliates Letters. Parent shall have received an Afliliates Letter from each Person identihed as an alfiliate of the Company pursuant to Section 6.8.

(f) Comfort ! cricts. Parent shall have received,in form and substance reasonably satisfactory to Patert, imm its independent public accounting firm and the Company's independent public accounting firm the " comfort" letters described in Section 6.5(b),

1.3. Conditions to obligation of the Company. The obligation of the Company to efTect the hierpet is also subject to the satisfaction or waiver by the Company prior to the EITective Time of the following conditions:

(a) 1 rpresentations and it'arrantics. The representations and warranties of Parent and hierger Sub set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation and warranty expressly speaks as of an earlier date), and the Company shall have received a certificate signed on behalf of Parent by an executive ofTicer of Parent and hierger Sub to such efTect.

(b) Performance of Obb tstions of Parent and Merger Sub. Each of Parent and b1crect Sub shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Parent and hierscr Sub by an executhe othece of Parent to such efTect.

(c) Consents. Parent shall have obtained the consent or approval of each Person whose consent or approval shall be required in order 'o consummate the transactions contemplated by this Agreement and the Stock Option Agreement under any Contract to which Parent or any of its Subsidiaries is a pany, except those for which failure to obtain such consents and approvals, individually or in the aggregate,is not reasonably likely to have a hiaterial Adverse EfTect on Parent or is not reasonably likely to materiall>

-adversely affect the ability of Parent to consummate the transactions contemplated by this Agreement.

A 27

(d) Tai Drinton. The Compan3 shall have received the opinion of 1.ellocuf, l.amb, Greene &

Maeltae, LLP., counsel to the Company, dated the Closing 1, ate, to the eficct that the Merger will be treated for federalincome tax purposes as a reorganization within the meaning of Section 368(a) of the Code, and that each of Parent, Merger Sub and the Company will be a party to that reorganitation within the meaning of Section 368(b) of the Code, Such opinion may be based on,in addition to the review of such matters of law and fact as such counsel considers appropriate. (i) representations made at the request of such counsel by Parent, the Company, Merger Sub, stockholders of Parent or the Campany, or any combination of such persons, (ii) certificates provided at the request of such counsel by officers of Parent, the Company and Merger Sub, or any cornbination of such officers and (iii) assumptions set fonh in the opinion with the consent of the Company, which consent shall not be unreasonably withheld.

(c) Comfort Letters. The Company shall have received from its independent public accounting firm and Parent's independent public accounting hrrn the " comfort" letters described in Section 6.$(b).

ARTICl.1: Vill Termination 8.1. Termination by Afutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Ellective Time, whether before or after the approval by stockholders of the Company and Parent referred to in Section 7.l(u), by mutual written consent of the Company, Parent and Merger Sub, by action of their respective boards of directors, 8,2. Termination by liither Parent or the Company. This Agreement may be terminated and the Merger may be abandoned at any time prior to the EITective Time by action of the board of directors of either Parent or the Company if (a) the Merger shall not have been consummated by Octaber $ 1998, whether such date is before or after the date of approval by the stockholders of the Company or Parent (the " Termination Darc"); provided that the Termination Date shall automatically be extended for six months if, on October 5, 1998: (i) any of the conditions set forth in Section 7.l(c) has not been satisfied or waived, (ii) each of the other conditions to the consummation of the Merger set forth in Article Vil has been satisfied or waived or can readily be satisfied, and (iii) any Governmental Consent that has not yet been obtained is being pursued diligently and in good faith, (b) any Governmental Consents shall have been made or obtained by Final Orders which contain terms or conditions that would cause the conditioa set forth in Section 7,1(c) not to be satisfied, (c) any Order permanently restraining, enjoining or otherwise prohibiting the Merger shall have become final and non appealable, whether before or after the approval by the stockholders of the Company or Parent, (d) the Company Requisite Vote shall not have been obtained at the duly held Stockholders Meeting, including any adjournments thereof, or (c) the Prent Requisite Vote shall not have been obtained at the duly held Parent Stockholders Meeting, including any adjournments thereof; provided that the right to terminate this Agreement pursuant to clause (a), (b), (d) or (c) above shall not be available to any party that has breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure of the Merger to be consummated, 8.3. Termination by the Company. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, wbether before or after the approval by stockholders of the Company referred to in Section 7.l(a), by action of the board of directors of the Company:

(a) subject to and in accordance with the provisions of Section 6.2; or (b) if (i) the floard of Directors of Parent shall have withdrawn or adversely modified its approval or recommendation of this Agreement or failed to reconfirm its recommendation of this Agreement within five business days after a written request by the Company to do so, (ii) there has been a material

! breach by Parent or Merger Sub of any representation, warranty, covenant or agreement contained in this Agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by the Company to the party committing such breach, or (iii) Parent or any of the other Persons described in Section 6,2(a) as afliliates, representatives or agents of Parent shall take any of the A 28

actmns that would be proscribed by Sectmn h2 but for the esceptions thercio allowing certain actions to bc taken pursuaat to the prmiso in Section 6 2(a) or in the $ccond sentence of Section 6.2(b).

L ,1. Termination by l'utent 1his Apreement may be terminated and the Merger may be abandoned at any time prior to the I.lTectisc lime, before or after the apprmal by the stockholders of Parent referred to in Section 7.l(a), by action of the board of directors of Parent:

(a) subject to and in accordance with the provisions of Section 6.2; or (b) if (i) the lloard of Directors of the Company shall have withdrawn or adversely modified its approval or recommendation of this Apreement or failed to reconfirm its recommendation of this Agreement within hve business dap aher a written request by Parent to do so, (ii) there has been a material breach by the Company of any representation, warranty, covenant or agreement contained in this Agreement that is not curable or, if curabic, is not cured within 30 dap after written notice of such breach is phen by Parent to the party committing such breach, or (iii) if the Company or any of the other Persons described in Section 6.2(a) as aflibates, representatives or agents of the Company shall take any of the actions that would be proscribed by Section 6.2 but for the exceptions therein allowing certain actions to be taken pursuant to the proviso in Section 6.2(u) or in the second sentence of Section 6.2(b),

8.5. Qlca of Terminavon and Abandonment. (a) in the esent of termination of this Agreement and the abandonment of the Merger pursuant to this Article Ylli, this Agreement (other than as r.cl forth in Section 9.1) shall become void and of no ellect uith no liabihty of any party huelo (or any of its directors, ollicers employees, agents, legal and financial advisors or other representatiscs); provided. Imwever, except as otherwise provided herein, no such termination shall relieve any part) hereto of any hability or damages resulting from any breach of this Agreement.

