10-K 1 PART I ITEM l. BUSINESS GENERAL Pennsylvania Gas and Water Company ("PG&W"), a subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), was incorporated in Pennsylvania in 1867 as Dunmore Gas & Water Company. PG&W is an operating public utility regulated by the Pennsylvania Public Utility Commission (the "PPUC") and is engaged in gas utility operations and water utility operations in northeastern Pennsylvania. As of December 31, 1994, PG&W had approximately 139,300 gas customers and 132,500 water customers. PG&W has one wholly-owned subsidiary, Penn Gas Development Co., which was organized to promote the use of natural gas primarily by assisting in the financing of the development of property but which has been inactive in recent years. PG&W's gas operating revenues are highly seasonal and depend on certain factors that are beyond its control, such as the price of natural gas and the availability of markets for natural gas. Other factors include the weather, the effect of federal and state regulation, the effect of competition from other forms of energy, including electricity and oil, and the switching of customers from sales to transportation service. See "GAS BUSINESS-Transportation and Storage Service." Since 1986, PG&W has incurred significant expenditures for water treatment facilities and improvements to its water distribution system. While the PPUC has approved rate increases since January 1, 1991, designed to produce an aggregate of $35.8 million in additional annual water operating revenues, PG&W will require additional rate increases in order to fully recover the capital investment associated with its water utility operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Rate Matters - Water Rate Filings" in Item 7 of this Form 10-K and "Industry Segments." As of December 31, 1994, PG&W employed approximately 965 persons. Certain of these employees also perform services for PEI and its subsidiaries, since certain of those companies have no employees other than officers. -1- INDUSTRY SEGMENTS The following tables set forth certain financial information concerning PG&W's industry segments for the years indicated. [CAPTION] Year Ended December 31, 1994 1993 1992 (Thousands of Dollars) [S] [C] [C] [C] GAS UTILITY OPERATIONS Operating revenues $167,992 $153,325 $143,227 Operating expenses excluding income taxes: Cost of gas 98,653 86,557 77,720 Depreciation 6,667 6,388 6,087 Other operating expenses 37,247 34,927 34,031 Total 142,567 127,872 117,838 Operating income before income taxes 25,425 25,453 25,389 Income taxes 5,926 6,307 6,129 Operating income $ 19,499 $ 19,146 $ 19,260 Additions to utility plant $ 17,455 $ 13,325 $ 12,669 Identifiable assets at December 31 (a) $290,253 $285,596 $238,017 WATER UTILITY OPERATIONS Operating revenues $ 66,731 $ 53,363 $ 48,651 Operating expenses excluding income taxes: Depreciation 7,672 5,911 4,769 Other operating expenses 29,072 29,292 27,347 Deferred treatment plant costs, net 581 (1,532) (294) Total 37,325 33,671 31,822 Operating income before income taxes 29,406 19,692 16,829 Income taxes 6,573 2,682 2,176 Operating income $ 22,833 $ 17,010 $ 14,653 Additions to utility plant $ 19,321 $ 32,575 $ 44,352 Identifiable assets at December 31 (a) $440,202 $426,389 $379,989 TOTAL OPERATIONS Operating revenues $234,723 $206,688 $191,878 Operating expenses excluding income taxes: Cost of gas 98,653 86,557 77,720 Depreciation 14,339 12,299 10,856 Other operating expenses 66,319 64,219 61,378 Deferred treatment plant costs, net 581 (1,532) (294) Total 179,892 161,543 149,660 Operating income before income taxes 54,831 45,145 42,218 Income taxes 12,499 8,989 8,305 Operating income $ 42,332 $ 36,156 $ 33,913 Additions to utility plant $ 36,776 $ 45,900 $ 57,021 Identifiable assets at December 31 (a) $730,455 $711,985 $618,006 Other assets at December 31 (b) 8,825 14,323 11,866 Total assets $739,280 $726,308 $629,872 (a) Includes allocated common plant and is net of the respective accumulated depreciation. (b) Composed primarily of investments, cash and special deposits, prepayments and unallocated deferred charges. -2- Operating income from gas utility operations increased $353,000 (1.8%) from $19.1 million in 1993 to $19.5 million in 1994, primarily as a result of a $2.6 million increase in the gross margin (gas operating revenues less the cost of gas), the effect of which was partially offset by a higher level of maintenance expense because of colder than normal weather in January and February 1994, and increased gross receipts tax as a result of the higher level of gas revenues. Operating income from gas utility operations decreased $114,000 (0.6%) from $19.3 million in 1992 to $19.1 million in 1993, primarily as a result of increases in other operations and maintenance expenses, depreciation, and income and gross receipts taxes, the effects of which were largely offset by a $1.3 million increase in the gross margin. The higher level of additions to gas utility plant in 1994 was principally the result of increased expenditures for mains and services. Operating income from water utility operations increased $5.8 million (34.2%) from $17.0 million in 1993 to $22.8 million in 1994. This increase was primarily the result of rate increases effective (i) March 9, 1993, for customers in the Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, (ii) June 23, 1993, for customers in the Scranton Water Rate Area and (iii) December 16, 1993, for customers in the Spring Brook Water Rate Area served by the Ceasetown and Watres Water Treatment Plants, as well as a decrease in other taxes. The effects of these increases were partially offset by increases in other operations expense, depreciation, net deferred treatment plant costs and income taxes. Operating income from water utility operations increased $2.4 million (16.1%) from $14.7 million in 1992 to $17.0 million in 1993. This increase was primarily the result of the aforementioned rate increases which became effective in 1993. The effects of this increase were partially offset by increases in other operations and maintenance expenses, depreciation, and income and property taxes. Additions to water utility plant decreased in 1994 and 1993, largely as a result of the timing of expenditures with respect to the Crystal Lake, Ceasetown and Watres Water Treatment Plants in the Spring Brook Water Rate Area. GAS BUSINESS PG&W distributes natural gas to an area in northeastern Pennsylvania lying within the Counties of Lackawanna, Luzerne, Wyoming, Susquehanna, Columbia, Montour, Northumberland, Lycoming, Union and Snyder, a territory that includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and Williamsport. The total estimated population of PG&W's natural gas service area, based on the 1990 U.S. Census, is 561,000. Number and Type of Customers. At December 31, 1994, PG&W had approximately 139,300 natural gas customers, from which it derived total natural gas revenues of $168.0 million during 1994. The following chart shows a breakdown of the types of customers and the percentages of gas revenues generated by each type of customer in 1994: [CAPTION] Type of Customer % of Customers % of Revenues [S] [C] [C] Residential 91.6% 63.8% Commercial 8.1 23.8* Industrial 0.2 10.8* Other Users 0.1 1.6 Total 100.0% 100.0% * Includes the 4.0% of total gas revenues derived from interruptible customers. -3- During 1994, PG&W delivered an estimated total of 44,400,000 thousand cubic feet ("MCF") of natural gas to its customers, of which 56.3% was sold at normal tariff rates, 40.9% represented gas transported for customers and 2.8% was sold under the Alternate Fuel Rate (as described below). PG&W sells gas to "firm" customers with the understanding that it will not interrupt their supply except during periods of supply deficiency or emergency conditions. "Interruptible" gas customers are required to have equipment installed capable of using an alternate energy form. Interruptible customers, therefore, do not require a continuous supply of gas and their supply can be interrupted by PG&W at any time under the conditions set forth in their contracts for gas service. In 1994, a total of 1,157,000 MCF of natural gas was sold by PG&W to interruptible customers and 3,712,000 MCF was transported for such customers, which together represented 11.0% of the total deliveries of natural gas by PG&W to its customers during 1994. No individual customer accounted for as much as 2.0% of PG&W's operating revenues in 1994. Transportation and Storage Service. PG&W provides transportation service to natural gas customers who consume at least 5,000 MCF of natural gas per year, meet certain other conditions and execute a transportation agreement. In addition, groups of up to ten customers, with a combined consumption of at least 5,000 MCF per year, are eligible for transportation service. Prior to March 25, 1993, transportation service was only provided to individual customers, or groups of not more than three customers, who consumed at least 50,000 MCF of natural gas per year. Transportation service is provided on both a firm and an interruptible basis and includes provisions regarding over and under deliveries of gas on behalf of the respective customer. In addition, PG&W offers firm transportation customers a "storage service" pursuant to which such customers may have gas delivered to PG&W during the period from April through October for storage and redelivery during the winter period. PG&W also offers firm transportation customers a "standby service" under the terms of which PG&W will supply the customer with gas in the event the customer's transportation service is interrupted or curtailed by its broker, supplier or other third party. Commencing in April, 1995, PG&W will begin offering a Market Sensitive Sales Service ("MSSS") in conjunction with its transportation service. The MSSS, which was approved by Order of the PPUC entered January 11, 1995, provides for the sale of natural gas at contracted rates based on market prices and other specified terms and conditions. The MSSS is expected to result in additional sales of natural gas by PG&W and less transportation of natural gas by it on behalf of third parties. Set forth below is a summary of the gas transported by PG&W and the number of its customers using transportation service from 1992 to 1994: [CAPTION] Number Volume of Gas Transported (MCF) of Interstate Pennsylvania Year Customers Gas Gas Total [S] [C] [C] [C] [C] 1994 574 13,411,000 4,744,000 18,155,000 1993 569 10,078,000 4,627,000 14,705,000 1992 457 9,084,000 3,843,000 12,927,000 During 1995, PG&W expects to transport approximately 16,672,000 MCF of natural gas, of which it anticipates approximately 5,203,000 MCF will be Pennsylvania gas. -4- The rates charged by PG&W for the transportation of interstate gas are essentially equal to its tariff rates for the sale of gas with all gas costs removed. As a result, the transportation of interstate gas has had no significant adverse effect on earnings. However, the rate charged for the transportation of gas produced in Pennsylvania yields considerably less revenue than the gross margin (gas operating revenues less the cost of gas) that would be realized from sales under normal tariff rates. This lower rate for the transportation of Pennsylvania gas is the result of regulations adopted by the PPUC to encourage the production of natural gas within the state. Alternate Fuel Sales. In order to be more competitive in terms of price with certain alternate fuels, PG&W offers an Alternate Fuel Rate for eligible customers. This rate applies to large commercial and industrial accounts that have the capability of using No. 2, 4 or 6 fuel oil or propane as an alternate source of energy. Whenever the cost of such alternate fuel drops below the cost of natural gas at PG&W's normal tariff rates, PG&W is permitted by the PPUC to lower its price to these customers so that PG&W can remain competitive with the alternate fuel. However, in no instance may PG&W sell gas under this special arrangement for less than its average commodity cost of gas purchased during the month. PG&W's revenues under the Alternate Fuel Rate amounted to $3.7 million in 1994, $4.6 million in 1993 and $3.4 million in 1992. These revenues reflected the sale of 1,223,000 MCF, 1,541,000 MCF and 1,149,000 MCF in 1994, 1993, and 1992, respectively. It is anticipated that approximately 1,410,000 MCF will be sold under the Alternate Fuel Rate in 1995. The change in volumes sold under the Alternate Fuel Rate reflects the switching by certain customers between alternate fuel service and transportation service as a result of periodic changes in the relative cost of natural gas and alternate fuels. FERC Order 636. On April 8, 1992, the Federal Energy Regulatory Commission ("FERC") issued Order No. 636 ("Order 636"), requiring interstate pipeline suppliers to restructure their services and operations in an attempt to enhance competition and maximize the benefits of wellhead price decontrol. The objectives of Order 636 were to be accomplished primarily by unbundling the services (i.e., the sale, transportation and storage of gas) provided by the interstate pipeline suppliers and by making those services available to end users on the same terms as local gas distribution companies, such as PG&W. Pursuant to Order 636, the interstate pipelines have been required to: (1) unbundle transportation service from sales service; (2) allocate sufficient storage capacity, together with firm transportation, to replicate previous sales services; (3) provide a no-notice transportation service; (4) provide open access storage service; (5) reallocate upstream pipeline capacity and upstream storage for the benefit of downstream interstate pipeline suppliers; and (6) implement a straight fixed-variable rate design to replace all modified fixed- variable rate designs. The interstate pipelines have been granted a blanket sales certificate to make unbundled sales in competition with non-pipeline merchants and are being permitted recovery of all reasonable and prudent transition costs incurred in order to comply with Order 636. Such transition costs include: (1) the cost of renegotiating existing gas supply contracts with producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included in the interstate pipelines' purchased gas adjustment accounts at the time they adopted market-based pricing for gas sales ("Account 191 Costs"); (3) unrecovered costs of assets that cannot be assigned to customers of unbundled services ("Stranded Costs"); and (4) costs of new facilities to physically implement Order 636 ("New Facility Costs"). Additionally, the interstate pipelines have been allowed pre-granted abandonment of sales and transportation services to customers upon expiration of applicable contracts, subject to customers' rights of first refusal. -5- On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding the recovery of Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to recovery through the annual PGC rate filing made with the PPUC by PG&W and other larger local gas distribution companies. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs are subject to full recovery by local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Pennsylvania Public Utility Code (the "Code"). The PGC Order further stated that all such filings would be evaluated on a case-by-case basis. As of February 1, 1994, PG&W began to recover the Gas Transition Costs that are being billed to PG&W by its interstate pipelines through an increase in its PGC rate. It is currently estimated that these costs, which will be billed to PG&W over a nineteen-month period extending through March 31, 1995, will aggregate $1.2 million, of which $1.1 million had been billed to PG&W and $659,000 had been recovered from its customers as of December 31, 1994. By Order of the PPUC entered August 26, 1994, PG&W began recovering the Non-Gas Transition Costs that it estimates it will ultimately be billed pursuant to Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $9.4 million of Non-Gas Transition Costs will be billed to PG&W, generally over a four-year period extending through the fourth quarter of 1997, of which $3.8 million had been billed to PG&W and $1.1 million had been recovered from its customers as of December 31, 1994. As of December 31, 1994, PG&W had recorded a liability of $5.6 million for the estimated transition costs that remained to be billed to it as of such date, and both a current asset and a deferred asset (which together totaled $8.8 million) representing the transition costs remaining to be recovered from its customers. Sources of Supply. PG&W purchases natural gas from marketers, producers, and integrated energy companies, generally under the terms of supply arrangements that extend for the heating season (i.e., November through March) or for periods of one year or longer. These contracts typically provide for an adjustment each month in the cost of gas purchased pursuant thereto based on the then current market prices for natural gas. The largest individual supplier, an integrated energy company, accounted for 24.5% of PG&W's total purchases of natural gas in 1994. No other supplier accounted for more than 15% of PG&W's total purchases of natural gas in 1994. The purchases of natural gas by PG&W during each of the years 1994, 1993 and 1992 are summarized below: [CAPTION] Volume Average Year Purchased (MCF) Cost per MCF [S] [C] [C] 1994 28,364,000 $2.82 1993 26,200,000 $2.98 1992 21,323,000 $2.61 During 1995, PG&W expects to purchase a total of approximately 30,157,000 MCF of natural gas under seasonal or longer-term contracts at a currently projected average cost of $2.79 per MCF. It is expected that a portion of these purchases will be made through a company that is being formed by a group of eight Northeastern and Mid-Atlantic local gas distribution companies including PG&W, the primary purposes of which will be to increase the reliability of natural gas supplies and reduce the cost of natural gas for the eight companies. -6- PG&W presently has adequate supplies of natural gas to meet the demands of existing customers through October, 1995, and believes that it will be able to obtain sufficient supplies to meet the demands of its existing customers and to serve new customers (of which approximately 3,500 are expected to be added in 1995) beyond October, 1995. Pipeline Transportation and Storage Entitlements. Pursuant to the terms of Order 636, PG&W has entered into agreements with its former interstate pipeline suppliers providing for the firm transportation by those pipelines of the following quantities of gas: [CAPTION] Daily Percentage of Total Expiration Transportation Transportation Pipeline Date (a) Entitlement (MCF) Entitlement [S] [C] [C] [C] Transco Various through 2015 74,100 (b) 55.5% Tennessee 1999 and 2000 48,252 36.2 Columbia 2004 11,016 8.3 133,368 100.0% (a) Agreements are automatically extended from month-to-month or year- to-year after their expiration unless notice of termination is given by one of the parties and PG&W agrees to such termination. In no event may any of the agreements be unilaterally terminated by the pipelines without the approval of the FERC. (b) Includes 3,300 MCF per day that PG&W can transport during the period December through February pursuant to an agreement with Transco that extends through 2011. PG&W has also contracted with its former interstate pipeline suppliers for the following volumes of gas storage and storage withdrawals: [CAPTION] Maximum Expiration Total Storage Daily Withdrawal Pipeline Date (a) (MCF) (b) From Storage (MCF) [S] [C] [C] [C] Transco Various through 2013 6,500,000 131,044 Tennessee November 1, 2000 3,500,000 23,031 Columbia October 31, 2004 1,100,000 16,036 11,100,000 170,111 (a) Agreements are automatically extended from month-to-month or year- to-year after their expiration unless notice of termination is given by one of the parties and PG&W agrees to such termination. In no event may any of the agreements be unilaterally terminated by the pipelines without the approval of the FERC. (b) Storage is utilized in order to meet peak day and seasonal demands. -7- Based on its present pipeline transportation and storage entitlements, PG&W is entitled to a maximum daily delivery of the following quantities of gas: [CAPTION] Firm Pipeline Withdrawals Transportation From Storage Percentage Pipeline (MCF) (MCF) Total (MCF) of Total [S] [C] [C] [C] [C] Transco 74,100 (a) 131,044 205,144 67.6% Tennessee 48,252 23,031 71,283 23.5 Columbia 11,016 16,036 27,052 8.9 133,368 170,111 303,479 100.0% (a) Includes 3,300 MCF that may be transported during the period December through February. In accordance with the provisions of Order 636, PG&W may release to its customers and other parties the portions of its firm pipeline transportation and storage entitlements which are in excess of its requirements. Such releases may be made upon notice in accordance with the provisions of Order 636 and for a consideration not in excess of PG&W's cost of the respective entitlement. Releases may be made for periods ranging from one day to the remaining term of the entitlement. Since September 1, 1993, PG&W has released portions of its firm pipeline transportation capacity to certain of its customers and third parties for varying periods extending up to three years. The maximum capacity so released on any one day in 1994 was 38,985 MCF. Through March 10, 1995, PG&W had not, however, released any of its storage capacity. PG&W believes that it has sufficient firm pipeline transportation and storage entitlements to meet the demands of its existing customers and to supply new customers. Peak Day Requirements. PG&W plans for peak day demand on the basis of a daily mean temperature of 0 degrees Fahrenheit. Requirements for such a design peak day, assuming the curtailment of service to interruptible customers, are currently estimated to be 302,906 MCF. Based upon present pipeline transportation and storage contracts, and assuming no curtailments by its suppliers, PG&W could meet a peak day requirement of 303,479 MCF. PG&W's historic maximum daily sendout is 293,683 MCF, which occurred on January 19, 1994, when service to interruptible customers was curtailed. The mean temperature in its gas service area on that day was -8 degrees Fahrenheit. Construction Expenditures. PG&W's construction expenditures for gas utility plant in 1994 totaled $17.5 million and are estimated to be $21.9 million for 1995. The higher level of expenditures estimated for 1995 reflects certain long-term pipeline improvement programs, as well as an increased emphasis on new business development. Regulation. PG&W's natural gas utility operations are regulated by the PPUC, particularly as to utility rates, service and facilities, accounts, issuance of certain securities, the encumbering or disposition of public utility properties, the design, installation, testing, construction, and maintenance of PG&W's pipeline facilities and various other matters associated with broad regulatory authority. In addition to those regulations promulgated by the PPUC, PG&W must also comply with federal, state and local regulations relating generally to the discharge of materials into the environment or otherwise relating to the -8- protection of the environment. Compliance with such regulations has not had any material effect upon the capital expenditures, earnings or competitive position of PG&W's gas business. Although it cannot predict the future impact of these regulations, PG&W believes that any additional expenditures and costs made necessary by them would be fully recoverable through rates. PG&W, like many gas distribution companies, once utilized manufactured gas plants in connection with providing gas service to its customers. None of these plants have been in operation since 1960, and several of the plant sites are no longer owned by PG&W. Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed notices with the Environmental Protection Agency (the "EPA") with respect to the former plant sites. None of the sites is or was formerly on the proposed or final National Priorities List. The EPA has conducted site inspections and made preliminary assessments of each site and has concluded that no further remedial action is planned. While this conclusion does not constitute a legal prohibition against further regulatory action under CERCLA or other applicable federal or state laws, PG&W does not believe that additional costs, if any, related to these manufactured gas plant sites will be material to its financial position or results of operations. PG&W's gas distribution and transportation activities are not subject to the Natural Gas Act, as amended. Valve Maintenance. On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring PG&W by January 31, 1994, to survey its gas distribution system to verify the location and spacing of its gas shut off valves, to add or repair valves where needed and to establish programs for the periodic inspection and maintenance of all such valves and the verification of all gas service line information. The Emergency Order was issued following the occurrence of two gas incidents (one concerning an explosion and the other a fire) in PG&W's service area in June and October, 1993, respectively, involving nearby gas shut off valves that had been paved over by third parties and that could not be readily located due to alleged inaccurate service line records. The Emergency Order also cited four additional incidents occurring since January 31, 1991, in which shut off valves had been paved over or records were inaccurate. In connection with these incidents, the PPUC has alleged that PG&W has violated certain federal and state regulations related to gas pipeline valves. The PPUC has the authority to assess fines for such violations. The PPUC ordered PG&W to develop a plan, including a timetable, by December 30, 1993, for compliance with the terms of the Emergency Order. PG&W met the December 30, 1993, deadline for submission of this plan. However, PG&W included in such plan, a timetable, which, in effect, requested an extension of the January 31, 1994, deadline contained in the Emergency Order, which PG&W viewed as unrealistic. On February 2, 1994, the PPUC staff notified PG&W that it considered the plan submitted by PG&W "only a general plan of action to address the problem with valving in [PG&W's] system" and that the plan "is lacking in detail and more information is needed." By letter dated February 2, 1994, the PPUC staff indicated that it would initiate an informal investigation of the matter, including PG&W's responsibility for the incidents referred to in the Emergency Order. Following discussions between the PPUC staff and PG&W regarding the development of a mutually acceptable plan, PG&W submitted a detailed plan of action for complying with the Emergency Order to the PPUC on April 11, 1994, which was subsequently revised. The PPUC staff agreed that the revised plan (the "Plan") satisfies the concerns of the PPUC expressed in the Emergency Order, and on November 30, 1994, the PPUC staff and PG&W entered into a Settlement Agreement, subject to approval by the PPUC, (i) terminating the informal investigation initiated by the PPUC staff, (ii) -9- memorializing the acceptance by the PPUC staff of the Plan and (iii) evidencing PG&W's commitment to satisfy the requirements of the Plan. The PPUC must approve the Settlement Agreement. PG&W does not believe that compliance with the terms of the Settlement Agreement or any liability that might result from violations of law or the Emergency Order will have a material adverse effect on its financial position or results of operations. Rates. As required by the Code, PG&W files an annual purchased gas cost rate with the PPUC. This rate is designed to recover purchased gas costs for the period it will be in effect. The procedure includes a process for the reconciliation of actual gas costs incurred and actual revenues received and also provides for the refund of any overcollections, plus interest thereon, or the recoupment of any undercollections of gas costs. The procedure is limited to purchased gas costs, to the exclusion of other rate matters, and requires a formal evidentiary proceeding conducted by the PPUC, the submission of specific information regarding gas procurement practices and specific findings of fact by the PPUC regarding the "least cost fuel procurement" policies of the utility. In accordance with this procedure, PG&W placed a purchased gas cost rate of $3.68 per MCF in effect on December 1, 1994, and is required to file a proposed purchased gas cost rate on or before June 1, 1995, to be effective December 1, 1995. It is not presently possible to estimate how this proposed rate will compare to the current purchased gas cost rate of $3.68 per MCF, which is scheduled to remain in effect through November 30, 1995. The annual changes in gas rates on account of purchased gas costs have no effect on PG&W's earnings since the change in revenues is offset by a corresponding change in the cost of gas. The PPUC has issued proposed regulations that would provide for the quarterly adjustment of the purchased gas cost rate of larger gas distribution companies, including PG&W. Except for reducing the amount of any over or undercollections of gas costs, the adoption of these proposed regulations would not have any material effect on PG&W's financial position or results of operations. FERC Order 636, among other matters, requires that PG&W contract for sufficient gas supplies, pipeline capacity and storage for its annual needs. These added responsibilities may result in increased scrutiny by the PPUC as to the prudence of PG&W's gas procurement and supply activities. Depending upon how the PPUC views the cost effectiveness of such activities, PG&W may not be permitted to recover all of its gas supply costs in the rates charged to customers. However, although it cannot be certain, PG&W believes that it will be able to demonstrate to the PPUC the prudence of its gas supply costs and, therefore, will be allowed to recover all such costs in its purchased gas cost rate. Tax Surcharge Adjustments. The PPUC allows PG&W to apply a state tax adjustment surcharge tariff to its bills for gas service to recoup any increased taxes resulting from changes in the law with respect to the Pennsylvania Capital Stock Tax, Corporate Net Income Tax, Gross Receipts Tax or Public Utility Realty Tax. In accordance with such procedure, PG&W filed a revised state tax adjustment surcharge tariff with the PPUC which became effective August 1, 1994, to reflect the effect of tax legislation enacted by the Commonwealth of Pennsylvania on June 16, 1994, decreasing the Corporate Net Income Tax rate. -10- WATER BUSINESS PG&W distributes water to an area lying within the Counties of Lackawanna, Luzerne, Susquehanna and Wayne, which includes the Cities of Scranton and Wilkes-Barre and 62 other municipalities. The total estimated population of PG&W's water service area, based on the 1990 U.S. Census, is 398,000. Number and Type of Customers. At December 31, 1994, PG&W had approximately 132,500 water customers from which it derived total water revenues of $66.7 million during 1994. The following chart shows a breakdown of the types of customers and the percentages of water revenues they generated in 1994: [CAPTION] Type of Customer % of Customers % of Revenues [S] [C] [C] Residential 91.6% 63.2% Commercial 7.1 18.3 Industrial 0.3 8.6 Municipal and Other Users 1.0 9.9 Total 100.0% 100.0% Sources of Supply and Safe Yield. The water that PG&W distributes is furnished by a PG&W-owned water supply system, which includes 36 active and standby reservoirs located on extensive watershed lands and five wells. The water supply can be augmented, on a short-term basis, by two pump stations that can pump water from streams outside the watershed into the reservoir storage system. The combined "safe yield" of PG&W's active and standby sources of supply is approximately 88 million gallons per day, and the combined storage capacity of the reservoir system is estimated by PG&W to be approximately 20 billion gallons. ("Safe yield" is the quantity of water, generally expressed in million gallons per day, that a source of supply can deliver in extreme drought conditions.) The average daily delivery into PG&W's water distribution system during 1994 was approximately 66.5 million gallons. As of December 31, 1994, the quantity of water held in PG&W's reservoirs was approximately 19.0 billion gallons or 96.3% of their maximum storage capacity. PG&W has always been able to provide adequate water supplies to meet the requirements of its service area and has never issued a mandatory water conservation directive. PG&W believes it can continue to meet fully the water supply requirements of its service area in the absence of any extended periods of severe drought. The Susquehanna River, one of the major rivers in the Commonwealth of Pennsylvania, flows through PG&W's service area and has always been considered a possible source of supply for its service area. Although PG&W is not presently taking any water from the Susquehanna River and does not have facilities installed that would permit it to do so, it is currently authorized to withdraw, on an emergency basis, 15 million gallons per day from the river. Filtration of Water Supplies. All of PG&W's water customers are supplied with filtered water (except for several hundred who are supplied with ground water from wells) which meets all federal and state drinking water regulations. The filtration of PG&W's water supplies is performed at ten water treatment plants, located throughout PG&W's water service area, which have an aggregate daily capacity of 101.1 million gallons. The goal of providing all of PG&W's customers who are served from surface supplies with filtered water was achieved on September 30, 1993, when the Watres Water Treatment Plant was placed into operation. The Watres Water Treatment Plant was the last of eight water treatment plants to be constructed and placed into operation by PG&W during the -11- period 1988 through 1993. Until the construction of these plants, most of PG&W's water customers were supplied with treated, but nonfiltered water, obtained from various reservoirs and stream intakes, although a relatively small percentage of its customers received filtered water from two previously existing water treatment plants or ground water pumped from wells. Main Replacement and Rehabilitation Program and Other Distribution System Improvements. PG&W distributes water to its customers through approximately 1,689 miles of pipe ranging in size from over 48" in diameter to less than 1" in diameter. The majority of the water mains in PG&W's distribution system consists of cast iron or ductile iron pipe. The majority of cast iron pipe is unlined. Approximately 54% (based on linear feet of pipe of all diameters) of PG&W's water mains were installed prior to 1920 and approximately 30% were installed prior to 1900. In 1987, PG&W completed a review of its distribution system designed to ascertain the general nature and the approximate cost of improvements that would be required for a complete distribution system main rehabilitation. In performing the study, PG&W made certain assumptions as to the general structural condition of its system. It did not request outside engineering assessments of the entire system. Using the criteria developed in the distribution system assessment as a guide, PG&W preliminarily estimated the cost of complete distribution system main replacement and/or rehabilitation to be approximately $248 million at 1987 price levels. Based upon this assessment, PG&W determined that embarking on a program to accomplish total distribution system rehabilitation in a relatively short span of time would not be a cost effective means of improving water quality. PG&W determined that the most substantial opportunities for improvement of water quality lay in the filtration of PG&W's sources of water supply. In view of the large commitment of capital needed to construct water treatment plants, rapid implementation of a distribution system rehabilitation program would divert financial resources from, and cause delays in, the construction of those facilities. Consequently, PG&W developed a program of rehabilitation to be implemented on a more modest scale, which PG&W believes will address the conditions that are most likely to cause degradation of water quality in the distribution system. This program, which includes the selective replacement and rehabilitation of water mains and services and the elimination of dead-end lines, involved the expenditure of $55.0 million during the period 1988 through 1994. In connection with its distribution system rehabilitation program, PG&W intends to expend an average of $9.8 million per year during the period 1995 through 1997 for water distribution system improvements, primarily the replacing or cleaning and lining of mains. Such replacement and cleaning and lining of mains will focus on the areas of highest priority and will be based on the criteria set forth in the 1987 distribution system assessment, which will be updated in accordance with the PPUC's June 23, 1993, Order allowing PG&W a conditional rate increase for the Scranton Water Rate Area. As part of the settlement resolving certain disputed issues relating to such Order, PG&W agreed to spend a total of $4.9 million annually beginning June 23, 1993 (an additional $2.5 million over its actual average annual expenditure of $2.4 million during the three-year period ended June 30, 1993), for distribution system improvements in the Scranton Water Rate Area until the PPUC is satisfied that PG&W is providing adequate service. PG&W was in compliance with this provision of the Order as of December 31, 1994, and the additional expenditures it is so required to make are included in the amounts that it is planning to spend annually on distribution system improvements during the years 1995 through 1997. -12- PG&W estimates that approximately 30% of the water introduced to its distribution system is lost through leakage or otherwise cannot be accounted for through identifiable uses. However, PG&W believes that its rate of unaccounted for water is not uncharacteristic of water systems of similar age, size and demographics. Unaccounted for water requires PG&W to incur expenses to process water that is not furnished to customers. While such costs are typically recoverable in the rates charged to customers, the PPUC has disallowed their recovery when unaccounted for water reached a level the PPUC determined to be unreasonable. The PPUC, in a 1989 Policy Statement on water conservation for water utilities, stated that levels of unaccounted for water should be kept within reasonable levels. Although the PPUC has considered levels above 20% to be excessive in certain circumstances, there is no industry standard for unaccounted for water levels. In a 1990 decision involving another Pennsylvania water utility, the PPUC recognized that historic unaccounted for water problems could not be resolved immediately and that a utility would not be penalized if it were making substantial progress toward achieving the 20% unaccounted for goal. PG&W believes that it has made substantial progress in identifying sources of water loss in its system through the implementation of an aggressive leak detection program in conjunction with an ongoing main replacement program and it is continuing its efforts to identify additional sources utilizing the services of consultants. Regulation. PG&W's water utility operations are regulated by the PPUC, particularly as to utility rates, service and facilities, accounts, issuance of certain securities, the encumbering or disposition of public utility properties and various other matters associated with broad regulatory authority. PG&W, in common with most industrial enterprises, is subject to regulation with respect to the environmental effects of its operations. In addition to the PPUC, the principal agency having regulatory authority over PG&W's water operations is the DER, which has jurisdiction, among other matters, concerning water rights, sources of supply, the design and construction of waterworks, the quality of drinking water and the safety of dams. In addition to those regulations promulgated by the PPUC, PG&W must also comply with federal, interstate compact, state and local regulations relating generally to the discharge of materials into the environment, or otherwise relating to the protection of the environment. Compliance with such regulations has not had any material effect upon the capital expenditures, earnings or competitive position of PG&W's water business. Although it cannot predict the future impact of these regulations, PG&W believes that any additional expenditures and costs made necessary by them will be fully recoverable through rates. Federal and State Water Quality Standards. The Federal Safe Drinking Water Act of 1974 (the "Act") regulates the quality of drinking water provided to the public. Pursuant to the Act, the EPA has issued regulations relating to, among other things, water quality standards, maximum contaminant levels and monitoring requirements and prohibitions against the use of lead in distribution systems. As permitted by the Act, the Pennsylvania Department of Environmental Resources (the "DER") has assumed primacy for enforcement of drinking water standards in Pennsylvania. PG&W has taken action to comply with these regulations and does not anticipate any impact on its water operations as a result thereof. Treatment and Testing of Water. All water entering PG&W's distribution system is filtered (except for the small quantity of ground water pumped from wells), disinfected, and treated with chemicals to minimize corrosion of the distribution system and customers' piping. Water samples are taken at each of -13- the intake stations and at selected locations in PG&W's service area, and turbidity is monitored at each location at which the water enters the distribution system. PG&W operates a laboratory which is certified by the DER to perform microbiological, inorganic and organic chemical analyses of the water in both its reservoirs and distribution system, utilizing a scheduled sampling program. Such analyses include those tests required by the DER, and the results of such tests are reported to the DER as required by law. Construction Expenditures. PG&W's construction expenditures for water utility plant in 1994 totaled $19.3 million, and are estimated to be $23.0 million for 1995. The higher level of capital expenditures estimated for 1995 is primarily attributable to the construction of storage tanks at the Hillside Water Treatment Plant and increased expenditures for distribution system improvements. Rates. The following table summarizes PG&W's requests for water rate increases and the action taken by the PPUC on those requests from January 1, 1991, to March 10, 1995:
Amount Increase Date of Requested Effective Granted Service Area Request (in millions) Date (in millions) Scranton (filtered water customers) June, 1990 $ 25.5 March, 1991 $ 15.0 (1) (subject to phase-in) Spring Brook (customers served water exclusively from the Nesbitt Water Treatment Plant) April, 1991 2.6 January, 1992 1.9 Spring Brook (customers served water exclusively from the Crystal Lake Water Treatment Plant) June, 1992 4.4 March, 1993 2.0 (1) (subject to phase-in) Scranton (filtered water customers) September, 1992 9.9 June, 1993 5.0 (1) Spring Brook (customers served water exclusively from the Ceasetown and Watres Water Treatment Plants) April, 1993 19.5 December, 1993 11.9 (1) (subject to phase-in)