(b) in the esent that this Agreement is terminated (x) by the Company pursuant to Section 8J(a) (or 6,2), or (y) by Parent pursuant to Section 8A(b)(i) or (iii), or (r) by the Company or Parent pursuant to Section 8.2(d), then the Company: (1) shall promptly, but in ne event later than two dap after the date of such termination (except in the case of a termination pursuant to Section 8)(a) which requires payment prior to termination), pay Parent,in addition to any amount, not to exceed $20,000,000, paid and/or payable by the Company to Parent pursuant to the Stock Option Agreement, a termination fee equal to the sum of (1) the charpes and expenses repaid to Parent or Merger Sub pursuant to clause (2) of this Sectmn 8.5(b) and (11) an amount equM to MO,000,000 lets the sum of (x) the amounts paid pursuant to clauw (1) of this Section 8.5(b)(1), and (y) the amount, not to exceed $20,000 000, paid and/or payable by the Company to Parent pursuant to the Stock Optm Agreement and (2) shall promptly, but in no event later than two days after being notilied of such hv Parent, pay all of the charpe 'ind expenses, including those of the Exchanpc Agent, incurred by Parent or Merger Sutiin connection with this Aprcement and the Stock Option Agreement and the transactions contemplated by this Agreement and the Stock Option Agreement up to a maximum amount of $10100,000, in each case payable by wire transl:t of same day funds, in no event shall the Company be required to pay more than 550 000,(00 pursuant to the preceding sentence. In addition, if this Agreement is terminated (u at a time when a termination fee is payable pursuant to the terms of the preceding sentcnce or

()) at a time when the approval of the Company's stockholdert, required by Section 7,1(a) shall not have been obtained at a meeting duly convened therefor or at an> adjournment or postponement thereof and at any time within two years after such termination the Company shall consummate a Material Acquisition Transaction (as defined below) with any Person other than I arent or a Subsidiary of Parent, then the Company shall simultaneously with the consummation of such Material Acquisition Transaction pay Parent an additional termination fee of $50,000.000 payable b,s wire transfer of same day funds. A "Marrrial Acquisition Tramaction" shall mean, with respect to Parent or the Company, any Acquisition Transaction or series of related Acquisition Transactions involving a merger or consolidation of such party or involving forty percent or more of its soting power, equity interests or assets (in each case directly or indirectly). The Company acknowledges that the agreements contained in this Section 8.5(b) are a? integral natt of the transactions contemplated by this Agreement und that, without these agreement.s Parent and Merger Sub would not enter into this Apreement: accordingly, if the Company fails to promptly pay the amount due pursuant to this Section 8.5(b) and. in order to obtain such pay ment, Parent or Merger Sub commences a suit w hich resuhs in A-29 *

. - ~ -- . -- . _ . - . . . _- - - _ - - - - - _ = _ - - --

a judgment against the Company for any of the feen $ct forth in thk Section 8.5(b), the Company shall pay to Parent or Merger Sub its costs and espenses (including attorneys' fees) in connection with such suit, topcther with interest on the amount of such payment at the prime rate of Citibank, N.A. in c!Tect on the date such payment was required to be made.

(c) In the event that this Agreement is terminated (x) by Parent pursuant to Section 8.4(a)(or 6.2) or (y) by the Company pursuant to Section 8)(b)(i) or (iii), or (r) by the Company or Parent pursuant to Section 8.2(c), then Parent: (1) Shall promptly, but in no event later than two days after the date of such termination (except in the case of a termination purwt to Section 8.4(a) which requirer, payment prior to termination), pay the Company,in addition to any amout, not to exceed $20JKiOJXK), paid und/or payable by Parent to the Company pursuant to the letter agreement, dated the date hereof, between Parent and the Company, a termination fee equal to ilm sum of (1) the charpen and r:xpenses repaid to the Company pursuant to clause (2) of thb Section 8.$(c) and (11) an amount equal to $50MK),000 less the sum of (x) the amounts paid pursuant to clause (1) of this Section 8.5(c)(l), ed (y) the amount, not to execed $20,000,000, paid and/or payable by Parent to the Company pursuant to the letter agreement, dated the date hereof, between Parent and the Company; and (2) shall promptly, Nt in no event later than two days after being notified of such by the Company, pay all of the charpes and expenses incurred by the Company in connection with this I Agreement and the Stock Option Agreement and the transactions contemplatcd by this Agreement and the l Stock Option Agreement up to a masimum amount of $10.000,000,in each case payable by wire transfer of same day funds. In no event shall Parent be required to pay more than $50,000AK)0 pursuant to the preceding sentence. In addition,if this Agreement is terminated (x) at a time when a termination fee is payable pursuant to the terms of the preceding sentence or (y) at a ilme when the approval of Parent's stockholders required by Section 7 l(a) Shall not have been obtained at a mecting duly convened therefor or at any adjournment or postponement thereof and at any time within two years after such termination Parent shall consummate a Material Acquisition Transaction with any Person other than the Company or a Subsidiary of the Company, then Parent shall simultaneously with the consummation of such Material Acquisition Transaction pay the Company an adt"tional termination fee, payable by wire transfer of same day fends, of $50,000,000. Parent I

acknowledges that the agreements contained in this Section 8.5(c) arc un integral part of the transactions contemplated by this Agreement and that, without thesc Screcments, the Company would not enter inte this Agreement; accordingly,if Parent fails to promptly pay it.r annount due pursuant to this Section 8.$(c) and,in order to obtain such payment, the Company commences a suit which results in a judgment against Par:nt for any of tk fees set forth in this Section 8.5(c). Parent shall pay to the Company its costs and expenses (including attorneys' fees) in connection with such suit, together with interest on the amount of such payment at the prime rate of Citibank, N.A. in c!Tect on the date such payment was required to be made.

A1(TlCII IN Mheellaneous and General  ;

9.1, Survival. This Articic IX and the aprecments of the Company, Parent and Merper Sub contained in Sections 6,6 (Taxation and Accounting),6.11 (llenefits),6.12 (Expenses) and 6.13 (Indemnification; Directors' and Officers' Insurance) shall survive the consummadon of the Merger. This Article IX, the representations contained in Section 5.l(c), the agreements of the Company, Parent ard Merger Sub contained in Section 6.12 (Expenses), Sectiou 8.5 (Effect of Termination and Abandonment) and the Confidentiality Agreement shall sursive the termination of this Agreement. All other representations, warranties, agreements and covenants in this Agreement shall not survive the consummation of the Merger or the termination of this Agreement.

9.2. Modification or Amendment. Subject to thp provisions of applicable !=nw the parties herhto may modify or amend this Agreement, by written apeement excxted and delivered by duly authorized officers of the respective panies.

93. It'alver of Condniontl Drention. The conditions to each of the parties' obligations to consum-mate the Merper are for the sole benefit of such pany and at any time prior to the EfTective Time such party "

A 30

nia) wai.c such wnditiom,in whole or in part or estcnd the time for the performance of any of the obhf ations or other uets of the other parties hereto to the extent permitted by applicable Law.

9.4. Counterpartt This Agreement ma) be cdcute i in any number of counterparts, cuch such counterpart being deemed to be an originalinstrument, and all such counterparts shall together constitute the same agreement. This Agreement shall become a binding obligation of Merger Sub upon Merrer Sub's executior, of this Agreement in accordance with Section 1.l(u).

9.$. GOl'ERNING LAll' AND l'ENVQ \\'All'ER Of JURI' TRIAL. (a) Tills AGRI:1:MI:Nl' Sil Al.1 Ilt DI:l:MEI) 10 Ilt MADl: IN. AND IN ALL ltt:SPl: CTS SilAl.1 til: INTERPRI:TED, CONSTRUl:D ANI) GOVEltNI:D llY AND IN ACruitDANCE WITil Tile LAW OF, Tile COM.

MONWl:Al Til UF PENNSYl.VANI A WITilOUT ltEGARD TO Till: CONFLICI OF l AW PRINCl.

PLES lill:lli:OF, The parties hereby irrevocably submit to the jurisdiction of the courts of the Commonwealth of Pcnnsylvania and the Federal courts of the United States of America located in the Commonwealth of Penns>lvania solely in respect of the interFrctation and enforcement of the provisions of this Agreement and the Stock Option Agreement and of the documents referred toln this Agreement and the Stock Option Agreement, and in respect of the transactions contemplated hereby and thereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proce-ding may not be brought or is not maintainable in said courts or that the venut thereof may not be appropriate or that-this Agreement and the Stoel Option Agreement or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a Commonwealth of I ennsyteania or i ederal court.1hc parties hereby content to and grant any such court jurisdiction over the person of such parties and mer the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 9.6, or in such other manner as may be permitted by Law, shall be valid and suflicient senice thereof. No provision of this Agreement shall be construcJ to require any party to violate or contravene any applicable Law.

(b) EACll PARTY ACKNOWLEDGES AND AGREES TilAT ANY CONTROVERSY WillCil MAY ARISE UNDER Tills AGREEMENT OR Tile STOCK OPTION AGREEhlENT IS LIKELY 10 INVOLVE COMI'LICATED AND DIFFICULT ISSUES, AND TilEREIORE EACll SUCil PARTY llEREllY 1RREVOCAllLY AND UNCONDITIONALLY WAlVES ANY RIGilT SUCil PARTY MAY llAVE TO A TRI AL llY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO Tills AGREEMENT OR Tile S10CK OPTION AGREEMENT, OR Tile TRANS ACTIONS CONTEMPLATED llY Tills AGRELMENT OR Tile STOCK OPTION AGREEMENT. EACll PARTY CERTIFIES AND ACKNOWLEDGES TilAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTilER PARTY llAS REPRESENTED, EXPRESSLY OR OTHERWISE, Til AT SUCil OTilER PARTY WOULD NOT,IN Tile EVENT OF LITIGATION, SEEK TO ENFORCE Ti!E FOREGOING WAIVER, (ii) EACil SUCil PARTY UNDERSTANDS AND llAS CONSIDERED Tile IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCll PARTY MAKES Tills WAlVER YOLUNTARILY, AND (iv) EACH SUCil PARTY llAS 11EEN INDUCED TO ENTER INTO Tills AGREEMENT OR Tile STOCK OPTION AGREEMENT llY, AMONG OTHER THINGS, Tile MUTUAL WAIVERS AND CERTI-FICATIONS IN THIS SECTION 9.5.

s A 31

- _ ~ _ _ . _ _ .-._- - _- -_- ___-.- --- ._--.---.-_---.- -

9.6. Noticci Any notice, request, instruction or other document to be given hereunder by any party to the others shall be in w riting und delivered personally or sent by registered or certified mail, postage prepaid, or by facsimile:

If to Parent or Merger Sub Allegheny Power System, Inc.

10435 Downsville Pike llagerstown, Maryland 21740 1766 Attention: Thomas K. llenderson telecopier: (301) 665 9006 (with a copy to Joseph it Frumkin r

Sullivan & Cromwell 125 Broad Street New York, New York 10004 telecopier: (212) 558 3588)

If to the Company DQE, Inc.

411 Seventh Asenue Pittsburgh, Pennsylvania 15230 1930 Attentioa: Victor A. Roque telecopier: (412) 393 6266 (with copies to Oc eglas W. Itawes and Steven 11. Davis LeBoeuf Lamb, Greene & MacRae, LLP, 125 West $5th Street New York, New York 10019 telecopier: (212) 424 8500) or to such other persons or addresses as may be designated in writing by the party to receive such notice as provided above, 9.7. Entire Agreement. This Agreement (including any exhibits hereto), the Company Disclosure Letter, the Parent Disclosure Letter, the Stock Option Agreement and the Confidentiality Agreement, dated November 18, 1996, between Parent and the Company (the " Confidentiality Agreement") constitute the emite agreement, and supersede all other prior agreements, understandings, representations and warranties +

both written and oral, amonF the parties with respect to the subject matter hereof. References herein to this

. Agreement shall for all rurposes be deemed to include references to the Company Disclosure Letter and Parent Disclosure 1 .ter, EAC11 PARTY llERETO AGREES Til AT, EXCEPT FOR Tile REPRESEN.

TATIONS AND WARRANTIES CONTAINED IN Tills AGREEMENT, NEITilER PARENT AND MERGER SUD NOR Tile COMPANY MAKES ANY OT11ER REPRESENTATIONS OR WAR-RANTIES, AND EACil llEREllY DISCLAIMS ANY OTiiER REPRESENTATIONS OR WAR-RANTIES M ADE IlY ITSELP OR ANY OF ITS OFFICERS DIRECTORS,' EMPLOYEES, AGENTS, FINANCIAL AND LEGAL ADVISORS OR OTilER REPRESENTATIVES WITil RE-SPECT TO Tile EXECUTION AND DELIVERY OF Tills AGREEMENT OR Tile TRANSAC.

TIONS CONTEMPLATED llEREBY, NOTWIT11 STANDING Tile DELIVERY OR DISCLOSURE TO TiiE OTilER OR Tile OT13ER'S REPRESENTATIVES OF ANY DOCUMENTATION OR OT11ER INFORMATION WITil RESPECT TO ANY ONE OR MORE OF Tile FOREGOING.

9.8. No Third Party Bem:/iciaries. Except as provided in Section 6.13 (Indemnification; Directors' and Oflicers' Insurance), this Agreement is not intended to confer upon any Person other than the parties hereto any rights or remedies hereundcr, A 32

. - - - . - - --- - - ~ -- _ - , - - _ _ - - . -

i i

v.9 Mhratmo ol Parrnt und ol thr Com/wny Wheneser this Agreement requires a Subsidiary of 1

Parent to take any action such requirement shall be deemed to include an undertaking on the part of Parent to

{ cause sut h Subsidiary to talc such action Whenescr this Agreement requires a Subsidiary of the Company to i- take any action, such requirement shall be deemed to iriclude an undertaking on the part of the Company to j cause such Subsidiar) to take such action and, after the EfTective Time, on the part of the Surviving ,

j Corporation to cause such Subsidiary to take such action.  !