(1) See "-Management's Discussion and Analysis of Financial Condition and Results of Operations-Rate Matters-Water Rate Filings." The rate relief granted in the past to PG&W by the PPUC has been less than the full amounts requested. Generally, the amounts granted have been determined through negotiated settlements with certain parties to the proceedings in order to obtain rate relief earlier than expected and to avoid the substantial expenses associated with further administrative and possible appellate proceedings. PG&W believes that it will be able to obtain adequate future rate relief as it makes further improvements to its distribution system and is able -14- to demonstrate it is providing water that is suitable for all "household purposes", i.e., meeting federal and state primary (health-related) and -15- secondary (aesthetics-related, particularly taste, odor and color) drinking water standards, and that meets all applicable water quality standards. The magnitude of the projected rate increases that will be required to enable PG&W to fully recover its capital expenditures associated with the construction of the water treatment plants will be significant. Prior to the construction of the plants, the average annual cost of water to PG&W's customers receiving nonfiltered water was approximately $143. The average annual cost of water to PG&W's residential customers, all of whom are now receiving filtered water (except for several hundred who are supplied ground water from wells) was approximately $340 as of March, 1995. PG&W anticipates that this cost will increase to approximately $460 in the latter part of this decade, at which time PG&W expects to have been allowed by the PPUC to fully reflect in rates its costs associated with the filtration of its water supplies. PG&W believes that these levels of increases, in terms of percentages, will not be inconsistent with those that have been or will be experienced by other water utilities required to make a similar transition to filtered water; however, the level of rates that PG&W expects to seek in future rate increases will be such that the PPUC may question the "affordability" of such rates and may require that any such rate increases be phased-in over a period of time in order to reduce consumer "rate shock." While PG&W expects that the PPUC will grant adequate rate relief in a timely manner, there can be no assurance that the PPUC will take such action. Tax Surcharge Adjustments. The PPUC allows PG&W to apply a state tax adjustment surcharge tariff to its bills for water service to recoup any increased taxes resulting from changes in the law with respect to the Pennsylvania Capital Stock Tax, Corporate Net Income Tax or Public Utility Realty Tax. In accordance with such procedure, PG&W filed a revised state tax adjustment surcharge tariff with the PPUC which became effective August 1, 1994, to reflect the effect of tax legislation enacted by the Commonwealth of Pennsylvania on June 16, 1994, decreasing the Corporate Net Income Tax rate. -16- ITEM 2. PROPERTIES Gas. PG&W's gas system consists of approximately 2,191 miles of distribution lines, nine city gate and 67 major regulating stations and miscellaneous related and additional property. PG&W believes that its gas utility properties are adequately maintained and in good operating condition in all material respects. Continued expenditures will, however, be required with regard to PG&W's on-going valve maintenance program. See "Business-Gas Business-Valve Maintenance." Most of PG&W's gas utility properties are subject to a first mortgage lien pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15, 1946, as supplemented by twenty-nine supplemental indentures (collectively, the "Indenture") from PG&W to First Trust of New York, National Association, as Trustee. Water. PG&W's water system consists principally of 36 active and standby reservoirs and stream intakes, ten water treatment plants, five wells, various distribution system storage tanks, approximately 1,689 miles of aqueducts and pipelines, and miscellaneous related and additional property. In addition, PG&W owns approximately 53,000 acres of land situated in northeastern Pennsylvania. In PG&W's opinion, its water utility properties are adequately maintained and in good operating condition in all material respects. Continued capital expenditures will, nonetheless, be required for PG&W's on-going program of water main replacement and rehabilitation and other improvements to ensure the integrity of PG&W's distribution system. See "Business-Water Business-Main Replacement and Rehabilitation Program and Other Distribution System Improvements." Most of PG&W's water utility properties are subject to a first mortgage lien pursuant to the Indenture. Additionally, certain of these properties are subject to a second mortgage lien (the "PENNVEST Mortgage") pursuant to a loan agreement, dated October 16, 1987, between PG&W and the Pennsylvania Water Facilities Loan Board and pursuant to loan agreements, dated March 3, 1989, and December 3, 1992, between PG&W and the Pennsylvania Infrastructure Investment Authority ("PENNVEST"), under the terms of which funds were provided to finance the construction of certain water facilities. The PENNVEST Mortgage also secures PG&W's obligations under assumption agreements dated April 5, 1993, with PENNVEST which relate to loans which were assumed by PG&W in connection with its acquisition of two small water companies. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1994, there were no matters submitted to a vote of security holders of the registrant through the solicitation of proxies or otherwise. -17- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Registrant's common stock is owned entirely by PEI and is not traded. The dividends per share of common stock paid by PG&W during the years ended December 31, 1994 and 1993, were as follows: 1994 1993 First quarter $ .350 $ .7100 Second quarter .355 .7100 Third quarter .425 .7100 Fourth quarter .680 .6925 Total $ 1.810 $2.8225 Information relating to restriction on the payment of dividends by PG&W is set forth in Note 7 to the Financial Statements in Item 8 of this Form 10-K. -18- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table expresses certain items in PG&W's Statements of Income contained in Item 8 of this Form 10-K as percentages of total operating revenues for each of the calendar years ended December 31, 1994, 1993 and 1992. Percentage of Operating Revenues Year Ended December 31, 1994 1993 1992 Operating Revenues: Gas 71.6% 74.2% 74.6% Water 28.4 25.8 25.4 Total operating revenues 100.0 100.0 100.0 Operating Expenses: Cost of gas 42.0 41.9 40.5 Other operation expenses 17.1 18.8 19.8 Maintenance and depreciation 10.4 10.5 10.2 Deferred treatment plant costs, net 0.3 (0.7) (0.1) Income and other taxes 12.2 12.1 12.0 Total operating expenses 82.0 82.6 82.4 Operating Income 18.0 17.4 17.6 Other Income, Net - 0.3 - Interest Charges 9.5 9.9 10.9 Dividends on Preferred Stock 2.0 3.1 2.6 Earnings Applicable to Common Stock 6.5% 4.7% 4.1% o Year ended December 31, 1994, compared with year ended December 31, 1993 Operating Revenues. PG&W's operating revenues increased $28.0 million (13.6%) from $206.7 million for 1993 to $234.7 million for 1994. Gas operating revenues increased by $14.7 million (9.6%) from $153.3 million for 1993 to $168.0 million for 1994, primarily as a result of a price increase averaging 19.0% (designed to total $28.8 million on an annual basis) effective December 1, 1993, due to increased costs of purchased gas. See "-Rate Matters- Gas Rate Filings." Also contributing to the increase in gas operating revenues in 1994 was a 224 million cubic feet (1.0%) increase in sales to residential and commercial heating customers. This increase was attributable to the addition of approximately 2,200 new customers and occurred despite heating degree days* that were 2.1% lower than normal and 0.3% less than in 1993. Additionally, the implementation of surcharges to recover Federal Energy Regulatory Commission ("FERC") Order 636 transition costs (as more fully discussed below under "-Rate Matters-Gas Rate Filings") acted to increase gas operating revenues by $1.8 million in 1994. The effects of the price increase and the surcharges on gas operating revenues were partially offset by the switching of certain commercial * A heating degree day ("degree day") represents each degree by which the average of the high and low temperatures for a given day is below 650 Fahrenheit. Actual degree days represent the sum of the degree days for the period. -19- and industrial customers from sales to transportation service and a price decrease averaging 1.1% (designed to total $1.8 million on an annual basis) effective December 1, 1994, due to decreased costs of purchased gas (see"-Rate Matters-Gas Rate Filings"). Water operating revenues increased by $13.4 million (25.0%) from $53.4 million for 1993 to $66.7 million for 1994. This increase in revenues was primarily the result of rate increases which the Pennsylvania Public Utility Commission (the "PPUC") allowed PG&W, including a $2.0 million annual rate increase effective March 9, 1993, for customers in the Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, a $5.0 million annual rate increase effective June 23, 1993, for customers in the Scranton Water Rate Area, and an $11.9 million annual rate increase effective December 16, 1993, for customers in the Spring Brook Water Rate Area served by the Ceasetown and Watres Water Treatment Plants, as more fully explained below under "-Rate Matters-Water Rate Filings." Operating Expenses. Operating expenses, including depreciation and income taxes, increased $21.9 million (12.8%) from $170.5 million for 1993 to $192.4 million for 1994. As a percentage of operating revenues, total operating expenses decreased from 82.6% during 1993 to 82.0% during 1994. Operating expenses related to gas utility operations increased by $14.3 million (10.7%) from $134.2 million in 1993 to $148.5 million in 1994, primarily as a result of a $12.1 million increase in the cost of gas, a higher level of other operations and maintenance expense and increased gross receipts tax as a result of the higher level of gas revenues. Operating expenses related to water utility operations increased by $7.5 million (20.8%) from $36.4 million in 1993 to $43.9 million in 1994, primarily as a result of increases in other operation expense, depreciation, net deferred treatment plant costs and income taxes. The cost of gas increased $12.1 million (14.0%) from $86.6 million for 1993 to $98.7 million for 1994. The effect of this increase, which was the result of higher costs for purchased gas and the implementation of surcharges to recover FERC Order 636 transition costs (see "-Rate Matters-Gas Rate Filings"), was partially offset by a 9.0% (2.6 billion cubic feet) decrease in the volume of gas sold during 1994, compared to 1993. This decreased volume was largely attributable to the aforementioned switching of certain customers from sales to transportation service. The gross margin on gas operations (gas operating revenues less the cost of gas) increased $2.6 million or 3.9% in 1994, primarily as a result of the increased sales to residential and commercial heating customers. Other than the cost of gas and income taxes, operating expenses increased by $6.3 million (8.3%) from $75.0 million for 1993 to $81.2 million for 1994. This increase was largely attributable to a $1.2 million increase in other operation and maintenance expenses (principally as a result of a $668,000 increase in payroll costs, a $507,000 increase in other postretirement benefits and increased provisions for uncollectible accounts of $728,000) and a $2.1 million increase in net deferred treatment plant costs during 1994 (see "-Deferred Treatment Plant Costs, Net and Carrying Charges"), as well as a $2.0 million increase in depreciation (primarily because of capital additions and the change in December, 1993, from a 4% compound interest to a straight-line method of depreciation with respect to water plant in the Ceasetown and Watres Service Areas). The effects of these increases were partially offset by a $613,000 increase in costs charged to construction (which acts to reduce expense) as a result of a higher level of construction activity. -20- Income taxes increased by $3.5 million from $9.0 million in 1993 to $12.5 million in 1994 due to a higher level of income before income taxes (for this purpose, operating income net of interest charges). Deferred Treatment Plant Costs, Net and Carrying Charges. Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred all operating expenses, including depreciation and property taxes, and the carrying charges (equivalent to the allowance for funds used during construction ("AFUDC")) relative to the four new Scranton Area water treatment plants and related facilities from the dates of commercial operation of the plants until March 23, 1991, the effective date of the Scranton Area water rate increase approved by the PPUC on March 22, 1991. By its Order entered June 23, 1993, relative to the Scranton Water Rate Area, the PPUC granted PG&W's request to recover $5.8 million of costs deferred with respect to the Scranton Area water treatment plants and related facilities over a ten-year period beginning June 23, 1993, of which $885,000 had been recovered as of December 31, 1994. Similarly, as permitted by an Order of the PPUC entered September 24, 1992, PG&W deferred all operating expenses, including depreciation and property taxes, and the carrying charges relative to the Crystal Lake Water Treatment Plant and related facilities from August 3, 1992 (the date of commercial operation of that plant), until March 9, 1993, the effective date of the water rate increase approved by the PPUC on February 25, 1993, for customers in PG&W's Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant. Additionally, in accordance with an Order of the PPUC entered July 28, 1993, PG&W deferred all expenses and the carrying charges relative to the Ceasetown and Watres Water Treatment Plants and related facilities incurred prior to December 16, 1993, the effective date of the water rate increase approved by the PPUC on December 15, 1993, for customers served by the Ceasetown and Watres Water Treatment Plants. As of December 31, 1994, a total of $4.6 million of costs relative to the Crystal Lake, Ceasetown and Watres Water Treatment Plants and related facilities had been deferred pursuant to the PPUC's Orders of September 24, 1992, and July 28, 1993. PG&W will seek recovery of the costs that have been so deferred in its next rate increase request relating to the Spring Brook Water Rate Area. Although it cannot be certain, PG&W believes that the recovery of such costs will be allowed by the PPUC in future rate increases, particularly in view of the PPUC's action allowing the recovery of the costs deferred with respect to the Scranton Area water treatment plants and related facilities. Operating Income. As a result of the above, total operating income increased by $6.2 million (17.1%) from $36.2 million for 1993 to $42.3 million for 1994, and increased as a percentage of total operating revenues for such periods from 17.4% in 1993 to 18.0% in 1994. Operating income from gas utility operations increased $353,000 (1.8%) from $19.1 million in 1993 to $19.5 million in 1994, primarily as a result of a $2.6 million increase in the gross margin, the effect of which was partially offset by a higher level of maintenance expense because of colder than normal weather in January and February, 1994, and increased gross receipts tax as a result of the higher level of gas revenues. Operating income from water utility operations increased $5.8 million (34.2%) from $17.0 million in 1993 to $22.8 million in 1994. This increase was primarily the result of rate increases effective March 9, 1993, June 23, 1993, and December 16, 1993, and a decrease in other taxes, the effects of which were partially offset by increases in other operations expense, depreciation, net deferred treatment plant costs and income taxes, as discussed above. -21- Other Income, Net. Other income, net decreased $544,000 from $560,000 for 1993 to $16,000 for 1994. This decrease was primarily attributable to a $1.5 million decrease in the allowance for equity funds used during construction because of a lower level of construction in progress, largely as a result of the completion of the Crystal Lake, Watres and Ceasetown Water Treatment Plants in 1993, and the discontinuance of the deferral of carrying charges relative to those plants. The effect of such items was partially offset by a $254,000 increase ($145,000 net of related income taxes) in gains on the sale of non- watershed land, a $469,000 gain ($268,000 net of related income taxes) on the sale of PG&W's interest in an oil and gas joint venture and a decrease in net interest expense associated with the unutilized portion of the proceeds from the issuance on December 22, 1992, of the Luzerne County Industrial Development Authority (the "Authority") Exempt Facilities Revenue Bonds, 1992 Series B (Pennsylvania Gas and Water Company Project) (the "1992 Series B Bonds.") See "-Liquidity and Capital Resources-Long-Term Debt and Capital Stock Financings." The proceeds from the issuance of the 1992 Series B Bonds were deposited in a construction fund held by PNC Bank (formerly Northeastern Bank of Pennsylvania) as trustee for the 1992 Series B Bonds (the "IDA Trustee"), pending their utilization to finance the construction of various additions and improvements to PG&W's water facilities for which construction commenced subsequent to September 23, 1992. Interest expense relative to the funds so utilized for the benefit of PG&W is reflected as interest on long-term debt. The interest expense relating to the portion of the funds held by the IDA Trustee, net of the income earned on the temporary investment of such funds, is reflected in other income, net. Interest Charges. Interest charges increased by $2.1 million (10.4%) from $20.4 million for 1993 to $22.5 million for 1994. This increase was primarily attributable to a $1.2 million decrease in AFUDC, largely because of the completion of the Crystal Lake, Ceasetown and Watres Water Treatment Plants, and the discontinuance of the deferral, which totaled $1.2 million during 1993, of the carrying charges associated with those plants. Interest on long-term debt increased by $707,000 (3.4%) from $20.5 million during 1993 to $21.2 million during 1994. The increase was principally the result of an additional $868,000 of interest expense relative to the 1992 Series B Bonds being reflected as interest on long-term debt (see "-Other Income, Net"). The weighted average indebtedness outstanding during 1994 was $287.8 million as compared to $288.2 million during 1993. The weighted average interest rate on indebtedness during 1994 was 7.73% as compared to 7.93% during 1993. Dividends on Preferred Stock. Dividends on preferred stock decreased $1.8 million (28.2%) from $6.5 million for 1993 to $4.6 million for 1994, primarily as a result of the redemption by PG&W on December 23, 1993, of 100,000 shares ($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0 million), of its 9.50% cumulative preferred stock, $100 par value. Earnings Applicable to Common Stock. Earnings applicable to common stock increased $5.3 million (54.2%) from $9.8 million for 1993 to $15.2 million for 1994. The increased earnings in 1994 were the result of the matters discussed above, principally the increases in water operating revenues resulting from the rate increases which the PPUC allowed PG&W effective March 9, 1993, June 23, 1993, and December 16, 1993, and the increase in the gross margin on gas operations resulting primarily from the higher level of sales to residential and commercial heating customers. The effects of these factors were partially offset by increased operating expenses and interest charges. -22-
Before the $534,000 premium paid on the redemption of 150,000 shares of PG&W's 9.50% cumulative preferred stock on May 31, 1994, and the $446,000 premium paid on the redemption of 150,000 shares of PG&W's 8.90% cumulative preferred stock on December 16, 1994, the earnings per share of common stock increased $.56 (23.7%) from $2.36 per share for 1993 to $2.92 per share for 1994. This improvement was the result of the 54.2% increase in earnings applicable to common stock and occurred despite a 24.3% increase in the weighted average number of shares outstanding during 1994, primarily as a result of PG&W's sale of 834,000 shares of common stock to Pennsylvania Enterprises, Inc. ("PEI"), the parent company of PG&W, on October 27, 1993. While premiums on the redemption of preferred stock are charged to retained earnings and are not a determinant of earnings applicable to common stock, the premiums associated with any redemptions occurring subsequent to January 20, 1994, must be taken into account in calculating the earnings per share of common stock. As a consequence, the premiums on the redemption of the 150,000 shares of PG&W's 9.50% cumulative preferred stock and the 150,000 shares of PG&W's 8.90% cumulative preferred stock acted to reduce earnings per share for 1994 by $.19 per share, resulting in earnings of $2.73 per share of common stock for the year, an increase of $.37 per share (15.7%) over the earnings of $2.36 per share for the year ended December 31, 1993.
o Year ended December 31, 1993, compared with year ended December 31, 1992 Operating Revenues. Operating revenues of PG&W increased $14.8 million (7.7%) from $191.9 million for 1992 to $206.7 million for 1993. Gas operating revenues increased by $10.1 million (7.1%) from $143.2 million for 1992 to $153.3 million for 1993, primarily as a result of price increases averaging 6.8% (designed to total $9.5 million on an annual basis) effective December 1, 1992, and 19.0% (designed to total $28.8 million on an annual basis) effective December 1, 1993, due to increased costs of purchased gas. Also contributing to the increase in gas operating revenues in 1993 was an 840 million cubic feet (3.9%) increase in sales to residential and commercial heating customers. Although heating degree days were 1.8% lower than normal during 1993, they were 0.7% higher than in 1992. The effect of the price increases and colder weather on gas operating revenues were partially offset by the switching of certain commercial and industrial customers from sales to transportation service. Water operating revenues increased by $4.7 million (9.7%) from $48.7 million for 1992 to $53.4 million for 1993. This increase in revenues was largely the result of rate increases which the PPUC allowed PG&W, including a $2.0 million annual rate increase effective March 9, 1993, for customers in the Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, a $5.0 million annual rate increase effective June 23, 1993, for customers in the Scranton Water Rate Area, and an $11.9 million annual rate increase effective December 16, 1993, for customers in the Spring Brook Water Rate Area served by the Ceasetown and Watres Water Treatment Plants, as more fully explained below under "-Rate Matters-Water Rate Filings." Operating Expenses. Operating expenses, including depreciation and income taxes, increased $12.6 million (8.0%) from $158.0 million for 1992 to $170.5 million for 1993. As a percentage of operating revenues, total operating expenses increased from 82.4% during 1992 to 82.6% during 1993. Operating expenses related to PG&W's gas utility operations increased by $10.2 million (8.2%) from $124.0 million in 1992 to $134.2 million in 1993, primarily as a result of an $8.8 million increase in the cost of gas. Operating expenses related to PG&W's water utility operations increased by $2.4 million (6.9%) from -23- $34.0 million in 1992 to $36.4 million in 1993, primarily as a result of increased operation and maintenance costs, depreciation and taxes, the effects of which were partially offset by a $1.2 million increase in the deferral of treatment plant costs (which acted to reduce expenses). The cost of gas increased $8.8 million (11.4%) from $77.7 million for 1992 to $86.6 million for 1993. The effect of this increase, which was the result of higher costs for purchased gas, was partially offset by a 2.7% (797 thousand cubic feet) decrease in the volume of gas sold during 1993 compared to 1992. This decreased volume was largely attributable to the aforementioned switching of customers from sales to transportation service. The gross margin on gas operations increased $1.3 million or 2.0% in 1993, primarily as a result of the increased sales to residential and commercial heating customers due to the colder weather experienced in 1993. Other than the cost of gas and income taxes, operating expenses increased by $3.0 million (4.2%) from $71.9 million for 1992 to $75.0 million for 1993. This increase was largely attributable to a $1.3 million increase in other taxes, principally as a result of increased gross receipts tax (resulting from the higher level of gas revenues) and increased property taxes (resulting from the construction of the Ceasetown and Watres Water Treatment Plants). Also contributing to this increase was a $1.6 million increase in other operations and maintenance expenses, primarily as a result of a $1.5 million increase in payroll costs, as well as a $1.4 million increase in depreciation (primarily as a result of capital additions and the change in March, 1993, from a 4% compound interest to a straight-line method of depreciation with respect to water plant in the Crystal Lake Service Area). The effects of such increases were partially offset by a $1.2 million increase in the deferral of treatment plant costs during 1993. See "Deferred Treatment Plant Costs, Net and Carrying Charges." Income taxes increased by $684,000 (8.2%) from $8.3 million in 1992 to $9.0 million in 1993 due to a higher level of income before income taxes (for this purpose, operating income net of interest charges) and the change, from 34% to 35%, in the federal corporate income tax rate on taxable income in excess of $10.0 million. This increase was the result of the enactment of the Omnibus Budget Reconciliation Act of 1993 (the "1993 Tax Act") on August 10, 1993. The provisions of the 1993 Tax Act, which were retroactive to January 1, 1993, increased PG&W's income tax expense by approximately $124,000 for the year 1993. The effects of the increased income before income taxes and the higher federal income tax rate were partially offset by the impact (approximately $668,000) of the nontaxable equity portions of the AFUDC and of the deferred treatment plant carrying charges that were recorded during 1993. See "-Other Income, Net", as discussed above. Deferred Treatment Plant Costs, Net and Carrying Charges. As more fully discussed above, pursuant to an Order of the PPUC entered September 24, 1992, PG&W deferred all operating expenses, including depreciation and property taxes, and the carrying charges (equivalent to the AFUDC) relative to the Crystal Lake Water Treatment Plant and related facilities from August 3, 1992 (the date of commercial operation of that plant), until March 9, 1993, the effective date of the water rate increase approved by the PPUC on February 25, 1993, for customers in PG&W's Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant. Similarly, in accordance with an Order of the PPUC entered July 28, 1993, PG&W deferred all expenses and the carrying charges relative to the Ceasetown and Watres Water Treatment Plants and related facilities incurred prior to December 16, 1993, the effective date of the water rate increase approved by the PPUC on December 15, 1993, for customers served by the Ceasetown and Watres Water Treatment Plants. As contemplated by the PPUC's -24- Orders, PG&W will seek recovery of the $4.6 million of costs that have been so deferred in its next rate increase request relating to the Spring Brook Water Rate Area. Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred all operating expenses and the carrying charges relative to the four new Scranton Area water treatment plants and related facilities from the dates of commercial operation of the plants until March 23, 1991, the effective date of the Scranton Area water rate increase approved by the PPUC on March 22, 1991. By its Order entered June 23, 1993, relative to the Scranton Water Rate Area, the PPUC granted PG&W's request to recover $5.8 million of costs deferred with respect to the Scranton Area water treatment plants and related facilities over a ten-year period beginning June 23, 1993, of which $304,000 had been recovered as of December 31, 1993. Operating Income. As a result of the above, total operating income increased by $2.2 million (6.6%) from $33.9 million for 1992 to $36.2 million for 1993, but decreased as a percentage of total operating revenues for such periods from 17.6% in 1992 to 17.4% in 1993. Operating income from gas utility operations decreased $114,000 (0.6%) from $19.3 million in 1992 to $19.1 million in 1993, primarily as a result of increases in other operations and maintenance expenses, depreciation, and income and gross receipts taxes, the effects of which were partially offset by a $1.3 million increase in the gross margin. Operating income from water utility operations increased $2.4 million (16.1%) from $14.7 million in 1992 to $17.0 million in 1993. This increase was primarily the result of rate increases effective March 9, 1993, June 23, 1993, and December 16, 1993, as well as the deferral of costs relative to the Crystal Lake, Ceasetown and Watres Water Treatment Plants and related facilities, the effects of which were partially offset by increases in other operations and maintenance expenses, depreciation, and income and property taxes, as discussed above. Other Income, Net. Other income, net increased from $30,000 in 1992, to $560,000 in 1993, primarily as a result of the recording of $1.6 million of deferred treatment plant carrying charges and allowance for equity funds used during construction. This amount was partially offset by the net interest expense associated with the unutilized portion of the proceeds from the issuance on December 22, 1992, of the Authority's 1992 Series B Bonds. See "-Liquidity and Capital Resources-Long-Term Debt and Capital Stock Financings." The proceeds from the issuance of the 1992 Series B Bonds were deposited in a construction fund held by the IDA Trustee, pending their utilization to finance the construction of various additions and improvements to PG&W's water facilities for which construction commenced subsequent to September 23, 1992. Interest expense relative to the funds so utilized for the benefit of PG&W is reflected as interest on long-term debt. The interest expense relating to the portion of the funds held by the IDA Trustee, net of the income earned on the temporary investment of such funds, is reflected in other income, net. Interest Charges. Interest charges decreased by $572,000 (2.7%) from $21.0 million for 1992 to $20.4 million for 1993. This decrease was largely attributable to a higher level of deferred treatment plant carrying charges associated with the Crystal Lake, Ceasetown and Watres Water Treatment Plants and related facilities, the effect of which was partially offset by increased interest on long-term debt. Although the weighted average interest rate on indebtedness decreased from 8.88% during 1992 to 7.93% during 1993, interest on long-term debt increased by $1.6 million (8.4%) from $18.9 million during 1992 to $20.5 million during 1993. -25- This increase was largely attributable to increased indebtedness to finance the construction of various additions and improvements to PG&W's water utility plant. The weighted average indebtedness outstanding during 1993 was $288.2 million as compared to $229.7 million during 1992. Largely offsetting the effect of this increase was a lower level of interest expense incurred during 1993 in connection with overcollections from PG&W's gas customers. Dividends on Preferred Stock. Dividends on preferred stock increased $1.4 million (27.6%) from $5.1 million in 1992, to $6.5 million in 1993, as a result of the issuance by PG&W of 250,000 shares of its 9% cumulative preferred stock, $100 par value, on August 18, 1992. Earnings Applicable to Common Stock. Earnings applicable to common stock increased $1.9 million (24.7%) from $7.9 million ($2.02 per share) for the year ended December 31, 1992, to $9.8 million ($2.36 per share) for the year ended December 31, 1993. The increased earnings in 1993 were the result of the matters discussed above, primarily the increases in water operating revenues resulting from the rate increases which the PPUC allowed PG&W effective March 9, 1993, June 23, 1993, and December 16, 1993, and the increase in the gross margin on gas operations resulting from higher levels of sales to residential and commercial heating customers. The effects of these factors were partially offset by increases in operating expenses and dividends on PG&W's preferred stock. The earnings per share for the year ended December 31, 1993, increased 16.8%, compared to the similar period in 1992, as a result of the 24.7% increase in earnings applicable to common stock and despite the 6.9% increase in the weighted average number of shares outstanding during 1993, primarily as a result of PG&W's sale of 834,000 shares of common stock to PEI on October 27, 1993. RATE MATTERS In accordance with the Pennsylvania Public Utility Code (the "Code"), PG&W files an annual purchased gas cost rate with the PPUC. From time to time, PG&W also files for adjustments to its gas and water rates to, among other reasons, recover interest charges and depreciation expenses relating to capital expenditures, recover increased operating expenses and make adjustments to existing surcharge rates approved by the PPUC. The following is a summary of such filings (exclusive of those solely involving state tax adjustment surcharges) with respect to which the PPUC has issued an order since the beginning of 1992, or which are currently pending. Gas Rate Filings. Pursuant to the provisions of the Code which require that the tariffs of larger gas distribution companies, such as PG&W, be adjusted on an annual basis to reflect changes in their purchased gas costs, the PPUC ordered PG&W to make the following changes during 1994, 1993 and 1992 to the gas costs contained in its gas tariff rates: [CAPTION] Change in Calculated Effective Rate per MCF Increase (Decrease) Date From To in Annual Revenue [S] [C] [C] [C] December 1, 1994 $3.74 $3.68 $(1,800,000) December 1, 1993 2.79 3.74 28,800,000 December 1, 1992 2.46 2.79 9,500,000 -26- The annual changes in gas rates on account of purchased gas costs have no effect on PG&W's earnings since the change in revenue will be offset by a corresponding change in the cost of gas. The PPUC has issued proposed regulations that would provide for the quarterly adjustment of the purchased gas cost rate of larger gas distribution companies, including PG&W. Except for reducing the amount of any over or undercollections of gas costs, the adoption of these proposed regulations would not have any material effect on PG&W's financial position or results of operations. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding the recovery of FERC Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to recovery through the annual PGC rate filing made with the PPUC by PG&W and other larger local gas distribution companies. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs are subject to full recovery by local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Code. The PGC Order further stated that all such filings would be evaluated on a case-by-case basis. As of February 1, 1994, PG&W began to recover the Gas Transition Costs that are being billed to PG&W by its interstate pipelines through an increase in its PGC rate. It is currently estimated that these costs, which will be billed to PG&W over a nineteen-month period extending through March 31, 1995, will aggregate $1.2 million, of which $1.1 million had been billed to PG&W and $659,000 had been recovered from its customers as of December 31, 1994. By Order of the PPUC entered August 26, 1994, PG&W began recovering the Non-Gas Transition Costs that it estimates it will ultimately be billed by its interstate pipelines pursuant to FERC Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $9.4 million of Non-Gas Transition Costs will be billed to PG&W, generally over a four-year period extending through the fourth quarter of 1997, of which $3.8 million had been billed to PG&W and $1.1 million had been recovered from its customers as of December 31, 1994. As of December 31, 1994, PG&W had recorded a liability of $5.6 million for the estimated transition costs that remained to be billed to it as of such date and both a current asset and a deferred asset (which together totaled $8.8 million) representing the transition costs remaining to be recovered from PG&W's customers. Water Rate Filings. As a general rule, public utilities are entitled to recover their reasonable operating expenses and earn a fair rate of return on their investment, or rate base. However, a regulated utility's ability to generate earnings is influenced significantly by the timing and amount of rate relief that it is granted. As part of the ratemaking process, the PPUC may reject, in whole or in part, a public utility's request to increase its rates where the PPUC concludes, after a hearing, that the service rendered by the public utility is inadequate in that it fails to meet quantity or quality standards for the type of service provided. Based upon previous rate filings (referred to below), PG&W expects that the quality of its water service will be scrutinized by the PPUC in any future water rate filings. In its Order of June 23, 1993, relating to the most recent Scranton Water Rate Area rate case, the PPUC granted PG&W rate relief despite its finding that PG&W's water quality did not always meet secondary drinking water standards. Notwithstanding this decision, PG&W believes that it is providing its customers with water service meeting or exceeding the PPUC's standards for quantity and quality, based on testing performed by PG&W and an independent laboratory of water at certain -27- customers' premises which indicates that the water meets federal and state primary (health-related) drinking water standards all of the time and secondary (aesthetics-related, particularly taste, odor and color) drinking water standards nearly all of the time. PG&W also believes that in the future as it makes further improvements to its distribution system, it will be able to demonstrate to the PPUC's satisfaction that it is providing adequate service to its customers. As discussed below, the rate relief granted in the past to PG&W by the PPUC has been less than the full amounts requested. Generally, the amounts granted have been determined through negotiated settlements with certain parties to the proceedings in order to obtain rate relief earlier than expected and to avoid the substantial expenses associated with further administrative and possible appellate proceedings. PG&W believes that it will be able to obtain adequate future rate relief as it makes further improvements to its distribution system and is able to demonstrate it is providing water that is suitable for all "household purposes" and that meets all applicable water quality standards. See "-Liquidity and Capital Resources-Failure to Obtain Adequate Rate Relief" for a discussion of the adverse effects on PG&W if adequate rate relief were denied. The magnitude of the projected rate increases that will be required to enable PG&W to fully recover its capital expenditures associated with the construction of the water treatment plants will be significant. Prior to the construction of the plants, the average annual cost of water to PG&W's customers receiving nonfiltered water was approximately $143. The average annual cost of water to PG&W's residential customers, all of whom are now receiving filtered water (except for several hundred who are supplied with ground water from wells), was approximately $340 as of March, 1995. PG&W anticipates that this cost will increase to approximately $460 in the latter part of this decade, at which time PG&W expects to have been allowed by the PPUC to fully reflect in rates its costs associated with the filtration of its water supplies. PG&W believes that these levels of increases, in terms of percentages, will not be inconsistent with those that will be experienced by other water utilities required to make a similar transition to filtered water; however, the level of rates that PG&W expects to seek in future rate increases will be such that the PPUC may question the "affordability" of such rates and may also require that any rate increases be phased-in over a period of time in order to reduce consumer "rate shock." While PG&W expects that the PPUC will grant it adequate rate relief in a timely manner, there can be no assurance that the PPUC will take such action. Scranton Area. By Order adopted March 22, 1991, the PPUC granted PG&W an approximate 110% rate increase effective March 23, 1991, for the Scranton Water Rate Area that was designed to produce $15.0 million of additional annual revenue to be phased-in over a two-year period under the terms of a qualified phase-in plan, pursuant to Financial Accounting Standards Board ("FASB") Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in Plans." In accordance with said Order, PG&W deferred the billing of $4.7 million of the increased revenue recorded during the period March 23, 1991, through March 22, 1992. Effective March 23, 1992, PG&W began to bill such $4.7 million by means of a surcharge that will be in effect during the period through March 22, 2001, and as of December 31, 1994, $1.4 million had been so billed to its Scranton Water Rate Area customers. -28- Crystal Lake Service Area. On June 30, 1992, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $4.4 million in additional annual revenue. This rate increase request involved the approximately 5,000 customers in the Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, which became fully operational in August, 1992. On December 15, 1992, PG&W and certain parties filing objections to the rate increase request reached a settlement providing for an approximate 130% rate increase designed to produce $2.0 million of additional annual revenue to be phased-in over a two-year period under the terms of FASB Statement 92. The settlement provided that $1.1 million of the increased revenue (an approximate 72% increase in rates) was to be realized through an immediate rate increase and that the remaining $900,000 in increased revenue (an additional 58% increase in rates) was to be realized through another rate increase one year later (i.e., at the beginning of year two of the phase-in period). The settlement also specified that the $900,000 in revenue that would be deferred during the first year of the phase-in period, as well as an approximate $243,000 in related carrying charges, was to be collected from customers in the form of a surcharge in years three through five of the phase-in period. By Order adopted February 25, 1993, the PPUC approved the settlement effective March 9, 1993. In accordance with the provisions of FASB Statement 92, PG&W commenced recording the entire $2.0 million increase in annual revenue allowed by the PPUC as additional revenue beginning March 9, 1993, along with the related carrying charges on revenue deferred in accordance with the phase-in plan. However, pursuant to the terms of the settlement, PG&W deferred the billing of approximately $900,000 of the increased revenue recorded during the first year of the phase-in period (i.e., the period March 9, 1993, through March 8, 1994). Effective March 9, 1995, PG&W began to bill, by means of the surcharge that will be in effect in years three through five of the phase-in period, the approximate $900,000 that has been so deferred, as well as the related carrying charges. Scranton Area. On September 25, 1992, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $9.9 million in additional annual revenue. This rate increase request involved the approximately 56,000 customers in PG&W's Scranton Water Rate Area at such date. By Order entered June 23, 1993, the PPUC rejected the proposed rate increase in its entirety "due to inadequate service" (i.e., water quality). However, by the same Order, the PPUC granted PG&W the alternative of a rate increase designed to produce an additional $5.0 million in annual revenue, provided that PG&W dedicate the entire increase to augment the improvements to its water distribution system until "the demonstration by [PG&W] to [the PPUC] that it is providing adequate service." PG&W accepted this alternative and placed such $5.0 million rate increase into effect as of June 23, 1993. On August 19, 1993, the PPUC approved a settlement agreement (the "Settlement Agreement") resolving certain disputed issues relating to its June 23, 1993, Order. The Settlement Agreement provided, among other things, for (i) modification by the PPUC of its June 23, 1993, Order to reduce the amount of the revenue increase that it ordered be dedicated to distribution system improvements by the related income taxes and other expenses and the $319,000 additional expense for retiree health care and life insurance benefits that the PPUC allowed PG&W in its revenues (which resulted in the requirement for an additional annual expenditure for distribution system improvements by PG&W of $2.5 million), (ii) the agreement by PG&W (with which it was in compliance as of December 31, 1994) to spend a total of $4.9 million annually (an additional $2.5 million over its actual average annual expenditure of $2.4 million during the -29- three-year period ended June 30, 1993) for distribution system improvements in the Scranton Water Rate Area until the PPUC is satisfied that PG&W is providing adequate service, (iii) the modification by the PPUC of its June 23, 1993, Order to restore the Hollister Reservoir to PG&W's rate base, and (iv) the withdrawal by PG&W and the Office of Consumer Advocate (the "OCA") of their appeals to the Commonwealth Court of Pennsylvania regarding the PPUC's June 23, 1993, Order. Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $19.5 million in additional annual revenue. This rate increase request involved approximately 59,300 customers in PG&W's Spring Brook Water Rate Area, principally those customers (i) served by the Ceasetown Water Treatment Plant which was placed in service on March 31, 1993, (ii) served by the Watres Water Treatment Plant which was placed in service on September 30, 1993, (iii) served jointly by the Ceasetown and Watres Water Treatment Plants, and (iv) who are served exclusively by the Nesbitt Water Treatment Plant. On September 23, 1993, PG&W, the PPUC Office of Trial Staff, the OCA and the Office of Small Business Advocate filed a settlement petition (the "Settlement Petition") with the Administrative Law Judge ("ALJ") assigned to conduct the investigation of the rate increase request. This Settlement Petition provided for an overall 119% rate increase involving approximately 44,900 customers, principally those served either exclusively or jointly by the Ceasetown and Watres Water Treatment Plants, that was designed to produce $11.9 million of additional annual revenue to be phased-in over a two-year period under the terms of a qualified phase-in plan, pursuant to FASB Statement 92. Under the terms of the Settlement Petition, except for approximately 200 customers who were previously served jointly by the Hillside and Nesbitt Water Treatment Plants, none of the approximately 14,600 customers served exclusively by the Nesbitt Water Treatment Plant would receive an increase. The Settlement Petition further provided that $6.4 million of the increased revenue (an approximate 65% increase in rates) was to be realized through an immediate rate increase and that the remaining $5.5 million of the increased revenue (an additional 54% increase in rates) was to be realized through a further rate increase one year later (i.e., at the beginning of year two of the phase-in period). The Settlement Petition also specified that the $5.5 million in revenue that was to be deferred during the first year of the phase-in period, as well as an approximate $1.3 million in related carrying charges, was to be collected from customers in the form of a surcharge in years three through five of the phase-in period. By Order adopted December 15, 1993, the PPUC approved the Settlement Petition effective December 16, 1993. In accordance with the provisions of FASB Statement 92, PG&W commenced recording the entire $11.9 million increase in annual revenue allowed by the PPUC as additional revenue beginning December 16, 1993, along with the related carrying charges on revenue deferred in accordance with the phase-in plan. However, pursuant to the terms of the settlement, PG&W deferred the billing of $5.3 million of the increased revenue recorded during the first year of the phase-in period (i.e., the period December 16, 1993, through December 15, 1994). The amount so deferred was $200,000 less than the $5.5 million originally estimated because of slightly lower than anticipated consumption. Effective December 16, 1995, PG&W will begin to bill the $5.3 million that had been so deferred, as well as the related carrying charges, by means of the surcharge that will be effective in years three through five of the phase-in period. Effects of Inflation. When utility property reaches the end of its useful life and must be replaced, PG&W will incur replacement costs in amounts that due to the effects of inflation would materially exceed either the original cost or the accrued depreciation of such property as reflected on its books of account. However, the cost of such replacement property would be includable in PG&W's -30- rate base, and PG&W would be entitled to recover depreciation expense and earn a return thereon, to the extent that its investment in such property was prudently incurred and the property is used and useful in furnishing public utility service. LIQUIDITY AND CAPITAL RESOURCES Liquidity The liquidity of PG&W is influenced significantly by the capital intensive nature of its operations and the ratemaking practices of the PPUC, which together effectively require external financing of a substantial portion of PG&W's construction expenditures. Additionally, because of the seasonal nature of its gas utility operations and the ratemaking practices of the PPUC regarding the recovery of purchased gas costs (see "-Rate Matters-Gas Rate Filings"), it is necessary for PG&W to finance its gas purchases and increases in its customer accounts receivable with bank borrowings during certain periods of the year. PG&W's ability to generate sufficient internal funds and to obtain the external funds that are required for its operations and construction expenditures is influenced significantly by the timing and amount of rate relief it is granted. PG&W believes that it will be granted sufficient rate relief to enable it to meet its future anticipated capital requirements, particularly in view of the increases in annual water revenue aggregating $35.8 million which PG&W has been granted by the PPUC since 1991 with respect to customers being supplied with filtered water. PG&W also believes that it will be allowed additional rate increases by the PPUC for its approximately 132,500 water customers, all of whom are now receiving filtered water (except for several hundred who are supplied with ground water from wells), because of the relatively low level of earnings that PG&W is realizing from its water utility operations and its expectation that with filtration and further distribution system improvements, water quality should be less of a concern in its requests for water rate increases. See "-Construction Expenditures and Related Financing" and "-Failure to Obtain Adequate Rate Relief." PEI relies on a number of sources, primarily cash dividends from PG&W, to provide the funds necessary to pay dividends on its common stock, to pay interest on its outstanding debt, and to meet all of its other obligations (other than the repayment of debt for which PEI principally relies upon periodic refinancings or sales of securities). Because of limitations imposed by the terms of PG&W's Restated Articles of Incorporation, as amended, PG&W is prohibited, without the consent of the holders of a majority of the outstanding shares of its preferred stock, from issuing more than $12.0 million of unsecured debt due on demand or within one year from issuance. PG&W had no unsecured debt due on demand or within one year from issuance outstanding as of December 31, 1994. In addition, PG&W is prohibited from paying any dividends to PEI in the event of a default under certain of its debt instruments or failure to make any required dividend payments due holders of PG&W's preferred stock. Furthermore, any failure by PG&W to pay preferred stock dividends for four consecutive quarters would permit the holders of the PG&W preferred stock to elect a majority of the directors of PG&W. -31- PG&W believes that it will be able to raise in a timely manner such funds as are required for its future construction expenditures, refinancings and other working capital requirements. Interim Financing Practices It is the practice of PG&W to use bank borrowings to finance certain of its construction expenditures pending the periodic issuance of stock and long-term debt. Additionally, because of the seasonal nature of its gas utility operations and the ratemaking practices of the PPUC regarding the recovery of purchased gas costs (see "-Rate Matters-Gas Rate Filings"), it is necessary for PG&W to finance its gas purchases and increases in its customer accounts receivable with bank borrowings during certain periods of the year. In order to so finance construction expenditures and to meet its seasonal borrowing requirements, PG&W has made arrangements for a total of $67.5 million of unsecured revolving bank credit. Specifically, PG&W has entered into a revolving bank credit agreement (the "Credit Agreement") with a group of six banks under the terms of which $60.0 million is available for borrowing by PG&W. The Credit Agreement terminates on May 31, 1996, at which time any borrowings outstanding thereunder are due and payable. The interest rate on borrowings under the Credit Agreement is generally less than prime. The Credit Agreement also requires the payment of a commitment fee of 0.195% per annum on the average daily amount of the unused portion of the available funds. As of March 10, 1995, $35.0 million of borrowings were outstanding under the Credit Agreement.
PG&W currently has three additional short-term bank lines of credit with an aggregate borrowing capacity of $7.5 million which provide for borrowings at interest rates generally less than prime. Borrowings outstanding under two of these bank lines of credit with borrowing capacities of $2.0 million and $3.0 million mature on May 31, 1995, and June 30, 1995, respectively. Borrowings outstanding under the third bank line of credit with a borrowing capacity of $2.5 million mature on May 31, 1996. As of March 10, 1995, PG&W had $3.9 million of borrowings outstanding under these additional bank lines of credit. Prior to their respective maturities, PG&W intends to renew the $7.5 million of these bank lines of credit.