I 9.10. Neverabl/ity. The provisions of this Agreement shall be deemed sescrable and the invalidity or .

l unenforecability of any provision shall not alleet the validity or cnforceabikty of the other provisions hereof, if l

]- any provision of this Agreement, or the application thereof to any Person or any circumstance,is invalic or 1 j unenforecable, (a) a suitable and equitable provision shall bc substituted therefor in order to carry out, so far l 1

as may be valid and enfotecable, the intent and purpose of such invalid or unenforecable provision and (b) the remainder of this Agreement and the application of such provision to other Pctsons or circumstances shall not i

he alTected by i,uch invalidity or unenforecubility, nor shall r,uch invalidity or unenforceability afTect the validity or enforecability of such provision, or the application thereof,in any other jurisdiction.

9. l l . /nterpretation. The table of contents and headings herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise afTect any of the provisions hereof. Where a reference in this Agreement is rnade to a Section or inhibit, such reference shall be to a Section of or Eshibit to this Aptcement unless otherwise indicated. Whenever the words " include,"

" includes" or " including" are used in this Agreement, they shall be deemed to be followed by the words ,

"without limitation." .

9.12. Anignment. This Agreement shall not be assignable by operation oflaw or otherwise;provided.

however, that Parent may designate, by written notiec to the Company, another wholly owned dircet or indirect subsidiary to be a Constituent Corporation in lieu of Merger Sub,in the event of which all references herein to Merger Sub shall be deemed references to such other subsidiary, mcept that all representations and  ;

warrantics made herein with respect in Merger Sub as of the date of ibis Agreement shall be deemed representations and warrant"s made with respect to such other subsidiar) as of the date of such designation.

IN WITNESS WilEl(EOF, this Agreement has been duly csecuted and delivered by the duly i authorized ollicers of the Company and ! Stent as of the date hereof.

DQE, INC.  :

Ily: /s/ DAviti D.' M AIGil At.L l David D Marshall ,

President and Chief Executive Ojhccr  :

ALLEGilENY POWER SYSTEM,INC.

l l . liy: /s/ ALAN J. Noi A I Alan J. Noia l President and Chh1Earcutive Officer Accepted and Agreed as of:

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t AYP SUll. INC.

, 11y:

Name: '

! litle:

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investment htnking Corporate and institutions)

Client Group World financialCenter Nor.h Tower l New York. New York 10281 1327 Merrillbynch i

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TAX 212 449 7148 TAX 212 449 6636  ;

l June 25,1997 a

1 -

Board of Directors j Allegheny Power System,Inc.

i ' 10435 Downsville Pike 1-H:gerstown, Maryland 21740 1766 1 adies and Gentlemen:

i Allegheny Power System, Inc. (' Parent" or 'Auegheny'), a Maryland corporation, and DQE, Inc. (the '

' Company" or 'DQE'), a Pennsylvania corporation, have entered into an Agreement and Plan of Merger as of April 5,1997 (the " Agreement *) pursuant to which AYP Sub, Inc., a Pennsylvania corporation to be formed as a wholly owned subsidiary of Parent ("Sub"), shan be merged with and into the Company and the separate corporate existence of Sub shall thereupon cease (the " Merger"). Pursuant to the Agreement, each issued and outstanding share of the Company's common stock, without par value (' Company Common Stock"),

i +

shiU le converted into, and become exchangeable for,1.12 shares (the " Conversion Ratio") of Parent's commtn stock, par value $1.25 per share (' Parent Common Stock').  ;

You have asked us whether,in our opinion, the Conversion Ratio is fair to the holders of Parent Common Stock from a financial point of view.

In arriving at the opinion set forth below, we have, among other things:

(1) Reviewed Allegheny's Annual Reports, Form 10-K's and related financial information for the three fiscal year period ended December 31, 1996 and certain other filings made with the Securities and Exchange Commission, including proxy statements, Form 8-K's and registration statements, during the last three years; (2) Reviewed DQE's Annual Reports, Form 10 K's and rehted financial information for the three

- fiscal year period ended December 31,1996 and certain other filings made with the Securities ,

and Exchange Commission, including proxy statements, Form 8-K's and registration statements, during the last three years; (3) Reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of Allegheny and DQE furnished to us by Allegheny and DQE;  ;

I (4) Conducted discussions with members of senior management of Allegheny and DQE concerning their respective businesser, regulatory environments, prospects and strategic objectives; J

q

.(5) Reviewed the market prices and valuation multiples for the Parent Common Stock and the Company Common Stock and compared them with those of certain publicly traded companies ,

which we deemed to be reasonably similar to Allegheny and DQE, respectively; 1(6)' Compared the results of operations of Allegheny and DQE with those of certain companies r which we deemed to be reasonably similar to Allegheny and DQE, respectively; B.I

,_ ,_ . 2 _ . - - , _ _ __ _. _ _ _ . _ . _ _ _ . _ _ . - - __ _._._,._ _.

i M:rrillLynch (7) Compared the financial terms of the transaction contemp!*ted by the Agreement with the financial terms of certain other transactions which we deemed to be relevant; (8) Considered the pro forma effect of the Merger on Allegheny's capitalization ratios and earnings, divid mds and book value per r, hare; (9) Reviewed the Agreement; (10) Reviewed the Joint Proxy Statement / Prospectus; and (11) Reviewed such other financial studies and analyses and performed such othu investigations and took into accaunt such other matters r, we demed necessary, including sur assessment of general economic, market, monetary ora other conditions.

In prepaiins; our opinion, we have relied on the securacy and completeness of all information supplied or otherwise made available to us by Allegheny anc. DQE, and we have not assumed any responsibility for independent y venfying such informatsn or undevaken an . independent evaiuation or appraisal of the assets or liabihties of Allegheny or DGE. In addition, we have not ce nducted eny physicalinspection of the properties or facilities of Allegheny or DQE. With respect to the fmancial forecasts and projected synergies furnished by Allegheny and DQE, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of Allegheny's or DQE's management ts to the expected future financial performance of Allogheny or DQE, as the case may be, and as to the expected future projected outcomes of various legal, regulatory and other contingencies. We have assumed that the Merger will be accounted for as a pooling of interests and will be free of Federal tax to Allegheny ar.d DQE and the respective holders of Parent Common Stock and Company Common Steck.

Our opinion is necessarily based upon general economic, market, monetary and other conditions as they a:xist and ca be evaluated, and the information made available to us, as of the date hereof, s This opinion has been prepared solely for the information and use of the Ber.rd of Directors of Parent and does not constitute a recommendation to any sharehalder of Parent as to how such shareholder should vote on the Merger. This opinion rnay not be reproduced, summarized, described or referred to without Merrill Lynch's prior written consent, which is not to be unreasonably withleld.

We htve acted as financial advisor to Allegheny in connection with the Merger and will receive a fee for our services, a significant portion of which is contingent upon consummation of the Merger. We have, in the L past, provided fmancing services to Alleghen) and DQE and have received fees for the rendering of such services, in the ordinary course of our business, we may actively trade the securities of Allegheny and DQE for our own account and for the accounts of customos and, accordingly, may at any time hh a long or short 4 positmn m such securities On the bar.is of and subject to the foregoing and other matters which we deem relevant, we are of the opinion that,. ' 'he date hereof, the Convenian Ratio is fair to the holders of Parent Common Stock from a financi. . ,2 of view.

Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED B. #11 / N -

M adagingWeetor M

Investment Banking Group B-2

APPENDIX C 7 EDIT FIRST CW W "C @N Cor*owoN JISSE BOSTON  % ,,, _ ,.. . . , w, m 37m Nen h .fu 10010-3529 I

l June 25,1997 lioard of Directors DQE, Inc.

4117th Avenue Pittsburgh, Pennsylvania 77054 Members of the Board:

You have asked us to advise you with respect to the fairness to the holders of the common stock of DQE, Inc. ("DQE") from a financial point of view of the consideration to be received by such holders pu suant to the terms of the Agreement and Plan of Merger, dated as of Apnl 5,1997 (the " Merger Agreement"), among DQE, Allegheny Power System, Inc. ("AYP") and AYP Sub, Inc. (" Merger Sub").

The Merger Agreement provides for, among other things, the merger of Merger Sub with and into DQE (the

• Merger") pursuant to which DQE will become a wholly owned subsidiary of AYP and each outstanding share of the common stock, without par value, of DQE (the "DQE Common Stock") will be converted into the right to receive 1.12 shares (the " Conversion Ratio") of the common stock, par value $1.25 per share, of AYP (the "N/P Common Stock *).

In arriving at our opinion, we have reviewed the Merger Agreement, the Joint Proxy Statement / Prospectus of DQE and AYP relating to the proposed Merger (the " Joint Proxy Statement / Prospectus") and certain publicly available business and financial information relating to DQE and AYP. We have also reviewed certain other informa* ion relating to DQE and AYP, including financial forecasts, provided to us by DQE and AYP, and havt: met with the managements of DQE and AYP to discuss the businesses and prospects of DQE and AYP.

We have also considered certain Cnancial and stock market data of DQE and AYP, and we have compared those data with similar data for other publicly held companies in businesses similar to DQE and AYP, and we h ve considered, to the extent publicly available, the financial terms of certain other business combinations and other transactions which have recently been effected. We also considered such other information, financial studies, analyses and investigations and financial, economic and

, market criteria which we deemed relevant.

In connection with our review, w. have not assumed any responsibility for independent verification of any of the foregoing information (including the information in the Joint Proxy Statement / Prospectus) and have relied on its being complete and accurate m all material respects. With respect to the financial forecasts, we have assumed that such forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of DQE and AYP as to the future financial performance of DQE and AYP. We also have assumed, with your consent and based upon the views of the management of, and regdatory counsel for, CQE, that in the course of obtaining tl e necessary regulatory and third party consents for the proposed Merger, no restriction will be imposed that will have a material adverse effect on the contemp'ated benefits of the Merger.

In addition, we have not been requested to make, and have not made, an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of DQE or AYP, nor have we been furnished with any such evaluations or appraisals. Our opinion is necessarily based upon information available to us, and financial, economic, market and other conditions as they exist and can be C-1

i cama sutsst ms, sanos cowmwas CREDIT FIRST

' SUISSE BOSTON Board of Directors DQE, Inc.

! June 25,1997 Page 2 ,

evaluated,4 the date hereof. We are not expressing any opinion as to the actual value of the AYP Common Stock w;ien issued pursuant to the Merger or the prices at which the AYP Common Stock will trade subsequent to the Merger. In connection with our engagement, we were not requested to, and did not, solicit third party indications o' interest in acquiring all or any part of DQE.

We have acted as financial advisor to DQE in connection with the Merger and will receive a fee for our services, a significant portion of which is contingent upon the consummation of the Merger, in the past, we have provided financial services to DQE unrelated to the proposed Merger, for which

- services we have received compensation. in the ordinary course of its business, Credit Suisse First Boston and its affiliates may actively trade the debt and equity securities of both DQE and AYP for their own accounts and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities.

It is understood that this letter is for the information of the Board of Directors of DQE in connection with its evaluation of the Merger, does rot constitu' recommendation to any stockholder as to how such stockholder should vote with respect to the ' ger, and is not to be quoted or referred to, in whole or in part, in any registration statemen. ,;ospectus or proxy ste.tement, or in any other document used in connection with the offering or sale of securities, nor shall this letter be used for any other purposes, without our prior written consent.

Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Conversion Ratio is fair to the holders of DQE Common Stock from a financial point of view.

Very truly yours, CREDIT SUISSE FIRST t3OSTON CORPORATION i

C-2 l

Al'PI:NDIX D SI:Cr10NS 25412548 Ol' Tilt I'l:NNSYLVANIA IlUSINESS CORI' ORATION LAW SECTION 2541 API'LICATION AND EITECI' OF SUllCilAl'TER (a) GENERAL RULE - Except as otherwise provided in this section, this subchapter shall apply to a registered corporation unless:

(1) the registered corporation is one described in section 2502(1)(ii) or (2) (relating to regist: red

, corporation status):

(2) the bylaws, by amendment adopted either-(i) by March 23,1984; or (ii) on or after March 23,1988, and on or before June 21,1988; and, in either event, not subscuuently rescinded by an artich amendment, explicitly provide that this subchapter shall not be applicable to the corporation in the case of a corporation which on June 21,1988, did not have outstanding one or more classes or series of preference shares entitled, upon the occurrence of a default in the payment of dividends or another similar contingency, to elect a majori:y of the members of the board of directors (a bylaw adopted on or before June 21, 1988, by a corporation excluded from the scope of this paragraph by the restriction of this paragraph relating to certain outstanding preference shares shall be ineffective unless ratified under paragraph (3));

(3) the bylaws of which explicitly provide that this subchapter shall not be applicable to the corporation by amendment ratified by the board of directors on or after December 19,1990, and on or before March 19,1991, in the case of a corporation:

(i) which on June 21,1988, had outstanding one or more classes or series of preference shares entitled, upon the occurrence of a default in the payment of dividen6 or another Jmilar contingency, to elect a majority of the members of the board of directors; and (ii) the bylaws of which on that date contained a provision described in paragraph (2)t or (4) the articles explicitly provide that this subchapter shall not be applicable to the corporation by a provision included in the original articles, by an article amendment adopted prior to the date of the control transaction and prior to or on March 23,1988, puisuant to the procedures then applicable to the corporation, or by an article amendment adopted prior to the date of the control transaction und subsequent to March 23,1988, pursuant to both:

(i) the procedures then applicable to the corporation; and (ii) unless such proposed amendment has been approved by the board of directors of the corporation, in which event this subparagraph shall not be applicable, the affirmative vote of the

, shareholder: entitled to cast at least 80% of the votes which all shareholders are entitled to cast thereon, A reference in the articles or bylaws to former section 910 (relating to right of shareholders to receive payment for shares following a control transaction) of the act of May 5,1933 (P.L. 364, No.106), known as the Business Corporation Law of 1933, shall be a reference to this subchapter for the purposes of this section. See -

section 101(c) (relating to references to prior statutes).