Current Maturities of Long-Term Debt and Preferred Stock As of December 31, 1994, $3.8 million of PG&W preferred stock and long-term debt was required to be repaid within twelve months. Such amount included $3.0 million of borrowings that were outstanding under PG&W's bank lines of credit as of such date. PG&W believes that it will have sufficient cash flow and borrowing capacity to repay current maturities of its preferred stock and long-term debt and to meet its other obligations based on its present earnings and financing capabilities, capitalization and banking arrangements and relationships. Long-Term Debt and Capital Stock Financings PG&W periodically engages in long-term debt and capital stock financings in order to obtain funds required for construction expenditures, the refinancing of existing debt and various working capital purposes. Set forth below is a summary of such financings, exclusive of interim bank borrowings, consummated by PG&W since the beginning of 1993. -32- During 1993 and 1994, PG&W utilized $15.9 million and $9.8 million, respectively, of the proceeds from the issuance by the Luzerne County Industrial Development Authority (the "Authority") on December 22, 1992, of $30.0 million of its 1992 Series B Bonds and with respect to which PG&W issued $30.0 million of its 7.125% First Mortgage Bonds to the PNC Bank (formerly Northeastern Bank of Pennsylvania) as trustee (the "IDA Trustee") for the 1992 Series B Bonds, as security for the 1992 Series B Bonds. The proceeds from the issuance of the 1992 Series B Bonds were deposited in a construction fund held by the IDA Trustee for the Authority's 1992 Series B Bonds, pending their utilization to finance the construction of various additions and improvements to PG&W's water facilities for which construction commenced subsequent to September 23, 1992. As of December 31, 1994, $3.4 million of the proceeds (including investment income) was held by the IDA Trustee and was available to finance the future construction of qualified water facilities for PG&W. In addition, during 1993, PG&W assumed $812,000 of indebtedness to the Pennsylvania Infrastructure Investment Authority (an agency of the Commonwealth of Pennsylvania known as "PENNVEST") in connection with its acquisition of the assets and operations of two small water companies. Also, during 1993 and 1994, PG&W borrowed $1.6 million and $695,000 respectively, under the terms of a water facility loan agreement with PENNVEST dated December 3, 1992, relative to such acquisition. A total of $2.6 million is being made available to PG&W pursuant to the PENNVEST loan agreement, of which $270,000 remained available as of December 31, 1994, for borrowing by PG&W. On October 27, 1993, PG&W issued to PEI 834,000 shares of its common stock for aggregate net proceeds of $31.9 million. PG&W utilized such funds to repay bank borrowings. These borrowings had been incurred primarily to finance construction expenditures. On December 21, 1993, the Authority issued $19.0 million of its Exempt Facilities Revenue Refunding Bonds, 1993 Series A (Pennsylvania Gas and Water Company Project) (the "1993 Series A Bonds") and, in connection therewith, PG&W issued $19.0 million of its 6.05% Series First Mortgage Bonds to the IDA Trustee for the 1993 Series A Bonds, as security for the 1993 Series A Bonds. PG&W will make payments to the IDA Trustee pursuant to the 6.05% Series First Mortgage Bonds in amounts sufficient and at the times necessary to pay the debt service requirements on the 1993 Series A Bonds. The proceeds from the issuance of the 1993 Series A Bonds, along with additional funds provided by PG&W, were deposited with the IDA Trustee for the Authority's $19.0 million Exempt Facilities Revenue Bonds, 1989 Series A (Pennsylvania Gas and Water Company Project) (the "1989 Series A Bonds") on December 21, 1993, for use in redeeming the 1989 Series A Bonds on January 1, 1994. The deposit of such funds acted to discharge all of PG&W's obligations with respect to its 7%, 1989 Series A Note in the principal amount of $19.0 million which had been issued to the IDA Trustee in connection with the 1989 Series A Bonds and which was subject to repayment on January 1, 1994. On May 31, 1994, PG&W issued 500,000 shares of its common stock to PEI for aggregate net proceeds of $20.0 million. PG&W used a portion of the proceeds it so received to redeem $15.0 million of its 9.50% cumulative preferred stock and to fund the $534,375 premium in connection with such redemption. The remaining $4.5 million of proceeds were used by PG&W to repay a portion of its bank borrowings and for working capital purposes. On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the "Customer Plan") which provides the residential customers of PG&W with a method of purchasing newly-issued shares of PEI common stock at a 5% discount from the -33- market price. PEI uses proceeds from the issuance of shares through the Customer Plan to purchase common stock of PG&W. During 1994, PG&W realized $1.7 million from the issuance of common stock to PEI in connection with the Customer Plan. Additionally, on January 3, 1995, PG&W realized $1.2 million from the issuance of common stock to PEI in connection with the Customer Plan. Through PEI's Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders of shares of PEI common stock may reinvest cash dividends and/or make cash investments in the common stock of PEI. The DRP was amended on May 5, 1994, to provide PEI's shareholders with a method of reinvesting cash dividends and making cash investments to purchase newly-issued shares of PEI's common stock at a 5% discount from the market price. Prior to such amendment, cash dividends were reinvested at 100% of the market price in newly-issued shares and cash investments were used to purchase shares of PEI common stock on the open market. PEI uses the proceeds from the DRP to purchase common stock of PG&W. During 1994, 1993 and 1992, PG&W realized $1.8 million, $465,000 and $385,000, respectively, from the issuance of common stock to PEI in connection with the DRP. Additionally, on January 3, 1995, PG&W realized $1.3 million from the issuance of common stock to PEI in connection with the DRP. On November 15, 1994, the Authority issued $30.0 million of its Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) (the "1994 Series A Bonds") and in connection therewith, PG&W issued $30.0 million of its 7% Series First Mortgage Bonds. PG&W will make payments to the IDA Trustee pursuant to the 7% Series First Mortgage Bonds in amounts sufficient and at the times necessary to pay the debt service requirements on the 1994 Series A Bonds. The proceeds from the issuance of the 1994 Series A Bonds, along with additional funds provided by PG&W, were deposited with the IDA Trustee for the Authority's Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) (the "1987 Series B Bonds") on November 15, 1994, for use in redeeming the 1987 Series B Bonds on December 1, 1994. The deposit of such funds acted to discharge all of PG&W's obligations with respect to its 8%, 1987 Series B Note in the principal amount of $30.0 million which had been issued to the IDA Trustee in connection with the 1987 Series B Bonds and which was subject to repayment on December 1, 1994. PG&W's rated first mortgage bonds are currently rated BBB- (investment grade) by Standard & Poor's Corporation ("S&P"), Baa3 (investment grade) by Moody's Investors Services ("Moody's") and Class 2 by the National Association of Insurance Commissioners ("NAIC"). On July 25, 1994, S&P said PG&W's outlook was "stable" and that "continued, though slow financial improvement is expected with the phase-in of water rate relief." However, S&P noted that "significant capital expenditures and an excessive dividend payout...will continue to challenge management over the intermediate term." If PG&W's rated first mortgage bonds are downgraded below Class 2 (i.e., below investment grade) by the NAIC, this downgrade would cause the stated interest rate on PG&W's $50.0 million of 9.57% Series First Mortgage Bonds due 1996 to increase to 11.17% per annum (which increase would cost PG&W $800,000 per year in additional interest expense, exclusive of tax benefits). Also, any downgrading of PG&W's rated first mortgage bonds below investment grade by both S&P and Moody's would result in the interest rate charged on borrowings under the Credit Agreement being increased by one quarter percent per annum (which increase could cost PG&W as much as $150,000 per year in additional interest expense, exclusive of tax benefits, depending on the amount of borrowings outstanding under the Credit Agreement). Additionally, any downgrading of PG&W's rated first mortgage bonds by S&P, Moody's or the NAIC could have a -34- material adverse effect on the cost and difficulty of issuing additional debt, which in turn could significantly impair PEI's and PG&W's ability to refinance debt and fund future capital expenditures. See "-Failure to Obtain Adequate Rate Relief." Construction Expenditures and Related Financing Expenditures for the construction of utility plant during the period 1992 through 1994 were as follows: [CAPTION] Water Gas Year Facilities Facilities Total (Thousands of Dollars) [S] [C] [C] [C] 1992 $ 44,352 $ 12,669 $ 57,021 1993 32,575 13,325 45,900 1994 19,321 17,455 36,776 $ 96,248 * $ 43,449 $139,697 * Includes $30.5 million, $20.7 million and $2.1 million, expended in 1992, 1993 and 1994, respectively, for various water supply and treatment facilities and associated distribution system improvements constituting part of the program that PG&W adopted in 1986 for filtering all of its regularly used water supplies. Approximately $13.2 million of PG&W's expenditures for the construction of water facilities during 1994 were financed with proceeds from the issuance of the Authority's 1992 Series B Bonds being held by the IDA Trustee for the benefit of PG&W and with revenues from the water rate increase for Scranton Water Rate Area which was effective June 23, 1993 (the "Scranton Area Water Rate Increase") (see "-Rate Matters-Water Rate Filings-Scranton Area"). The balance ($6.1 million) of PG&W's expenditures for the construction of water facilities during 1994, as well as its expenditures for the construction of gas facilities during 1994, were financed with internally-generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. PG&W estimates that its capital expenditures for 1995 through 1997 will total $147.7 million, of which $74.5 million will involve the construction of water facilities and $73.2 million will involve the construction of gas facilities. PG&W anticipates that a portion of such water facilities will be financed with the $3.4 million of proceeds from the issuance of the Authority's 1992 Series B Bonds held by the IDA Trustee as of December 31, 1994, for the benefit of PG&W and with $7.5 million of revenues from the Scranton Area Water Rate Increase, while the balance of its expenditures for water facilities ($63.6 million), as well as its expenditures for gas facilities, will be financed with approximately $25.0 million from the issuance of a term loan in 1995, $29.5 million in 1996 from the sale of common stock to PEI, $50.0 million from the issuance of another series of first mortgage bonds in 1997, proceeds from the sale of common stock to PEI in connection with the Customer Plan and DRP, and internally generated funds. Neither PEI nor PG&W has made any formal arrangements for such proposed future debt or stock financings and there can be no assurance that any commitments for such proposed future debt or stock financings will be available on terms acceptable to PEI or PG&W or that such proposed financings will be consummated. The failure to consummate such proposed financings could have a material adverse effect on PEI and PG&W. -35- Failure to Obtain Adequate Rate Relief If PG&W is unable to obtain adequate rate relief in future rate increase applications filed with the PPUC, PG&W would be forced to restrict its cash expenditures by, among other actions, possibly reducing dividends on its common stock, thereby resulting in a reduction of PEI's common stock dividends, curtailing or deferring work on various capital projects, all of which could negatively impact the quality and reliability of services rendered to the public by PG&W. Notwithstanding the PPUC's decision in its June 23, 1993, Order (see "-Rate Matters-Water Rate Filings"), PG&W believes it will be able to obtain adequate future rate relief, although there can be no assurance that such rate relief will be obtained. However, if PG&W were unable to obtain adequate rate relief from the PPUC under circumstances where PG&W believed that it is entitled as a matter of law to such rate relief, PG&W would file appropriate appeals with the Commonwealth Court of Pennsylvania, claiming that, contrary to law, the PPUC by its actions had denied PG&W an opportunity to earn a fair rate of return on its prudent investment in property which is used and useful in providing public utility service. -36- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of PG&W and the report of independent public accountants thereon are presented on pages 37 through 62 of this Form 10-K. -37- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Pennsylvania Gas and Water Company: We have audited the accompanying balance sheets and statements of capitalization of Pennsylvania Gas and Water Company (the "Company") (a Pennsylvania corporation and a wholly-owned subsidiary of Pennsylvania Enterprises, Inc.) as of December 31, 1994 and 1993, and the related statements of income, common shareholder's investment, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Gas and Water Company as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 9, effective January 1, 1993, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions pursuant to standards promulgated by the Financial Accounting Standards Board. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, N.Y. February 17, 1995 -38- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF INCOME [CAPTION] Year Ended December 31, 1994 1993 1992 (Thousands of Dollars) [S] [C] [C] [C] OPERATING REVENUES: Gas $ 167,992 $ 153,325 $ 143,227 Water 66,731 53,363 48,651 Total operating revenues 234,723 206,688 191,878 OPERATING EXPENSES: Cost of gas 98,653 86,557 77,720 Other operation expenses 40,153 38,859 37,971 Maintenance 10,093 9,341 8,677 Depreciation 14,339 12,299 10,856 Deferred treatment plant costs, net 581 (1,532) (294) Income taxes 12,499 8,989 8,305 Other taxes 16,073 16,019 14,730 Total operating expenses 192,391 170,532 157,965 OPERATING INCOME 42,332 36,156 33,913 OTHER INCOME, NET (Note 3) 16 560 30 INCOME BEFORE INTEREST CHARGES 42,348 36,716 33,943 INTEREST CHARGES: Interest on long-term debt 21,222 20,515 18,929 Other interest 1,575 2,589 4,292 Allowance for borrowed funds used during construction (255) (1,482) (1,773) Deferred treatment plant carrying charges - (1,207) (461) Total interest charges 22,542 20,415 20,987 NET INCOME 19,806 16,301 12,956 DIVIDENDS ON PREFERRED STOCK 4,639 6,462 5,065 EARNINGS APPLICABLE TO COMMON STOCK $ 15,167 $ 9,839 $ 7,891 COMMON STOCK: Earnings per share of common stock (Note 4): Before premium on redemption of preferred stock $ 2.92 $ 2.36 $ 2.02 Premium on redemption of preferred stock (.19) - - Earnings per share of common stock $ 2.73 $ 2.36 $ 2.02 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,189,108 4,176,087 3,908,351 The accompanying notes are an integral part of the financial statements. -39- PENNSYLVANIA GAS AND WATER COMPANY BALANCE SHEETS [CAPTION] December 31, 1994 1993 (Thousands of Dollars) ASSETS [S] [C] [C] UTILITY PLANT: Gas plant, at original cost less acquisition adjustments of $386,000 $260,679 $245,969 Water plant, at original cost plus acquisition adjustments of $14,572,000, and $14,577,000, respectively 376,735 360,996 Common plant, at original cost 26,118 26,212 663,532 633,177 Accumulated depreciation (94,461) (86,287) 569,071 546,890 OTHER PROPERTY AND INVESTMENTS: Restricted funds held by trustee (Note 6) 3,401 12,853 Other 2,872 3,291 6,273 16,144 CURRENT ASSETS: Cash and cash equivalents 304 2,714 Accounts receivable - Customers 22,297 20,533 Others 1,474 1,258 Reserve for uncollectible accounts (1,299) (1,223) Accrued utility revenues 13,299 16,123 Materials and supplies, at average cost 4,078 3,549 Gas held by suppliers, at average cost 20,025 26,650 Deferred cost of gas & supplier refunds, net 8,475 12,752 Prepaid expenses and other 2,531 2,026 71,184 84,382 DEFERRED CHARGES: Deferred taxes collectible 55,410 51,382 Natural gas transition costs collectible (Note 2) 4,099 - Unamortized debt expense 7,177 5,745 Deferred treatment plant costs and carrying charges 9,548 10,129 Deferred water utility billings (Note 2) 8,908 3,885 Other 7,610 7,751 92,752 78,892 TOTAL ASSETS $739,280 $726,308 The accompanying notes are an integral part of the financial statements. -40- PENNSYLVANIA GAS AND WATER COMPANY BALANCE SHEETS [CAPTION] December 31, 1994 1993 (Thousands of Dollars) [S] [C] [C] CAPITALIZATION AND LIABILITIES CAPITALIZATION (see accompanying statements on page 42): Common shareholder's investment (Notes 4 and 7) $216,032 $188,011 Preferred stock (Note 5) - Not subject to mandatory redemption, net 33,615 33,615 Subject to mandatory redemption 1,760 31,840 Long-term debt (Note 6) 311,725 266,259 563,132 519,725 CURRENT LIABILITIES: Current portion of long-term debt and preferred stock subject to mandatory redemption (Notes 5, 6 and 8) 3,810 38,664 Notes payable - Bank (Note 8) - 2,000 Parent - 3,680 Accounts payable - Suppliers 16,762 22,401 Affiliates, net 788 1,888 Accrued general business and realty taxes 3,881 3,574 Accrued income taxes 3,185 4,984 Accrued interest 4,716 4,042 Accrued natural gas transition costs (Note 2) 2,356 - Other 3,455 2,440 38,953 83,673 DEFERRED CREDITS: Deferred income taxes 96,939 87,005 Accrued natural gas transition costs (Note 2) 3,250 - Unamortized investment tax credits 8,943 9,183 Advances for construction 11,349 10,985 Contributions in aid of construction 10,207 9,810 Operating reserves 2,383 1,863 Other 4,124 4,064 137,195 122,910 COMMITMENTS AND CONTINGENCIES (Notes 10 and 11) TOTAL CAPITALIZATION AND LIABILITIES $739,280 $726,308 The accompanying notes are an integral part of the financial statements. -41- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 1994 1993 1992 (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 19,806 $ 16,301 $ 12,956 Effects of noncash charges (credits) to income - Depreciation 14,365 12,324 10,875 Deferred income taxes, net 5,871 1,678 2,048 Provisions for self insurance 1,695 1,800 1,196 Deferred treatment plant costs and carrying charges, net 581 (3,560) (756) Allowance for equity funds used during construction (40) (734) - Deferred water utility billings (5,574) (582) (969) Other, net 3,522 4,540 2,812 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and accrued utility revenues 1,449 (2,159) (2,517) Gas held by suppliers 6,625 (5,038) (1,586) Accounts payable (5,609) (515) 2,377 Deferred cost of gas and supplier refunds, net 5,784 (13,307) (11,429) Other current assets and liabilities, net (559) 754 2,794 Other operating items, net (3,822) (3,251) (2,326) Net cash provided by operating activities 44,094 8,251 15,475 CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (net of allowance for equity funds used during construction) (37,940) (46,526) (58,324) Other, net 2,226 1,493 2,030 Net cash used for investing activities (35,714) (45,033) (56,294) CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock 23,439 32,366 12,905 Issuance of preferred stock - - 23,615 Redemption of preferred stock (30,080) (10,080) (80) Dividends on common and preferred stock (14,244) (18,398) (14,940) Issuance of long-term debt 30,696 20,634 110,000 Repayment of long-term debt (38,584) (31,485) (57,371) (Repayment) issuance of note payable to parent (3,680) - 3,680 Intercompany advance - - 15,000 Restricted funds held by trustee (Note 6) 9,753 15,868 (27,994) Net increase (decrease) in bank borrowings 15,370 32,247 (20,167) Other, net (3,460) (2,226) (3,917) Net cash provided by (used for) financing activities (10,790) 38,926 40,731 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,410) 2,144 (88) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,714 570 658 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 304 $ 2,714 $ 570 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) $ 21,001 $ 21,092 $ 16,972 Income taxes $ 7,353 $ 6,790 $ 3,667 -42-
The accompanying notes are an integral part of the financial statements. -43- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF CAPITALIZATION
December 31, 1994 1993 (Thousands of Dollars) COMMON SHAREHOLDER'S INVESTMENT (Note 7): Common stock, no par value (Note 4) (stated value $10 per share) Authorized - 10,000,000 shares Outstanding - 5,456,665 shares and 4,868,718 shares, respectively $ 54,567 $ 48,687 Additional paid-in capital 90,201 72,642 Retained earnings 71,264 66,682 Total common shareholder's investment 216,032 38.4% 188,011 36.2% PREFERRED STOCK, par value $100 per share Authorized - 997,500 shares (Note 5): Not subject to mandatory redemption, net - 4.10% cumulative preferred, 100,000 shares issued 10,000 10,000 9% cumulative preferred, 250,000 shares outstanding, net of issuance costs 23,615 23,615 Total preferred stock not subject to mandatory redemption, net 33,615 6.0% 33,615 6.5% Subject to mandatory redemption - 5.75% cumulative preferred, 18,400 and 19,200 shares outstanding, respectively 1,840 1,920 8.90% cumulative preferred, 150,000 shares outstanding in 1993 - 15,000 9.50% 1988 series cumulative preferred, 150,000 shares outstanding in 1993 - 15,000 Less current redemption requirements (80) (80) Total preferred stock subject to mandatory redemption 1,760 0.3% 31,840 6.1% LONG-TERM DEBT (Note 6): First mortgage bonds 237,535 207,745 Notes 65,500 77,845 Other 12,420 19,253 Less current maturities and sinking fund requirements (3,730) (38,584) Total long-term debt 311,725 55.3% 266,259 51.2% TOTAL CAPITALIZATION $563,132 100.0% $519,725 100.0% The accompanying notes are an integral part of the financial statements.
-44- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 [CAPTION] Additional Common Paid-In Retained Stock Capital Earnings Total (Thousands of Dollars) [S] [C] [C] [C] [C] Balance at December 31, 1991 $36,957 $ 39,587 $ 71,134 $147,678 Net income for 1992 - - 12,956 12,956 Issuance of common stock 3,230 9,207 - 12,437 Loss on sale of preferred stock held in treasury - (18) (15) (33) Dividends on: Preferred stock (Note 5) - - (5,065) (5,065) Common stock ($2.54 per share) - - (9,875) (9,875) Balance at December 31, 1992 40,187 48,776 69,135 158,098 Net income for 1993 - - 16,301 16,301 Issuance of common stock 8,500 23,866 - 32,366 Premium on redemption of preferred stock - - (356) (356) Dividends on: Preferred stock (Note 5) - - (6,462) (6,462) Common stock ($2.8225 per share) - - (11,936) (11,936) Balance at December 31, 1993 48,687 72,642 66,682 188,011 Net income for 1994 - - 19,806 19,806 Issuance of common stock 5,880 17,559 - 23,439 Premium on redemption of preferred stock - - (980) (980) Dividends on: Preferred stock (Note 5) - - (4,639) (4,639) Common stock ($1.81 per share) - - (9,605) (9,605) Balance at December 31, 1994 $54,567 $ 90,201 $ 71,264 $216,032 The accompanying notes are an integral part of the financial statements. -45- PENNSYLVANIA GAS AND WATER COMPANY NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Pennsylvania Gas and Water Company ("PG&W"), a wholly-owned subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), is a regulated public utility subject to the jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for rate and accounting purposes. PG&W has one wholly-owned subsidiary, Penn Gas Development Co. (PGD), which has not been consolidated since it is insignificant. Prior to October 1, 1994, PG&W had four other wholly-owned subsidiaries, each a small water company, which were not consolidated since they also were insignificant. As of September 30, 1994, these four small water companies were merged into PG&W. The equity method is used to account for PG&W's investment in PGD and was used to account for its investment in the four small water companies prior to their merger into PG&W. Utility Plant and Depreciation. Utility plant is stated at cost, which represents the original cost of construction, including payroll, administrative and general costs, an allowance for funds used during construction, and the plant acquisition adjustments. The plant acquisition adjustments represent the difference between the cost to PG&W of plant acquired as a system and the cost of such plant when first devoted to public service, and are primarily attributable to land, water rights and goodwill. Except for approximately $340,000 recorded in 1993 with respect to water plant, which is being amortized over a ten-year period, the plant acquisition adjustments relate to acquisitions made prior to October 31, 1970, and thus are not required to be amortized for financial reporting purposes since PG&W believes there has been no diminution in their value. Also, such treatment is consistent with PPUC Orders. The allowance for funds used during construction ("AFUDC") is defined as the net cost during the period of construction of borrowed funds used and a reasonable rate upon other funds when so used. Such allowance is charged to utility plant and reported as either other income, net (with respect to the cost of equity funds) or as a reduction of interest expense (with respect to the cost of borrowed funds) in the accompanying statements of income. AFUDC varies according to changes in the level of construction work in progress and in the sources and costs of capital. The weighted average rate for such allowance was approximately 7% in 1994, 8% in 1993 and 7% in 1992. PG&W provides for depreciation on a straight-line basis for gas plant and all common plant. As of December 31, 1994, depreciation was provided on a straight-line basis for approximately 96% of the water plant and on a 4% compound interest method for the remainder of the water plant. Exclusive of transportation and work equipment, the annual provision for depreciation, as related to the average depreciable original cost of utility plant, resulted in the following percentages: [CAPTION] 1994 1993 1992 [S] [C] [C] [C] Gas 2.48% 2.49% 2.51% Water 2.02 1.71 1.57 Common 7.62 8.06 6.76 -46- The increase in the annual rate of depreciation relative to water plant in both 1994 and 1993 reflects a change from the 4% compound interest method to the straight-line method of depreciation with respect to certain of that plant, as ordered by the PPUC. Such change in method of depreciation has generally been made as PG&W was allowed to initially increase its rates for customers receiving filtered water service. When depreciable property is retired, the original cost of such property is removed from the utility plant accounts and is charged, together with the cost of removal less salvage, to accumulated depreciation. No gain or loss is recognized in connection with retirements of depreciable property, other than in the case of significant involuntary conversions or extraordinary retirements. Revenues and Cost of Gas. PG&W bills its customers based on estimated or actual meter readings on a cycle basis. Gas customers and certain water customers, primarily large users, are billed monthly on a cycle that extends throughout the month. Other water customers are billed bi-monthly on cycles that extends over the bi-monthly period. The estimated unbilled amounts from the most recent meter reading dates through the end of the period being reported on are recorded as accrued revenues. PG&W generally passes on to its customers increases or decreases in gas costs from those reflected in its tariff charges. In accordance with this procedure, PG&W defers any current under or over-recoveries of gas costs and collects or refunds such amounts in subsequent periods. Deferred Charges (Regulatory Assets). PG&W generally accounts for and reports its costs in accordance with the economic effect of rate actions by the PPUC. To this extent, certain costs are recorded as deferred charges pending their recovery in rates. Such deferred charges include, among other amounts, deferred treatment plant costs and carrying charges as more fully discussed in the following paragraphs, certain pre-operating costs relative to PG&W's water treatment plants, costs associated with an early retirement plan, and certain preliminary survey and investigation costs. These amounts either relate to previously-issued orders of the PPUC or are of a nature which, in the opinion of PG&W, will be recoverable in future rates, based on past actions of the PPUC or other relevant factors. Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred all operating expenses, including depreciation and property taxes, and the carrying charges (equivalent to the AFUDC) relative to the four new Scranton Area water treatment plants and related facilities from the dates of commercial operation of the plants until March 23, 1991, the effective date of the Scranton Area water rate increase approved by the PPUC on March 22, 1991. By its Order entered June 23, 1993, relative to the Scranton Water Rate Area, the PPUC granted PG&W's request to recover the $5.8 million of costs deferred relative to the Scranton Area water treatment plants and related facilities over a ten-year period beginning June 23, 1993, of which $885,000 had been recovered as of December 31, 1994. Similarly, as permitted by an Order of the PPUC entered September 24, 1992, PG&W has deferred all operating expenses, including depreciation and property taxes, and the carrying charges relative to the Crystal Lake Water Treatment Plant and related facilities from August 3, 1992 (the date of commercial operation of that plant), until March 9, 1993, the effective date of the water rate increase approved by the PPUC on February 25, 1993, for customers in PG&W's Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant. Additionally, in accordance with an Order of the PPUC entered -47- July 28, 1993, PG&W deferred all expenses and the carrying charges relative to the Ceasetown and Watres Water Treatment Plants and related facilities, until December 16, 1993, the effective date of the water rate increase for customers served by the Ceasetown and Watres Water Treatment Plants approved by the PPUC on December 15, 1993. A total of $4.6 million of costs relative to these plants and related facilities had been so deferred pursuant to the respective PPUC Orders permitting the deferral of such costs. As contemplated by the PPUC's Orders of September 24, 1992, and July 28, 1993, PG&W will seek recovery of these costs, which total $4.6 million, in its next rate increase request relative to the Spring Brook Water Rate Area. Although it cannot be certain, PG&W believes that the recovery of such costs will be allowed by the PPUC in future rate increases, particularly in view of the PPUC's action allowing the recovery of the costs deferred with respect to the Scranton Area water treatment plants and related facilities. PG&W also records, as deferred charges, the direct financing costs incurred in connection with the issuance of long-term debt and redeemable preferred stock and equitably amortizes such amounts over the life of such securities. Cash and Cash Equivalents. For the purposes of the statements of cash flows, PG&W considers all highly liquid debt instruments purchased, which generally have a maturity of three months or less, to be cash equivalents. Such instruments are carried at cost, which approximates market value. Income Taxes. Effective January 1, 1993, PG&W adopted the provisions of Financial Accounting Standards Board ("FASB") Statement 109, "Accounting for Income Taxes," which superseded previously issued income tax accounting standards. The adoption of FASB Statement 109 did not have a significant effect on PG&W's results of operations. In accordance with the provisions of FASB Statement 109, PG&W recorded as of January 1, 1993, an additional deferred tax liability and an asset, representing the probable future rate recovery of the previously unrecorded deferred taxes, primarily relating to certain temporary differences in the basis of utility plant which had not previously been recorded because of the regulatory rate practices of the PPUC.
The components of PG&W's net deferred income tax liability as of December 31, 1994 and 1993, are shown below: 1994 1993 (Thousands of Dollars) Utility plant basis differences $94,430 $86,924 Deferred treatment plant costs, net 4,194 4,460 Deferred water utility billings 4,151 1,892 FERC Order 636 transition costs 1,371 - Contributions and advances for construction (3,544) (3,284) Alternative minimum tax (2,213) (2,176) Operating reserves (1,020) (816) Other (430) 5 Net deferred income tax liability $96,939 $87,005 -48- The provision for income taxes consists of the following components: 1994 1993 1992 (Thousands of Dollars) Included in operating expenses: Currently payable - Federal $ 4,986 $ 5,644 $ 4,664 State 1,893 1,917 1,888 Total currently payable 6,879 7,561 6,552 Deferred, net - Federal 5,486 2,535 2,512 State 390 (851) (503) Total deferred, net 5,876 1,684 2,009 Amortization of investment tax credits (256) (256) (256) Total included in operating expenses 12,499 8,989 8,305 Included in other income, net: Currently payable - Federal 213 (44) (29) State 85 (28) (26) Total currently payable 298 (72) (55) Deferred, net - Federal (5) (6) 39 State - - - Total deferred, net (5) (6) 39 Total included in other income, net 293 (78) (16) Total provision for income taxes $ 12,792 $ 8,911 $ 8,289 The components of deferred income taxes, which are recorded consistent with the treatment allowed by the PPUC for ratemaking purposes, are as follows: 1994 1993 1992 (Thousands of Dollars) Excess of tax depreciation over depreciation for accounting purposes $ 3,449 $ 3,214 $ 2,502 Deferred treatment plant costs, net (266) 1,458 585 Deferred water utility billings 2,259 75 258 FERC Order 636 transition costs 1,371 - - Take-or-pay costs, net (652) (1,126) (446) Other, net (290) (1,943) (851) Total deferred taxes, net $ 5,871 $ 1,678 $ 2,048 Included in: Operating expenses $ 5,876 $ 1,684 $ 2,009 Other income, net (5) (6) 39 Total deferred taxes, net $ 5,871 $ 1,678 $ 2,048 -49- The total provision for income taxes shown in the accompanying statements of income differs from the amount which would be computed by applying the statutory federal income tax rate to income before income taxes. The following table summarizes the major reasons for this difference: 1994 1993 1992 (Thousands of Dollars) Income before income taxes $32,598 $25,212 $21,245 Tax expense at statutory federal income tax rate $11,409 $ 8,824 $ 7,223 Increases (reductions) in taxes resulting from - State income taxes, net of federal income tax benefit 1,751 935 1,161 Deferred treatment plant carrying charges and allowance for equity funds used during construction (14) (545) - Amortization of investment tax credits (256) (256) (256) Other, net (98) (47) 161 Total provision for income taxes $12,792 $ 8,911 $ 8,289 (2) RATE MATTERS Gas Utility Operations Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania Public Utility Code, which require that the tariffs of gas distribution companies, such as PG&W, be adjusted on an annual basis to reflect changes in their purchased gas costs, the PPUC ordered PG&W to make the following changes during 1994, 1993 and 1992 to the gas costs contained in its gas tariff rates: Change in Calculated Effective Rate per MCF Increase (Decrease) Date From To in Annual Revenue December 1, 1994 $3.74 $3.68 $(1,800,000) December 1, 1993 2.79 3.74 28,800,000 December 1, 1992 2.46 2.79 9,500,000 The annual changes in gas rates on account of purchased gas costs have no effect on PG&W's earnings since the change in revenue is offset by a corresponding change in the cost of gas. Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition costs. The PGC Order stated that Gas Transition Costs are subject to recovery through the annual PGC rate filing made with the PPUC by PG&W and other larger local gas distribution companies. The PGC Order also indicated that while Non- Gas Transition Costs were not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs were subject to full recovery by local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Code. The PGC Order further stated that all such filings would be evaluated on a case-by-case basis. As of February 1, 1994, PG&W began to recover the Gas Transition Costs that are being -50- billed to PG&W by its interstate pipelines through an increase in its PGC rate. It is currently estimated that these costs, which will be billed to PG&W over a nineteen-month period extending through March 31, 1995, will aggregate $1.2 million, of which $1.1 million had been billed to PG&W and $659,000 had been recovered from its customers as of December 31, 1994. By Order of the PPUC entered August 26, 1994, PG&W began recovering the Non-Gas Transition Costs that it estimates it will ultimately be billed pursuant to FERC Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $9.4 million of Non-Gas Transition Costs will be billed to PG&W, generally over a four-year period extending through the fourth quarter of 1997, of which $3.8 million had been billed to PG&W and $1.1 million had been recovered from its customers as of December 31, 1994. PG&W has recorded a liability for the $5.6 million of such estimated transition costs that remain to be billed to it as of December 31, 1994, and both a current asset and a deferred asset (which together totaled $8.8 million as of December 31, 1994) representing the transition costs remaining to be recovered from its customers. Water Rate Filings Scranton Area Water Rate Increase. On September 25, 1992, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $9.9 million in additional annual revenue, to be effective November 24, 1992. This rate increase request involved the approximately 56,000 customers in PG&W's Scranton Water Rate Area at such date. By Order entered June 23, 1993, the PPUC rejected the proposed rate increase in its entirety "due to inadequate service" (i.e., water quality). However, by the same Order, the PPUC granted PG&W the alternative of a rate increase designed to produce an additional $5.0 million in annual revenue, provided that PG&W dedicate the entire increase to augment the improvements to its water distribution system until "...the demonstration by [PG&W] to [the PPUC] that it is providing adequate service." PG&W accepted this alternative and placed such $5.0 million rate increase into effect as of June 23, 1993. On August 19, 1993, the PPUC approved a settlement agreement resolving certain disputed issues relating to its June 23, 1993, Order. This settlement agreement provided, among other things, for (i) modification by the PPUC of its June 23, 1993, Order to reduce the amount of the revenue increase that it ordered be dedicated to distribution system improvements by the related income taxes and other expenses and the $319,000 additional expense for retiree health care and life insurance benefits that the PPUC allowed PG&W in its revenues (which resulted in the requirement for an additional annual expenditure for distribution system improvements by PG&W of $2.5 million), (ii) the agreement by PG&W (with which it was in compliance as of December 31, 1994) to spend a total of $4.9 million annually (an additional $2.5 million over its actual average annual expenditure of $2.4 million during the three-year period ended June 30, 1993) for distribution system improvements in the Scranton Water Rate Area until the PPUC is satisfied that PG&W is providing adequate service, (iii) the modification by the PPUC of its June 23, 1993, Order to restore the Hollister Reservoir to PG&W's rate base, and (iv) the withdrawal by PG&W and the Office of Consumer Advocate (the "OCA") of their appeals to the Commonwealth Court of Pennsylvania regarding the PPUC's June 23, 1993, Order. Spring Brook Water Rate Increases. Crystal Lake Service Area. On June 30, 1992, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $4.4 million in additional annual revenue. This rate increase request involved the approximately 5,000 customers in the Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, which became fully operational in August, 1992. On December 15, 1992, PG&W and -51- certain parties filing objections to the rate increase request reached a settlement providing for an approximate 130% rate increase designed to produce $2.0 million of additional annual revenue to be phased-in over a two-year period under the terms of a qualified phase-in plan pursuant to FASB Statement 92. The settlement provided that $1.1 million of the increased revenue (an approximate 72% increase in rates) was to be realized through an immediate rate increase and that the remaining $900,000 in increased revenue (an additional 58% increase in rates) was to be realized through another rate increase one year later (i.e., at the beginning of year two of the phase-in period). The settlement also specified that the $900,000 in revenue that would be deferred during the first year of the phase-in period, as well as an approximate $243,000 in related carrying charges, was to be collected from customers in the form of a surcharge in years three through five of the phase-in period. By Order adopted February 25, 1993, the PPUC approved the settlement effective March 9, 1993. In accordance with the provisions of FASB Statement 92, PG&W commenced recording the entire $2.0 million increase in annual revenue allowed by the PPUC as additional revenue beginning March 9, 1993, along with the related carrying charges on revenue deferred in accordance with the phase-in plan. Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $19.5 million in additional annual revenue, to be effective June 28, 1993. This rate increase request involved approximately 59,300 customers in PG&W's Spring Brook Water Rate Area, principally those customers (i) served by the Ceasetown Water Treatment Plant which was placed in service on March 31, 1993, (ii) served by the Watres Water Treatment Plant which was placed in service on September 30, 1993, (iii) served jointly by the Ceasetown and Watres Water Treatment Plants, and (iv) who are served exclusively by the Nesbitt Water Treatment Plant. On September 23, 1993, PG&W and certain parties filing objections to the rate increase request reached a settlement providing for an overall 119% rate increase involving approximately 44,900 customers, principally those served either exclusively or jointly by the Ceasetown and Watres Water Treatment Plants, designed to produce $11.9 million of additional annual revenue to be phased-in over a two-year period under the terms of a qualified phase-in plan, pursuant to FASB Statement 92. Under the terms of the settlement, except for approximately 200 customers who were previously served jointly by the Hillside and Nesbitt Water Treatment Plants, none of the approximately 14,600 customers now served exclusively by the Nesbitt Water Treatment Plant would receive an increase. The settlement further provided that $6.4 million of the increased revenue (an approximate 65% increase in rates) was to be realized through an immediate rate increase and that the remaining $5.5 million of the increased revenue (an additional 54% increase in rates) was to be realized through a further rate increase one year later (i.e., at the beginning of year two of the phase-in period). The settlement also specified that the $5.5 million in revenue to be deferred during the first year of the phase-in period, as well as an approximate $1.3 million in related carrying charges, is to be collected from customers in the form of a surcharge in years three through five of the phase-in period. By Order adopted December 15, 1993, the PPUC approved the settlement effective December 16, 1993. In accordance with the provisions of FASB Statement 92, PG&W commenced recording the entire $11.9 million increase in annual revenue allowed by the PPUC as additional revenue beginning December 16, 1993, along with the related carrying charges on revenue deferred in accordance with the phase-in plan. -52- (3) OTHER INCOME, NET Other income, net was comprised of the following elements: 1994 1993 1992 (Thousands of Dollars) Gain on sale of investment in joint venture, net of related income taxes $ 268 $ - $ - Gain on sale of non-watershed land and other property, net of related income taxes 165 20 102 Deferred treatment plant carrying charges and allowance for equity funds used during construction 40 1,555 - Interest on note to affiliate - - 133 Amortization of preferred stock issuance costs, net of related income tax benefits (227) (126) (66) Net interest expense on proceeds remaining in construction fund (217) (785) (23) Premium on retirement/defeasance of debt (40) (81) (127) Other 27 (23) 11 Total $ 16 $ 560 $ 30 (4) COMMON STOCK Since January 1, 1992, PG&W has issued the following amounts of common stock to PEI, its parent company, in addition to shares issued in connection with PEI's Dividend Reinvestment and Stock Purchase Plan and Customer Stock Purchase Plan: Purchase Price Date Purchased Number of Shares Per Share* Aggregate March 23, 1992 171,779 $ 40.75 $ 7.0 million June 19, 1992 137,143 $ 40.25 $ 5.5 October 27, 1993 834,000 $ 38.25 $31.9 May 31, 1994 500,000 $ 40.00 $20.0 Total 1,642,922 $64.4 million * Approximately equal to the book value of PG&W's common stock at the date of issuance. The proceeds from the shares issued on June 19, 1992, and October 27, 1993, were used to repay bank borrowings which had been incurred primarily to finance construction expenditures. The shares issued on March 23, 1992, represented capitalization of the $7.0 million contribution made by PEI to PG&W on January 30, 1992, which had been temporarily treated as an intercompany advance pending approval by the PPUC of the issuance of shares of common stock relative to such contribution. Upon its receipt, the $7.0 million contribution was also utilized to repay bank borrowings incurred primarily to finance construction expenditures. The proceeds from the shares issued on May 31, 1994, were used by PG&W to redeem $15.0 million of its 9.50% 1988 series cumulative preferred stock, to fund the $534,375 premium in connection with such redemption, to repay a portion of its bank borrowings and for working capital purposes. -53- On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the "Customer Plan") which provides the residential customers of PG&W with a method of purchasing newly-issued shares of PEI common stock at a 5% discount from the market price. PEI uses proceeds from the issuance of shares through the Customer Plan to purchase common stock of PG&W. During 1994, PG&W realized $1.7 million from the issuance of common stock to PEI in connection with the Customer Plan. Additionally, on January 3, 1995, PG&W realized $1.2 million from the issuance of common stock to PEI in connection with the Customer Plan. Through PEI's Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders of shares of PEI common stock may reinvest cash dividends and/or make cash investments in the common stock of PEI. The DRP was amended on May 5, 1994, to provide PEI's shareholders with a method of reinvesting cash dividends and making cash investments to purchase newly-issued shares of PEI's common stock at a 5% discount from the market price. Prior to such amendment, cash dividends were reinvested at 100% of the market price in newly-issued shares and cash investments were used to purchase shares of PEI common stock on the open market. PEI uses the proceeds from the DRP to purchase common stock of PG&W. During 1994, 1993 and 1992, PG&W realized $1.8 million, $465,000 and $385,000, respectively, from the issuance of common stock to PEI in connection with the DRP. Additionally, on January 3, 1995, PG&W realized $1.3 million from the issuance of common stock to PEI in connection with the DRP. (5) PREFERRED STOCK Preferred Stock of PG&W Subject to Mandatory Redemption On December 23, 1993, PG&W redeemed 100,000 shares of the 9.50% 1988 series cumulative preferred stock at a price of $103.5625 per share (plus accrued dividends to the redemption date), which included a voluntary redemption premium of $3.5625 per share ($356,250 in the aggregate). On May 31, 1994, PG&W redeemed the remaining 150,000 outstanding shares of its 9.50% 1988 series cumulative preferred stock, $100 par value, at a price of $103.5625 per share, which included a voluntary redemption premium of $3.5625 per share ($534,375 in the aggregate), plus accrued dividends. On December 16, 1994, PG&W redeemed all 150,000 shares of its 8.90% cumulative preferred stock at a price of $102.97 per share, which included a voluntary redemption premium of $2.97 per share ($445,500 in the aggregate). The holders of the 5.75% cumulative preferred stock have a noncumulative right each year to tender to PG&W and to require it to purchase at a per share price not exceeding $100, up to (a) that number of shares of the 5.75% cumulative preferred stock which can be acquired for an aggregate purchase price of $80,000 less (b) the number of such shares which PG&W may already have purchased during the year at a per share price of not more than $100. Eight hundred such shares were acquired and cancelled by PG&W in each of the three years in the period ended December 31, 1994, for an aggregate purchase price in each year of $80,000. As of December 31, 1994, the sinking fund requirements relative to PG&W's 5.75% cumulative preferred stock (the only series of preferred stock subject to mandatory redemption that was outstanding on such date) were $80,000 for each of the years 1995 through 1999. At PG&W's option, the 5.75% cumulative preferred stock may currently be redeemed at a price of $102.00 per share ($1,876,800 in the aggregate.) -54- Preferred Stock of PG&W Not Subject to Mandatory Redemption On August 18, 1992, PG&W issued 250,000 shares of its 9% cumulative preferred stock, par value $100 per share, for aggregate net proceeds of approximately $23.6 million. The 9% cumulative preferred stock is not redeemable by PG&W prior to September 15, 1997. Thereafter, it is redeemable at the option of PG&W, in whole or in part, upon not less than 30 days' notice, at $100 per share plus accrued dividends to the date of redemption and at a premium of $8 per share if redeemed from September 15, 1997, to September 14, 1998, and a premium of $4 per share if redeemed from September 15, 1998, to September 14, 1999. At PG&W's option, the 4.10% cumulative preferred stock may currently be redeemed at a redemption price of $105.50 per share or for an aggregate redemption price of $10,550,000. Dividend Information The dividends on the preferred stock of PG&W in each of the three years in the period ended December 31, 1994, were as follows: Series 1994 1993 1992 (Thousands of Dollars) 4.10% $ 410 $ 410 $ 409 5.75% 108 113 117 8.90% 1,280 1,335 1,335 9.00% 2,250 2,250 829 9.50% 1988 series 591 2,354 2,375 Total $4,639 $6,462 $5,065 Dividends on all series of PG&W's preferred stock are cumulative, and if dividends in an amount equivalent to four full quarterly dividends on all shares of preferred stock then outstanding are in default and until all such dividends have been paid, the holders of the preferred stock, voting separately as one class, shall be entitled to elect a majority of the Board of Directors of PG&W. Additionally, PG&W may not declare dividends on its common stock if any dividends on shares of preferred stock then outstanding are in default. -55- (6) LONG-TERM DEBT Long-term debt consisted of the following components at December 31, 1994 and 1993: 1994 1993 (Thousands of Dollars) First mortgage bonds - 6.05 % Series, due 2019 $ 19,000 $ 19,000 7 % Series, due 2017 30,000 - 7.125% Series, due 2022 30,000 30,000 7.20 % Series, due 2017 50,000 50,000 8 % Series, due 1997 3,535 3,745 8.375% Series, due 2002 30,000 30,000 9.23 % Series, due 1999 10,000 10,000 9.34 % Series, due 2019 15,000 15,000 9.57 % Series, due 1996 50,000 50,000 237,535 207,745 Notes - 1%, due 1994 (Small Business Administration) - 845 8%, 1987 Series B, defeased on November 15, 1994 - 30,000 Bank borrowings, at weighted average interest rates of 5.28% and 4.31%, respectively, (Note 8) 65,500 47,000 65,500 77,845 Water facility loans from agencies of the Commonwealth of Pennsylvania, at interest rates ranging from 1.76% to 9.36%, repayable in installments through 2012 12,420 19,253 Less current maturities and sinking fund requirements (3,730) (38,584) Total long-term debt $311,725 $266,259 7.125% Series First Mortgage Bonds. On December 22, 1992, the Luzerne County Industrial Development Authority (the "Authority") issued $30.0 million of its 7.125% Exempt Facilities Revenue Bonds, 1992 Series B (Pennsylvania Gas and Water Company Project) (the "1992 Series B Bonds") and, in connection therewith, PG&W issued $30.0 million of its 7.125% Series First Mortgage Bonds to PNC Bank (formerly Northeastern Bank of Pennsylvania), as trustee (the "IDA Trustee") for the 1992 Series B Bonds, as security for the 1992 Series B Bonds. The proceeds from the issuance of the 1992 Series B Bonds were deposited in a construction fund held by the IDA Trustee for the 1992 Series B Bonds, pending their utilization to finance the construction of various additions and improvements to PG&W's water facilities for which construction commenced subsequent to September 23, 1992. As of December 31, 1994, $3.4 million (including investment income) was so held by the IDA Trustee and was available to finance the future construction of qualified water facilities for PG&W. Under the terms of the 7.125% Series First Mortgage Bonds, PG&W will make payments to the IDA Trustee in amounts sufficient and at the times necessary to pay the debt service requirements on the 1992 Series B Bonds. 6.05% Series First Mortgage Bonds. On December 21, 1993, the Authority issued $19.0 million of its Exempt Facilities Revenue Refunding Bonds, 1993 Series A (Pennsylvania Gas and Water Company Project) (the "1993 Series A Bonds") and, in connection therewith, PG&W issued $19.0 million of its 6.05% Series First Mortgage Bonds to the IDA Trustee for the 1993 Series A Bonds, as security for the 1993 Series A Bonds. PG&W will make payments to the IDA Trustee pursuant to the 6.05% Series First Mortgage Bonds in amounts sufficient and at the times necessary to pay the debt service requirements on the 1993 -56- Series A Bonds. The proceeds from the issuance of the 1993 Series A Bonds, along with additional funds provided by PG&W, were deposited with the IDA -57- Trustee for the Authority's $19.0 million of 7% Exempt Facilities Revenue Bonds, 1989 Series A (Pennsylvania Gas and Water Company Project) (the "1989 Series A Bonds") on December 21, 1993, for use in redeeming the 1989 Series A Bonds on January 1, 1994. The deposit of such funds acted to discharge all of PG&W's obligations with respect to its 7%, 1989 Series A Note in the principal amount of $19.0 million which had been issued to the IDA Trustee in connection with the 1989 Series A Bonds and which was subject to repayment on January 1, 1994. 7% Series First Mortgage Bonds. On November 15, 1994, the Authority issued $30.0 million of its Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) due 2017 (the "1994 Series A Bonds") and, in connection therewith, PG&W issued $30.0 million of its 7% Series First Mortgage Bonds, as security for the 1994 Series A Bonds. PG&W will make payments to the IDA Trustee pursuant to the 7% Series First Mortgage Bonds in amounts sufficient and at the times necessary to pay the debt service requirements on the 1994 Series A Bonds. The proceeds from the issuance of the 1994 Series A Bonds, along with additional funds provided by PG&W, were deposited with the IDA Trustee for the Authority's $30.0 million of 8% Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) (the "1987 Series B Bonds") on November 15, 1994, for use in redeeming the 1987 Series B Bonds on December 1, 1994. The deposit of such funds acted to discharge all of PG&W's obligations with respect to its 8%, 1987 Series B Note in the principal amount of $30.0 million which had been issued to the IDA Trustee in connection with the 1987 Series B Bonds and which was subject to repayment on December 1, 1994. Maturities and Sinking Fund Requirements. As of December 31, 1994, the aggregate annual maturities and sinking fund requirements of long-term debt for each of the next five years ending December 31, were: Year Amount 1995 $ 3,730,000 1996 $113,258,000 (a) 1997 $ 3,694,000 1998 $ 611,000 1999 $ 10,644,000 (b) (a) Includes $62.5 million of bank borrowings outstanding as of December 31, 1994, due May 31, 1996, and PG&W's 9.57% Series First Mortgage Bonds in the principal amount of $50.0 million due September 1, 1996. (b) Includes PG&W's 9.23% Series First Mortgage Bonds in the principal amount of $10.0 million due September 1, 1999. Liens Securing Indebtedness. Most of PG&W's properties are subject to mortgage liens securing certain funded debt. Additionally, PG&W's gross revenues and receipts, accounts receivable and certain of its other rights and interests are subject to liens securing various water facility loans from agencies established by the Commonwealth of Pennsylvania for the purpose of providing financial assistance to public water supply and sewage systems in the state. These liens are limited to the amount of the related loans outstanding, which aggregated $12.4 million as of December 31, 1994. -58- (7) DIVIDEND RESTRICTIONS The preferred stock provisions of PG&W's Restated Articles of Incorporation and certain of the agreements under which PG&W has issued long-term debt provide for certain dividend restrictions. As of December 31, 1994, $37,357,000 of the retained earnings of PG&W were restricted against the payment of cash dividends on common stock under the most restrictive of these covenants. (8) BANK NOTES PAYABLE PG&W has entered into a revolving bank credit agreement (the "Credit Agreement") with a group of six banks under the terms of which $60.0 million is available for borrowing by PG&W. The Credit Agreement terminates on May 31, 1996, at which time any borrowings outstanding thereunder are due and payable. The interest rate on borrowings under the Credit Agreement is generally less than prime. The Credit Agreement also requires the payment of a commitment fee of .195% per annum on the average daily amount of the unused portion of the available funds. As of March 10, 1995, $35.0 million of borrowings were outstanding under the Credit Agreement. PG&W currently has three additional bank lines of credit with an aggregate borrowing capacity of $7.5 million which provide for borrowings at interest rates generally less than prime. Borrowings outstanding under two of these bank lines of credit with borrowing capacities of $2.0 million and $3.0 million mature on May 31, 1995, and June 30, 1995, respectively. Borrowings outstanding under the third bank line of credit with a borrowing capacity of $2.5 million mature on May 31, 1996. As of March 10, 1995, PG&W had $3.9 million of borrowings outstanding under these additional bank lines of credit. The commitment fees paid by PG&W with respect to its revolving bank credit agreements totaled $97,000 in 1994, $113,000 in 1993 and $152,000 in 1992. Because of limitations imposed by the terms of PG&W's preferred stock, PG&W is prohibited, without the consent of the holders of a majority of the outstanding shares of its preferred stock, from issuing more than $12.0 million of unsecured debt due on demand or within one year from issuance. PG&W had no unsecured debt due on demand or within one year from issuance outstanding as of December 31, 1994. -59- Information relating to PG&W's bank lines of credit and borrowings under those lines of credit is set forth below: As of December 31, 1994 1993 1992 (Thousands of Dollars) Borrowings under lines of credit Short-term $ - $ 2,000 $ - Long-term 65,500 47,000 17,000 $ 65,500 $ 49,000 $ 17,000 Unused lines of credit Short-term $ - $ 5,000 $ - Long-term 2,000 13,000 28,000 $ 2,000 $ 18,000 $ 28,000 Total lines of credit Prime rate $ - $ 2,000 $ 45,000 Other than prime rate 67,500 65,000 - $ 67,500 $ 67,000 $ 45,000 Short-term bank borrowings (a) Maximum amount outstanding $ 5,692 $ 5,666 $ - Daily average amount outstanding $ 441 $ 637 $ - Weighted daily average interest rate 3.984% 4.046% - Weighted average interest rate at year-end - 4.208% - Range of interest rates 3.700- 3.750- - 6.000% 6.000% - (a) PG&W did not incur any short-term bank borrowings during the year ended December 31, 1992, and had no short-term bank borrowings outstanding as of December 31, 1992, or December 31, 1994. (9) POSTEMPLOYMENT BENEFITS Pension Benefits Substantially all employees of PG&W are covered by PEI's trusteed, noncontributory, defined benefit pension plan. Pension benefits are based on years of service and average final salary. PG&W's funding policy is to contribute an amount necessary to provide for benefits based on service to date, as well as for benefits expected to be earned in the future by current participants. To the extent that the present value of these obligations is fully covered by assets in the trust, a contribution may not be made for a particular year. Net pension costs, including amounts capitalized, were $562,000, $443,000 and $333,000 in 1994, 1993 and 1992, respectively. -60- The following items were the components of the net pension cost for the years 1994, 1993 and 1992:
1994 1993 1992 (Thousands of Dollars) Present value of benefits earned during the year $ 999 $ 854 $ 789 Interest cost on projected benefit obligations 2,545 2,402 2,262 Return on plan assets 973 (3,127) (2,646) Net amortization and deferral (101) (97) (93) Deferral of investment (loss) gain (3,854) 411 21 Net pension cost $ 562 $ 443 $ 333 The funded status of the plan as of December 31, 1994 and 1993, was as follows:
[CAPTION] 1994 1993 (Thousands of Dollars) [S] [C] [C] Actuarial present value of the projected benefit obligations: Accumulated benefit obligations Vested $ 21,592 $ 24,265 Nonvested 77 125 Total 21,669 24,390 Provision for future salary increases 7,565 9,769 Projected benefit obligations 29,234 34,159 Market value of plan assets, primarily invested in equities and bonds 30,457 32,471 Plan assets in excess of (less than) projected benefit obligations 1,223 (1,688) Unrecognized net transition asset as of January 1, 1986, being amortized over 20 years (2,528) (2,758) Unrecognized prior service costs 2,150 2,279 Unrecognized net (gain) loss (1,644) 1,710 Accrued pension cost at year-end $ (799) $ (457) The discount rate used to determine the actuarial present value of the projected benefit obligations was 8-3/4% in 1994 and 8% in 1993. An expected long-term rate of return on plan assets of 9% and a 5-1/2% projected increase in future compensation levels were assumed in determining the net pension cost for both of the years 1994 and 1993. Other Postretirement Benefits In addition to pension benefits, PG&W provides certain health care and life insurance benefits for retired employees. Substantially all of PG&W's employees may become eligible for those benefits if they reach retirement age while working for PG&W. Prior to January 1, 1993, the cost of retiree health care and life insurance, which totaled $870,000 in 1992, was expensed as the premiums were paid under insurance contracts. Effective January 1, 1993, PG&W adopted the provisions of FASB Statement 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The provisions of FASB Statement 106 require that PG&W record the cost of retiree health care and life insurance benefits as a liability over the employees' active service periods instead of on a benefits-paid basis, as was PG&W's prior practice. -61- The following items were the components of the net cost of postretirement benefits other than pensions for the years 1994 and 1993: [CAPTION] 1994 1993 (Thousands of Dollars) [S] [C] [C] Present value of benefits earned during the year $ 269 $ 226 Interest cost on accumulated benefit obligation 967 967 Return on plan assets (6) - Net amortization and deferral 654 617 Net cost of postretirement benefits other than pensions 1,884 1,810 Less disbursements for benefits (987) (983) Increase in liability for postretirement benefits other than pensions $ 897 $ 827 Reconciliations of the accumulated benefit obligation to the accrued liability for postretirement benefits other than pensions as of December 31, 1994 and 1993, follow: [CAPTION] 1994 1993 (Thousands of Dollars) [S] [C] [C] Accumulated benefit obligation: Retirees $ 9,021 $ 10,149 Fully eligible active employees 1,628 1,735 Other active employees 1,305 1,222 11,954 13,106 Plan assets at fair value 839 - Accumulated benefit obligation in excess of plan assets 11,115 13,106 Unrecognized transition obligation being amortized over 20 years (11,108) (11,725) Unrecognized net gain (loss) 885 (554) Accrued liability for postretirement benefits other than pensions $ 892 $ 827 The assumptions used to calculate the costs to be accrued by PG&W under FASB Statement 106 included discount rates of 8-3/4% and 8% in 1994 and 1993, respectively, and a 5-1/2% projected annual increase in future compensation levels. It was also assumed that the per capita cost of covered health care benefits would increase at an annual rate of 10-1/2% in 1994 and that this rate would decrease gradually to 5-1/2% for the year 2003 and remain at that level thereafter. The health care cost trend rate assumption had a significant effect on the amounts accrued. To illustrate, increasing the assumed health care cost trend rate by 1 percentage point in each year would increase the transition obligation as of January 1, 1994, by approximately $778,000 and the aggregate of the service and interest cost components of the net cost of postretirement benefits other than pensions for the year 1994 by approximately $64,000. The additional costs accrued pursuant to FASB Statement 106 are allocated between PG&W's gas utility and water utility operations. By Orders entered in 1993 relative to PG&W's water utility operations, the PPUC approved the inclusion of the costs required to be accrued pursuant to FASB Statement 106 in PG&W's water rates. Since PG&W has not sought to increase its base gas rates, the $447,000 ($256,000 net of related income taxes) and $407,000 ($232,000 net of related income taxes) of additional cost incurred in 1994 and 1993, respectively, with regard to PG&W's gas utility operations as a result of the -62- adoption of the provisions of FASB Statement 106 were expensed without any adjustment being made to its gas rates. -63- Other Postemployment Benefits In December, 1992, FASB Statement 112, "Employers' Accounting for Postemployment Benefits," was issued. The provisions of this statement require the recording of a liability for postemployment benefits (such as disability benefits, including workers' compensation, salary continuation and the continuation of benefits such as health care and life insurance) provided to former or inactive employees, their beneficiaries and covered dependents. PG&W consistently recorded liabilities for benefits of this nature prior to the effectiveness of FASB Statement 112 and, as a result, the provisions of FASB Statement 112, which PG&W adopted effective January 1, 1994, did not have a material impact on its financial position or results of operations. (10) CONSTRUCTION EXPENDITURES PG&W estimates the cost of its 1995 construction program will be $44.9 million, which includes $23.0 million for the construction of water facilities and $21.9 million for the construction of gas facilities. (11) COMMITMENTS AND CONTINGENCIES Valve Maintenance On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring PG&W by January 31, 1994, to survey its gas distribution system to verify the location and spacing of its gas shut off valves, to add or repair valves where needed and to establish programs for the periodic inspection and maintenance of all such valves and the verification of all gas service line information. PG&W submitted a detailed plan of action for complying with the Emergency Order to the PPUC on April 11, 1994, which was subsequently revised. The PPUC staff agreed that the revised plan (the "Plan") satisfies the concerns of the PPUC expressed in the Emergency Order, and on November 30, 1994, the PPUC staff and PG&W entered into a Settlement Agreement, subject to approval by the PPUC, (i) terminating the informal investigation of the matter initiated by the PPUC staff, (ii) memorializing the acceptance by the PPUC staff of the Plan and (iii) evidencing PG&W's commitment to satisfy the requirements of the Plan. The PPUC must approve the Settlement Agreement. PG&W does not believe that compliance with the terms of the Settlement Agreement or any liability that might result from violations of law or the Emergency Order will have a material adverse effect on its financial position or results of operations. Environmental Matters PG&W, like many gas distribution companies, once utilized manufactured gas plants in connection with providing gas service to its customers. None of these plants has been in operation since 1960, and several of the plant sites are no longer owned by PG&W. Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed notices with the United States Environmental Protection Agency (the "EPA") with respect to the former plant sites. None of the sites is or was formerly on the proposed or final National Priorities List. The EPA has conducted site inspections and made preliminary assessments of each site and has concluded that no further remedial action is planned. While this conclusion does not constitute a legal prohibition against further regulatory action under CERCLA or other applicable federal or state law, PG&W does not believe that additional costs, if any, related to these manufactured gas plant sites would be material to its financial position or results of operations since environmental remediation costs generally are recoverable through rates over a period of time. -64- (12) INDUSTRY SEGMENTS Financial information with respect to PG&W's industry segments for the years ended December 31, 1994, 1993 and 1992 is included in Item 1 of this Form 10-K. Such industry segment information is incorporated herein as part of these Financial Statements. (13) QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED March 31, June 30, September 30, December 31, 1994 1994 1994 1994 (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 96,285 $ 43,483 $ 31,862 $ 63,093 Operating income 15,892 7,654 6,225 12,561 Net income (loss) 9,037 882 (520) 5,768 Earnings (loss) applicable to common stock Before premium on redemption of preferred stock 1.86 .17 (.10) 1.06 Premium on redemption of preferred stock - (.11) - (.08) Earnings (loss) per share of common stock (a) 1.86 .06 (.10) .98 QUARTER ENDED March 31, June 30, September 30, December 31, 1993 1993 1993 1993 (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 78,318 $ 37,251 $ 27,959 $ 63,160 Operating income 13,315 5,672 4,762 12,407 Earnings (loss) applicable to common stock 6,827 (1,037) (1,506) 5,555 Earnings (loss) per share of common stock (a) 1.70 (.26) (.37) 1.20
(a) The total of the earnings per share for the quarters does not equal the earnings per share for the year, as shown elsewhere in Item 8 of this Form 10-K, as a result of PG&W's issuance of additional shares of common stock at various dates during the year. Because of the seasonal nature of PG&W's gas heating business, there are substantial variations in operations reported on a quarterly basis. -65- (14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: o Restricted funds held by trustee. The fair value of the restricted funds held by the trustee has been based on the market value as of the respective dates of the financial instruments in which such funds have been invested. o Long-term debt. The fair value of PG&W's long-term debt has been estimated based on the quoted market price as of the respective dates for the portion of such debt which is publicly traded and, with respect to the portion of such debt which is not publicly traded, on the estimated borrowing rate as of the respective dates for long-term debt of comparable credit quality with similar terms and maturities. o Preferred stock subject to mandatory redemption. The fair value of PG&W's preferred stock subject to mandatory redemption has been estimated based on the market value as of the respective dates for preferred stock of comparable credit quality with similar terms and maturities. The carrying amounts and estimated fair values of PG&W's financial instruments at December 31, 1994 and 1993, were as follows: [CAPTION] 1994 1993 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (Thousands of Dollars) [S] [C] [C] [C] [C] Restricted funds held by trustee $ 3,401 $ 3,401 $ 12,853 $ 12,857 Long-term debt (including current portion) 315,455 317,867 306,843 327,436 Preferred stock subject to mandatory redemption (including current portion) 1,840 1,877 31,920 33,087 PG&W believes that the regulatory treatment of any excess or deficiency of fair value relative to the carrying amounts of these items, if such items were settled at amounts approximating those above, would dictate that these amounts be used to increase or reduce its rates over a prescribed amortization period. Accordingly, any settlement would not result in a material impact on PG&W's financial position or the results of operations of either PEI or PG&W. -66- ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -67- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following financial statements, notes to financial statements and report of independent public accountants for PG&W are presented in Item 8 of this Form 10-K. Page Report of Independent Public Accountants . . . . . . . . . . . . 37 Statements of Income for each of the three years in the period ended December 31, 1994 . . . . . . . . . . . . . . . . 38 Balance Sheets as of December 31, 1994 and 1993. . . . . . . . . 39 Statements of Cash Flows for each of the three years in the period ended December 31, 1994 . . . . . . . . . . . . . . . . 41 Statements of Capitalization as of December 31, 1994 and 1993. . 42 Statements of Common Shareholder's Investment for each of the three years in the period ended December 31, 1994. . . . . 43 Notes to Financial Statements. . . . . . . . . . . . . . . . . . 44 2. Financial Statement Schedules The following financial statement schedule for PG&W is filed as a part of this Form 10-K. Schedules not included have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Schedule Number Page II Valuation and Qualifying Accounts for the three-year period ended December 31, 1994 . . . . . . . . . . . . . 66 3. Exhibits See "Index to Exhibits" located on page 68 for a listing of all exhibits filed herein or incorporated by reference to a previously filed registration statement or report with the Securities and Exchange Commission. -68-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
(b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 1994. (c) Executive Compensation Plans and Arrangements The following listing includes PG&W's executive compensation plans and arrangements in effect as of December 31, 1994. Exhibit 10-32 Form of Change in Control Agreement between PEI and certain of its Officers -- filed as Exhibit 10-34 to PG&W's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-33 Agreement dated as of March 15, 1991, by and between PEI, PG&W and Robert L. Jones -- filed as Exhibit No. 10-38 to PG&W's Annual Report on Form 10-K for 1990, File No. 1-3490. 10-34 Employment Agreement effective September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 0-7812. 10-35 Supplemental Retirement Agreement, dated as of December 23, 1991, between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-36 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812. 10-37 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy Statement, File No. 0-7812. (d) Statements Excluded from Annual Report to Shareholders Not applicable. -69- Schedule II -70- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENNSYLVANIA GAS AND WATER COMPANY (Registrant) Date: March 27, 1995 By: /s/ Dean T. Casaday Dean T. Casaday President and Chief Executive Officer (Principal Executive Officer) Date: March 27, 1995 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Finance (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity Date /s/ Kenneth L. Pollock Chairman of the Board of March 27, 1995 Kenneth L. Pollock Directors /s/ William D. Davis Vice Chairman of the Board March 27, 1995 William D. Davis of Directors /s/ Dean T. Casaday Director, President and March 27, 1995 Dean T. Casaday Chief Executive Officer /s/ Robert J. Keating Director March 27, 1995 Robert J. Keating /s/ John D. McCarthy Director March 27, 1995 John D. McCarthy /s/ Kenneth M. Pollock Director March 27, 1995 /s/ Kenneth M. Pollock /s/ James A. Ross Director March 27, 1995 James A. Ross /s/ Ronald W. Simms Director March 27, 1995 Ronald W. Simms -71- INDEX TO EXHIBITS Exhibit Number (3) Articles of Incorporation and By Laws: 3-1 Restated Articles of Incorporation of PG&W, as amended -- filed as Exhibit 3-1 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-3490. 3-2 By-Laws of PG&W, as amended and restated on January 18, 1995 -- filed herewith. (4) Instruments Defining the Rights of Security Holders, Including Debentures: 4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946, between Scranton-Spring Brook Water Service Company (now PG&W) and Guaranty Trust Company, as Trustee (now Morgan Guaranty Trust Company of New York) -- filed as Exhibit 2(c) to PG&W's Bond Form S- 7, Registration No. 2-55419. 4-2 Fourth Supplemental Indenture, dated as of March 15, 1952 -- filed as Exhibit 2(d) to PG&W's Bond Form S-7, Registration No. 2-55419. 4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as Exhibit 2(e) to PG&W's Bond Form S-7, Registration No. 2-55419. 4-4 Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed as Exhibit 2(f) to PG&W's Bond Form S-7, Registration No. 2-55419. 4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960 -- filed as Exhibit 2(g) to PG&W's Bond Form S-7, Registration No. 2-55419. 4-6 Fourteenth Supplemental Indenture, dated as of December 15, 1961 -- filed as Exhibit 2(h) to PG&W's Bond Form S-7, Registration No. 2- 55419. 4-7 Fifteenth Supplemental Indenture, dated as of December 15, 1963 -- filed as Exhibit 2(i) to PG&W's Bond Form S-7, Registration No. 2- 55419. 4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed as Exhibit 2(j) to PG&W's Bond Form S-7, Registration No. 2-55419. 4-9 Seventeenth Supplemental Indenture, dated as of October 15, 1967 -- filed as Exhibit 2(k) to PG&W's Bond Form S-7, Registration No. 2- 55419. 4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970 -- filed as Exhibit 2(1) to PG&W's Bond Form S-7, Registration No. 2-55419. 4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed as Exhibit 2(m) to PG&W's Bond Form S-7, Registration No. 2-55419. -72- Exhibit Number 4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed as Exhibit 2(n) to PG&W's Bond Form S-7, Registration No. 2-55419. 4-13 Twenty-first Supplemental Indenture, dated as of December 1, 1976 -- filed as Exhibit 4-16 to PG&W's Annual Report on Form 10-K for 1982, File No. 1-3490. 4-14 Twenty-second Supplemental Indenture, dated as of August 15, 1989 -- filed as Exhibit 4-22 to PG&W's Annual Report on Form 10-K for 1989, File No. 1-3490. 4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 -- filed as Exhibit 4-23 to PG&W's Annual Report on Form 10-K for 1989, File No. 1-3490. 4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991, from PG&W to Morgan Guaranty Trust Company of New York, as Trustee -- filed as Exhibit 4-3 to PEI's Common Stock Form S-2, Registration No. 33-43382. 4-17 Twenty-fifth Supplemental Indenture, dated as of September 1, 1992, from PG&W to Morgan Guaranty Trust Company of New York, as Trustee -- filed as Exhibit 4-1 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-3490. 4-18 Twenty-sixth Supplemental Indenture, dated as of December 1, 1992, from PG&W to Morgan Guaranty Trust Company of New York, as Trustee -- filed as Exhibit 4-20 to PG&W's Bond Form S-2, Registration No. 33-54278. 4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992, from PG&W to Morgan Guaranty Trust Company of New York, as Trustee -- filed as Exhibit 4-19 to PG&W's Annual Report on Form 10-K for 1992, File No. 0-7812. 4-20 Twenty-eighth Supplemental Indenture, dated as of December 1, 1993, from PG&W to Morgan Guaranty Trust Company of New York, as Trustee -- filed as Exhibit 4-20 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994, from PG&W to First Trust of New York, National Association, as Successor Trustee to Morgan Guaranty Trust Company of New York -- filed herewith. NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth, Eleventh and Thirteenth Supplemental Indentures merely convey additional properties to the Trustee. -73- Exhibit Number (10) Material Contracts: 10-1 Service Agreement for storage service under Rate Schedule LGA, dated August 6, 1974, between PG&W and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-3 to PG&W's Annual Report on Form 10-K for 1984, File No. 1-3490. 10-2 Service Agreement for transportation service under Rate Schedule FT, dated February 1, 1992, by and between PG&W and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-4 to PG&W's Annual Report on Form 10-K for 1991, File No. 1-3490. 10-3 Service Agreement for storage service under Rate Schedule SS-2, dated April 1, 1990, between PG&W and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-8 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-4 Service Agreement for sales service under Rate Schedule FS, dated August 1, 1991, between PG&W and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-6 to PG&W's Annual Report on Form 10-K for 1991, File No. 1-3490. 10-5 Service Agreement for transportation service under Rate Schedule FT, dated August 1, 1991, between PG&W and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-10 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-6 Service Agreement for transportation service under Rate Schedule IT, dated January 31, 1992, between PG&W and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-8 to PG&W's Annual Report on Form 10-K for 1991, File No. 1-3490. 10-7 Service Agreement for storage service under Rate Schedule LSS, dated October 1, 1993, by and between PG&W and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-7 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-8 Service Agreement for storage service under Rate Schedule GSS, dated October 1, 1993, by and between PG&W and Transcontinental Gas Pipeline Corporation Company -- filed as Exhibit 10-8 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-9 Service Agreement for transportation service under Rate Schedule FTS, dated November 1, 1993, by and between PG&W and Columbia Gas Transmission Corporation -- filed as Exhibit 10-9 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-10 Service Agreement for transportation service under Rate Schedule SST, dated November 1, 1993, by and between PG&W and Columbia Gas Transmission Corporation -- filed as Exhibit 10-10 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. -74- Exhibit Number 10-11 Service Agreement for storage service under Rate Schedule FSS, dated November 1, 1993, by and between PG&W and Columbia Gas Transmission Corporation -- filed as Exhibit 10-11 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-12 Service Agreement for transportation service under Rate Schedule FTS-1, dated November 1, 1993, by and between PG&W and Columbia Gulf Transmission Company -- filed as Exhibit 10-12 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-13 Service Agreement for transportation service under Rate Schedule ITS-1, dated November 1, 1993, by and between PG&W and Columbia Gulf Transmission Company -- filed as Exhibit 10-13 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-14 Service Agreement for transportation service under Rate Schedule ITS, dated November 1, 1993, by and between PG&W and Columbia Gas Transmission Corporation -- filed as Exhibit 10-14 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-15 Service Agreement (Contract No. 946) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-16 Service Agreement (Service Package No. 171) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit 10-2 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-17 Service Agreement (Service Package No. 187) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit 10-3 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-18 Service Agreement (Service Package No. 190) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG&W and Tennessee Gas Pipeline -- filed as Exhibit 10-4 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-19 Service Agreement (Contract No. 2289) for storage service under Rate Schedule FS dated September 1, 1993, by and between PG&W and Tennessee Gas Pipeline -- filed as Exhibit 10-5 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. -75- Exhibit Number 10-20 Bond Purchase Agreement, dated September 1, 1989, relating to PG&W's First Mortgage Bonds 9.23% Series due 1999 and First Mortgage Bonds 9.34% Series due 2019 among Allstate Life Insurance Company, Allstate Life Insurance Company of New York and PG&W -- filed as Exhibit 10-33 to PG&W's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-21 Form of Bond Purchase Agreement, dated as of September 1, 1991, re: $50.0 million of 9.57% First Mortgage Bonds, due September 1, 1996, entered into between PG&W and each of the following parties: Pacific Mutual Life Insurance Company, Principal Mutual Life Insurance Company, Great West Life & Annuity Insurance Company, The Life Insurance Company of Virginia, Lutheran Brotherhood, Transamerica Life Insurance and Annuity Company and The Franklin Life Insurance Company -- filed as Exhibit 10-7 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-22 Amended and Restated Project Facilities Agreement dated as of September 1, 1992, between PG&W and the Luzerne County Industrial Development Authority -- filed as Exhibit 10-1 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-3490. 10-23 7.20% Bond Purchase Agreement, dated September 2, 1992, among the Luzerne County Industrial Development Authority, PG&W and Butcher & Singer, a division of Wheat First Securities Inc., as representative on behalf of itself and Legg Mason Wood Walker Incorporated -- filed as Exhibit 10-2 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-3490. 10-24 Project Facilities Agreement, dated December 1, 1992, between Luzerne County Industrial Development Authority and PG&W -- filed as Exhibit 10-29 to PG&W's Annual Report on Form 10-K for 1992, File No. 1-3490. 10-25 7.125% Bond Purchase Agreement, dated December 10, 1992, among the Luzerne County Industrial Development Authority, PG&W and Butcher & Singer, a division of Wheat First Securities Inc., as representative on behalf of itself and Legg Mason Wood Walker Incorporated -- filed as Exhibit 10-30 to PG&W's Annual Report on Form 10-K for 1992, File No. 1-3490. 10-26 Second Amended and Restated Project Facilities Agreement, dated as of December 1, 1993, between PG&W and the Luzerne County Industrial Development Authority -- filed as Exhibit 10-30 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-27 6.05% Bond Purchase Agreement, dated December 2, 1993, among the Luzerne County Industrial Development Authority, PG&W and Butcher & Singer, a division of Wheat First Securities, Inc., as representative on behalf of itself and Legg Mason Wood Walker Incorporated -- filed as Exhibit 10-31 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490. -76- Exhibit Number 10-28 7% Bond Purchase Agreement, dated November 1, 1994, among the Luzerne County Industrial Development Authority, PG&W and Wheat First Butcher Singer, as representative on behalf of itself and Legg Mason Wood Walker Incorporated -- filed herewith. 10-29 Amended and Restated Project Facilities Agreement, dated as of November 1, 1994, between PG&W and the Luzerne County Industrial Development Authority -- filed herewith. 10-30 Credit Agreement, dated as of April 19, 1993, by and among PG&W, the Banks parties thereto and PNC Bank, Northeast PA, as Agent, and CoreStates Bank, N.A. and NBD Bank, N.A. as Co-Agents -- filed as Exhibit 10-1 to PG&W's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-3490. 10-31 First Amendment to Credit Agreement and Notes, dated as of December 16, 1994, by and among PG&W, the Banks parties thereto and PNC Bank, Northeast PA, as Agent, and CoreStates Bank, N.A. and NBD Bank, N.A. as Co-Agents -- filed herewith. 10-32 Form of Change in Control Agreement between PEI and certain of its Officers -- filed as Exhibit 10-34 to PG&W's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-33 Agreement, dated as of March 15, 1991, by and between PEI, PG&W and Robert L. Jones -- filed as Exhibit 10-38 to PG&W's Annual Report on Form 10-K for 1990, File No. 1-3490. 10-34 Employment Agreement, effective September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1994, File No. 0-7812. 10-35 Supplemental Retirement Agreement, dated as of December 23, 1991, between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-36 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812. 10-37 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy Statement, File No. 0-7812. -77- TABLE OF CONTENTS PART I PAGE Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 16 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 16 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 17 Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . * Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 36 Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 63 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . * Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . * Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . * Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . * PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 64** SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 67 ________________________ * These items have been omitted from this Form 10-K as Registrant meets the conditions set forth in General Instructions J(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format. ** The "Index to Exhibits" is located on page 68.
PENNSYLVANIA GAS AND WATER COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994 Balance at Charged Charged Balance beginning to to other at end Description of year income accounts Deductions of year (Thousands of Dollars) Deducted from the asset to which it applies: Reserve for uncollectible accounts- Year ended December 31, 1994 $ 1,223 $ 2,325 $ - $ 2,249(a) $ 1,299 Year ended December 31, 1993 $ 1,475 $ 1,590 $ - $ 1,842(a) $ 1,223 Year ended December 31, 1992 $ 1,607 $ 1,806 $ - $ 1,938(a) $ 1,475 Shown as operating reserves on the balance sheets: Insurance - Year ended December 31, 1994 $ 1,863 $ 1,695 $ - $ 1,175(b) $ 2,383 Year ended December 31, 1993 $ 1,565 $ 1,823 $ 75 $ 1,600(b) $ 1,863 Year ended December 31, 1992 $ 1,847 $ 1,216 $ - $ 1,498(b) $ 1,565 NOTES: (a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries. (b) Deductions are principally payments made in settlement of claims.