(b) IN ADVERTENT TRANSACTIONS - This subchapter shall not apply to any person or group that inadvertectly becomes a controlling person or group if that controlling person or group, as soon as practicable, divests itself of a suilicient amount of its voting shares so that it is no longer a controlling person or group.

D-1

(c) CI:RTAIN SUllSIDI Altil'.S - This subchapter shall not apply to any corporation that on Decem- 1

- bcr 23,1983, was a subsidiary of any other corporation.

SECTION 2542 del'INIilONS The following words and phrases when used in this subchapter shall have the meanings given to them in this f.cction unless the context clearly indicates otherwise:

" CONTROL TRANSACTION." The acquisition by a person or group of the status of a controlling g person or group.

" CONTROLLING PERSON OR GROUv." A controlling person or group as defined in section 25 43 (relating to controlhng person or pmup).

" FAIR VALUE." A value not less than the highest price paid per share by the contmtling person or group at any time during the 90-dey period ending on and includng the date of the control transaction plus an increment representing any value, including, without limitation, any proportion of any valuc payable for acquisition of control of the wrporation, that may not be reflected in such price.

" PARTIAL PAYMENT AMOUNT." The amount per share specif ed in section 2545(c)(2) (relat-ing to contents of notice),

"SUllSI DI ARY." Any corporation as to which any other corporation has or has the right to acquire, directly or indirectly, through the exercise of all warrants, options and rights and the conversion of all convertible securities, whether issued or granted by the subsidiary or otherwise, voting power over voting shares of the subsidiary that would entitle the holders thereof to cast in excess of 50% of the votes that all shareholders would be entitled to cast in the election of director of such subsidiary, except that a subsidiary will not be deemed tc _ cease being a subsidiary as long as such corporation remains a controlling person or group within the meaning of thi< subchapter,

" VOTING .S11 ARES." The term shall have the meaning specified in section 2552 (relating to definitions).

SECTION 2543 CONTROLLING PERSON OR GROUP (a) GENERAL RULE- For the puTose of this subchapter, a " controlling person or group" means a person who has, or a group of persons acting in concert that has, voting power over voting shares of the registered corporation that .would entitle the holders thereof to cast at least 20% of the votes that all shareholders would be entitled to cast in an election of directors of the corporation.  !

(b) EXCEPTIONS GENERALLY- Notwithstanding subsection (a):

(1) A person or group which would otherwise be a controlling person or group within the meaning of this section shall not be deemed a controlling person or group unless sub. sequent to the later of March 23,1988, or the tiate this subchapter becomes applicable to a corporation by bylaw or article amendment or otherwise, that person or group increases the percentage of outstanding voting shares of the corporation over which it has voting power to in excess of the percentage of outstanding voting shares ,

of the corporation over which that person or group had voting power on such later date, and to at least the amount specified in subsection (a), as the result of forming or enlarging a group or acquiring, by purchase, voting power over voting shares of the corporation.

D-2 l

(2) No perwn or group shall be deemed to be a controlling person or group at 2r.3 particular time if voting power over any of the following voting shares is required to be counted at such time in order to meet the 20% minimum:

(i) Shares which have been held continuously by a natural person since January 1,1983, and which are held by such natural person at such time.

(ii) Shares which are held at such time by any natural person or trust, estate, foundation or other similar entity to the extent the shares were acquired solely by gift, inheritance, bequest, devi<,e or other testamentary distribution or series of these transactions, directly or indirectly, from a natural person who had acquired the shares prior to January 1,1983.

(iii) Shares which were acquired pun;uant to a stock split, stock dividend, reclassification or

- similar recapitalization with respect to shms described under this paragraph that have been held continuously since their issuance by the corporation by the natural person or entity that acquired them from the corporation or that were acquired, directly or indirectly, from such natural person or entity, solely pursuant to a transaction or . cries of transactions described in st.bparagraph (ii), and that are held at such time by a nataral permn or entity described in subparagraph (ii).

(iv) Control shares as defined in Metior' 2562 (relating to definitions) which have not yet been accorded voting rights purruant to section 2564(a) (relating to voting rights of shares acquired m i control share acquisition).

(v) Shares, the voting rights of which are attributable to a person under subsection (d) if:

( A) the person acquired the option or conversion right directly from or made the contract, arrangement or understanding or has the relationship directly with the corporation; and (B) the person does not at the particular time own or otherwise efTectively possess the voting rights of the shares.

(vi) Shares acquired directly from the co7 oration or an afIlliate or associate, as defined in section 2552 (relating to definitions), of the corporation by a person engaged in business as an underwriter of securities who acquires the shares through his participation in good faith in a firm commitment underwriting registered under the Securities Act of 1933.

(3) In determining whether a person or group is or would be a controlling person or group at any particular time, there shall be disreg: rded voting power arising from a contingent right of the holders of one or more classes or series of preference shares to elect one or more members of the board of directors upon or during the continuation of a default in the payment of dividends on such shares or another similar contingency.

(c) CEllTAIN llECOllD llOLDEllS- A person shall not be a controlling person under subsec-tion (a) if the person holds voting power, in good faith and not for the purpose of circumventir.g this subchapter, as an agent, bank, broker, nominee or trustec for one or more beneficial owners who do not individually or, if they are a group acting in concert, as a group have the voting power specified in subsection (a), or who are not deemed a controlling person or group under subsection (b).

(d) EXISTENCE Ol' VOTING l'O% Ell- For the purposes of this subchapter, a person has voting power over a voting share if the person has or shares, directly or indirectly, through any option, contract, arrangement, understanding, conversion right or relationship, or by acting jointly or in concert or otherwise, the power to vote, or to direct the voting of, the voting share, t D-3 i

1x _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

4

-Si r fl0 N 2544 RIGitT OF SilARI:ll0LDERS TO RECEIVE l'AYMENT l'OR SilARI'S Any holder of voting shares of a registered corporation that becomes the subject of a control transaction who shall object to the transaction shall be entitled to the rights and remedics provided in this subehapter.

' SEcrlON 2545 NOTICE TO Sil AREllOLDrRS

- (a) GENERAL RULE-l'rompt notice that a control transaction has occurred shall be given by the controlling person or group to:

(1) Each shareholder of record of the regiatered corporation holding voting shares.

(2) To the court, accompanied by a petition to the court praying that the fair value of the voting shares of the corporation be determined pursuant to section 2547 (relating to valuation procedures) if the court should receive pursuant to section 2547 certificates from shareholders of the corporation or an equivalent request for transfer of uncertificated accurities.-

(b) OllLIGATIONS OF Tile CORPORAT!ON - If the controlling person or group so requests, the corporation shall, at the option of the corporation and at the expense of the person or group, either furnish a list of all such shareholders to the person or group or mail the notice to all such shareholders.

(c) CONTENTS OF NOTICE-The notice shall state that:

(1) All shareholders are entitled to demand that they be paid the fair value of their shares.

(2) The minimum value the shareholder can receive under this subchapter is the highest price paid per share by the con

• rolling penion or group within the 90-day period ending on and including the date of the control transaction, and stating that value.-

(3) If the sharcholder believes the fair value of his shares is higher, that this subchapter provides an appraisal procedure for determining the fair value of such shares, specifying the name of the court and its address and the caption of the petition referenced in subsection _ (a)(2), and stating that the information is provided for the possible u:e by the shareholder in electing to proceed with a court appointed appraiser under section 2547.

There shall be included in, or enclosed with, the notice a copy of this subchapter, (d) OPTIONAL PROCEDURE -The controlli_ng person or group may, at its option, supply with the notice referenced in subsection (c) a form for the shareholder to demand payment of the partial payment amount directly from the controlling person or group without utilizing the court appointed appraiser procedure of section 2547, requiring the shareholder to state the number and class or series,if any, of the shares owned by him, and stating where the payment demand must be sent and the procedures to be followed.

- SECTION 2546 SilAREllOLDER DEMAND FOR FAIR VALUE (a) GENERAL RULE - After the occurrence of the control transaction, any holder of voting shares of the registered corporation may, prior to or within a reasonable time after the notice required by section 2545 (relating to notice to shareholders) is given, which time period may be specified in the notice, make written demand on the controlhng person or group for payment of the amount provided in subsection (c) with respect to the voting shares of the corporation held by the shareholder, and the controlling person or group shall be D-4

=_-________-__

required to pay that amount to the shareholder pursuant to the procedures specihed in section 2547 (relatmp to valuation procedures).

(b) CONTI:NTS 01 DEM AND - The demand of the shareholder shall state the number and clas or scrica, if any, of the shares owned by him with respect to which the demand is made.

(c) MEASURE OF YALUE- A shareholder making written demand under this section shall be entitled to receive cash for each of his shares in an amount' equal to the fair value of each voting share as of the date on w hich the control transaction occurs, taking into account all relevant factors, including an increment representing a proportion of any value payable for acquisition of control of the corporatior..

(d) PURCllASES INDEPENDENT OF SUllCilAPTE81-The provisions of it ' subchapter shall not preclude a controlling person or group subject to this subchapter from ollering, whether in the notice

, required by section 2545 or otherwise, to purchase voting shares of the corporation at price other than ihat provided in subsection (c), and the provisions of this subchapter shall not preclude any shareholder from agreeing to sell his voting shares at that or any other price to any person.

SI'CTION 2547 VALUATION PROCEDURES (a) GENERAL, RULE -- It w; thin 45 days (or such other time period,if any, as required by applicable law) after the date of the notice required by section 2545 (relating to_ notice to shareholder >), or,if such notice was not provided prior to the date of the written demand by the shareholder under section 2546 (relating to shcreholder demand for fair value), then within 45 days (or such other time period, if any, required by app icable law) of the date of such written demand, the controlling person or group and the shareholder are una ,lc to agree on the fair value of the shares or on a binding procedure to determine the fair value of the shares, then each shareholdce who is unable to agree on both the fair value and on such a procedure with the controlung person or group and who so desires to obtain the rights and remedies provided in this subchapter shall, no later than 30 days after the expiration of the applicable 45-day or other period, surrender to the court certificates representing any of the shares that are certificated shares, duly endorsed for transfer to the controlling person or group, or cause any uncertificated shares to be transferreci to the court as escrow agent under subsection (c) with a notice stating that the certificates or uncertificated shares are being surrcrdered or transferred, as the case may be,in ccnricction with the petition referenced in section 2545 or,if no petition has theretofore been fibd, the shareholder may fde a petition within the 30-day period in the coutt praying that the fair value (as defined in this subchapter) of the shares be determined.

, (b) EFFECT OF FAILURE TO GIVE NOTICE AND SURRENDER CERTIFICATES- Any shareholder who does not so give notice and surreno,,e any certificates or cause uncertificated shares to be transferred within such time period shall have no further @ht to receive, with respect to shares the certificates of which were not so surrendered or the uncertif.cated shares which were not so transferred under this section,

. payment under this subchapter from the controlling person or group with respect to the control transaction giving rise to the rights of the shareholder under this subchapter.

(c) ESCROW AND NOTICE-The court shall hold the certificates surrendered and the uncertili-cated shares transferred to it in escrow for, and shall promptly, following the expiration of the timt. period during which the certificates may be sur*endered and the uncertificated shares transferred, provide a notice to the controlling penon or group of the number of sharu so surrendered or transferred.

(d) PARTIAL P4YMENT FOR SilARES - The controlling person or Froup shall then make a partial payment for the shares so surrendered or transferred to the court, within ten business days of receipt of the notice from the court. at a per-share price equal to the partial payment amount. The court shall then make payment as soon as practicable, but in any event within ten business days, to the shareholders who so surrender or transfer their shares to the court of the a;)propriate per-share amount received from the controlling person or group.

D-5 1

(c) Al'i'OINTMEN'l OF APPRAISI;R - Upon receipt of any share certihcate surrendered or uncertificated share transferred under this section, the court shall, as soon as practicable but in any event within 30 da appoint an appraiser with experience ir. appraidng share values of companies of like nature to the rcgistered corporation to determine th: fair value of the shares.

(f) APPRAISAL PROCI:DURF - The appraiser so appointed by the court shall,as soon as reasonably practicable, determine the fair value of the shares subject to its appraisal and the appropriate market rate of interest on the amount then owed by the controliing person or group to the holders of tb shares. The determination of any appraiser so appointed by the court shall be final and binding on both the control!ing person or group and all shArcholdert. who so surrendered their share certificates or transferred : heir shares to the court, except that the determination of the appraiser shall be subject to review to the extent and witi.in the time provided or prescribed by law in the case of other appointed judicial officers. Sec 42 Pa C.S.

gf $105(a)(3) (relating to right to appellate review) and 5571(b) (relating to appeals generally).