EX-3 2 PENNSYLVANIA GAS AND WATER COMPANY B Y L A W S ARTICLE I STOCKHOLDERS Section 1. Place of Holding Meetings. Meetings of stockholders shall be held within the State of Pennsylvania, and, unless otherwise determined by the Board of Directors, all meetings of the stockholders shall be held at the office of the Company. Section 2. Voting. (a) Voting Rights of Stockholders. - Unless otherwise provided in the articles, every stockholder of the Company shall be entitled to one vote for every share standing in the name of the stockholder on the books of the Company; provided, however, that in all elections for directors such stockholders may cast the whole number of his votes for one candidate or distribute them upon two or more candidates as he may prefer. (b) Voting and Other Action by Proxy. (1) Every stockholder entitled to vote at a meeting of stockholders may authorize another person to act for the stockholder by proxy. (2) The presence of, or vote or other action at a meeting of stockholders by a proxy of a stockholder shall constitute the presence of, or vote or action by the stockholder. (3) Where two or more proxies of a stockholder are present, the Company shall, unless otherwise expressly provided in the proxy, accept, as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (c) Execution and Filing. - Every proxy shall be executed in writing by the stockholder or by the duly authorized attorney-in-fact of stockholder and filed with the Secretary of the Company. A telegram, telex, cablegram, datagram or similar transmission from a stockholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a stockholder or attorney-in-fact: (1) may be treated as properly executed for purposes of this subsection; and (2) shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the Company to the stockholder for the purposes of a particular meeting or transaction. - 1 - (d) Revocation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the Company. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the Secretary of the Company. (e) Expenses. The Company shall pay the reasonable expenses of solicitation of votes, proxies or consents of stockholders by or on behalf of the Board of Directors or its nominees for election to the Board, including solicitation by professional proxy solicitors and otherwise. (f) Voting by Fiduciaries and Pledgees. Shares of the Company standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A stockholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee. (g) Voting by Joint Holders of Shares. Where shares of the Company are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise: (1) if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the Company shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and (2) if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves. (3) However, if there has been filed with the Secretary of the Company a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith. (h) Voting by Corporations. Any corporation that is a stockholder of the Company may vote at meetings of stockholders of this Company by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, by resolution of the Board of Directors of - 2 - the other corporation or a provision of its articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the Secretary of this Company, is appointed its general or special proxy in which case that person shall be entitled to vote the shares. Section 3. Quorum. Any number of stockholders together holding at least a majority of the stock issued and outstanding of the class or classes entitled to vote, who shall be present in person or represented by proxy at any meeting (other than an adjourned meeting as specified in Article I, Section 8, herein) duly called, shall constitute a quorum for the transaction of business, except as may be otherwise provided by law. The stockholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 4. Adjournment of Meetings. If less than a quorum shall be in attendance at the time for which the meeting shall have been called, the meeting may be adjourned from time to time by a majority vote of the stockholders present or represented, without any notice other than an announcement at the meeting, until a quorum shall attend. Any meeting at which a quorum is present may also be adjourned, in like manner, for such time, or upon such call, as may be determined by vote. Section 5. Annual Election of Directors. The Board of Directors may fix and designate the date and time of the Annual Meeting of Stockholders for the election of directors and the transaction of other business. If no such date and time is fixed and designated by the Board,the meeting for any calendar year shall be held on the second Wednesday in May at an hour to be named in the notice. At each Annual Meeting, the stockholders entitled to vote shall, as provided in Section 2 of this Article, by ballot, elect a Board of Directors, and they may transact such other corporate business as shall come before the meeting. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. If at any meeting of stockholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election. Section 6: Special Meetings. How Called. Special meetings of the stockholders for any purpose or purposes, may be called at any time by the Board, upon written request delivered to the Secretary of the Company. In addition, an "interested stockholder" (as defined in section 2553 of the Pennsylvania Business Corporation Law as it may from time to time be amended) may, upon written request delivered to the Secretary of the Company, call a special meeting for the purpose of approving a business combination under either subsection (3) or (4) of section 2555. Any request for a special meeting of stockholders shall state the purpose or purposes of the proposed meeting. Upon receipt of any such request, it shall be the duty of the Secretary to give notice, in a manner consistent with these Bylaws, of a special meeting of the stockholders to be held at such time as the Secretary may fix, which time may not be, if the meeting is called pursuant to a statutory right, more than sixty (60) days after receipt of the request. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the person or persons calling the meeting may do so. Business transacted at any special meeting shall be confined to the business stated in the notice. Section 7. Manner of Voting at Stockholders' Meetings. At all meetings of stockholders, all questions, except the question of an amendment to the Bylaws, and the election of directors, and all such other questions, the manner of deciding which is especially regulated by statute, shall be determined by a majority vote of the stockholders entitled to vote - 3 - present in person or represented by proxy; provided, however, that any qualified voter may demand a stock vote, and in that case, such stock vote shall immediately be taken. Section 8. Notice of Stockholders' Meetings. Written notice of every meeting of the stockholders stating the place, the date and hour thereof and the matters to be acted on at such meeting, shall be given in a manner consistent with the applicable provisions of section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, or any successor act or regulation (the "Exchange Act"), by, or at the direction of, the Secretary of the Company or, in the absence of the Secretary of the Company any Assistant Secretary of the Company, at least twenty (20) days prior to the day named for a meeting, to each stockholder entitled to vote thereat on the date fixed as a record date in accordance with these Bylaws or, if no record date be fixed, then of record at the close of business on the 50th day next preceding the day of the meeting, at such address as appears on the transfer books of the Company. Any notice of any meeting of stockholders shall state that, for purposes of any meeting that has been previously adjourned for one or more periods aggregating at least fifteen (15) days because of an absence of a quorum, the stockholders entitled to vote who attend such a meeting, although less than a quorum pursuant to Article 1, Section 3 of these Bylaws, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the original notice of the meeting that was so adjourned. Notice or other communications need not be sent to any stockholder with whom the Company has been unable to communicate for more than twenty-four (24) consecutive months because communications to the stockholder are returned unclaimed or the stockholder has otherwise failed to provide the Company with a current address. Whenever the stockholder provides the Company with a current address, the Company shall commence sending notices and other communications to the stockholder in the same manner as to the other stockholders. Section 9. Unanimous Written Consent. Any action required or permitted to be taken at a meeting of the stockholders or of a class of stockholders may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto in writing, setting forth the action so taken, shall be signed by all of the stockholders who would be entitled to vote at a meeting for such purpose and filed with the Secretary. Except as otherwise provided in Article V, Section 5 of these Bylaws, the record date for determining stockholders entitled to express consent or dissent to action in writing without a meeting, when prior action by the Board of Directors is not necessary, shall be at the close of business on the day on which the first written consent or dissent is filed with the Secretary. If prior action by the Board of Directors is necessary, the record date for determining such stockholders shall be at the close of business on the day on which the Board adopts the resolution relating to such action. ARTICLE II DIRECTORS Section 1. First Meeting. The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the Annual Meeting of Stockholders, or the time and place of such meeting may be fixed by consent in writing of all the directors. Section 2. Election of Officers. At such meeting the directors shall elect a President, one or more Vice Presidents, a Treasurer and a Secretary, who need not be directors. The directors may also elect such other officers as provided in Article III, Section 1. of these Bylaws. Such officers shall hold office until the next annual election of officers - 4 - and until their successors are elected and qualify, unless removed by the Board of Directors as provided in Section 8 of Article III of these Bylaws. Section 3. Regular Meetings. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Section 4. Special Meetings. How called. Notice. Special meetings of the Board may be called by either the President, the Secretary, the Chairman of the Executive Committee or by the Secretary pursuant to the written request of any two directors, upon forty-eight (48) hours' notice afforded by either telephone, telegraph, facsimile or personal notice, or upon three (3) days' notice afforded by mail. Section 5. Number and Quorum. The number of directors shall be not less than three (3) nor more than fifteen (15). Within such limits, the number of directors may be increased or decreased by the Board of Directors from time to time without a vote of the stockholders. The directors shall be elected by the stockholders, at the Annual Meeting of stockholders, in each year, to hold office for the term of one year and until their successors are chosen. A majority of the directors in office shall constitute a quorum for the transaction of business. Directors need not be stockholders. Section 6. Place of Meeting. The directors may hold their meetings and have one or more offices, and keep the books of the Company, outside the State of Pennsylvania, at any office or offices of the Company, or at any other place, as they may from time to time by resolution determine. Section 7. Powers of Directors. The Board of Directors shall have all the necessary powers for the management of the business of the Company, and subject to the restrictions imposed by law, or by these Bylaws, may exercise all the powers of the Corporation. Section 8. Vacancies. Vacancies occurring in the membership of the Board of Directors, from whatever cause arising, shall be filled by a majority vote of the remaining directors, and in case of any increase in the number of directors, the additional directors authorized by such increase shall be elected by a majority vote of the directors in office, although less than a quorum. Section 9. Removal of Directors. Any one or more of the directors may be removed, either with or without cause, at any time, by a majority vote of the stockholders entitled to vote at any regular or special meeting. The successor or successors of any director or directors so removed shall be elected by the remaining directors. Section 10. Compensation of Directors. Directors and members of any committee of the Board of Directors, except full-time officers and employees of the Company, shall be entitled to such reasonable compensation for their services as directors and members of any such committee as shall be fixed from time to time by resolution of the Board of Directors, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending such meetings. The compensation of directors may be paid on such basis as is determined in the resolution of the Board of Directors. Section 11. Executive Committee and Other Committees. How Appointed. The directors may by a resolution adopted by a majority of the directors in office appoint from their number an Executive Committee of three or more members and other Committees of one or more members. The Committees may make their own rules of procedure and shall meet where and as provided by such rules, or by a resolution of the directors. A majority shall constitute a quorum, but in every case the affirmative vote of a - 5 - majority of all the members of the committee shall be necessary to the adoption of any resolution. Section 12. Executive Committee. Powers. During the intervals between the meetings of the directors, the Executive Committee shall have and may exercise all the powers of the directors in the management of the business and affairs of the Company, including power to authorize the seal of the Company to be affixed to all papers which may require it, in such manner as such committee shall deem best for the interests of the Company, in all cases in which specific directions shall not have been given by the directors. Neither the Executive Committee or any other committee of the Board of Directors created by these Bylaws nor the Board of Directors shall have any power or authority as to the following: (i) the submission to stockholders of any action requiring approval of stockholders under the Pennsylvania Business Corporation Law. (ii) the creation or filling of vacancies in the Board of Directors. (iii) the adoption, amendment or repeal of the Bylaws. (iv) the amendment or repeal of any resolution of the Board that by its terms is amendable or repealable only by the Board. (v) action on matters committed by the Bylaws or resolution of the Board of Directors to another committee of the Board. Section 13. Meeting by Telephonic Conference. Any meeting of the Board of Directors or of a committee thereof, including the Executive Committee, may be held in which any one or more or all of the directors or participants may participate as if present in person, by means of conference telephone or similar communication equipment in a manner by which all persons participating in the meeting can hear each other. Section 14. Substitute Committee Members. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. Section 15. Personal Liability of Directors. To the fullest extent that the laws of the Commonwealth of Pennsylvania, as now in effect or as hereafter amended, permit elimination or limitation of the liability of directors, no director of the Company shall be personally liable for monetary damages as such for any action taken, or any failure to take any action, as a director. Further, any amendment or repeal of this Section 15 which has the effect of increasing director liability shall operate prospectively only, and shall not affect any action taken, or any failure to act, prior to its adoption. Section 16. Action by Consent of Directors. Any action required or permitted to be taken at a meeting of the Board or of a committee of the Board may be taken without a meeting if, prior or subsequent to the action, a consent or consents in writing setting forth the action so taken shall be signed by all of the directors in office or the members of the committee, as the case may be, and filed with the Secretary of the Company. ARTICLE III OFFICERS Section 1. Required Officers of the Company. The officers of the Company shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Secretary and a Treasurer, one or more Assistant Secretaries, and one or more Assistant Treasurers. One person may hold any two offices except the office of President and Vice President. The Board - 6 - of Directors may appoint such other officers as from time to time they may determine. All officers of the Company, as between themselves and the Company, shall have such authority and perform such duties in the management of the Company as may be provided by or pursuant to the Board of Directors, or as may be determined by or pursuant to these Bylaws. Section 1A. Chairman of the Board of Directors. The Chairman of the Board of Directors shall be a member of the Board of Directors. He shall preside as Chairman at all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as are specified in these Bylaws or as are usually performed by a Chairman of the Board of Directors, or as from time to time shall be assigned to him by the Board of Directors. In the absence of, or at the request of, the Chairman of the Board of Directors, the Board of Directors is authorized to designate a Chairman for the Annual Meeting or special meetings. Section 2. President. The President shall be the Chief Executive Officer of the Company and shall have general management and control of the business and affairs of the Company, subject to the direction of the Board of Directors, and he shall generally do and perform all acts incident to the office of the President, or which are authorized or required by law. The President shall have power to call special meetings of the stockholders or directors for any purpose or purposes, and when authorized by the Board of Directors or these Bylaws shall make and sign contracts and agreements in the name of and on behalf of the Company. Section 3. Vice Presidents. Each Vice President shall have such powers and shall perform such duties as may be assigned to him by the President or the Board of Directors. In case of the absence or disability of the President, the duties of the office of the President shall be performed by the Vice Presidents in the order of priority established by the Board, and unless and until the Board of Directors shall otherwise direct. Section 4. Secretary. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these Bylaws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the directors or stockholders upon whose request the meeting is called, as provided in these Bylaws. He shall record all the proceedings of the meetings of the stockholders and of the directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the directors or the President. He shall have custody of the seal of the Company and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. Section 5. Assistant Secretary. The Board of Directors may appoint an Assistant Secretary or more than one Assistant Secretary. Each Assistant Secretary shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors or the President. Section 6. Treasurer. The Treasurer shall have the custody of all funds, securities, evidences of indebtedness and other valuable documents of the Company; he shall receive and give or cause to be given receipts and acquittances for moneys paid in on account of the Company and shall pay out of the fund on hand all just debts of the Company, of whatever nature upon maturity of the same; he shall enter or cause to be entered in books of the Company to be kept for that purpose full and accurate accounts of all moneys received and paid out on account of the Company, and he shall perform all the other duties incident to the office of the Treasurer. If the Board of Directors so determine, he shall give the Company a bond for the faithful discharge of his duties in such amount and with such security as the Board shall prescribe. - 7 - Section 7. Assistant Treasurer. The Board of Directors may appoint an Assistant Treasurer or more than one Assistant Treasurer. Each Assistant Treasurer shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors or the President. Section 8. Removal of Officers and Agents. Any officer or agent of the Company may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. ARTICLE IV CAPITAL STOCK Section 1. Issue of Certificates of Stock. Certificates of the shares of the capital stock of the Company shall be in such form as shall be approved by the Board of Directors. Each stockholder shall be entitled to a certificate of his stock under the seal of the Company, executed, by facsimile or otherwise, by or on behalf of the Company, by the President or a Vice President, and also by the Treasurer or an Assistant Treasurer. In case any officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be such officer, because of death, resignation or otherwise, before the certificate is issued, it may be issued by the Company with the same effect as if the officer had not ceased to be such at the time of issue. No stock certificate shall be valid unless countersigned and registered in such manner, if any, as the directors shall by resolution prescribe. Section 2. Transfer of Shares. The shares of stock of the Company shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Company by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer, and a duplicate thereof mailed to the Pennsylvania office of the Company. Section 3. Dividends. The directors may declare dividends from the surplus or net profits arising from the business of the Company as and when they deem expedient. Before declaring any dividend, there may be reserved out of the accumulated profits such sum or sums as the directors from time to time, in their discretion, think proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends, or for such other purposes as the directors shall think conducive to the interest of the Company. Section 4. Lost Certificates. If the owner of a share certificate claims that it has been lost, destroyed, or wrongfully taken, the Company shall issue a new certificate in place of the original certificate if the owner so requests before the Company has notice that the certificate has been acquired by a bona fide purchaser and if the owner has filed with the Company an indemnity bond and an affidavit of facts satisfactory to the Board or its designated agent, and has complied with such other reasonable requirements, if any, as the Board may deem appropriate. Section 5. Rules as to Issue of Certificates. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock of the Company. - 8 - Each and every person accepting from the Company certificates of stock therein shall furnish the Corporation a written statement of his or her residence or post office address. Section 6. Holder of Record to be deemed Holder in Fact. The Company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by law or by Section 7 of this Article. Section 7. Shares of Stock Held for Account of Another. The Board of Directors is authorized to adopt a procedure whereby a stockholder of the Corporation may certify in writing that all or part of the shares of stock registered in the name of the stockholder are held for account of a specified person or persons. The resolution of the Board of Directors that adopts this certification procedure may include the following: (1) The class of stockholder who may qualify. (2) The purpose or purposes for which the certification may be made. (3) The form of certification and the information that it should contain. (4) The time after the record date within which the certification must be received by the Corporation, if the certification concerns a record date. (5) Any other provisions regarding the certification procedure that the Board of Directors deems necessary or desirable. On receipt by the Corporation of a certification that complies with the procedure adopted by the Board of Directors, the person specified in the certification is deemed, for the purpose set forth in the certification, to be the holder of record of the shares of stock indicated in the certification in place of the stockholder making the certification. ARTICLE V MISCELLANEOUS PROVISIONS Section 1. Fiscal Year. The fiscal year of the Company shall end on the 31st day of December of each year. Section 2. Checks, etc. All checks, drafts or orders for the payment of money shall be signed by such officer(s) or agent(s) as the directors may designate. Section 3. Notice and Waiver of Notice. Except as provided in Article 1 Section 8 of these Bylaws, whenever, under the provisions of the Pennsylvania Business Corporation Law or of the Articles or of these Bylaws or otherwise, written notice is required to be given to any person, it may be given to such person either personally or by sending a copy thereof by first class or express mail, postage prepaid, telegram (with messenger service specified), telex, TWX (with answerback received), courier service (with charges prepaid) or facsimile transmission to his or her address (or to his or her telex, TWX, or facsimile number) appearing on the books of the Company or, in the case of directors, supplied by the director to the Company for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person. A notice given by telex or TWX shall be deemed to have been given when dispatched. - 9 - If mailed at least twenty (20) days prior to the meeting or corporate action to be taken, notice may be sent by any class of postpaid mail (including bulk mail). Whenever any notice is required to be given by the Pennsylvania Business Corporation Law or by the Articles or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted nor the purpose of a meeting need be specified in the waiver of notice of the meeting. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting, except where any person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened, and the person so objects at the beginning of the meeting. Section 4. Inspection of Books. Every stockholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register books and records of account, and records of the proceedings of the incorporators, stockholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a stockholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand shall be directed to the Company at its registered office in the Commonwealth of Pennsylvania or at its principal place of business wherever situated. Section 5. Record date. The Board of Directors may fix a time prior to the date of any meeting of stockholders as a record date for the determination of the stockholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of stockholders. Only stockholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Company after any record date fixed as provided in this subsection. The Board of Directors may similarly fix a record date for the determination of stockholders of record for any other purpose. When a determination of stockholders for a record date has been made as provided in this Section for the purpose of a meeting, such determination shall apply to any adjournments thereof unless the Board fixes a new record date for the adjourned meeting. ARTICLE VI AMENDMENT AND REPEAL Section 1. Amendment and Repeal of Bylaws. The stockholders by the affirmative vote of the holders of a majority of the stock issued and outstanding of the class or classes entitled to vote, may at any meeting, provided the substance of the proposed amendment shall have been stated in the notice of the meeting, amend, alter or repeal any of these Bylaws. Section 2. Amendments By Directors. Except as prohibited by law, the directors, by the affirmative vote of a majority of the Board, may at any meeting amend, alter or repeal these Bylaws, in whole or in part. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Right to Indemnification. Except as prohibited by law, every director and officer of the Company shall be entitled as of right to be indemnified by the Company against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, - 10 - administrative, investigative or other, whether brought by or in the right of the Company or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director or officer of the Company or by reason of the fact that such person is or was serving at the request of the Company as a director, officer, employee, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as "Action"). Such indemnification shall include the right to have expenses incurred by such person in connection with an Action paid in advance by the Company prior to final disposition of such Action, subject to such conditions as may be prescribed by law. Persons who are not directors or officers of the Company may be similarly indemnified in respect of service to the Company or to another such entity at the request of the Company to the extent the Board of Directors at any time designates such person as entitled to the benefits of this Section. As used herein, "expense" shall include fees and expenses of counsel selected by such person; and "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement. Section 2. Right of Claimant to Bring Suit. If a claim for indemnification by any person eligible to be indemnified under Section 1 is not paid in full by the Company within 30 days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such suit that the conduct of the claimant was such that under Pennsylvania law the Company would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel and its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the suit or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. Section 3. Insurance and Funding. The Company may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any Action, whether or not the Company would have the power to indemnify such persons against such liability or expense by law or under the provisions of this Article VII. The Company may create a trust fund, grant a security interest, cause a letter of credit to be issued or use other means (whether or not similar to the foregoing) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. Section 4. Non-exclusivity; Nature and Extent of Rights. The right of indemnification provided for herein (1) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, by-law or charter provision, vote of stockholders or directors or otherwise, (2) shall be deemed to create contractual rights in favor of persons entitled to indemnification hereunder, (3) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were designated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder and (4) shall be applicable to Actions commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof. The right of - 11 - indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the effective date of any such amendment, modification or repeal. - 12 - EX-4 3 CONFORMED COPY -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Twenty-Ninth Supplemental Indenture DATED AS OF NOVEMBER 1, 1994 (SUPPLEMENTAL TO INDENTURE DATED AS OF MARCH 15, 1946) ------------------ PENNSYLVANIA GAS AND WATER COMPANY (FORMERLY SCRANTON-SPRING BROOK WATER SERVICE COMPANY) TO FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION TRUSTEE ------------------ FIRST MORTGAGE BONDS 7% SERIES DUE 2017 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 1 TWENTY-NINTH SUPPLEMENTAL INDENTURE, dated as of the first day of November 1994, made by and between PENNSYLVANIA GAS AND WATER COMPANY (formerly Scranton-Spring Brook Water Service Company), a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (hereinafter sometimes called the 'Company'), and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States, and having its principal place of business at No. 100 Wall Street, Suite 1600, in The City of New York, New York, as Trustee (hereinafter sometimes called the 'Trustee'). WHEREAS, the Company executed and delivered its Indenture (hereinafter called the 'Original Indenture') dated as of March 15, 1946, to Morgan Guaranty Trust Company of New York ('Morgan') (formerly Guaranty Trust Company of New York), to secure its First Mortgage Bonds and has executed and delivered twenty-eight indentures supplemental thereto dated respectively as of February 15, 1951; as of September 15, 1951; as of January 15, 1952; as of March 15, 1952; as of June 15, 1952; as of December 1, 1954; as of April 15, 1956; as of November 15, 1956; as of March 15, 1957; as of September 1, 1958; as of April 15, 1959; as of July 15, 1960; as of October 31, 1961; as of December 15, 1961; as of December 15, 1963; as of June 15, 1966; as of October 15, 1967; as of May 1, 1970; as of June 1, 1972; as of March 1, 1976; as of December 1, 1976; as of August 15, 1989; as of August 15, 1989; as of September 1, 1991; as of September 1, 1992; as of December 1, 1992; as of December 1, 1992; and as of December 1, 1993 (the Original Indenture as heretofore supplemented and to be supplemented by this Twenty-Ninth Supplemental Indenture, and as the same may be further supplemented by additional indentures supplemental thereto, being hereinafter collectively called the 'Indenture'); and WHEREAS, the Company, Morgan and the Trustee executed and delivered the Resignation, Successor Appointment and Acceptance Agreement dated as of September 2, 1994, pursuant to which the Trustee became successor trustee under the Indenture; and WHEREAS, the Company at October 31, 1994 (i) had retired all of the original issue of $24,500,000 principal amount of bonds of a series designated First Mortgage Bonds 2 7/8% Series due 1976 (hereinafter called 'bonds of the First Series'), all of the original issue of $4,000,000 principal amount of bonds of a series designated First Mortgage Bonds 3 1/2% Series due 1982, all of the original issue of $1,000,000 principal amount of bonds of a series designated First Mortgage Bonds 4 7/8% Series due 1987, all of the original issue of $2,000,000 principal amount of bonds of a series designated First Mortgage Bonds 4 3/4% Series due 1983, all of the original issue of $3,000,000 principal amount of bonds of a series designated First Mortgage Bonds 5 1/2% Series due 1985, all of the 2 original issue of $3,000,000 principal amount of bonds of a series designated First Mortgage Bonds 5% Series due 1986, all of the original issue of $5,000,000 principal amount of bonds of a series designated First Mortgage Bonds 4 5/8% Series due 1988, all of the original issue of $4,000,000 principal amount of bonds of a series designated First Mortgage Bonds 5 7/8% Series due 1991, all of the original issue of $15,000,000 principal amount of bonds of a series designated First Mortgage Bonds 9% Series due 1991, all of the original issue of $10,000,000 principal amount of bonds of a series designated First Mortgage Bonds 6 7/8% Series due 1992, all of the original issue of $12,000,000 principal amount of bonds of a series designated First Mortgage Bonds 10% Series due 1995, and all of the original issue of $20,000,000 principal amount of bonds of a series designated First Mortgage Bonds 9 1/4% Series due 1996 and (ii) had outstanding and secured by the Original Indenture, as so supplemented to the date hereof, $3,535,000 (of an original issue of $7,000,000) principal amount of bonds of a series designated First Mortgage Bonds 8% Series due 1997, $10,000,000 (of an original issue of $10,000,000) principal amount of bonds of a series designated First Mortgage Bonds 9.23% Series due 1999, $15,000,000 (of an original issue of $15,000,000) principal amount of bonds of a series designated First Mortgage Bonds 9.34% Series due 2019, $50,000,000 (of an original issue of $50,000,000) principal amount of bonds of a series designated First Mortgage Bonds 9.57% Series due 1996, $50,000,000 (of an original issue of $50,000,000) principal amount of bonds of a series designated First Mortgage Bonds 7.20% Series due 2017, $30,000,000 (of an original issue of $30,000,000) principal amount of bonds of a series designated First Mortgage Bonds 8.375% Series due 2002, $30,000,000 (of an original issue of $30,000,000) principal amount of bonds of a series designated First Mortgage Bonds 7.125% Series due 2022 and $19,000,000 (of an original issue of $19,000,000) principal amount of bonds of a series designated First Mortgage Bonds 6.05% Series due 2019; and WHEREAS, Article 3 of the Original Indenture provides that additional bonds of any one or more series may be issued from time to time in accordance with and subject to the conditions, provisions and limitations set forth in said Article 3; and WHEREAS, Section 2.02 of the Original Indenture provides that before any bonds of any series, other than bonds of the First Series, shall be authenticated and delivered, the Company shall execute and deliver to the Trustee a supplemental indenture, in recordable form, containing the particulars of the new series of bonds as required by said Section 2.02 and containing appropriate provisions giving to such bonds the protection and security of the Original Indenture; and WHEREAS, Section 14.01 of the Original Indenture provides, among other things, that the Company, when authorized by a resolution of its Board of Directors, and the Trustee from time to time may enter into an indenture or indentures supplemental thereto and which thereafter shall form a part thereof for any one or more of the following purposes, among others, to provide for the 3 creation of any series of bonds (other than bonds of the First Series), designating the series to be created and specifying the form and provisions of bonds of such series; and WHEREAS, Section 14.02 of the Original Indenture provides that the Trustee is authorized to join with the Company in the execution of any such supplemental indenture; and WHEREAS, the Company in the course of its business has acquired certain additional properties, which properties are intended by the terms of the Granting Clauses of the Original Indenture to be subject to the lien thereof; and WHEREAS, in accordance with the provisions of Section 4.12 and Section 14.01 of the Original Indenture, the Company desires in and by this Twenty-Ninth Supplemental Indenture to record the description of and confirm unto the Trustee such properties, which properties (except such as are reserved or excepted from the lien and operation of the Indenture by virtue of the exceptions contained in the Granting Clauses thereof) are now subject to the lien of the Indenture by virtue of the provisions thereof conveying to the Trustee property acquired after its execution and delivery; and WHEREAS, the Company now desires to create a new series of bonds under the Indenture to be known and designated as its First Mortgage Bonds 7% Series due 2017 (hereinafter sometimes called 'bonds of the Twenty-First Series'); and WHEREAS, the Company proposes to execute and to request the Trustee to authenticate and deliver up to $30,000,000 principal amount of bonds of the Twenty-First Series pursuant to the provisions of Sections 3.02 to 3.06, both inclusive, of the Original Indenture; and WHEREAS, the bonds of the Twenty-First Series and the Trustee's certificate to be endorsed on such bonds are to be substantially in the form following (any of the provisions of such bonds may be set forth on the reverse side thereof): [FORM OF BOND OF THE TWENTY-FIRST SERIES] THE BOND EVIDENCED BY THIS CERTIFICATE HAS BEEN ISSUED IN A PRIVATE TRANSACTION, HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY NOT BE OFFERED, TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THAT ACT, SUCH LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. 4 PENNSYLVANIA GAS AND WATER COMPANY (Formerly Scranton-Spring Brook Water Service Company) First Mortgage Bond 7% Series due 2017 No.__________________ $__________________ PENNSYLVANIA GAS AND WATER COMPANY (formerly Scranton-Spring Brook Water Service Company), a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (hereinafter sometimes called the 'Company'), for value received, promises to pay to __________________, or registered assigns, on December 1, 2017 (unless this bond shall have been called for previous redemption and provision made for the payment of the redemption price thereof), __________________ Dollars at the Company's office or agency in the Borough of Manhattan, The City of New York, and, except as otherwise set forth below, semi-annually on the first day of June and the first day of December in each year commencing June 1, 1995, to pay interest thereon, at said office or agency, at the rate of 7% per annum from the interest payment date to which interest has been paid next preceding the date of authentication of this bond (except that if the date of authentication of this bond is an interest payment date for bonds of this series to which interest has been paid it shall bear interest from the date of authentication of this bond, and except that if this bond be authenticated prior to the first interest payment date for bonds of this series, it shall bear interest from November 1, 1994), until the Company's obligation with respect to such principal sum shall be discharged; provided that, so long as there is no existing default in the payment of interest, and except for the payment of defaulted interest, the interest payable on any June 1 or December 1 will be paid to the person in whose name this bond was registered at the close of business on the fifteenth day of May or the fifteenth day of November next preceding such interest payment date; and further provided that the interest payable on the bonds of this series shall be reduced to the extent that other moneys then on deposit with PNC Bank, National Association, as trustee, or any successor trustee (the 'IDA Trustee') under the Trust Indenture dated as of November 1, 1994 (the 'Trust Indenture') from the Luzerne County Industrial Development Authority (the 'Authority') to the IDA Trustee are available for the purpose of paying interest on the bonds of this series and a credit in respect thereof has been granted pursuant to the Trust Indenture. The principal of, premium if any, and the interest on this bond shall be payable in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. This bond is one of an issue of bonds of the Company, known as its First Mortgage Bonds, issued and to be issued in one or more series under, and equally and ratably secured (except as any sinking, amortization, improvement or other fund, established in accordance with the provisions of the indenture hereinafter mentioned, may afford additional security for the bonds of any particular series) 5 by, a certain mortgage and deed of trust, dated as of March 15, 1946 (hereinafter called the 'Original Indenture'), and by twenty-nine indentures supplemental thereto (of which, the Seventeenth Supplemental Indenture, dated as of October 15, 1967, the Eighteenth Supplemental Indenture, dated as of May 1, 1970, and the Twentieth Supplemental Indenture, dated as of March 1, 1976, amended certain provisions of the Original Indenture) (said Original Indenture and all said indentures supplemental thereto being hereinafter collectively called the 'Indenture'), made by the Company to First Trust of New York, National Association, as successor trustee (hereinafter called the 'Trustee') to which Indenture (and to all additional indentures supplemental thereto) reference is hereby made for a description of the property mortgaged, the nature and extent of the security, the rights and limitations of rights of the Company, the Trustee, and the holders of said bonds under the Indenture, and the terms and conditions upon which said bonds are secured, to all of the provisions of which Indenture and of all such additional supplemental indentures in respect of such security, including the provisions of the Indenture permitting the issue of bonds of any series in respect of property which, under the restrictions and limitations therein specified, may be subject to liens prior to the lien of the Indenture, the holder, by accepting this bond, assents. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said bonds (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company, by the holders of at least 75% in aggregate principal amount of the bonds then outstanding (or, if one or more, but less than all, series of bonds are affected, by the holders of at least 75% in aggregate principal amount of outstanding bonds of such one or more series so affected), such percentage being determined as provided in the Indenture; provided, however, that without the consent of the holder hereof no such modification or alteration shall be made which will extend the time of payment of the principal of, premium, if any, or the interest on this bond or reduce the principal amount hereof, or premium, if any, or the rate of interest hereon or effect any other modification of the terms of payment of such principal or interest or will permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture on any of the mortgaged property, or will deprive any non-assenting holder of this bond of a lien upon the mortgaged property for the security of this bond, or will reduce the percentage of bonds required for the aforesaid action under the Indenture and provided further that, as provided in Section 4.02 of the Twentieth Supplemental Indenture, when all bonds of all series issued prior to January 1, 1976, shall cease to be outstanding, each reference to '75%' in this sentence shall become '60%.' This bond is one of a series of bonds designated as the First Mortgage Bonds 7% Series due 2017 of the Company. 6 The bonds of this series are subject to redemption upon not less than thirty (30) nor more than sixty (60) days' prior notice, in whole or in part, under the circumstances set forth in paragraphs (A), (B) and (C), below. (A) The bonds of this series are subject to mandatory redemption, in whole or in part, upon any redemption of the Luzerne County Industrial Development Authority Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) due December 1, 2017 (the '1994 Series A Bonds'). The principal amount of bonds of this series to be redeemed upon any redemption of the 1994 Series A Bonds shall be equal to 100% of the principal amount of 1994 Series A Bonds which are to be redeemed. The redemption price of the bonds of this series which are redeemed under the circumstances set forth in this paragraph (A) shall be equal to 100% of the principal amount of the bonds of this series to be redeemed plus interest accrued to the date fixed for redemption except (i) in the case of bonds of this series which are redeemed upon a redemption of the 1994 Series A Bonds at the option of the Authority (other than in an 'Extraordinary Optional Redemption,' as defined in the Trust Indenture) upon the direction of the Company (an 'Optional IDA Redemption') which occurs between December 1, 2004 and November 30, 2005, inclusive, the redemption price shall be equal to 102% of the principal amount of the bonds of this series to be redeemed plus interest accrued to the date fixed for redemption and (ii) in the case of bonds of this series which are redeemed upon an Optional IDA Redemption which occurs between December 1, 2005 and November 30, 2006, inclusive, the redemption price shall be equal to 101% of the principal amount of the bonds of this series to be redeemed plus interest accrued to the date fixed for redemption. (B) The bonds of this series are subject to mandatory redemption, in whole, if the IDA Trustee declares the 1994 Series A Bonds to be immediately due and payable under Section 9.02 of the Trust Indenture. The redemption price of the bonds of this series which are redeemed under the circumstances set forth in this paragraph (B) shall be equal to 100% of the principal amount of the bonds of this series to be redeemed plus interest accrued to the date fixed for redemption. (C) The bonds of this series are subject to mandatory redemption, in whole or in part (but if in part on a pro rata basis with bonds of all other series then outstanding under the Indenture), pursuant to the provisions of Section 8.13 of the Indenture. The redemption price of the bonds of this series which are redeemed under the circumstances set forth in this paragraph (C) shall be equal to 100% of the principal amount of the bonds of this series to be redeemed plus interest accrued to the date fixed for redemption. If this bond shall be called for redemption, and payment of the redemption price shall be duly provided by the Company as specified in the Indenture, interest shall cease to accrue hereon from and after the date of redemption fixed in the notice thereof. 7 The principal of this bond may be declared or may become due prior to the maturity date hereinbefore named, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of a default as therein defined. This bond is transferable by the registered owner hereof in person or by his duly authorized attorney at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this bond, and thereupon a new bond or bonds of the same series and maturity, for a like aggregate principal amount, will be issued to the transferee in exchange therefor, as provided in the Indenture. The Company and the Trustee and any registrar and any paying agent may deem and treat the person in whose name this bond is registered as the absolute owner hereof for the purpose of receiving payment and for all other purposes. This bond, alone or with other bonds of the same series and maturity, may in like manner be exchanged at such office or agency for one or more new bonds of the same series and maturity of the same aggregate principal amount. Upon each such transfer or exchange the Company may require the payment of charges as prescribed in the Indenture. No recourse under or upon any covenant or obligation of the Indenture, or of any bonds thereby secured, or for any claim based thereon, or otherwise in any manner in respect thereof, shall be had against any incorporator, subscriber to the capital stock, stockholder, officer or director, as such, whether former, present or future, of the Company or any successor corporation, either directly, or indirectly through the Company or the Trustee, by the enforcement of any subscription to capital stock, assessment or otherwise, or by any legal or equitable proceeding by virtue of any constitution, statute, contract of subscription or otherwise (including, without limiting the generality of the foregoing, any proceeding to enforce any claimed liability of stockholders of the Company based upon any theory of disregarding the corporate entity of the Company or upon any theory that the Company was acting as the agent or instrumentality of the stockholders), any and all such liability of incorporators, stockholders, subscribers, officers and directors, as such, being released by the holder hereof, by the acceptance of this bond, and being likewise waived and released by the terms of the Indenture under which this bond is issued. This bond shall not be valid or become obligatory for any purpose until the certificate of authentication endorsed hereon shall have been signed by First Trust of New York, National Association, or its successor, as Trustee under the Indenture. 8 IN WITNESS WHEREOF, PENNSYLVANIA GAS AND WATER COMPANY has caused this bond to be signed in its name by, or to bear the facsimile signature of, its President or a Vice President, and its corporate seal to be affixed hereto and attested by, or to bear the facsimile signature of, its Secretary or an Assistant Secretary. Dated: PENNSYLVANIA GAS AND WATER COMPANY By:______________________________________ Vice President Attest: ___________________________________ Secretary 9 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This bond is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Trustee By:________________________________ Authorized Officer [End of Form of Bond] WHEREAS, all requirements of law and of the restated articles of incorporation, as amended, and by-laws of the Company, including all requisite action on the part of its directors and officers, relating to the execution of this Twenty-Ninth Supplemental Indenture have been complied with and observed, and all things necessary to make this Twenty-Ninth Supplemental Indenture a valid and legally binding instrument in accordance with its terms for the security of all bonds from time to time issued under the Indenture have happened, been done and been performed, and the issue of the bonds of the Twenty-First Series, hereinafter referred to, has been in all respects duly authorized; NOW, THEREFORE, THIS TWENTY-NINTH SUPPLEMENTAL INDENTURE WITNESSETH: That Pennsylvania Gas and Water Company, intending to be legally bound, in consideration of the premises and of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and in order to secure the payment of the principal of, premium, if any, and interest on all bonds from time to time outstanding under the Indenture, according to the terms of said bonds and to secure the performance and observance of all the covenants and conditions therein and in the Indenture contained, and to declare the terms and conditions upon and subject to which the bonds of the Twenty-First Series are and are to be issued and secured, hath granted, bargained, sold, warranted, aliened, remised, released, conveyed, assigned, transferred, mortgaged, created a security interest in, pledged, set over and confirmed, and by these presents doth grant, bargain, sell, warrant, alien, remise, release, convey, assign, transfer, mortgage, create a security interest in, pledge, set over and confirm unto First Trust of New York, National Association, as Trustee, and its successor or successors in the trust and its or their assigns forever, the following described property -- that is to say: 10 All property, real, personal and mixed, tangible and intangible, of the Company whether now owned or hereafter acquired by it (except such property as is expressly excepted from the lien and the operation of the Indenture). Without limitation of the foregoing, all real estate and interests in or relating to real estate, plants, properties and equipment, and all pumping and transmission systems and facilities, together with all franchises, grants, easements, permits, privileges, appurtenances, tenements and other rights and property thereunto belonging or appertaining, whether now owned by the Company or hereafter acquired by it and used in its business of impounding, storing, transporting and selling water, or in its business of manufacturing, storing, transporting and selling gas, at wholesale or retail, for domestic, commercial, industrial and municipal use and consumption. Also, without limitation of the foregoing, all buildings, improvements, standpipes, towers, reservoirs, wells, springs, flumes, sluices, canals, basins, cribs, mains, conduits, hydrants, valves, pipes, pipe lines, service pipes, tanks, shops, structures, purification systems, pumping stations, pumps, meters, fixtures, machinery and equipment, used or useful for the impounding, procuring, transmission or distribution of water; all generators, conveyors, purifiers, holders, power plants, fixtures, engines, boilers, pumps, meters, transmission and distribution mains, machinery and equipment used or useful for the manufacture, transmission or distribution of gas; and all and every character of apparatus whatsoever used or useful for procuring, manufacturing, transmitting or distributing water or gas; whether the same or any thereof are now owned by the Company or hereafter acquired by it. Also, without limitation of the foregoing, all real estate and interests in real estate acquired by sale or by merger of subsidiary or constituent companies, now owned or as may be subsequently acquired by the Company. The property covered by the lien of the Indenture shall include particularly, among other property, without prejudice to the generality of the language hereinbefore or hereinafter contained, the following described property (which generally includes property additions through September 30, 1994, except such property as is expressly excepted from the lien and operation of the Indenture): I The following piece or parcel of land situate in the County of Lackawanna and Commonwealth of Pennsylvania, to wit: Section 01. Parcel of land situate in the City of Scranton, Lackawanna County, from William W. Scranton, joined by Mary L. Scranton, his wife, by Deed dated July 12, 1994 and recorded July 18, 1994 in Lackawanna County 11 Deed Book 1478 at Page 230. Containing Fourteen One Hundredths (0.14) of an acre. II The following pieces or parcels of land situate in the County of Luzerne and Commonwealth of Pennsylvania, to wit: Section 01. Two (2) parcels of land situate in the Township of Kingston, Luzerne County, from Harry F. Goeringer and Mary C. Goeringer, by Deed dated December 22, 1936 and recorded December 29, 1936 in Luzerne County Deed Book 761 at Page 160. Containing Twenty-Six One Hundredths (0.26) of an acre. Section 02. Parcel of land situate in the Borough of Dallas, Luzerne County, from Harry F. Goeringer and Mary C. Goeringer, by Deed dated August 31, 1953 and recorded September 1, 1953 in Luzerne County Deed Book 1210 at Page 25. Containing Thirty-Six One Hundredths (0.36) of an acre. Section 03. Three (3) parcels of land situate in the Township of Kingston, Luzerne County, from Harry F. Goeringer and Mary C. Goeringer, by Deed dated August 31, 1953 and recorded September 1, 1953 in Luzerne County Deed Book 1210 at Page 21. Containing One and Twenty-Seven One Hundredths (1.27) of an acre. Section 04. Parcel of land situate in the Township of Kingston, Luzerne County, from M. E. Keeler and Ethel H. Keeler, his wife, by Deed dated September 9, 1959 and recorded September 21, 1959 in Luzerne County Deed Book 1436 at Page 868. Containing Twenty-Five One Hundredths (0.25) of an acre. Section 05. Parcel of land situate in the Township of Kingston, Luzerne County, from Sheldon J. Rice and E. Pendred Rice, his wife, and Margaret Bell Rice, widow, by Deed dated April 10, 1971 and recorded April 14, 1971 in Luzerne County Deed Book 1716 at Page 806. Containing Seventy-Eight One Hundredths (0.78) of an acre. Section 06. Parcel of land situate in the Township of Kingston, Luzerne County, from Trucksville Realty Company, by Deed dated June 4, 1973 and recorded June 15, 1973 in Luzerne County Deed Book 1786 at Page 664. Containing Six One Hundredths (0.06) of an acre. Section 07. Parcel of land situate in the Township of Kingston, Luzerne County, from Rulison Evans, by Deed dated June 4, 1973 and recorded June 15, 1973 in Luzerne County Deed Book 1786 at Page 692. Containing Fifteen One Hundredths (0.15) of an acre. 12 III The following rights-of-way and/or easements situate in the County of Columbia and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for gas pipeline in the Township of Briar Creek, Columbia County, from Peter Stenko, et al, by Indenture dated December 10, 1993 and recorded December 27, 1993 in Columbia County Record Book 556 at Page 994. Section 02. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Delmar R. Zeisloft, et ux, by Indenture dated February 25, 1994 and recorded March 30, 1994 in Columbia County Record Book 564 at Page 580. Section 03. Right-of-way for gas pipeline in the Town of Bloomsburg, Columbia County, from J. Harland Melick, et ux, by Indenture dated March 25, 1994 and recorded March 30, 1994 in Columbia County Record Book 564 at Page 585. Section 04. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Canadian Four State Holding Ltd, et al, by Indenture dated May 5, 1994 and recorded July 19, 1994 in Columbia County Record Book 574 at Page 523. Section 05. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Delmar R. Zeisloft, et ux, by Indenture dated July 19, 1994 and recorded July 19, 1994 in Columbia County Record Book 574 at Page 529. Section 06. Right-of-way for gas pipeline in the Borough of Berwick, Columbia County, from Briar Meadows Development, Inc., by Indenture dated September 2, 1994 and recorded September 29, 1994 in Columbia County Record Book 580 at Page 636. IV The following rights-of-way and/or easements situate in the County of Lackawanna and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Scranton Mall Associates, by Indenture dated June 17, 1993 and recorded December 27, 1993 in Lackawanna County Deed Book 1458 at Page 99. Section 02. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from City of Scranton, by Indenture dated July 26, 1993 13 and recorded December 27, 1993 in Lackawanna County Deed Book 1458 at Page 107. Section 03. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Consolidated Rail Corporation, by Indenture dated September 30, 1993 and recorded December 1, 1993 in Lackawanna County Deed Book 1455 at Page 305. Section 04. Right-of-way for gas pipeline in the Borough of Dalton, Lackawanna County, from Richard J. Volz, et ux, et al, by Indenture dated October 15, 1993 and recorded October 20, 1994 in Lackawanna County Deed Book 1451 at Page 186. Section 05. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Ferranti Brothers, Inc., by Indenture dated October 20, 1993 and recorded December 1, 1993 in Lackawanna County Deed Book 1455 at Page 313. Section 06. Right-of-way for gas pipeline in the Borough of Olyphant, Lackawanna County, from Harry Zinskie, et ux, et al, by Indenture dated October 25, 1993 and recorded December 1, 1993 in Lackawanna County Deed Book 1455 at Page 318. Section 07. Right-of-way for water pipeline in the Borough of Olyphant, Lackawanna County, from Harry Zinskie, et ux, et al, by Indenture dated October 25, 1993 and recorded December 1, 1993 in Lackawanna County Deed Book 1455 at Page 323. Section 08. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Oakmont Manor, Inc., by Indenture dated November 5, 1993 and recorded December 1, 1993 in Lackawanna County Deed Book 1455 at Page 328. Section 09. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Randall G. Brundage, et ux, by Indenture dated November 5, 1993 and recorded December 1, 1993 in Lackawanna County Deed Book 1455 at Page 333. Section 10. Right-of-way for gas pipeline in the Borough of Taylor, Lackawanna County, from Gilbert Weinberger, by Indenture dated November 17, 1993 and recorded December 1, 1993 in Lackawanna County Deed Book 1455 at Page 337. Section 11. Right-of-way for gas pipeline in the Borough of Clarks Green, Lackawanna County, from Henry Jellock, et ux, by Indenture dated December 10, 1993 and recorded December 27, 1993 in Lackawanna County Deed Book 1458 at Page 115. 14 Section 12. Right-of-way for gas pipeline in the Borough of Blakely, Lackawanna County, from Janet Ann Merli, by Indenture dated December 10, 1993 and recorded December 27, 1993 in Lackawanna County Deed Book 1458 at Page 130. Section 13. Right-of-way for water pipeline in the Borough of Archbald, Lackawanna County, from Joseph Krajewski, et ux, by Indenture dated December 13, 1993 and recorded December 27, 1993 in Lackawanna County Deed Book 1458 at Page 120. Section 14. Right-of-way for gas pipeline in the Borough of Archbald, Lackawanna County, from Joseph Krajewski, et ux, by Indenture dated December 13, 1993 and recorded December 27, 1993 in Lackawanna County Deed Book 1458 at Page 125. Section 15. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Gilbert Weinberger, Inc., by Indenture dated December 23, 1993 and recorded January 31, 1994 in Lackawanna County Deed Book 1460 at Page 480. Section 16. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Hemingway Development, et al, by Indenture dated January 5, 1994 and recorded January 31, 1994 in Lackawanna County Deed Book 1460 at Page 484. Section 17. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Robert J. Avery, et ux, by Indenture dated January 11, 1994 and recorded January 31, 1994 in Lackawanna County Deed Book 1460 at Page 489. Section 18. Right-of-way for cathodic protection in the City of Scranton, Lackawanna County, from City of Scranton, by Indenture dated January 11, 1994 and recorded March 30, 1994 in Lackawanna County Deed Book 1466 at Page 520. Section 19. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Glenmaura National Golf Club, by Indenture dated February 7, 1994 and recorded March 30, 1994 in Lackawanna County Deed Book 1466 at Page 526. Section 20. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Glenmaura National Golf Club, by Indenture dated February 7, 1994 and recorded March 30, 1994 in Lackawanna County Deed Book 1466 at Page 530. Section 21. Right-of-way for water pipeline in the Borough of Dickson City, Lackawanna County, from Wegmans Food Market, by Indenture dated 15 March 4, 1994 and recorded March 30, 1994 in Lackawanna County Deed Book 1466 at Page 534. Section 22. Right-of-way for gas pipeline in the Borough of Dickson City, Lackawanna County, from Wegmans Food Market, by Indenture dated March 4, 1994 and recorded March 30, 1994 in Lackawanna County Deed Book 1466 at Page 543. Section 23. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Scranton Lackawanna Industrial Building Company, by Indenture dated March 9, 1994 and recorded March 30,1994 in Lackawanna County Deed Book 1466 at Page 551. Section 24. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Frank Riviello, et ux, by Indenture dated March 31, 1994 and recorded June 8, 1994 in Lackawanna County Deed Book 1474 at Page 13. Section 25. Right-of-way for water storage tank, water pipelines, access and related facilities in the Borough of Old Forge, Lackawanna County, acquired by Condemnation Proceedings No. 1802 of 1994, as property of PAGNOTTI COAL COMPANY, Successor by Merger to PITREAL CORPORATION. A Declaration of Taking was filed on April 14, 1994 and recorded in Lackawanna County Prothonotary Office. Section 26. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Scott P. Jones, by Indenture dated April 28, 1994 and recorded June 8, 1994 in Lackawanna County Deed Book 1474 at Page 17. Section 27. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Douglas M. Fink, by Indenture dated April 29, 1994 and recorded June 8, 1994 in Lackawanna County Deed Book 1474 at Page 21. Section 28. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Edward A. Barry, et ux, by Indenture dated May 10, 1994 and recorded June 8, 1994 in Lackawanna County Deed Book 1474 at Page 25. Section 29. Right-of-way for gas pipeline in the Borough of Blakely, Lackawanna County, from June Marie McShaffery, et al, by Indenture dated May 31,1994 and recorded July 11, 1994 in Lackawanna County Deed Book 1477 at Page 336. Section 30. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Frank J. Summa, widower, by Indenture dated June 2, 1994 and recorded July 11, 1994 in Lackawanna County Deed Book 1477 at Page 340. 16 Section 31. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Anthony Bruno, by Indenture dated June 3, 1994 and recorded July 11, 1994 in Lackawanna County Deed Book 1477 at Page 344. 17 Section 32. Right-of-way for gas pipeline in the Township of Carbondale, Lackawanna County, from Robert J. Fortuner, et ux, by Indenture dated June 22, 1994 and recorded August 8, 1994 in Lackawanna County Deed Book 1480 at Page 452. Section 33. Right-of-way for water pipeline in the Township of Carbondale, Lackawanna County, from Robert J. Fortuner, et ux, by Indenture dated June 22, 1994 and recorded August 8, 1994 in Lackawanna County Deed Book 1480 at Page 445. Section 34. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Paul Misiura, et ux, by Indenture dated June 30, 1994 and recorded July 11, 1994 in Lackawanna County Deed Book 1477 at Page 348. Section 35. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Keyser Terrace, Inc., by Indenture dated July 5, 1994 and recorded July 11, 1994 in Lackawanna County Deed Book 1477 at Page 357. Section 36. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Keyser Terrace, Inc., by Indenture dated July 5, 1994 and recorded July 11, 1994 in Lackawanna County Deed Book 1477 at Page 352. Section 37. Right-of-way for gas pipeline in the Borough of Glenburn, Lackawanna County, from W. Kenneth Rees, by Indenture dated July 13, 1994 and recorded August 8, 1994 in Lackawanna County Deed Book 1480 at Page 441. Section 38. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Emerald Isle Realty, by Indenture dated July 15, 1994 and recorded August 8, 1994 in Lackawanna County Deed Book 1480 at Page 437. Section 39. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Corey Street Properties, by Indenture dated July 25, 1994 and recorded August 8, 1994 in Lackawanna County Deed Book 1480 at Page 431. Section 40. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Alyn J. Scheatzle, et ux, by Indenture dated July 26, 1994 and recorded August 8, 1994 in Lackawanna County Deed Book 1480 at Page 427. 17 V The following right-of-way and/or easements situate in the County of Luzerne and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Harry F. Goeringer and Mary C. Goeringer, by Indenture dated December 22, 1936 and recorded December 29, 1936 in Luzerne County Deed Book 761 at Page 160. Section 02. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Etta R. Roche, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 03. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from G. L. Howell, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 04. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from G. H. Johnson and Ethel Johnson, by Indenture dated March 1, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 05. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Raymond Gregory and Goldie S. Gregory, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 06. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from H. E. Owens and Betty Owens, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 07. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Maude Robbins and W. J. Robbins, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 08. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from John C. Lewis and Emily J. Lewis, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 09. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Wilford H. Parsons and Edith K. Parsons, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. 18 Section 10. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Gertrude Perrin, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 11. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Ben N. Pettebone and Nellie C. Pettebone, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 12. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from William Williams and Martha S. Williams, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 13. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Jacob B. Rice Estate by Sheldon J. Rice, Executor, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 14. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Frank G. Mathers, President of the Board of Trustees of the Free Methodist Church of Trucksville, Pennsylvania, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 15. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from George R. Flack, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 16. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from James Trebilcox, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 17. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from May A. Cronk, Besse J. Cronk and Elizabeth Cronk, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 18. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from John A. Demko and Florence Demko, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 19. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Charles Steinhauer and Mrs. Charles Steinhauer, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. 19 Section 20. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Fred J. Laux and Bertha E. Laux, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 21. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Delphine Norrie Rees and R. E. Rees, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 22. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Richard Nordheim and Theresa Nordheim, by Indenture dated March 31, 1947 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 361. Section 23. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Etta Roche and Harold K. Weiss, by Indenture dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 358. Section 24. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Walter L. Fish and Mildred F. Fish, by Indenture dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 355. Section 25. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Donald A. Miller and Dorothy G. Miller, by Indenture dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 355. Section 26. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Amanda E. Pfahler, by Indenture dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 355. Section 27. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Trucksville Vol. Fire Co., by W. E. Strange, by Indenture dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 355. Section 28. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Thelma Davenport, by Indenture dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 355. Section 29. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Warren S. Taylor and Guida M. Taylor, by Indenture 20 dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 355. Section 30. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Gertrude P. Hanson, by Indenture dated September 23, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 355. Section 31. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Kingston Township School District, by Indenture dated October 14, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 348. Section 32. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Cedrick Griffiths and Elizabeth G. Griffiths, by Indenture dated December 13, 1948 and recorded June 13, 1949 in Luzerne County Deed Book 1033 at Page 352. Section 33. Right-of-way for water pipeline in the Borough of Dallas, Luzerne County, from Harry F. Goeringer and Mary C. Goeringer, by Indenture dated August 31, 1953 and recorded September 1, 1953 in Luzerne County Deed Book 1210 at Page 25. Section 34. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Harry F. Goeringer and Mary C. Goeringer, by Indenture dated August 31, 1953 and recorded September 1, 1953 in Luzerne County Deed Book 1210 at Page 21. Section 35. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Thomas F. McGuire, by Indenture dated June 20, 1964 and recorded June 23, 1964 in Luzerne County Deed Book 1546 at Page 618. Section 36. Right-of-way for water pipelines and access in the Township of Kingston, Luzerne County, from Sheldon J. Rice and E. Pendred Rice, his wife, and Margaret Bell Rice, widow, by Indenture dated April 10, 1971 and recorded April 14, 1971 in Luzerne County Deed Book 1716 at Page 806. Section 37. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Trucksville Realty Company, by Indenture dated June 4, 1973 and recorded June 15, 1973 in Luzerne County Deed Book 1786 at Page 664. Section 38. Right-of-way for water pipelines and access in the Township of Kingston, Luzerne County, from Rulison Evans, by Indenture dated June 4, 1973 and recorded June 15, 1973 in Luzerne County Deed Book 1786 at Page 692. 21 Section 39. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from George G. Conyngham and Shirley L. Conyngham, his wife, by Indenture dated October 20, 1988 and recorded December 2, 1988 in Luzerne County Deed Book 2292 at Page 838. Section 40. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Hillside Farms, Inc., by Merger Conyngham and Company, Inc., Now by Merger W. H. Conyngham & Company, Inc., by Indenture dated October 24, 1988 and recorded December 2, 1988 in Luzerne County Deed Book 2292 at Page 841. Section 41. Right-of-way for water pipeline in the Township of Kingston, Luzerne County, from Robert A. Williamson and Carol L. Williamson, his wife, by Indenture dated November 3, 1988 and recorded December 2, 1988 in Luzerne County Deed Book 2292 at Page 320. Section 42. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from Greater Wilkes-Barre Industrial Fund and ERC Properties, by Indenture dated September 30, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 961. Section 43. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Wilkes-Barre General Hospital, by Indenture dated October 4, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 956. Section 44. Right-of-way for gas pipeline in the Borough of West Wyoming, Luzerne County, from Paul E. Matteucci, et ux, by Indenture dated October 18, 1993 and recorded November 16, 1993 in Luzerne County Deed Book 2475 at Page 439. Section 45. Right-of-way for water pipeline in the Township of Wilkes- Barre, Luzerne County, from Joseph Paglianite, et al, by Indenture dated October 29, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 940. Section 46. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from George J. Campas, Sr., et al, by Indenture dated November 3, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 930. Section 47. Right-of-way for water pipeline in the Borough of Wyoming, Luzerne County, from George J. Campas, Jr., et al, by Indenture dated November 3, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 935. 22 Section 48. Right-of-way for water pipeline in the Township of Hanover, Warrior Run Borough and Sugar Notch Borough, Luzerne County, from Greater Wilkes-Barre Industrial Fund, Inc., by Indenture dated November 15, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 971. Section 49. Right-of-way for gas pipeline in the Township of Hanover, Warrior Run Borough and Sugar Notch Borough, Luzerne County, from Greater Wilkes-Barre Industrial Fund, Inc., by Indenture dated November 15, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 980. Section 50. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from JRH, Inc., by Indenture dated November 15, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 989. Section 51. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from First United Methodist Church, Kingston, by Indenture dated November 17, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 966. Section 52. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Corgan Contracting Co., by Indenture dated November 18, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 948. Section 53. Right-of-way for gas pipeline in the Township of Exeter, Luzerne County, from Joseph Katarsky, by Indenture dated November 18, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 952. Section 54. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Wilkes-Barre Federal Credit Union, by Indenture dated November 29, 1993 and recorded December 1, 1993 in Luzerne County Deed Book 2476 at Page 944. Section 55. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Ray W. Turner, Jr., et al, by Indenture dated December 2, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 656. Section 56. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from James J. Brodginski, Sr., et al, by Indenture dated December 3, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 646. Section 57. Right-of-way for water pipeline in the City of Nanticoke, Luzerne County, from James J. Brodginski, Sr., et al, by Indenture dated 23 December 3, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 651. Section 58. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from Francis G. Capitano, by Indenture dated December 9, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 642. Section 59. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from Marien M. Boehm, widow, by Indenture dated December 9, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 660. Section 60. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from Bernard Shockloss, et ux, by Indenture dated December 9, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 672. Section 61. Right-of-way for gas pipeline in the Borough of Edwardsville, Luzerne County, from James Donovan, et ux, by Indenture dated December 20, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 668. Section 62. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from Lo-Meadows, Inc., by Indenture dated December 22, 1993 and recorded January 27, 1994 in Luzerne County Deed Book 2481 at Page 1136. Section 63. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Thomas C. Lloyd, Jr., et ux, by Indenture dated December 23, 1993 and recorded December 28, 1993 in Luzerne County Deed Book 2479 at Page 664. Section 64. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from George Stolarick, by Indenture dated January 3, 1994 and recorded January 27, 1994 in Luzerne County Deed Book 2481 at Page 1152. Section 65. Condemnation for access road and water line in the Borough of West Wyoming, Luzerne County, from Jerome A. Freedman, et ux, et al, by Indenture dated January 7, 1994 and recorded January 7, 1994 in Luzerne County Deed Book 2480 at Page 701. Section 66. Right-of-way for water pipeline in the Borough of Duryea, Borough of Avoca and Borough of Dupont, Luzerne County, from Hurricane Realty, Inc., by Indenture dated January 11, 1994 and recorded January 27, 1994 in Luzerne County Deed Book 2481 at Page 1146. 24 Section 67. Right-of-way for gas pipeline in the Borough of Duryea, Borough of Avoca and Borough of Dupont, Luzerne County, from Hurricane Realty, Inc., by Indenture dated January 11, 1994 and recorded January 27, 1994 in Luzerne County Deed Book 2481 at Page 1187. Section 68. Right-of-way for water pipeline in the City of Wilkes-Barre, Luzerne County, from Boich Development Corp., by Indenture dated January 14, 1994 and recorded January 27, 1994 in Luzerne County Deed Book 2481 at Page 1182. Section 69. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Boich Development Corp., by Indenture dated January 14, 1994 and recorded January 27, 1994 in Luzerne County Deed Book 2481 at Page 1177. Section 70. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from McCarthy Tire Service Company, by Indenture dated February 14, 1994 and recorded March 31, 1994 in Luzerne County Deed Book 2487 at Page 950. Section 71. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Wilkes-Barre Property, L. P., by Indenture dated February 17, 1994 and recorded March 31, 1994 in Luzerne County Deed Book 2487 at Page 955. Section 72. Right-of-way for gas pipeline in the Borough of Dallas, Luzerne County, from SRHC, Inc., by Indenture dated February 21, 1994 and recorded March 31, 1994 in Luzerne County Deed Book 2487 at Page 959. Section 73. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from First Fidelity Bank, N. A., by Indenture dated February 25, 1994 and recorded March 31, 1994 in Luzerne County Deed Book 2487 at Page 967. Section 74. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from City of Wilkes-Barre, by Indenture dated March 8, 1994 and recorded March 31, 1994 in Luzerne County Deed Book 2487 at Page 983. Section 75. Right-of-way for water pipeline in the City of Wilkes-Barre, Luzerne County, from City of Wilkes-Barre, by Indenture dated March 8, 1994 and recorded March 31, 1994 in Luzerne County Deed Book 2487 at Page 988. Section 76. Right-of-way for gas and water pipelines in the Township of Rice, Luzerne County, from Montaintop Village, L. P., by Indenture dated March 21, 1994 and recorded March 31, 1994 in Luzerne County Deed Book 2487 at Page 993. 25 Section 77. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from C.A.R. Enterprises, by Indenture dated March 28, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1150. Section 78. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from Williams and Williams Real Estate, by Indenture dated March 25, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1146. Section 79. Right-of-way for gas pipeline in the Borough of Courtdale, Luzerne County, from Thomas C. Huk, et ux, by Indenture dated March 30, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1157. Section 80. Right-of-way for gas pipeline in the Borough of West Wyoming, Luzerne County, from Ralph Mastruzzo, et ux, by Indenture dated April 6, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1161. Section 81. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Rokom, Inc., by Indenture dated April 12, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1170. Section 82. Right-of-way for water pipeline in the City of Nanticoke, Luzerne County, from James J. Brodginski, Sr., et al, by Indenture dated April 25, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1165. Section 83. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from Bernard Zapusek, widower, by Indenture dated April 27, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1179. Section 84. Right-of-way for gas pipeline in the Township of Newport, Luzerne County, from John M. Wengryn, et ux, by Indenture dated May 3, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1183. Section 85. Right-of-way for gas pipeline in the Township of Newport, Luzerne County, from David Schaefer, by Indenture dated May 6, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1187. Section 86. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from Joseph D. Nalepa, et ux, by Indenture dated May 13, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1191. Section 87. Right-of-way for water pipeline in the Borough of Hughestown, Luzerne County, from Joseph Mitchell, et ux, by Indenture dated May 20, 1994 and recorded June 6, 1994 in Luzerne County Deed Book 2493 at Page 1195. 26 Section 88. Right-of-way for gas regulator in the Borough of Pringle, Luzerne County, from UGI Utilities, Inc., by Indenture dated May 25, 1994 and recorded August 12, 1994 in Luzerne County Deed Book 2500 at Page 1145. Section 89. Right-of-way for water pipeline in the Township of Jenkins, Luzerne County, from Roze Development Company, by Indenture dated June 2, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 575. Section 90. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from Sunshine Market, Inc., by Indenture dated June 7, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 580. Section 91. Right-of-way for water pipeline in the Township of Wilkes- Barre, Luzerne County, from Sunshine Market, Inc., by Indenture dated June 7, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 567. Section 92. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Eastern Consolidated Management Company, by Indenture dated June 17, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 588. Section 93. Right-of-way for water pipeline in the Township of Wright, Luzerne County, from Eastern Consolidated Management Company, by Indenture dated June 17, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 593. Section 94. Right-of-way for cathodic protection in the Borough of Larksville, Luzerne County, from John A. Connolly, Jr., et al, by Indenture dated June 30, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 598. Section 95. Right-of-way for gas pipeline in the Borough of Pringle and Borough of Luzerne, Luzerne County, from Timothy J. Connolly, et al, by Indenture dated June 20, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 639. Section 96. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from Martin Kapral, et ux, by Indenture dated June 21, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 623. Section 97. Right-of-way for gas pipeline in the Township of Newport, Luzerne County, from Marcella Sedor, widow, by Indenture dated June 21, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 616. 27 Section 98. Right-of-way for water pipeline in the Township of Newport, Luzerne County, from Marcella Sedor, widow, by Indenture dated June 21, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 609. Section 99. Right-of-way for gas pipeline in the Borough of Plymouth, Luzerne County, from John C. Good, et ux, by Indenture dated June 27, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 635. Section 100. Right-of-way for gas pipeline in the Borough of Larksville, Luzerne County, from Anita Gulich, single, by Indenture dated June 30, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 631. Section 101. Right-of-way for fire hydrant in the Township of Conyngham, Luzerne County, from Norbanc Realty Company, by Indenture dated July 7, 1994 and recorded July 11, 1994 in Luzerne County Deed Book 2497 at Page 627. Section 102. Right-of-way for gas pipeline in the Township of Hanover and City of Wilkes-Barre, Luzerne County, from Joseph DelBalso, et al, by Indenture dated July 12, 1994 and recorded August 12, 1994 in Luzerne County Deed Book 2500 at Page 1165. Section 103. Right-of-way for water pipeline in the Township of Hanover and City of Wilkes-Barre, Luzerne County, from Joseph DelBalso, et al, by Indenture dated July 12, 1994 and recorded August 12, 1994 in Luzerne County Deed Book 2500 at Page 1156. Section 104. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Allied Contractors and Engineers, Inc., by Indenture dated July 21, 1994 and recorded August 12, 1994 in Luzerne County Deed Book 2500 at Page 1161. Section 105. Right-of-way for water pipeline in the Township of Jenkins, Luzerne County, from Samuel J. Milazzo, et ux, by Indenture dated August 3, 1994 and recorded August 12, 1994 in Luzerne County Deed Book 2500 at Page 1177. Section 106. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Luzerne Associates Limited Partnership, by Indenture dated August 5, 1994 and recorded August 12, 1994 in Luzerne County Deed Book 2500 at Page 1181. Section 107. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Barbara M. Schwartz, widow, by Indenture dated August 16, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 841. 28 Section 108. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from James L. Caffrey, by Indenture dated August 22, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 845. Section 109. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Kingston Healthcare Center, Inc., by Indenture dated August 24, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 865. Section 110. Right-of-way for water pipeline in the Borough of Kingston, Luzerne County, from Kingston Healthcare Center, Inc, by Indenture dated August 24, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 860. Section 111. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Mericle Development Corp., by Indenture dated August 31, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 849. 28 Section 112. Right-of-way for gas pipeline in the Township of Wilkes- Barre, Luzerne County, from City of Wilkes-Barre Industrial Development Authority, et al, by Indenture dated September 7, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 854. Section 113. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Barbara Macko, Executrix of the Estate of Helen Smith, deceased, by Indenture dated September 13, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 886. Section 114. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Mark A. Macko, et ux, by Indenture dated September 13, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 882. Section 115. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Brian J. Macko, by Indenture dated September 13, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 878. Section 116. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Gerald J. Belardinelli, by Indenture dated September 13, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 870. Section 117. Right-of-way for gas pipeline in the Borough of Edwardsville, Luzerne County, from Francis Bublo, et ux, by Indenture dated September 15, 1994 and recorded September 27, 1994 in Luzerne County Deed Book 2505 at Page 874. VI The following rights-of-way and/or easements situate in the County of Lycoming and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for gas pipeline in the Borough of South Williamsport, Lycoming County, from Citizens Fire Company #2, by Indenture dated November 11, 1993 and recorded November 30, 1993 in Lycoming County Deed Book 2175 at Page 081. Section 02. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from James J. Carey, et ux, by Indenture dated November 17, 1993 and recorded November 30, 1993 in Lycoming County Deed Book 2175 at Page 084. Section 03. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Faxon-Kenmar United Methodist Church, by Indenture 29 dated November 17, 1993 and recorded November 30, 1993 in Lycoming County Deed Book 2175 at Page 087. Section 04. Right-of-way for gas pipeline in the Township of Fairfield, Lycoming County, from Warren A. Choate, et ux, et al, by Indenture dated November 30, 1993 and recorded December 27, 1993 in Lycoming County Deed Book 2192 at Page 245. Section 05. Right-of-way for gas pipeline in the Township of Clinton, Lycoming County, from Pennsylvania College of Technology, by Indenture dated December 1, 1993 and recorded December 27, 1993 in Lycoming County Deed Book 2192 at Page 250. Section 06. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from J. Savoy Realty Co., Inc., by Indenture dated December 16, 1993 and recorded December 27, 1993 in Lycoming County Deed Book 2192 at Page 254. Section 07. Right-of-way for gas pipeline in the Township of Old Lycoming, Lycoming County, from Daniel A. Klingerman, et ux, by Indenture dated December 17, 1993 and recorded December 27, 1993 in Lycoming County Deed Book 2192 at Page 257. Section 08. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Borough of Montoursville, by Indenture dated December 20, 1993 and recorded December 27, 1993 in Lycoming County Deed Book 2192 at Page 261. Section 09. Right-of-way for gas pipeline in the Township of Fairfield, Lycoming County, from Philip H. Bower, et ux, by Indenture dated December 22, 1993 and recorded December 27, 1993 in Lycoming County Deed Book 2192 at Page 265. Section 10. Right-of-way for gas pipeline in the Township of Old Lycoming, Lycoming County, from Carl N. Miller, et ux, by Indenture dated March 9, 1994 and recorded March 30, 1994 in Lycoming County Deed Book 2233 at Page 105. Section 11. Right-of-way for gas pipeline in the Township of Muncy Creek, Lycoming County, from James R. Rothermel, et ux, by Indenture dated March 18, 1994 and recorded March 30, 1994 in Lycoming County Deed Book 2233 at Page 108. Section 12. Right-of-way for gas pipeline in the Township of Muncy Creek, Lycoming County, from Harvey Stauffer, Jr., et ux, by Indenture dated March 21, 1994 and recorded March 30, 1994 in Lycoming County Deed Book 2233 at Page 111. 30 Section 13. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Michael J. Puma, by Indenture dated May 26, 1994 and recorded June 7, 1994 in Lycoming County Deed Book 2267 at Page 266. Section 14. Right-of-way for gas pipeline in the Borough of South Williamsport, Lycoming County, from Kyle Enterprises, Inc., by Indenture dated May 27, 1994 and recorded June 7, 1994 in Lycoming County Deed Book 2267 at Page 263. Section 15. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Loyalsock Township School District, by Indenture dated June 8, 1994 and recorded July 12, 1994 in Lycoming County Deed Book 2285 at Page 115. Section 16. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Harry Dean, et al, by Indenture dated July 7, 1994 and recorded August 25, 1994 in Lycoming County Deed Book 2308 at Page 52. Section 17. Right-of-way for gas pipeline in the Township of Old Lycoming, Lycoming County, from Daniel A. Klingerman, et ux, by Indenture dated July 13, 1994 and recorded August 25, 1994 in Lycoming County Deed Book 2308 at Page 48. Section 18. Right-of-way for gas pipeline in the Township of Fairfield, Lycoming County, from Bonnell Enterprises, by Indenture dated August 25, 1994 and recorded September 29, 1994 in Lycoming County Deed Book 2323 at Page 321. Section 19. Right-of-way for gas pipeline in the Township of Fairfield, Lycoming County, from 220 Fairfield Associates, by Indenture dated August 25, 1994 and recorded September 29, 1994 in Lycoming County Deed Book 2323 at Page 324. Section 20. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Pennsylvania College of Technology, by Indenture dated August 26, 1994 and recorded September 29, 1994 in Lycoming County Deed Book 2323 at Page 327. Section 21. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from David J. Eiswerth, et ux, by Indenture dated September 26, 1994 and recorded September 29, 1994 in Lycoming County Deed Book 2323 at Page 331. Section 22. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Robert N. Tagge, et ux, by Indenture dated September 26, 1994 and recorded September 29, 1994 in Lycoming County Deed Book 2323 at Page 335. 31 VII The following rights-of-way and/or easements situate in the County of Montour and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for gas pipeline in the Township of Mahoning, Montour County, from Paul J. Diehl, Inc., by Indenture dated November 10, 1993 and recorded November 30, 1993 in Montour County Record Book 173 at Page 804. Section 02. Right-of-way for gas pipeline in the Township of Mahoning, Montour County, from Paul J. Diehl, et ux, by Indenture dated November 10, 1993 and recorded November 30, 1993 in Montour County Record Book 173 at Page 798. Section 03. Right-of-way for gas pipeline in the Township of Mahoning, Montour County, from Maryanne Diehl, by Indenture dated November 10, 1993 and recorded November 30, 1993 in Montour County Record Book 173 at Page 795. Section 04. Right-of-way for gas pipeline in the Township of Mahoning, Montour County, from Paul J. Diehl, et ux, by Indenture dated November 10, 1993 and recorded November 30, 1993 in Montour County Record Book 173 at Page 801. Section 05. Right-of-way for gas pipeline in the Township of Mahoning, Montour County, from Greater Danville Area Industrial Development Corporation, by Indenture dated June 23, 1994 and recorded July 12, 1994 in Montour County Record Book 177 at Page 1343. VIII The following rights-of-way and/or easements situate in the County of Northumberland and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for gas pipeline in the Borough of Milton, Northumberland County, from Northumberland County Industrial Development Authority, Milton Steel, Inc. and W. Milton State Bank, by Indenture dated October 14, 1993 and recorded November 30, 1993 in Northumberland County Record Book 937 at Page 134. Section 02. Right-of-way for gas pipeline in the Borough of Milton, Northumberland County, from Lawrence S. Mattern, et ux, by Indenture dated November 12, 1993 and recorded November 30, 1993 in Northumberland County Record Book 937 at Page 140. Section 03. Right-of-way for gas pipeline in the Township of Turbot, Northumberland County, from D. T. Clark, Inc., by Indenture dated November 32 30, 1993 and recorded December 27, 1993 in Northumberland County Record Book 941 at Page 577. Section 04. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Thomas P. Garvey, by Indenture dated December 27, 1993 and recorded March 1, 1994 in Northumberland County Record Book 948 at Page 876. Section 05. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Thomas P. Garvey, by Indenture dated March 8, 1994 and recorded March 30, 1994 in Northumberland County Record Book 952 at Page 98. Section 06. Right-of-way for gas pipeline in the Township of Turbot, Northumberland County, from Donald A. Byerly, et ux, by Indenture dated March 29, 1994 and recorded June 7, 1994 in Northumberland County Record Book 961 at Page 348. Section 07. Right-of-way for gas pipeline in the Township of West Chillisquaque, Northumberland County, from Fred W. Strickland, et ux, by Indenture dated June 27, 1994 and recorded July 12, 1994 in Northumberland County Record Book 966 at Page 322. Section 08. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Robert E. Rockey, et ux, by Indenture dated August 31, 1994 and recorded September 29, 1994 in Northumberland County Record Book 977 at Page 322. Section 09. Right-of-way for gas pipeline in the Borough of Watsontown, Northumberland County, from John D. Moran, et ux, by Indenture dated September 23, 1994 and recorded September 29, 1994 in Northumberland County Record Book 977 at Page 325. Section 10. Right-of-way for gas pipeline in Borough of Milton, Northumberland County, from Weis Markets, Inc., by Indenture dated February 15, 1994, and February 23, 1994, and recorded March 1, 1994 in Northumberland County Record Book 948 at Page 879. IX The following rights-of-way and/or easements situate in the County of Snyder and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for gas pipeline in the Borough of Selinsgrove, Snyder County, from Susquehanna University of the Evangelical Lutheran Church, by Indenture dated October 29, 1993 and recorded November 30, 1993 in Snyder County Record Book 324 at Page 741. 33 Section 02. Right-of-way for gas pipeline in the Township of Monroe, Snyder County, from John A. Spigelmyer, et ux, by Indenture dated May 27, 1994 and recorded June 7, 1994 in Snyder County Record Book 334 at Page 896. Section 03. Right-of-way for gas pipeline in the Borough of Selinsgrove, Snyder County, from Mary G. Inch, widow, by Indenture dated August 26, 1994 and recorded September 29, 1994 in Snyder County Record Book 341 at Page 458. Section 04. Right-of-way for gas pipeline in the Borough of Selinsgrove, Snyder County, from Harlan G. Orndorf, et ux, by Indenture dated August 29, 1994 and recorded September 29, 1994 in Snyder County Record Book 341 at Page 461. Section 05. Right-of-way for gas pipeline in the Borough of Shamokin Dam, Snyder County, from Carey N. Sheaffer, et ux, by Indenture dated August 31, 1994 and recorded September 29, 1994 in Snyder County Record Book 341 at Page 464. X The following rights-of-way and/or easements situate in the County of Union and Commonwealth of Pennsylvania, to wit: Section 01. Right-of-way for gas pipeline in the Township of Kelly, Union County, from William J. Metzger, Sr., by Indenture dated October 11, 1993 and recorded June 7, 1994 in Union County Record Book 365 at Page 132. Section 02. Right-of-way for gas pipeline in the Township of Union, Union County, from Carl H. Lemmerman, III, et ux, by Indenture dated May 27, 1994 and recorded June 7, 1994 in Union County Record Book 365 at Page 136. Section 03. Right-of-way for gas pipeline in the Township of Kelly, Union County, from David A. Hoffman, et ux, by Indenture dated June 13, 1994 and recorded July 12, 1994 in Union County Record Book 372 at Page 1. SAVING AND EXCEPTING, HOWEVER, FROM THE PROPERTY DESCRIBED OR REFERRED TO ABOVE, all property which is reserved or excepted from the lien and operation of the Indenture by virtue of the exceptions contained in the Granting Clauses thereof. TO HAVE AND TO HOLD the same, unto the Trustee and its successors and assigns forever; SUBJECT, HOWEVER, to permitted encumbrances as defined in the Original Indenture and to any lien thereon existing, and to any liens for unpaid portions of the purchase money placed thereon, at the time of acquisition, and also subject to the provisions of Article 12 of the Original Indenture; 34 IN TRUST, NEVERTHELESS, upon the terms and trusts set forth in the Indenture. PROVIDED, HOWEVER, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or cause to be paid unto the holders of bonds issued and to be issued under the Indenture the principal and interest, and premium, if any, due or to become due in respect thereof at the times and in the manner stipulated therein and shall keep, perform and observe all and singular the covenants and promises in said bonds and in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then the Indenture and the estates and rights hereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect. IT IS HEREBY COVENANTED, DECLARED AND AGREED by and between the parties hereto that the Company will protect and make effective the lien intended to be created by the Indenture with respect to all of the properties hereinabove described and that all bonds are to be issued, authenticated, delivered and held, and that all property subject or to become subject to the Indenture is to be held, subject to the further covenants, conditions, uses and trusts set forth in the Original Indenture as heretofore supplemented, and as supplemented by this Twenty-Ninth Supplemental Indenture, in all respects as if said property was specifically described in the Granting Clauses of the Original Indenture; and the Company, for itself and its successors, doth hereby covenant and agree to and with the Trustee, for the benefit of those who hold said bonds as follows: ARTICLE 1. CREATION OF BONDS OF THE TWENTY-FIRST SERIES. Section 1.01. There is hereby created a new series of bonds to be issued under the Original Indenture which shall be designated First Mortgage Bonds 7% Series due 2017. Without limiting the rights of the holders of the bonds under Section 2.11 of the Original Indenture, the aggregate principal amount of bonds of the Twenty-First Series shall be limited to $30,000,000. All bonds of the Twenty-First Series shall mature December 1, 2017, and shall bear interest at the rate of 7% per annum, payable semi-annually on the first day of June and first day of December in each year, commencing June 1, 1995; provided, however, that the interest payable on the bonds of the Twenty-First Series shall be reduced to the extent that other moneys then on deposit with PNC Bank, National Association, as trustee or any successor trustee (the 'IDA Trustee') under the Trust Indenture dated as of November 1, 1994 (the 'Trust Indenture') from the Luzerne County Industrial Development Authority (the 'Authority') to the IDA Trustee are available for the purpose of paying interest on the bonds of the Twenty-First Series and a credit in respect thereof has been granted pursuant to the Trust Indenture. The Company shall notify the Trustee no later than sixteen 35 (16) days prior to any interest payment date on which the amount of interest payable on the bonds of the Twenty-First Series shall be reduced pursuant to the preceding sentence of the amount by which the interest payable on the bonds of the Twenty-First Series shall be reduced on such interest payment date. The principal of and interest on each such bond shall be payable at the office or agency of the Company in the Borough of Manhattan, The City of New York, and both principal and interest shall be payable in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. The bonds of the Twenty-First Series shall be dated the date of their authentication and shall bear interest from the interest payment date next preceding the date of authentication of the bond (except that if the date of authentication of any such bond is an interest payment date for bonds of the Twenty-First Series to which interest has been paid it shall bear interest from the date of authentication of such bond, and except that if any bond of the Twenty-First Series is authenticated prior to the first interest payment date for bonds of the Twenty-First Series it shall bear interest from November 1, 1994). So long as there is no existing default in the payment of interest on the bonds of the Twenty-First Series, the person in whose name any bond of the Twenty-First Series is registered at the close of business on the record date with respect to any interest payment date (the term 'record date' as used with respect to an interest payment date shall mean the fifteenth day of May or the fifteenth day of November next preceding the interest payment date whether or not such fifteenth day is a business day) shall be entitled to receive the interest payable on such interest payment date notwithstanding any transfer or exchange of the bond of the Twenty-First Series subsequent to the record date and on or prior to the interest payment date, except if, and to the extent, the Company shall default in the payment of the interest due on such interest payment date, the default interest shall be paid to the person in whose name the bond of the Twenty-First Series is registered five (5) days before the date of payment of the defaulted interest. Bonds of the Twenty-First Series shall be issued as fully registered bonds without coupons, in such denominations as authorized by the Board of Directors. Bonds of the Twenty-First Series shall be registrable and interchangeable at the office or agency of the Company in the Borough of Manhattan, The City of New York, in the manner and upon the terms set forth in Section 2.05 of the Original Indenture, upon payment of charges as required or permitted by the provisions of Section 2.08 of the Original Indenture as amended. The bonds of the Twenty-First Series shall be redeemable upon not less than thirty (30) nor more than sixty (60) days' prior notice, in whole or in part, pursuant to the requirements of the Indenture, upon the terms and conditions hereinafter specified in Section 1.02 hereof. 