(g) SUPPL.LMENTAI. PAYMENT- Any amount owed, together with interest, as determined pursuant to the appraisal procedures of this scetion shall be payable by the controlling person or group after it is so determined and upon and concurrently with the dehury or transfer to the controlling person or group by the court (which shall make delivery of the certificate or certificates surrendered or the uncertificated shares transferred to it to the controll:ag person or group as soon as practicabic but in any event within ten business days after the final determination of the amount owed) of the certificate or certificates representing shares surrendered or the uncertified shares transferred to the court, and the court shall then make payment, as soon as practicable but in any event within ten business days after receipt of payment from the controlling person or group, to the shareholders who so surrendered or transferred their shares to the court of the appropriate per-share amount received from the controlling person or group.

(h) VOTING AND DIVIDEND RIGilTS DURING APPRAISAL PROCEEDINGS- Shareholders who surrender their shares to the court pursuant to this section shall retain the right to vote their shares and receive dividends or other distributions thereon until the court receives payment in full for each of the shares so surrendered or transferred of the partial payment amount (and, thereafter, the controlling person or group shall be entitled to vote such shares and receive dividends or other distributions thereon). The fair value (as determined by the appraiser) of any dividends or othur distributions so received by the shareholders shall be subtracted from any amount owing to such shareholders under this section.

(i) POWERS OF Tile COURT-The court may appoint such agents, including the transfer agent of the corporation, or any other institution, to hold the share certificates so surrendered and the shares surrendered or transferred under this section, to eflect any necessary change in record ownership of the shares after the payment by the controlhng person or group to the court of the amount specified in subsection (h), to receise and disburse dividends or other distributions, to provide notices to shareholders and to take such other actions as the court determines are appropriate to etTect the purposes of this subchapter.

(j) COSTS AND EXPENSES - The costs and expenses of any appraiser or other agents appointed by the court shall be assessed against the controlling person or group. The costs and expenses of any other procedure to determine fair value shall be paid as agreed to by the parties agreeing to the procedure.

(L) JURISDICflON EXCLUSIVE-The jurisdiction of the court under this subchapter is plenary and exclusive and the controlling person or group, and all shareholders who so surrendered or transferred their i shares to the court shall be made a party to the proceeding as in an actwo against their shares.

(1) DUTY OF CORPORATION - The corporation shall comply with requests for information, which may be submitted pursuant *.c procedures maintaining the confidentiality c,f the info:mation, made by the court or the appraiser selected by the court. If any of the shares of the corporation are not represented by certiticates, the transfer, escrow or retransfer of those shares contemplated by this section shall be registered by the corporati on, which shall give the written notice requh-d by section 1528(f) (relating to uncertificated shares) to the transferring shareholder, the court and the controlling shareholder or group, as appropriate in the circumstances.

D-6

- . .. _ - .- - -- - . = . _ -

1 i

(m) l'AB11:NT UNDI:lt Ol'IlONAl. l'ItOCI:Dl!)ti:- Any amount agrced uniin between the partin or determined pursuant to the procedure agreed upon between the parties shall be payable by the controlling person or group after it is agreed upon or determined and upon and concurrently with the dehvery

- of any certificate or certificates representing such shares or the transfer of any uncertihcated shares to the controlling person or groep by the shaicholder.

(n) TITI.1:'IO SilAltl'S - Upon full payment by the controlling person or group of the amount owed to the shareholder or to the court, as appropriate, the shareholder shall ceaw to have any interest in the shares.

SECI'lON 2M8 COORDINATION WITil CONTitOL TitANT4CTION (a) GI;NI:RAl. Itlll.0- A person oc group that proposes to engage in a control transaction may comply with the require'..ents of this subchapter in conocction with the control transaction, and the effectiveness of the rights afrorded in this subchapter to shareholders may be conditioned upon the consummation of the control transaction.

~

(b) NOTICI:- The person or group shall give prompt written notice of the satisfaction of any such condition to each shareholder who has made demand as provided in this subehapter.

a e

4 4 D-7

(l APPI:NDl% 1:

l'OltM Ol' AMl:NDMl:NT 'IO Titi: DQl: AllTICl.ES To: Corporation llureau Department of State Commonwealth of Pennsylvania In compliance with the requirements of tl'c Pennsylvania !!usiness Corporation Law of 1988, as amended, the undersigned corporation, DQE, Inc., desiring to amend its Articles, certifies under its corporate seal that:

I, DQE, Inc. (the "Co poration") was incorporated on January 5,1989 pursuant to Article 11 of the Pennsylvania liusiness Corporation Law approved the 5th day of May,1933, P.L. 364, as amended.

The location of its registered of1 ice in the Commonwealth of Pennsylvania is 500 Cherrington Parkway, Coraopolis Pennsylvania 15108.

' ' . The amendment was adopted at a meeting of the lloard nf Directors of the Corporation duly ca: led and held on June 24,1997, at w hich a quorum was present and acting throughout. The amendment was approved by the shareholders of the Corporation at its Annual Meeting on AuFust 7,1997.

3. The amendment set forth in fullis as follows: A new Section 10.3 is added to the Corporation's Articles of incorporation to read in its entirely as follows:

10.3. Election to " Opt Out" of the Control Transaction Provisions. The provisions of Sections 2541-2548 cf the Pennsy!vanb ibniness Corporation Law of 1988, as amended, shall not be applicable to the Corporation.

IN TESTIMONY WilEREOF, the undersigned Corporation has caused these Articles of Amendment to be signed by its and its corporate seal to be aflixed to this document this day of

,199 .

[ Corporate Seall DQE, Inc.

Attest: Ily:

Name: Name:

Title:

Title:

Filed in the Department of State on Secretary of the Commonwealth E-1 u

DO NOT Hl: TURN Tills l'ORM UNI.I'S5 YOU PLAN TO ATTEND TiiE ANNUAL. h11:ETING TICKET REQl)EST I (We) will attend the Annual Meeting of Stockholders on August 7,1997 at 11:00 a.m. at the Manchester Cral'tsmen's Guild Auditorium 1815 Metropolitan Street, Pittsburgh, PA 15233.

NOTE: Ifyou are not a stockholder of record or 401(k) participant, please send proof of ownership if requesting a licket.

s PLEASE PRINT ACCOUNT NO.:

NAME:

ADDRESS:

PilONE: ( )

An admittance ticket will be sent to a stockholder whose request is received by July 28, 1997.

Stockholders without tickets will need to register at the meeting. RETURN WITH FORM OF PROXY OR M All TO:

Diane S. Eismont, Corporate Secretary DQE llox 68 Pittsburgh, PA 15230-0088 9

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