36 Section 1.02. (i) The bonds of the Twenty-First Series are subject to mandatory redemption, in whole or in part, upon any redemption of the Luzerne County Industrial Development Authority Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) due December 1, 2017 (the '1994 Series A Bonds'). The principal amount of bonds of the Twenty-First Series to be redeemed upon any redemption of the 1994 Series A Bonds shall be equal to 100% of the principal amount of 1994 Series A Bonds which are to be redeemed. The Company shall notify the Trustee of any redemption not less than forty-five (45) nor more than sixty (60) days prior to the date fixed for redemption of the bonds of the Twenty-First Series of the principal amount of 1994 Series A Bonds which are to be redeemed unless the Company shall give notice of such redemption pursuant to Section 5.03 of the Original Indenture. The Company shall provide the Trustee with a copy of any notice of redemption given pursuant to Section 5.03 of the Original Indenture within two (2) business days of such notice. The redemption price of the bonds of the Twenty-First Series which are redeemed under the circumstances set forth in this subsection (i) shall be equal to 100% of the principal amount of the bonds of the Twenty-First Series to be redeemed plus interest accrued to the date fixed for redemption except (a) in the case of bonds of the Twenty-First Series which are redeemed upon a redemption of the 1994 Series A Bonds at the option of the Authority (other than in an 'Extraordinary Optional Redemption,' as defined in the Trust Indenture) upon the direction of the Company (an 'Optional IDA Redemption') which occurs between December 1, 2004 and November 30, 2005, inclusive, the redemption price shall be equal to 102% of the principal amount of the bonds of the Twenty-First Series to be redeemed plus interest accrued to the date fixed for redemption and (ii) in the case of bonds of the Twenty-First Series which are redeemed upon an Optional IDA Redemption which occurs between December 1, 2005 and November 30, 2006, inclusive, the redemption price shall be equal to 101% of the principal amount of the bonds of the Twenty-First Series to be redeemed plus interest accrued to the date fixed for redemption. (ii) The bonds of the Twenty-First Series are subject to mandatory redemption, in whole, if the IDA Trustee declares the 1994 Series A Bonds to be immediately due and payable under Section 9.02 of the Trust Indenture. The Company shall notify the Trustee of such redemption not less than forty-five (45) nor more than sixty (60) days prior to the date fixed for such redemption of the bonds of the Twenty-First Series unless the Company shall give notice of such redemption pursuant to Section 5.03 of the Original Indenture. The Company shall provide the Trustee with a copy of any notice of redemption given pursuant to Section 5.03 of the Original Indenture within two (2) business days of such notice. The redemption price of the bonds of the Twenty-First Series which are redeemed under the circumstances set forth in this subsection (ii) shall be equal 37 to 100% of the principal amount of the bonds of the Twenty-First Series to be redeemed plus interest accrued to the date fixed for redemption. (iii) The bonds of the Twenty-First Series are subject to mandatory redemption, in whole or in part (but if in part on a pro-rata basis with bonds of all other series then outstanding under the Indenture), pursuant to the provisions of Section 8.13 of the Indenture. The redemption price of the bonds of the Twenty-First Series which are redeemed under the circumstances set forth in this subsection (iii) shall be equal to 100% of the principal amount of the bonds of the Twenty-First Series to be redeemed plus interest accrued to the date fixed for redemption. Section 1.03. The holder of each and every bond of the Twenty-First Series hereby agrees to accept payment thereof prior to maturity on the terms and conditions in Section 1.02 hereof and in Section 8.13 of the Indenture. ARTICLE 2. NO SINKING FUND FOR BONDS OF THE TWENTY-FIRST SERIES. Bonds of the Twenty-First Series will not be entitled to the benefit of a Sinking Fund. ARTICLE 3. ISSUANCE OF BONDS OF THE TWENTY-FIRST SERIES. Bonds of the Twenty-First Series may be executed, authenticated and delivered from time to time as provided or permitted by the provisions of Article 3 of the Original Indenture and the provisions of this Twenty-Ninth Supplemental Indenture. ARTICLE 4. MISCELLANEOUS. Section 4.01. Sections 4.10, 4.11 and 8.13 of the Original Indenture, as amended by Section 4.01 of Article 4 of the Fourth, Ninth, Tenth, Twelfth, Fourteenth, Fifteenth, Sixteenth, Seventeenth, Eighteenth, Nineteenth, Twentieth, Twenty-First, Twenty-Second, Twenty-Third, Twenty-Fourth, Twenty-Fifth, Twenty-Sixth, Twenty-Seventh and Twenty-Eighth Supplemental Indentures, are hereby further amended by this Twenty-Ninth Supplemental Indenture by inserting in each such section the words 'or bonds of the 7% Series due 2017' immediately after the words 'bonds of the 2 7/8% Series due 1976 or bonds of the 3 1/2% Series due 1982 or bonds of the 4 7/8% Series due 1987 or bonds of the 4 3/4% 38 Series due 1983 or bonds of the 5 1/2% Series due 1985 or bonds of the 5% Series due 1986 or bonds of the 4 5/8% Series due 1988 or bonds of the 5 7/8% Series due 1991 or bonds of the 6 7/8% Series due 1992 or bonds of the 10% Series due 1995 or bonds of the 8% Series due 1997 or bonds of the 9 1/4% Series due 1996 or bonds of the 9% Series due 1991 or bonds of the 9.23% Series due 1999 or bonds of the 9.34% Series due 2019 or bonds of the 9.57% Series due 1996 or bonds of the 7.20% Series due 2017 or bonds of the 8.375% Series due 2002 or bonds of the 7.125% Series due 2022 or bonds of the 6.05% Series due 2019' each time such last mentioned words occur therein. Section 4.02. The Trustee accepts the trusts hereby declared and provided and agrees to perform the same upon the terms and conditions in the Original Indenture and in this Twenty-Ninth Supplemental Indenture set forth. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Twenty-Ninth Supplemental Indenture or the due execution hereof by the Company, or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. The Original Indenture as heretofore supplemented by twenty-eight supplemental indentures and as supplemented by this Twenty-Ninth Supplemental Indenture is in all respects ratified and confirmed, and the Original Indenture, together with the twenty-nine indentures supplemental thereto, shall be read, taken and construed as one and the same indenture. Section 4.03. This Twenty-Ninth Supplemental Indenture may be executed in any number of counterparts, and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. Pennsylvania Gas and Water Company does hereby constitute and appoint Thomas J. Ward to be its attorney for it, and in its name and as and for its corporate act and deed to acknowledge this Twenty-Ninth Supplemental Indenture before any person having authority by the laws of the Commonwealth of Pennsylvania to take such acknowledgment, to the intent that the same may be duly recorded, and First Trust of New York, National Association does hereby constitute and appoint Catherine F. Donohue to be its attorney for it, and in its name and as and for its corporate act and deed to acknowledge this Twenty-Ninth Supplemental Indenture before any person having authority by the laws of the State of New York to take such acknowledgment, to the intent that the same may be duly recorded. 39 IN WITNESS WHEREOF, said Pennsylvania Gas and Water Company and said First Trust of New York, National Association have caused this Supplemental Indenture to be signed in their respective corporate names, and their respective corporate seals to be hereunto affixed and attested by their respective officers thereunto duly authorized, all as of the day and year first above written. PENNSYLVANIA GAS AND WATER COMPANY By: ________/s/_JOHN F. KELL, JR._______ Name: John F. Kell, Jr. Title: Vice President, Finance [CORPORATE SEAL] Attest: _______/s/_THOMAS J. WARD_______ Secretary FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION By: __________/s/_HELEN G. CHIN_________ Name: Helen G. Chin Title: Vice President [CORPORATE SEAL] Attest: ____/s/_CATHERINE F. DONOHUE____ Assistant Secretary 40 COMMONWEALTH OF PENNSYLVANIA ss.: COUNTY OF LUZERNE } BE IT REMEMBERED that on the 9th day of November, A.D., 1994, before the undersigned Notary Public in and for said County and said Commonwealth, commissioned for and residing in the County of Luzerne, personally came Thomas J. Ward, who, being duly sworn according to law, doth depose and say that he was personally present and did see the common or corporate seal of the above-named PENNSYLVANIA GAS AND WATER COMPANY affixed to the foregoing Supplemental Indenture; that the seal so affixed is the common or corporate seal of said PENNSYLVANIA GAS AND WATER COMPANY and was so affixed by authority of said corporation as the act and deed thereof; that the above-named John F. Kell, Jr. is the Vice President, Finance of said corporation and did sign the said Supplemental Indenture as such in the presence of this deponent; that this deponent is the Secretary of the said corporation and that the name of this deponent, above signed in attestation of the due execution of the said Supplemental Indenture, is in this deponent's own proper handwriting. __________/s/_THOMAS J. WARD____________ Thomas J. Ward [NOTARIAL SEAL] Sworn and subscribed before me the day and year aforesaid. ________/s/ JOANNE MCHALE_______ Notary Public NOTARIAL SEAL JOANNE MCHALE, NOTARY PUBLIC WILKES-BARRE, LUZERNE COUNTY MY COMMISSION EXPIRES SEPT. 6, 1998 Member, Pennsylvania Association of Notaries 41 COMMONWEALTH OF PENNSYLVANIA ss.: COUNTY OF LUZERNE } I HEREBY CERTIFY that on this 9th day of November, A.D., 1994, before me, a Notary Public in and for said County and said Commonwealth, commissioned for and residing in the County of Luzerne, personally appeared Thomas J. Ward, the attorney named in the foregoing Supplemental Indenture, and he, by virtue and in pursuance of the authority therein conferred upon him, acknowledged said Supplemental Indenture to be the act and deed of the said PENNSYLVANIA GAS AND WATER COMPANY. Witness my hand and notarial seal the day and year aforesaid. ____________/s/ JOANNE MCHALE___________ Notary Public [NOTARIAL SEAL] NOTARIAL SEAL JOANNE MCHALE, NOTARY PUBLIC WILKES-BARRE, LUZERNE COUNTY MY COMMISSION EXPIRES SEPT. 6, 1998 Member, Pennsylvania Association of Notaries 42 STATE OF NEW YORK ss.: COUNTY OF NEW YORK } BE IT REMEMBERED that on the 8th day of November, A.D., 1994, before the undersigned Notary Public in and for said County and State, commissioned for the County of New York, personally came Catherine F. Donohue who, being duly sworn according to law, doth depose and say that she was personally present and did see the corporate seal of the above-named FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, affixed to the foregoing Supplemental Indenture; that the seal so affixed is the corporate seal of said FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, and was so affixed by authority of said corporation as the act and deed hereof; that the above-named Helen G. Chin is a Vice President of said corporation and did sign the said Supplemental Indenture as such in the presence of this deponent; that this deponent is an Assistant Secretary of said corporation and that the name of this deponent, above signed in attestation of the due execution of the said Supplemental Indenture, is in this deponent's own proper handwriting. _______/s/_CATHERINE F. DONOHUE_________ Catherine F. Donohue Sworn and subscribed before me the day and year aforesaid. [NOTARIAL SEAL] _______/s/ JOANNE E. ILSE_______ Notary Public JOANNE E. ILSE Notary Public, State of New York No. 01IL5018680 Qualified in Queens County Commission Expires October 4, 1995 43 STATE OF NEW YORK ss.: COUNTY OF NEW YORK } I HEREBY CERTIFY that on this 8th day of November, A.D., 1994, before me, a Notary Public in and for said County and State, commissioned for the County of New York, personally appeared Catherine F. Donohue, the attorney named in the foregoing Supplemental Indenture, and she, by virtue and in pursuance of the authority therein conferred upon her, acknowledged said Supplemental Indenture to be the act and deed of the said FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION. Witness my hand and notarial seal the day and year aforesaid. ___________/s/ JOANNE E. ILSE___________ Notary Public JOANNE E. ILSE Notary Public, State of New York No. 01IL5018680 Qualified in Queens County Commission Expires October 4, 1995 [NOTARIAL SEAL] CERTIFICATE OF RESIDENCE FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION hereby certifies that its precise name and address as Trustee hereunder are: FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, 100 WALL STREET, SUITE 1600, NEW YORK, NEW YORK 10005. By:_________/s/_HELEN G. CHIN___________ Name: Helen G. Chin Title: Vice President EX-10 4 Not distributed, incorporate HHR additional comments; blackline against bap4 and distribute Final version BOND PURCHASE AGREEMENT $30,000,000 Luzerne County Industrial Development Authority Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) November 1, 1994 Luzerne County Industrial Development Authority Wilkes-Barre, Pennsylvania 18711 Attention: Executive Director Pennsylvania Gas and Water Company 39 Public Square Wilkes-Barre, Pennsylvania 18711 Attention: Chief Financial Officer Gentlemen: Wheat First Butcher Singer, as representative (in such capacity, the "Representative"), on behalf of itself and Legg Mason Wood Walker, Incorporated (individually, an "Underwriter" and together, the "Underwriters"), offers to enter into this Bond Purchase Agreement (the "Purchase Agreement") relating to $30,000,0001 aggregate principal amount of Luzerne County Industrial Development Authority Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) (the "Bonds") of the Luzerne County Industrial Development Authority (the "Issuer"). This offer is made subject to acceptance by the Issuer and the Company (as hereinafter defined) prior to 5:00 P.M., prevailing time in Philadelphia, Pennsylvania, on the date hereof, and upon such acceptance, as evidenced by the due execution hereof by the Issuer and the Company, this Purchase Agreement shall constitute a binding agreement among the Issuer, the Representative, the Underwriters and the Company in full force and effect according to the terms hereof. All capitalized terms used herein and not otherwise defined shall have the meanings specified in the Official Statement (defined below). The Bonds shall mature and shall be subject to mandatory and optional redemption and shall bear interest as set forth in Exhibit A hereto and shall otherwise be as described in the Official Statement hereinafter mentioned. The Bonds shall be eligible for deposit at The Depository Trust Company, New York, New York ("DTC") and for DTC's book- entry only system for clearance and settlement of municipal securities transactions. The Bonds shall be issued pursuant to a Bond Resolution of the Authority adopted on October 17, 1994 (the "Bond Resolution"). The Bonds shall be as described in, and shall be issued under and pursuant to, the Indenture. The Bonds are special limited obligations of the Issuer, payable solely from and secured by (i) the payments to be made by the Company under and pursuant to the Agreement and the 1994 First Mortgage Bonds, and (ii) amounts on deposit from time to time in the funds and accounts created pursuant to the Indenture. To evidence and secure its obligations under the Agreement, the Company will issue and deliver to the Issuer the Company's 1994 First Mortgage Bonds in the principal amount of $30,000,000 issued under and secured by the Indenture of Mortgage, as to be further supplemented by the Twenty-Ninth Supplemental Indenture to be dated as of November 1, 1994, providing for the issuance of the 1994 First Mortgage Bonds. Payment of the principal of and interest on the Bonds will be insured by a municipal bond insurance policy to be issued by AMBAC Indemnity Corporation ("AMBAC") on the Closing Date. Proceeds of the Bonds will be used to provide funds sufficient, together with other available moneys supplied by or on behalf of the Company, to reimburse Swiss Bank Corporation, New York Branch ("SBC") for drawings on a letter of credit (the "Letter of Credit") provided by SBC in connection with the issuance of the 1987 Bonds. Proceeds of the draws on the Letter of Credit will be used to enable the Issuer, at the direction of the Company, to refund (the "Refunding Program"), through redemption on December 1, 1994, the Issuer's 1987 Bonds. The estimated sources and uses of proceeds of the Bonds, together with other available moneys, is attached hereto as Exhibit B. The Issuer and the Company hereby consent to and confirm the prior use by the Underwriters of the Preliminary Official Statement dated October 19, 1994 (the "Preliminary Official Statement") in connection with the public offering of the Bonds by the Underwriters, and further confirm the authority of the Underwriters to use, and consent to the use of, a final Official Statement, which has been or will be approved by the Company, with respect to the Bonds, to be dated the date hereof, and any amendments or supplements thereto which shall be approved by the Company (as so amended and supplemented, the "Official Statement") in connection with the public offering, sale and distribution of the Bonds. The Issuer, with respect to information pertaining to the Issuer contained in the Preliminary Official Statement, and the Company, with respect to all information contained in the Preliminary Official Statement other than information pertaining to the Issuer, hereby represent and warrant that the Preliminary Official Statement previously furnished to the Underwriters has been "deemed final" by the Issuer and the Company as of its date for purposes of Rule 15c2-12 ("Rule 15c2-12") of the Securities and Exchange Commission (the "Commission") promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), except for the omission of such information as is permitted to be omitted in accordance with paragraph (b)(1) of Rule 15c2-12. The Issuer shall provide, or cause to be provided, to the Representative as soon as practicable after the Issuer's acceptance of this Purchase Agreement (but in no event later than seven business days after the Issuer's acceptance hereof, and in sufficient time to accompany any confirmation that requests payment from any customer) copies of the Official Statement, executed by the Issuer and the Company (and conformed copies thereof) in sufficient quantity to enable the Representative to comply with the rules of the Commission and the Municipal Securities Rulemaking Board. The Issuer and the Company hereby authorize the Representative and the Representative hereby agrees to file the Official Statement with at least one of the nationally recognized municipal securities information repositories designated by the Commission. The Issuer and the Company further authorize the Representative and the Representative hereby agrees to file the Official Statement with the Municipal Securities Rulemaking Board, or its designee. 1. Purchase, Sale and Closing. The Issuer hereby agrees to sell to the Underwriters, and the Underwriters, upon the basis of the representations, warranties, covenants and agreements of the Company and the Issuer contained herein, but subject to the conditions hereinafter set forth, jointly and severally agree to purchase from the Issuer, all (but not less than all) of the Bonds at an aggregate purchase price of $30,000,000, plus accrued interest on the Bonds from November 1, 1994, to the Closing Date (as hereinafter defined). Payment for the Bonds shall be made by wire transfer to the Trustee in Federal funds. The closing for the delivery of and payment for the Bonds shall take place at the offices of Ballard Spahr Andrews & Ingersoll, 1735 Market Street, 51st Floor, Philadelphia, Pennsylvania, at 9:00 am., local time in Philadelphia, Pennsylvania, on November 15, 1994, or at such other date, time or place as may be designated by the Representative, with the approval of the Company and the Issuer (the "Closing Date"). The Bonds will be delivered on the Closing Date to DTC in New York, New York, in definitive fully registered form without coupons, duly executed and authenticated, registered in the name of DTC's nominee, Cede & Co., and in the form of one Bond certificate in the principal amount of $30,000,000 maturing December 1, 2017. The Bonds will be made available to the Representative for inspection at a place suitable for such inspection in New York, New York at least 24 hours before the Closing Date. As sole compensation for the services of the Underwriters with respect to the Bonds the Company shall pay the Underwriters concurrently with closing of the sale of the Bonds a fee equal to $600,000.00 in connection with the purchase and sale of the Bonds hereunder. 2. Authority of Representative; Public Offering of Bonds. The Representative hereby represents and warrants that it has been duly designated and authorized to execute this Agreement on behalf of itself and the other Underwriter and to act hereunder for and on behalf of itself and the other Underwriter. The Underwriters agree to make a bona fide public offering of the Bonds at not in excess of the initial public offering prices set forth in the Official Statement. 3. Representations and Warranties of Issuer. In addition to the other representations and warranties made by the Issuer in this Agreement, the Issuer hereby represents and warrants to the Company and the Underwriters as follows: (a) The Issuer is a body corporate and politic constituting a public corporation and public instrumentality duly created and validly existing under the Pennsylvania Industrial and Commercial Development Authority Law of 1967, as amended (the "Act"), and has (or at the relevant time or times had) full power and authority (i) to adopt the Bond Resolution, (ii) to execute, deliver and perform its obligations under this Purchase Agreement, the Indenture, the Agreement and all other Issuer documents relating to the Refunding Program (the "Issuer Financing Documents"), (iii) to issue, sell, execute and deliver the Bonds to the Underwriters as provided in this Purchase Agreement, and (iv) to finance the Project Facilities and to undertake, carry out and consummate all other transactions contemplated by each of the aforesaid documents. (b) The Issuer has duly authorized by all requisite corporate action (i) the execution and delivery of, and the due performance of its obligations under, this Purchase Agreement and the other Issuer Financing Documents, (ii) the taking of any and all actions as may be required on the part of the Issuer to carry out, give effect to and consummate the transactions contemplated by this Purchase Agreement and the other Issuer Financing Documents, and (iii) the distribution of the Preliminary Official Statement and the execution and distribution of the Official Statement. (c) The Bond Resolution has been duly adopted by the Issuer and is in full force and effect. This Purchase Agreement has been duly authorized, executed and delivered by the Issuer. The Purchase Agreement is, and when executed and delivered by the parties thereto, the other Issuer Financing Documents will be, legal, valid and binding obligations of the Issuer, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws in effect from time to time affecting the rights of creditors generally and except to the extent that the enforceability thereof may be limited by the application of general principles of equity. At the Closing Date, each of the Issuer Financing Documents shall have been duly executed and delivered by the Issuer. (d) The Bonds have been duly authorized by the Issuer and, when issued, authenticated by the Trustee, and delivered and paid for by the Underwriters on the Closing Date in accordance with the terms of this Purchase Agreement, will constitute legal, valid and binding obligations of the Issuer, enforceable in accordance with their terms, and entitled to the benefits and security of the Indenture, except as such enforceability may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting creditors' rights and by general principles of equity. (e) The adoption of the Bond Resolution, the execution and delivery by the Issuer of this Purchase Agreement, the Bonds and the other Issuer Financing Documents, and compliance with the provisions of the Bond Resolution and of this Purchase Agreement, the Bonds and the other Issuer Financing Documents, will not conflict with or constitute a breach of, or a default under, any indenture, commitment, agreement or other instrument to which the Issuer is a party or by which it or any of its property is bound, or any constitutional or statutory provision, rule, regulation, ordinance, judgment, order or decree to which the Issuer or any of its property is subject. (f) There is no action, suit, proceeding, inquiry or investigation before or by any court, arbitrator, grand jury, public board or body, in which the Issuer has been served or of which it has otherwise received official notice or which, to the best knowledge of the Issuer after due inquiry, is threatened against the Issuer (nor to the best knowledge of the Issuer is there any basis therefor), (i) which in any way questions the powers of the Issuer referred to in subparagraph (a) of this Paragraph 3 or the validity of the proceedings taken by the Issuer in connection with the issuance and sale of the Bonds, or (ii) wherein an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Purchase Agreement or by the Official Statement, or (iii) which in any way would adversely affect the legality, validity or enforceability of the Issuer's obligations with respect to the Bonds, the Bond Resolution, this Purchase Agreement or the other Issuer Financing Documents. (g) No approval, permit, consent, authorization or order of any court or any governmental agency, authority or body not already obtained (other than any approvals that may be required under the Blue Sky or securities laws of any jurisdiction, as to which no representation is made) is required with respect to the Issuer in connection with the issuance and sale of the Bonds; the execution and delivery by the Issuer of, or the performance by the Issuer of its obligations under, this Purchase Agreement and the other Issuer Financing Documents; or the transactions on the part of the Issuer contemplated hereby and thereby. (h) On and as of the date hereof and unless an event of the nature described in Paragraph 5(c) hereof subsequently occurs, at all times during the period from the date hereof to and including the date which is 25 days following the End of the Underwriting Period (as defined and determined in accordance with Paragraph 11 hereof), the information in the Official Statement with respect to the Issuer and its affairs does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. (i) If the Official Statement is supplemented or amended pursuant to Paragraph 5(c) hereof, at the time of each such supplement or amendment to the Official Statement and, unless the Official Statement is subsequently supplemented or amended pursuant to Paragraph 5(c) hereof, at all times during the period from the date of this Purchase Agreement to and including the date which is 25 days following the End of the Underwriting Period (as defined and determined in accordance with Paragraph 11 hereof), the information with respect to the Issuer and its affairs contained in the Official Statement, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4. Representations and Warranties of Company. In addition to the other representations made by the Company in this Purchase Agreement, the Company hereby represents and warrants to the Issuer and the Underwriters as follows: (a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Pennsylvania, with full corporate power and authority to own, lease and operate its properties and conduct its business as its business is described in Appendix A to the Preliminary Official Statement. The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which it owns or leases properties or in which the conduct of its business requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the business, financial (or other) condition, results of operations or prospects of the Company and its subsidiary considered as a whole. (b) The financial statements of the Company, together with related notes and schedules as set forth in the Preliminary Official Statement, present fairly in all material respects the financial position and the results of operations of the Company at the indicated dates and for the indicated periods. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods presented except as noted in the accountant's reports thereon or the notes thereto, and all adjustments necessary for a fair presentation of the results for such periods have been made; and the selected financial information included in the Preliminary Official Statement presents fairly the information shown therein and has been compiled on a basis consistent with the financial statements presented therein. (c) Since the date as of which information is given in the Preliminary Official Statement (except to the extent corrected or updated in the Official Statement), there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, financial (or other) condition, operations, management or prospects of the Company and its subsidiary taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into by the Company or its subsidiary, other than transactions in the ordinary course of business and changes and transactions contemplated by the Preliminary Official Statement. Neither the Company nor its subsidiary has any contingent obligations which are or are reasonably likely to be material to the Company and its subsidiary taken as whole and which are required to be disclosed and are not disclosed in the Preliminary Official Statement (except to the extent such omission has been corrected in the Official Statement). (d) The Preliminary Official Statement and the Official Statement (together with any amendments or supplements thereto), as of their respective dates did not, and the Official Statement (together with any amendments or supplements thereto) as of the Closing Date will not, contain (as used hereinafter, the term "contain" shall include information contained in documents incorporated by reference therein) any untrue statement of a material fact or omit to state a material fact required to be stated therein in order to make the statements therein, in light of the circumstances under which they were made, not misleading (except to the extent any untrue statement or omission contained in the Preliminary Official Statement was corrected in the Official Statement); provided, however, this representation and warranty shall not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representative expressly for use therein or as to information relating to the Issuer. (e) The Company, PEI, and their respective subsidiaries are not in violation of their respective Articles of Incorporation or By-Laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which any of them is a party or by which any of them or their properties may be bound, other than such violations or defaults that would not individually or in the aggregate have a material adverse effect on the business, financial (or other) condition, results of operations or prospects of the Company, PEI and their respective subsidiaries considered as a whole. (f) On August 18, 1994, a securities certificate was registered by the Pennsylvania Public Utility Commission with respect to the issuance of the 1994 First Mortgage Bonds, and no other consent, approval, authorization, registration, or order of any court or governmental authority or agency was required to be made or obtained by the Company for the offer and sale of the 1994 First Mortgage Bonds and the Bonds, except for filings and applications pursuant to state securities or Blue Sky laws and regulations. (g) The 1994 First Mortgage Bonds have been duly and validly authorized and, when issued and delivered against payment therefor and in accordance with the Mortgage, will be duly and validly issued and conform, in all material respects, to the description of the 1994 First Mortgage Bonds contained in the Preliminary Official Statement and the Official Statement, and the 1994 First Mortgage Bonds will be valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); when the 1994 First Mortgage Bonds are issued in accordance with the provisions of the Mortgage, such 1994 First Mortgage Bonds will entitle the holders thereof to the rights and security specified in such Mortgage, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); and the Mortgage conforms, in all material respects, to the description thereof in the Preliminary Official Statement and the Official Statement. (h) Each of the Agreement, the Refunding Agreement and the Twenty-Ninth Supplemental Indenture has been duly authorized by the Company and each of the Agreement and the Twenty-Ninth Supplemental Indenture conforms, in all material respects, to the description thereof contained in the Preliminary Official Statement and the Official Statement. (i) The execution and delivery of this Purchase Agreement did not, and the issuance and sale of the 1994 First Mortgage Bonds and the Bonds, the execution and delivery of the Agreement, the Refunding Agreement and the Twenty-Ninth Supplemental Indenture, and the compliance by the Company with all of the provisions of this Purchase Agreement, the Refunding Agreement, the Agreement and the Twenty-Ninth Supplemental Indenture (the "Company Financing Documents") and the consummation of the transactions herein and therein contemplated will not conflict with or constitute a breach of, or default under any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company, PEI or any of their respective subsidiaries is a party, or by which any of them may be bound or to which any of their property or assets is subject (except for such conflicts, breaches, violations and defaults that would not have a material adverse effect on the financial condition or operations of the Company and its subsidiary taken as a whole and that would not affect the validity of the 1994 First Mortgage Bonds) nor will such action result in any violation of the provisions of the respective Articles of Incorporation or By-Laws of the Company, PEI or any of their respective subsidiaries or any law, administrative regulation or administrative or court decree. (j) Except in each case for such exceptions (including those described in the Official Statement) as would not, individually or in the aggregate, have a material adverse effect on the business, financial (or other) condition, results of operations or prospects of the Company and its subsidiary considered as a whole, (i) the Company and its subsidiary have such permits, licenses, franchises, water rights, certificates, approvals and authorizations of governmental or regulatory authorities ("Permits") as are necessary to own their respective properties and to conduct their respective businesses in the manner now being conducted and as described in the Preliminary Official Statement, and (ii) the Company and its subsidiary have each fulfilled and performed all of their respective obligations with respect to such Permits, and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or result in any other impairment of the rights of the holder of any such Permit. (k) There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Company, threatened against or affecting the Company or its subsidiary which, in the opinion of management of the Company after consultation with legal counsel handling such matters, is reasonably likely to (i) result in any material adverse change in the condition, financial or otherwise, earnings, affairs or business prospects of the Company and its subsidiary considered as a whole, except as set forth in, or incorporated by reference in, the Preliminary Official Statement or the Official Statement, or (ii) materially and adversely affect the offering of the 1994 First Mortgage Bonds and the Bonds. (l) This Purchase Agreement has been duly authorized, executed and delivered by the Company. (m) PEI is a "holding company" within the meaning of the Public Utility Holding Company Act of 1935 as amended ("PUHCA"), but is exempt, pursuant to Section 3(a) of PUHCA, from all the provisions of PUHCA (except Section 9(a)(2) thereof) and the rules and regulations thereunder. PEI has filed an annual exemption statement on Form U-3A-2 pursuant to Rule U-2 promulgated under PUHCA for each year of its existence as required to maintain its exempt status. The Commission has taken no action, nor threatened to take any action, to terminate PEI's exemption and the Company and PEI are not aware of any basis the Commission may have for taking any such action. (n) The Company is not subject to the Natural Gas Act, 15 U.S.C. subsection 717 et seq.; all of the conditions set forth in Section 1(c) of the Natural Gas Act, 15 U.S.C. subsection 717(c), for the non-application of the Natural Gas Act to the Company are satisfied. (o) Except as set forth in the Official Statement, the Company and its subsidiary are in compliance with all applicable laws, ordinances, rules or regulations, and any order, judgment or decree to which each may be subject, except where the failure to comply would not have a material adverse effect on the business, financial (or other) condition, operations or prospects of the Company and its subsidiary taken as a whole. (p) The Company and its subsidiary are in compliance with all applicable environmental protection laws and all applicable orders, rules and regulations promulgated under such laws by governmental agencies having jurisdiction therein, except for such failures to be in compliance as would not, individually or in the aggregate, have a material adverse affect on the business, financial (or other) condition, results of operations or prospects of the Company and its subsidiary considered as a whole. Neither the Company nor its subsidiary have received any notice that they are responsible parties or potentially responsible parties or are subject to any evaluation under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) or the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901 et seq.) or applicable state environmental laws, nor do any of them have knowledge of any liability to which they may be subject under such statutes, except where any such notice, claim, evaluation or liability is not reasonably likely to result in a material adverse effect on the business, financial (or other) condition, results of operations or prospects of the Company and its subsidiary taken as a whole. Except to the extent that such matters would not individually or in the aggregate have a material adverse effect on the business, financial (or other) condition, results of operations or prospects of the Company and its subsidiary considered as a whole, there are no past or present events, conditions, circumstances, activities, practices, incidents or actions of the Company or its subsidiary that, to the knowledge of the Company based on present legal and regulatory requirements: (i) interfere with or prevent compliance or continued compliance with applicable environmental laws or with applicable orders, rules, and regulations promulgated under such laws by government agencies having jurisdiction with respect thereto; or (ii) would be reasonably likely to give rise to any legal liability (whether statutory or at common law) or form the basis of any claim, action, suit, proceeding, notice of violation, investigation or demand (whether for money damages, remediation, clean up or performance of any evaluation, study or assessment or injunctive or equitable relief) based on or relating to the generation, handling, storage or release into the environment of any pollutant, contaminant, chemical or industrial, toxic or hazardous substance or waste. (q) The Company and its subsidiary have such title to, or other interest in, all real property and personal property owned by them as is necessary for the conduct of their respective businesses as currently being conducted or as contemplated to be conducted as described in the Preliminary Official Statement. The Company and its subsidiary occupy their respective leased properties under valid and binding leases. 5. Covenants of Issuer and Company. The Issuer and the Company hereby covenant and agree with the Representative and the Underwriters as follows: (a) To cooperate with the Representative in endeavoring to qualify the Bonds for offer and sale under the state securities or Blue Sky laws of such jurisdictions as the Representative may reasonably request and in determining their eligibility for investment under the laws of such jurisdictions as the Representative may reasonably request, provided that the foregoing shall not require the Issuer or the Company to qualify to do business in any foreign jurisdiction or require the Issuer to submit to service of process in any jurisdiction; (b) Not to take, or omit to take any action which it is required to take which will adversely affect the exclusion of the interest on the Bonds from the gross income of the holders thereof for Federal income tax purposes; (c) To promptly notify the Representative if, during the period from the date hereof to and including the date which is 25 days following the End of the Underwriting Period (as defined and determined in accordance with Paragraph 11 hereof), any event shall occur which is reasonably likely to, or would cause the Official Statement, as then supplemented or amended, to contain any untrue statement of a material fact or to omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and if in the opinion of the Representative such event requires the preparation and distribution of a supplement or amendment to the Official Statement, to prepare and furnish to the Representative (i) such number of copies of the supplement or amendment to the Official Statement, in form and substance mutually agreed upon by the Issuer and the Company and approved by the Representative, as the Representative may reasonably request, and (ii) if such notification shall be given subsequent to the Closing Date, such additional legal opinions, certificates, instruments and other documents as the Representative may reasonably deem necessary to evidence the truth and accuracy of any such supplement or amendment to the Official Statement; and (d) In the case of the Company, concurrently with the Company's acceptance hereof, to deliver to the Representative a letter of Arthur Andersen LLP, independent certified public accountants, substantially in the form set forth in Exhibit C hereto. 6. Conditions Precedent. The obligations of the Underwriters hereunder are subject to the satisfaction, or waiver thereof by the Representative, of the following conditions: (a) At the time of Closing: (1) this Purchase Agreement, and the other Issuer Financing Documents and Company Financing Documents shall be in full force and effect, and this Purchase Agreement shall not have been amended, modified or supplemented prior to the Closing except as may have been agreed to by the Representative; (2) the Issuer and the Company shall have duly adopted, and there shall be in full force and effect, such additional resolutions or agreements as shall, in the opinion of Bond Counsel, be necessary in connection with the transactions contemplated hereby; (3) the representations and warranties of the Issuer in the Issuer Financing Documents and of the Company in the Company Financing Documents shall be true and accurate in all material respects; (4) the Issuer and the Company shall perform or shall have performed all obligations required under or specified in this Purchase Agreement to be performed at or prior to the Closing; and (5) the proceeds of the sale of the Bonds shall be applied as described in the Official Statement. (b) The Representative may terminate this Purchase Agreement by notification from the Representative to the Issuer and the Company if at any time prior to the Closing: (1) legislation shall be enacted by the Congress of the United States or adopted by either House thereof or a decision by a Court of the United States or the United States Tax Court shall be rendered, or a ruling, regulation or official release or statement by or on behalf of the Treasury Department of the United States, the Internal Revenue Service or other governmental agency shall be made with respect to Federal taxation upon revenues or other income of the general character expected to be derived by the Issuer or upon interest received on bonds of the general character of the Bonds which would have the effect of changing, directly or indirectly, the Federal income tax consequences of interest on bonds of the general character of the Bonds in the hands of holders thereof, or which would materially affect the market price of the Bonds adversely; or (2) legislation shall be enacted or any action shall be taken by the Securities and Exchange Commission which, in the opinion of the counsel for the Representative, has the effect of requiring the contemplated distribution of the Bonds to be registered under the Securities Act of 1933, as amended, or the Indenture to be qualified under the Trust Indenture Act of 1939, as amended; or (3) there shall exist any event which either (A) makes untrue or incorrect in any material respect any statement or information contained in the Preliminary Official Statement or the Official Statement, or (B) is not reflected in the Preliminary Official Statement or the Official Statement but should be reflected therein in order to make the statements and information contained therein, in the light of the circumstances under which they are made, not misleading and the effect of such event materially adversely impacts the marketability of the Bonds; or (4) the United States shall be engaged in any conflict or hostilities which have resulted in a declaration of war, a national emergency or any other national calamity, or there shall have occurred any other conflict or outbreak of hostilities or an escalation of any existing conflict or hostilities, the effect of such outbreak or escalation on the financial markets of the United States being such as, in the reasonable belief of the Representative, materially and adversely affects the ability of the Representative to market or sell the Bonds; or (5) there shall be in force a general suspension of trading on the New York Stock Exchange or minimum or maximum prices for trading shall have been fixed and be in force, or maximum ranges for prices for securities shall have been required and be in force on the New York Stock Exchange, whether by virtue of a determination by the New York Stock Exchange or by order of the Securities and Exchange Commission or any other governmental authority having jurisdiction; or (6) a general banking moratorium shall have been declared by Federal, New York or Pennsylvania authorities having jurisdiction and be in force; or (7) a stop order, ruling, regulation or official statement by the Securities and Exchange Commission shall be issued or made to the effect that the issuance, offering or sale of the Bonds, or obligations of the general character of the Bonds as contemplated hereby, is in violation of any provision of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or the Trust Indenture Act of 1939, as amended; or (8) a supplement or amendment shall have been made to the Official Statement subsequent to the date hereof which, in the reasonable judgment of the Representative, materially adversely affects the marketability of the Bonds or market prices thereof. (c) At the Closing, the Representative shall receive the following documents: 1. Executed counterparts of the Company Financing Documents and the Issuer Financing Documents; 2. A Certified copy of the Bond Resolution; 3. The approving opinion of Ballard Spahr Andrews & Ingersoll, Bond Counsel, as to the Bonds, addressed to the Issuer and the Representative in the form attached as Exhibit D to the Official Statement with such changes as are satisfactory to the Representative; 4. A supplemental opinion or opinions of Bond Counsel addressed to the Company and the Representative, in form satisfactory to the Representative, to the effect that: (A) the Bonds are exempt securities within the meaning of Section 3(a)(2) of the Securities Act of 1933, and it is not necessary to qualify the Indenture under the Trust Indenture Act of 1939, as amended, (B) each of the Indenture and the Agreement has been duly authorized, executed, and delivered and constitutes the valid and binding obligation of the Issuer, and is enforceable in accordance with its terms, subject to limitations on creditors' rights generally, (C) the Purchase Agreement has been duly authorized, executed, and delivered by the Issuer and constitutes the legal, valid, and binding obligation of the Issuer, enforceable in accordance with its terms, (D) the descriptions, statements and summaries of provisions of the Bonds, the Bond Resolution, the Indenture, and the Agreement contained in the Official Statement under the headings "INTRODUCTORY STATEMENT", "THE 1994 BONDS", "SECURITY FOR THE 1994 BONDS", and "APPENDIX C -Summary of Certain Provisions of the Indenture, the Agreement, The 1994 First Mortgage Bonds and the Mortgage" fairly summarize the provisions of the documents or matters of law intended to be summarized therein as of the date of the Official Statement, and the descriptions and summaries contained on the cover page and under the heading "TAX EXEMPTION" accurately reflect the opinion of such counsel with respect to the matters stated therein relating to Pennsylvania and Federal tax law as applicable to the Bonds, and (E) all conditions precedent to the defeasance of the 1987 Bonds have been satisfied; 5. Certificates dated the date of Closing, signed by the Chairman or Vice Chairman of the Issuer and by an authorized officer of the Company, sufficient in form and substance to show to the satisfaction of Bond Counsel and the Representative that the Bonds will not be arbitrage bonds under Section 148 of the Code and the regulations thereunder; 6. A certificate, dated the day of Closing, in form and substance satisfactory to Bond Counsel and the Representative, signed by the chief financial officer of the Company in which such officer states that (A) the representations and warranties of the Company in this Purchase Agreement are true and correct in all material respects as of the date of Closing; (B) the Preliminary Official Statement and the Official Statement, as of their respective dates, insofar as they relate to the Company do not 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 not misleading; and (C) no event affecting the Company occurred since the date of the Purchase Agreement which is required to be disclosed in the Official Statement in order to make the statements and information therein not misleading in any material respect; 7. A certificate or certificates, dated the date of Closing, signed by the Chairman, Vice Chairman, or Secretary of the Issuer and in form and substance satisfactory to Bond Counsel and the Representative in which such official, to the best of his knowledge, states that: (A) the representations of the Issuer herein contained are true and correct as of the date of the Closing, and the Official Statement insofar as it contains information with respect to the Issuer, does not include 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 light of the circumstances in which they were made, not misleading; (B) no litigation is pending or, to the knowledge of the Issuer after consultation with its counsel, threatened (i) to restrain or enjoin the issuance or delivery of the Bonds, the application of the proceeds thereof, or the payment, collection or application of revenues pursuant to the Indenture and the Agreement, (ii) in any way contesting or affecting any authority for, or the validity of the Bonds, the Indenture, the Agreement, this Purchase Agreement, the application of the proceeds of the Bonds or the payment, collection or application of revenues, pursuant to the Indenture and the Agreement, or (iii) in any way contesting the right and power of the Issuer to act as described in the Bond Resolution and the Indenture or the Agreement; and (C) to the knowledge of the Issuer, no event affecting the Issuer has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purposes for which it is to be used, or which it is necessary to disclose therein in order to make the statements and information therein with respect to the Issuer not misleading in any material respect; 8. An opinion of LeBoeuf, Lamb, Greene & MacRae, special counsel for the Company, addressed to the Trustee, the Issuer and the Representative, dated the date of Closing, substantially in the form of Exhibit D hereto; 9. An opinion and supplemental letter of Hughes Hubbard & Reed, counsel for the Company, addressed to the Trustee, the Issuer and the Representative, dated the date of Closing, substantially in the form of Exhibit E hereto; 10. An opinion of Hourigan, Kluger, Spohrer & Quinn, Solicitors for the Issuer, addressed to the Representative, the Company, and Bond Counsel, dated the date of Closing, to the effect that: (A) the Issuer has been duly incorporated and is validly existing as an instrumentality of the Commonwealth of Pennsylvania, is in good standing under the laws of the Commonwealth of Pennsylvania and has the full power and authority to enter into the Indenture and the Agreement and to issue and sell the Bonds; (B) the Purchase Agreement, the Indenture, and the Agreement have been duly and validly authorized, executed and delivered by the Issuer and are valid and binding obligations of the Issuer enforceable in accordance with their respective terms except as enforceability may be limited by applicable bankruptcy, reorganization, insolvency, or other laws or equitable principles affecting creditors' rights generally; (C) the Bonds have been duly and validly authorized, executed, issued and delivered by the Issuer and constitute the legal, valid and binding limited obligations of the Issuer, enforceable in accordance with their respective terms except as enforceability may be limited by applicable bankruptcy, reorganization, insolvency or other laws or equitable principles affecting creditors' rights generally; (D) to the knowledge of such counsel, there is no action, suit, proceeding or investigation, at law or in equity, before or by any court, public board or body, pending or threatened against or affecting the Issuer, or which the Issuer is or may be a part or of which property of the Issuer is or may be the subject, wherein an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by the Official Statement or the validity of the Bonds, the Indenture, the Agreement, or the Purchase Agreement, or which is required to be set forth in the Official Statement; (E) the execution and delivery of, the consummation of the trans- actions contemplated by, and the fulfillment and compliance with the terms of, the Bonds, the Indenture, the Agreement, and the Purchase Agreement, do not and will not conflict with or constitute on the part of the Issuer a breach of or default under any indenture, mortgage, deed of trust or other instrument to which the Issuer is a party or by which it is or may be bound of which we have knowledge after due inquiry, or any existing law, regulation, administrative or court order or decree to which the Issuer is a party or by which it is or may be subject; (F) the Official Statement has been duly authorized, approved, signed and delivered by the Issuer; (G) the Bond Resolution was duly adopted by the affirmative vote of a majority of the entire Board of the Issuer at a public meeting duly called and held in accordance with all applicable laws and the By-Laws of the Issuer and has not been amended, modified or rescinded and remains in full force and effect as of this date; (H) based upon their participation in the preparation of the Preliminary Official Statement and the Official Statement, including conferences and telephone conferences, the information in the Preliminary Official Statement and the Official Statement insofar as it pertains to the Issuer is true and correct in all material respects and does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (I) such other matters as the Representative may reasonably request prior to the Closing; 11. A letter from Arthur Andersen LLP addressed to the Representative and dated the date of Closing reaffirming the matters set forth in Exhibit C hereto, but with the procedures described being carried out as of a date not more than five business days prior to the date of Closing, and references to the Preliminary Official Statement shall be updated to also include the Official Statement; 12. Evidence that the ratings on the Bonds of "AAA" by Standard and Poor's Corporation, "Aaa" by Moody's Investors Service and "AAA" of Fitch Investors Service, Inc. have not been reduced; 13. Pennsylvania Public Utility Commission Securities Certificate and Order for the 1994 First Mortgage Bonds; 14. Department of Commerce Notification; 15. An Information Return for Tax-Exempt Private Activity Bond Issues (IRS Form 8038), in a form satisfactory to Bond Counsel for filing, executed by the Issuer; 16. Written calculations demonstrating that the money deposited under the Refunding Agreement on the Closing Date is sufficient to redeem the 1987 Bonds on December 1, 1994; 17. A certified copy of the municipal bond insurance policy of AMBAC in standard form and substance, insuring the timely payment of principal of and interest on the Bonds accompanied by: (i) a certificate signed by an authorized officer of AMBAC, or an opinion of counsel to AMBAC, to the effect that the information relating to AMBAC appearing under the caption "Municipal Bond Insurance" in the Official Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading; and (ii) an opinion of counsel to AMBAC to the effect that: (A) AMBAC is duly organized and validly existing under the laws of its state of incorporation and is qualified to do business in the Commonwealth of Pennsylvania and (B) the policy has been duly and validly issued by AMBAC and constitutes the legal, valid and binding obligation of AMBAC enforceable in accordance with its terms except as limited by bankruptcy, insolvency, moratorium and other similar laws or equitable principles affecting creditors' rights generally; 18. A fully executed counterpart of the Letter of Representations from the Issuer and the Trustee to DTC with respect to the Bonds, in form and substance satisfactory to the Representative and its counsel, which Letter of Representations shall have been duly accepted by DTC as evidenced by its execution thereof; 19. Evidence of the due filing in all requisite filing offices of: (i) The Mortgage (ii) Financing Statements on Form UCC-l naming the Issuer as debtor and the Trustee as secured party relative to the security interests created under the Indenture with respect to the Bonds; and (iii) Financing Statements on Form UCC-1 naming the Company as debtor and the Mortgage Trustee as secured party, relative to the security interests created under the Twenty- Ninth Supplemental Indenture; 20. Such additional certificates or documents as the Representative or its counsel or Bond Counsel may reasonably request to evidence the authority of the Trustee to act under the Indenture and the Refunding Agreement; and 21. Such additional opinions, certificates, or documentation as the Representative or Bond Counsel may reasonably request. 7. Expenses. All costs and expenses incident to the authorization, preparation, issuance, sale and delivery of the Bonds including, without limitation, costs of the preparation, printing, distribution, execution, delivery and recording or filing, as the case may be, of the Preliminary Official Statement and the Official Statement, together with any amendments and supplements thereto, and the Indenture, the Bonds, this Purchase Agreement, the Agreement and all other documents, the fees and disbursements of Bond Counsel, counsel to the Company, counsel to the Trustee, counsel to the Issuer and firms of accountants and other consultants and advisors retained by the Issuer or the Company in connection with this transaction, all rating agency fees, the premium for the bond insurance policy issued by AMBAC, and all fees and expenses of the Trustee, shall be the obligation of the Company or shall be paid from the proceeds of the issuance and sale of the Bonds or otherwise. The Underwriters shall pay the cost of qualifying the Bonds for sale under the Blue Sky or securities laws of any jurisdictions and all advertising costs and other expenses and all costs and expenses of its counsel in connection with the public offering of the Bonds and the transactions contemplated thereby. 8. Indemnification and Contribution. (a) The Company will indemnify and hold harmless the Issuer and its members, officers and employees and each Underwriter and each person, if any, who controls (within the meaning of Section 15 of the Securities Act of 1933, as amended (the "Act") or Section 20 of the Exchange Act) any Underwriter, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified person may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Official Statement or the Official Statement or any amendment or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Company agrees to reimburse such indemnified person for any legal or other expenses reasonably incurred by such indemnified person in connection with investigating, preparing or defending any such loss, claim, damage, liability, or action as such expenses are incurred; provided, however, the Company will not be liable in any such case to the extent that any such loss, claim, damages or liability referred to in this sentence (x) arises out of or is based upon an untrue statement or omission or alleged untrue statement or omission based upon information pertaining to the Issuer, (y) arises out of or is based upon an untrue statement or omission or alleged untrue statement or omission made in the Preliminary Official Statement or the Official Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Underwriter expressly for use in the Preliminary Official Statement, the Official Statement or any amendment or supplement thereto, or (z) arises out of or is based upon the fact that such Underwriter sold Bonds to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Official Statement (excluding documents incorporated by reference), or of the Official Statement as then amended or supplemented (excluding documents incorporated by reference), in any case where such delivery is required by the Municipal Securities Rulemaking Board or by Rule 15c2-12 if the Company has previously furnished copies thereof to such Underwriter and the loss, claim, damage, liability or expense of such Underwriter results from an untrue statement contained in or the omission of a material fact from the Preliminary Official Statement which was corrected in the Official Statement (or the Official Statement as amended or supplemented). This indemnity agreement will be in addition to any liability or obligation which the Company may otherwise have to the persons referred to above in this Paragraph 8(a). (b) Each Underwriter will indemnify and hold harmless (i) the Issuer and its members, officers and employees and (ii) the Company and each person, if any, who controls the Company within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, in each case from and against any and all losses, claims, damages or liabilities to which such indemnified person may be subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Official Statement or the Official Statement (as amended or supplemented if the Company or the Issuer shall have furnished any amendments or supplements thereto), or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent that such untrue statement or omission or alleged untrue statement or omission was made in the Preliminary Official Statement, the Official Statement or any amendment or supplement thereto in reliance upon or in conformity with written information furnished to the indemnified person by or on behalf of such Underwriter expressly for use therein, and the Underwriters agree to reimburse such indemnified person for any legal or other expenses reasonably incurred by such indemnified person in connection with investigating, preparing to defend or defending any such action or claim. (c) Promptly after receipt by an indemnified person under subsection (a) or (b) above of notice of the assertion of any claim or the commencement of any action, such indemnified person or its affiliate that is a party to this Purchase Agreement shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the assertion or the commencement thereof; but the omission to so notify the indemnifying party (i) shall not relieve it from any liability which it may have to any indemnified person under such subsection unless and to the extent such failure prejudices the indemnifying party of substantial rights or defenses; and (ii) shall not, in any event, relieve the indemnifying party from any obligations to any indemnified person other than the indemnification obligations under such subsection. In case any such action shall be brought against any indemnified person or its affiliate that is a party to this Purchase Agreement, such indemnified person shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified person in an action, the indemnified person shall have the right to employ separate counsel (including local counsel) and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if and only if (i) the use of counsel chosen by the indemnifying party to represent the indemnified person would present such counsel with a conflict of interest, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified person to represent the indemnified person within a reasonable time after notice of the institution of such action, or (iii) the indemnifying party shall authorize the indemnified person to employ separate counsel at the expense of the indemnifying party. It is understood that the indemnifying party shall, in connection with any such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys together with appropriate local counsel at any time from all indemnified persons not having actual differing interests with any other indemnified person. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified person from all liability arising out of such claim, action, suit or proceeding. (d) If for any reason whatsoever (other than because and to the extent that any of the following are applicable: (A) the exception to Paragraph 8(a) provided in the first sentence of Paragraph 8(a) above, or (B) the specific reasons set forth in the first sentence of Paragraph 8(c) above pursuant to which an indemnified person would not be entitled to indemnification pursuant to Paragraph 8(a) above), the indemnification provided for in Paragraph 8(a) or (b) above is unavailable to an indemnified person referred to therein in respect of any losses, claims, damages, liabilities, judgments or other expenses covered by Paragraph 8(a) or (b), then each indemnifying party, in lieu of indemnifying such indemnified person, shall contribute to the amount paid or payable by such indemnified person as a result of such losses, claims, damages, liabilities, judgments and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Bonds, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the actions, statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the maximum total proceeds to be received, or the actual proceeds received, by the Company from the sale of the Bonds (before deducting expenses), whether or not consummated, bear to the total fee received by the Underwriters pursuant to the last paragraph of section 1 of this Purchase Agreement (the "Underwriting Fee"). The relative fault of the Company on the one hand and the Underwriter on the other shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the Underwriter, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to paragraph 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified person as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitation set forth above, any legal or other expenses reasonably incurred by such indemnified person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of Paragraph 8(d), in no event shall any Underwriter be required to contribute any amount in excess of the amount by which one-half of the Underwriting Fee exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Paragraph 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to Paragraph 8(d) are several on a co- equal (i.e., 50-50) basis. 9. Survival of Representations, Warranties and Agreements. All representations, warranties and agreements of the Issuer and the Company, and all agreements of the Underwriters, set forth in this Agreement shall remain operative and in full force and effect regardless of (a) any investigation, or statement as to the results thereof, made by or on behalf of the Underwriters (b) delivery of and payment for the Bonds, and (c) any termination of this Agreement. 10. Information Furnished By Underwriters. The Company acknowledges that the following information constitutes the only written information furnished by or on behalf of any Underwriter expressly for inclusion in the Preliminary Official Statement or the Official Statement (or any supplement thereto): (i) the statements set forth in capital letters on the inside front cover regarding stabilization, and (ii) the paragraph of text on page 13 under the caption "Underwriting." 11. Determination of End of Underwriting Period. (a) For purposes of this Agreement, the "End of the Underwriting Period" shall mean the earlier of (i) the Closing Date, unless the Issuer and the Company have each been notified to the contrary by the Representative on or prior to the Closing Date, or (ii) the date on which the "end of the underwriting period" for the Bonds has occurred under Rule 15c2-12; provided, however, that the Issuer and the Company shall be entitled to treat as the End of the Underwriting Period the date specified in the notification of the Representative required under subparagraph (c) of this Paragraph 11. (b) The Representative shall provide to the Issuer and the Company, upon request, such information as may be reasonably required by the Issuer or the Company in order to determine whether the "end of the underwriting period" for the Bonds has occurred under Rule 15c2-12 with respect to the unsold balance of Bonds that are held by any Underwriter for sale to the public within the meaning of Rule 15c2-12. (c) As soon as practicable following receipt thereof, the Representative shall deliver the Official Statement, and any supplement or amendment thereto, to a nationally recognized municipal securities information repository approved by the Commission. 12. Section Headings; Execution in Counterparts. Section headings in this Agreement are inserted for convenience of reference only and shall not be considered a part of, or used in the interpretation of any provisions of, this Agreement. This Agreement may be executed and accepted in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute or accept this Agreement by signing any such counterpart. 13. Notice and Other Actions. All notices, requests, demands and formal actions hereunder shall be in writing and mailed by registered or certified mail, postage prepaid, or delivered personally or by any recognized overnight delivery service with charges prepaid, to the following address: The Issuer: Luzerne County Industrial Development Authority 54 West Union Street Wilkes-Barre, PA 18701 Attention: Secretary with a copy to: Hourigan, Kluger, Spohrer & Quinn, P.C. 700 Mellon Bank Center 8 West Market Street Wilkes-Barre, PA 18701-1861 The Representative: Wheat First Butcher Singer 600 Linden Street Scranton, PA 18503 Attention: Kevin Finley The Company: Pennsylvania Gas and Water Company Wilkes-Barre Center 39 Public Square Wilkes-Barre, PA 18711-1601 Attention: Secretary 14. Parties In Interest. This Agreement is made solely for the benefit of the Underwriters, the Company, the Issuer and their respective successors and assigns, and no other person or entity shall acquire or have any rights under or by virtue of this Agreement. The terms "successors" and "assigns" shall not include any purchaser of Bonds from or through any Underwriter merely because of such purchase. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 16. Severability. The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdictions such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 17. Time of the Essence. Time shall be of the essence in this Agreement. 18. Limitation of Issuer's Liability. Notwithstanding anything to the contrary herein or in the Bonds, the liability of the Issuer under this Purchase Agreement or any other instrument, certificate or agreement executed in connection with the issuance of the Bonds shall be and hereby is limited for all purposes to the Issuer's interest in the 1994 First Mortgage Bonds and the Agreement. In taking any action under this Purchase Agreement or any other instrument, certificate or agreement executed in connection with the issuance of the Bonds, the Issuer shall be entitled to rely upon written directions of the Company and counsel of nationally recognized standing in matters pertaining to bonds issued by states and their political subdivisions and shall be entitled to payment from the Company of all reasonable costs, fees and expenses incurred or imposed by the Issuer in connection with the Bonds. Very truly yours, WHEAT FIRST BUTCHER SINGER By: _ Title: ACCEPTED AND AGREED as of the date first above written: LUZERNE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY By: _ Authorized Officer PENNSYLVANIA GAS AND WATER COMPANY By: _ Vice President, Finance EXHIBIT A DESCRIPTION OF CERTAIN PROVISIONS OF BONDS Maturity Date: December 1, 2017 Interest Rate: 7.00% Redemption Provisions: The Bonds are subject to redemption as follows: Optional Redemption. The Bonds are subject to redemption prior to maturity, at the option of the Issuer, upon direction of the Company, on any date on or after December 1, 2004, in whole, or in part by lot, upon payment of the applicable redemption price shown below (such price being expressed as a percentage of the principal amount of Bonds to be redeemed), plus interest accrued to the date fixed for redemption. [CAPTION] Redemption Period Redemption Price (both dates inclusive) [S] [C] December 1, 2004 through November 30, 2005 102% December 1, 2005 through November 30, 2006 101% December 1, 2006 and thereafter 100% Extraordinary Optional Redemption. The Bonds are subject to redemption at any time prior to maturity at the option of the Authority, upon the direction of the Company, in whole, at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date fixed for redemption, if any of the following events shall have occurred: (i) the damage or destruction of all or substantially all of the Project Facilities to such extent that, in the reasonable opinion of the Company, the repair and restoration thereof would not be economical; or (ii) the condemnation of all or substantially all of the Project Facilities or the taking by condemnation of any part, use or control of the Project Facilities so as to render them unsatisfactory to the Company for their intended use; or (iii) in the Company's reasonable opinion, (1) unreasonable burdens or excess liabilities shall have been imposed upon the Company with respect to the Project Facilities or the operation thereof, including, but without being limited to, federal, state or other ad valorem, property, income or other taxes not being imposed on the date of the Agreement other than ad valorem taxes presently levied upon privately owned property used for the same general purpose as the Project Facilities, or (2) the continued operation of the Project Facilities is impractical, uneconomical or undesirable for any reason; or (iv) as a result of any change in the Constitution of Pennsylvania or the Constitution of the United States of America, or by legislative or administrative body (whether state or federal), or by a final decree, a judgment or order of any court or administrative body (whether state or federal), after any contest thereof by the Company in good faith, the Indenture, the Agreement or the Bonds shall become void or unenforceable or impossible of performance in accordance with the intent and purposes of the Issuer and the Company as expressed in the Agreement. Any such redemption shall be on any date within 180 days following the occurrence of one of the events listed above. Special Mandatory Redemption. The Bonds are subject to mandatory redemption in whole at any time at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the date fixed for redemption, within 180 days after the occurrence of any "final determination" that, as a result of a failure by the Company to observe any covenant, agreement or representation in the Agreement, the interest payable on the Bonds or any of them is includable for federal income tax purposes in the gross income of any owner of a Bond, other than an owner who is a "substantial user" of the Project Facilities or a "related person" as provided in Section 147(a) of the Internal Revenue Code of 1986, as amended (the "Code"). As used in the preceding sentence, a "final determination" shall be deemed to have occurred upon the issuance to that effect of a published or private ruling or technical advice by the Internal Revenue Service or a judicial decision in a proceeding by any court of competent jurisdiction in the United States (from which ruling, advice or decision no further right of appeal exists), in all cases in which the Company has participated or been a party or has been given an opportunity to participate and has failed to do so; provided, however, that if the final determination of taxability shall include the determination that the interest on an amount less than all of the Bonds outstanding is includable in the gross income of the owners thereof, and the loss of tax exemption can be cured by a partial redemption of the Bonds, then only such amount of the Bonds shall be redeemed (at the redemption price set forth above, together with accrued interest to the date fixed for redemption); and provided further, however, that no decree or judgment by any court or action by the Internal Revenue Service shall be considered a final determination unless (i) the Issuer has given the Company and the Trustee prompt written notice of the commencement of such action or judicial proceeding which resulted in such decree or judgment, and (ii) the Issuer offers the Company, at the Company's expense, the opportunity to control the defense thereof. Notwithstanding the foregoing, if the lien of the Indenture is discharged prior to the occurrence of a final determination, the Bonds will not be redeemed as described above. EXHIBIT B STATEMENT OF ESTIMATED SOURCES AND USES As set forth in the Official Statement EXHIBIT C LETTER FROM ARTHUR ANDERSEN LLP Pursuant to Paragraph 5(d) of the Purchase Agreement, Arthur Andersen LLP shall furnish a letter to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Securities Act of 1933, as amended, and the applicable published rules and regulations thereunder; (ii) In their opinion, the financial statements and any supplementary financial information and schedules audited by them and included or incorporated by reference in the Preliminary Official Statement or the Official Statement comply as to form in all material respects with the applicable accounting requirements of the Act or the Exchange Act, as applicable, and the published rules and regulations thereunder; (iii) The unaudited selected financial information with respect to the results of operations and financial position of the Company for the five most recent fiscal years included in the Preliminary Official Statement and the Official Statement agrees with the corresponding amounts in the audited financial statements for such five fiscal years which were included or incorporated by reference in the Company's Annual Reports on Form 10-K for such fiscal years; (iv) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest interim financial statements of the Company and its subsidiaries, a reading of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included or incorporated by reference in the Preliminary Official Statement and the Official Statement, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the unaudited condensed statements of income, balance sheets and statements of cash flows included or incorporated by reference in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Preliminary Official Statement and the Official Statement do not comply as to form in all material respects with the applicable accounting requirements of the Securities Exchange Act of 1934, as amended, as it applies to Form 10-Q and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with the basis for the audited statements of income, balance sheets and statements of cash flows included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; (B) any other unaudited income statement data and balance sheet items included in the Preliminary Official Statement and the Official Statement do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited financial statements included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; (C) the unaudited financial statements which were not included in the Preliminary Official Statement and the Official Statement but from which were derived the unaudited condensed financial statements referred to in clause (A) and any unaudited income statement data and balance sheet items included in the Preliminary Official Statement and the Official Statement and referred to in clause (B) were not determined on a basis substantially consistent with the basis for the audited financial statements included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; (D) any unaudited pro forma condensed financial statements included or incorporated by reference in the Preliminary Official Statement and the Official Statement do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act of 1933, as amended, and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the capital stock or any increase in the long- term debt of the Company, or any decreases in net current assets or net assets or other items specified by the Underwriters, or any increases in any items specified by the Underwriters, in each case as compared with amounts shown in the last balance sheet included or incorporated by reference in the Preliminary Official Statement and the Official Statement, except in each case for changes, increases or decreases which the Preliminary Official Statement and the Official Statement disclose have occurred or may occur or which are described in such letter; and (F) for the period from the date of latest financial statements included or incorporated by reference in the Preliminary Official Statement and the Official Statement to the specified date referred to in clause (E) there were any decreases in total operating revenues or the total or per share amounts of net income or other items specified by the Underwriters, or any increases in any items specified by the Underwriters, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Underwriters, except in each case for increases or decreases which the Preliminary Official Statement and the Official statement disclose have occurred or may occur or which are described in such letter; and (v) In addition to the examination referred to in their report(s) included or incorporated by reference in the Preliminary Official Statement and the Official Statement and the limited procedures, reading of minute books, inquiries and other procedures referred to in paragraphs (iii) and (iv) above, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Underwriters which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Preliminary Official Statement and the Official Statement (excluding documents incorporated by reference) and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. EXHIBIT D FORM OF OPINION OF LE BOEUF, LAMB, GREENE & MAC RAE [Date of Closing] Ladies and Gentlemen: We have acted as special counsel to Pennsylvania Gas and Water Company, a Pennsylvania corporation (the "Company"), in connection with the issuance and sale by the Luzerne County Industrial Development Authority (the "Authority") of $30,000,000 aggregate principal amount of its Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) (the "Bonds"). The Bonds are being sold to the underwriters (the "Underwriters") named in the Bond Purchase Agreement dated November 1, 1994 (the "Bond Purchase Agreement") among the Company, the Authority and the Underwriters. This opinion is being furnished to you in accordance with Paragraph 6(c)(8) of the Bond Purchase Agreement. Capitalized terms not otherwise defined herein shall have the corresponding meanings given them (i) first, in order of priority, in the Bond Purchase Agreement and, if not defined therein, (ii) in the Official Statement dated November 1, 1994, relating to the Bonds (the "Official Statement"). In such capacity, we have participated in the preparation of portions of (i) the Preliminary Official Statement dated October 19, 1994 (the "Preliminary Official Statement") relating to the Bonds, and (ii) the Official Statement. We have also represented the Company before the Pennsylvania Public Utility Commission ("PPUC"), the Pennsylvania Department of Environmental Resources ("DER") and in other regulatory matters. PPUC, DER and the United States Environmental Protection Agency are collectively referred to as the "Regulatory Authorities". In rendering the opinions set forth below, we also have examined such certificates of public officials, corporate records and documents and other instruments, and have made such other investigations, as we have deemed necessary in connection with the opinions hereinafter set forth. As to certain issues of fact material to such opinions, we have relied upon certificates of officers of the Company and upon the representations of the Company contained in the Bond Purchase Agreement. We have assumed that the documents we have reviewed in connection with this opinion which purport to have been executed by parties other than the Company or Pennsylvania Enterprises, Inc., a Pennsylvania corporation, which is the Company's parent ("PEI"), or the directors and officers of the Company or PEI have been duly executed by such parties and that such parties had all requisite power to enter into and perform all obligations thereunder, that execution and delivery thereof have been duly authorized by all requisite action and that the subject instruments are valid and binding upon said parties. We have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures thereon, and the legal capacity of natural persons executing such documents and the conformity to originals of all documents submitted to us as copies and the authenticity of such originals. Based upon the foregoing, and subject to the limitations contained herein, we are of the opinion that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Pennsylvania, with full corporate power and authority to own, lease and operate its properties and conduct its business as described in the Preliminary Official Statement and the Official Statement, to issue the 1994 First Mortgage Bonds, to execute and deliver the Bond Purchase Agreement, the Agreement, the Refunding Agreement, the Twenty-Ninth Supplemental Mortgage Indenture and all other documents being executed and delivered by it at the Closing and to perform its obligations thereunder. (ii) The Bond Purchase Agreement, the Agreement, the Refunding Agreement and the Twenty-Ninth Supplemental Mortgage Indenture have been duly authorized, executed and delivered by the Company and are valid, legally binding and enforceable instruments in accordance with their terms, except (a) as rights of indemnity or contribution are limited by public policy or by law, (b) as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally, and (c) as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (iii) The 1994 First Mortgage Bonds have been duly authorized, issued and executed by the Company and are the legal, valid and binding obligations of the Company, enforceable in accordance with their terms, and are entitled to the benefits and security of the Mortgage in accordance with its terms and are secured thereby equally and ratably with all first mortgage bonds of the Company outstanding under the Mortgage, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (iv) The Company has filed with the PPUC, pursuant to the provisions of Chapter 19 of the Pennsylvania Public Utility Code, a securities certificate relating to the issuance and sale of the 1994 First Mortgage Bonds, and such securities certificate has been registered by Order of the PPUC dated August 18, 1994, which Order is in effect as of the date of this opinion and is not subject to any appeal or modification which could affect the validity or terms of the 1994 First Mortgage Bonds. To the extent required by applicable Pennsylvania law, all issued and outstanding equity and debt securities of the Company have been issued pursuant to valid security certificates registered by the PPUC. (v) Except for the Order of the PPUC referred to in paragraph (iv) above, no approval by any other governmental authorities, federal, state or otherwise, is required in connection with the issue and sale of the 1994 First Mortgage Bonds and the execution and delivery of the Agreement, the Bond Purchase Agreement, the Refunding Agreement and the Twenty-Ninth Supplemental Mortgage Indenture, except as may be required under state or foreign securities or Blue Sky laws and regulations, as to which no opinion is being rendered. (vi) The Company possesses, with minor exceptions or qualifications, such valid franchises, water rights, licenses or permits, free from unduly burdensome restrictions and of indeterminate duration, as are usual for the adequate conduct of the business of the Company in the Commonwealth of Pennsylvania. (vii) The Twenty-Ninth Supplemental Mortgage Indenture and a UCC-l financing statement in respect thereof have been filed for recordation in such manner (including, with respect to the financing statement, the notation on such financing statement that the debtor is a transmitting utility) and in such places as is required by law in order to establish, preserve and protect the lien of the Mortgage on all real estate and fixed property of the Company (excluding easements and other similar rights) described in the Mortgage as subject to the lien thereof, except as described in paragraph (ix) below. (viii) Under existing law, no recording, registration, filing, re-recording, re-registration or re- filing of the Mortgage, any indenture supplemental thereto, any UCC-l financing statement or any other document is necessary to maintain the lien of the Mortgage upon any such property now subject to the lien thereof. However, as to real property acquired after September 30, 1994, the lien of the Mortgage will be an equitable lien rather than a legal lien in the absence of recordation of a supplemental indenture specifically conveying such property. (ix) The Mortgage, as security for the Company's obligations with respect to the 1994 First Mortgage Bonds, creates a valid first lien on all real estate and fixed property (excluding easements and other similar rights) specifically described therein as subject to the lien thereof other than property released from the Mortgage in accordance with the terms thereof or parcels recently sold for which a release has not yet been obtained but which are not material, individually or in the aggregate, subject only to (a) permitted encumbrances as defined in the Mortgage, (b) other liens permitted under the Mortgage, (c) liens, encumbrances and title defects not discoverable by a diligent search of the public land records and judgments indices, and (d) minor defects and encumbrances customarily found in the case of properties of like size and character and defects in rights-of-way and easements existing at the time of acquisition thereof by the Company, none of which impair the use of such properties by the Company. However, as to real property acquired after September 30, 1994, the lien of the Mortgage will be an equitable lien rather than a legal lien in the absence of recordation of a supplemental indenture specifically conveying such property. (x) Neither the Company nor PEI is in violation of any provision of their respective Articles of Incorporation or By-Laws or, to our knowledge after due inquiry, in violation of or default in the performance or observance of any obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which any of them is a party or by which any of them or their properties may be bound, which has been filed with or submitted to any Regulatory Authority or the Securities and Exchange Commission ("Filed Documents") (except for such defaults that would not have a material adverse effect on the financial condition or operations of the Company and its subsidiary taken as a whole and that would not affect the validity of the Bond Purchase Agreement, the Agreement, the Twenty-Ninth Supplemental Mortgage Indenture, the 1994 First Mortgage Bonds and the Refunding Agreement). Without limitation of the foregoing, to our knowledge after due inquiry, (a) no event has occurred which, with the giving of notice or lapse of time or both, would be an event of default under any Filed Documents governing indebtedness of the Company or PEI, and (b) the execution and delivery of the Bond Purchase Agreement, the Refunding Agreement, the Twenty-Ninth Supplemental Mortgage Indenture and the Agreement did not, and the issuance of the Bonds and the 1994 First Mortgage Bonds, the compliance by the Company with all of the terms and provisions of the Bond Purchase Agreement, the Agreement, the Twenty-Ninth Supplemental Mortgage Indenture and the Refunding Agreement, and the consummation of the transactions therein contemplated will not, conflict with or constitute a breach of, or default under, (except for such conflicts, breaches, and defaults that would not have a material adverse effect on the financial condition or operations of the Company and its subsidiary taken as a whole and that would not affect the validity of the Bond Purchase Agreement, the Agreement, the Twenty-Ninth Supplemental Mortgage Indenture, the 1994 First Mortgage Bonds and the Refunding Agreement), or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or PEI pursuant to any Filed Documents to which the Company or PEI is a party or by which it or any of them may be bound or to which any of the property or assets of the Company or PEI is subject, other than the Mortgage. The issuance of the 1994 First Mortgage Bonds and the Bonds (by the Issuer) does not violate the provisions of the Articles of Incorporation or By-Laws of the Company or PEI. To our knowledge after due inquiry, the issuance of the 1994 First Mortgage Bonds does not violate any law, published rule, regulation administered or order issued by any Regulatory Authority or any Filed Documents. (xi) Except for such exceptions to the following as do not or will not, individually or in the aggregate, have a material adverse effect on the business, financial (or other) conditions, results of operations or prospects of the Company, (a) the Company has such Permits from any Regulatory Authority as are necessary to own its properties and to conduct its business in the manner now being conducted and as described in the Preliminary Official Statement and the Official Statement, (b) to our knowledge after due inquiry the Company has fulfilled and performed all of its obligations with respect to such Permits, and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or result in any other impairment of the rights of the holder of any such Permit, and (c) the Company has not received any notice of proceedings relating to the revocation or modification of any such Permit. To our knowledge after due inquiry, there is no proceeding pending or threatened to be brought before the PPUC against the Company that may cause any Permit material to the operations of the Company to be revoked, withdrawn, canceled, suspended or not renewed. To our knowledge after due inquiry, the Company is in substantial compliance with the provisions of the Pennsylvania Public Utility Code, 66 Pa.C.S.A. subsection 101 et seq., and the rules and regulations of the PPUC thereunder and any applicable orders of the PPUC and with all federal and state drinking water statutes and regulations. (xii) To our knowledge after due inquiry, except as described or referred to in the Preliminary Official Statement and the Official Statement, there is no action, suit or proceeding before or by any court or Regulatory Authority, now pending or threatened, against or affecting the Company which might (i) result in any material adverse change in the condition, financial or otherwise, earnings, affairs or business prospects of the Company, (ii) materially and adversely affect the properties or assets of the Company, or (iii) materially and adversely affect the issuance of the 1994 First Mortgage Bonds. (xiii) Statements in Appendix A of the Preliminary Official Statement and the Official Statement, to the extent such statements describe regulation by, or action of, the Regulatory Authorities, or laws administered by any of them, constitute a fair and accurate summary of the legal matters, terms, documents, proceedings or circumstances referred to therein, and present or summarize fairly in all material respects the information disclosed therein. (xiv) The Company is not subject to the Natural Gas Act, 15 U.S.C. subsection 717 et seq. Where an opinion set forth above is qualified, (i) "to our knowledge," it is intended to be limited to the actual knowledge of the attorneys in this Firm who have participated in our representation of the Company in the issuance of the 1994 First Mortgage Bonds, or our representation of the Company before the PPUC and in other regulatory matters, and (ii) "after due inquiry," it consists solely of a review of the subject matter of the opinions so qualified with appropriate officers of the Company and PEI and a review of such documents or agreements as may have been identified by such officers of the Company and PEI as being necessary to be reviewed in connection with the subject matter of such opinions. The opinions expressed above in paragraphs (vii) and (ix) are based upon searches and opinions made by other or prior counsel, and in our opinion such counsel are, or in the case of prior opinions were, competent and qualified and such opinions are satisfactory in scope and form and may be relied upon. The foregoing opinions are limited to the laws of the United States and the Commonwealth of Pennsylvania. In addition to the matters set forth above, this is to confirm that, although we have not independently verified and are not passing upon or assuming any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Official Statement and the Official Statement (except in respect of the matters covered by paragraph (xiii)) nothing has come to our attention during the course of our representation of the Company in connection with matters relating to the Preliminary Official Statement and the Official Statement and our general representation of the Company in regulatory matters that causes us to believe that the Preliminary Official Statement and the Official Statement (except as to the financial statements, schedules and other financial information contained or incorporated by reference therein or omitted therefrom as to which we express no view) contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The opinions and beliefs expressed herein are for your sole benefit, and may only be relied on by you. With respect to the first sentence of paragraph (x) of the foregoing opinion, as it applies to certain financial covenants, we have only relied upon a certificate of John F. Kell, Jr., Vice President of Finance of the Company and PEI, relating to such financial covenants and have not undertaken any investigation and do not express any opinion as to the calculations required by such financial covenants. We hereby consent to Hughes Hubbard & Reed relying on this opinion as to the matters of Pennsylvania law in giving its opinion to you on the date hereof with respect to matters covered by this opinion. Very truly yours, LeBoeuf, Lamb, Greene & MacRae EXHIBIT E FORM OF OPINION OF HUGHES HUBBARD & REED [Date of Closing] Ladies and Gentlemen: We have acted as special counsel to Pennsylvania Gas and Water Company, a Pennsylvania corporation (the "Company"), in connection with the issuance and sale by the Luzerne County Industrial Development Authority (the "Authority") of $30,000,000 aggregate principal amount of its Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) (the "Bonds"). The Bonds are being sold to underwriters (the "Underwriters") pursuant to the Bond Purchase Agreement dated November 1, 1994 (the "Bond Purchase Agreement") among the Company, the Authority and the Underwriters. This opinion is being furnished to you at the request of the Company pursuant to paragraph (9) of Section 6(c) of the Bond Purchase Agreement. Except as otherwise indicated herein, capitalized terms used in this Opinion Letter are defined as set forth in the Bond Purchase Agreement or the Accord (see below). This Opinion Letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991). As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, and this Opinion Letter should be read in conjunction therewith. The law covered by the opinion set forth below is limited to (a) the Public Utility Holding Company Act of 1935, as amended (the "PUHCA"), and the rules and regulations under such statute, and (b) the Laws of the State of New York. In our capacity as special counsel, we have participated with other counsel in the preparation of (i) the Preliminary Official Statement dated October 19, 1994 (the "Preliminary Official Statement") relating to the Bonds and (ii) the Official Statement. We have also represented the Company or PEI (as defined below) in connection with, or are otherwise generally familiar with, the agreements or instruments listed on Annex A to this opinion (the "Covered Agreements"). In rendering the opinion set forth below, we also have examined such certificates of public officials, corporate records and documents and other instruments, and have made such other investigations as we have deemed necessary in connection with the opinion hereinafter set forth. As to certain issues of fact material to this opinion, we have relied upon certificates of officers of the Company and upon the representations of the Company contained in the Bond Purchase Agreement. We have assumed that the documents we have reviewed in connection with this opinion which purport to have been executed by parties other than the Company or Pennsylvania Enterprises, Inc., a Pennsylvania corporation, which is the Company's parent ("PEI"), or the directors and officers of the Company or PEI, have been duly executed by such parties and that such parties had all requisite power to enter into and perform all obligations thereunder, that execution and delivery thereof has been duly authorized by all requisite action and that such documents are valid and binding upon such parties. We have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures thereon, and the legal capacity of natural persons executing such documents and the conformity to originals of all documents submitted to us as copies. Based upon the foregoing, we are of the opinion that: (i) The terms of the 1994 First Mortgage Bonds and the Mortgage conform, in all material respects, to the description thereof contained in the Preliminary Official Statement and the Official Statement. (ii) To the Opinion Giver's Actual Knowledge, the execution and delivery of the Bond Purchase Agreement, the Agreement, the Refunding Agreement and the Twenty-Ninth Supplemental Mortgage Indenture, and the issuance and sale of the 1994 First Mortgage Bonds, do not constitute a default under any of the Covered Agreements, except for such defaults that would not have a material adverse effect on the financial condition or operations of the Company and its subsidiary taken as a whole and that would not affect the validity of the 1994 First Mortgage Bonds. (iii) PEI is a "holding company" within the meaning of the Public Utility Holding Company Act of 1935 ("PUHCA"), but is exempt, pursuant to Section 3(a) of PUHCA, from all the provisions of PUHCA (except Section 9(a)(2) thereof) and the rules and regulations thereunder, assuming that, (A) no person, except PEI, directly or indirectly owns, controls or holds with power to vote 10% or more of the voting securities (as defined in PUHCA) of the Company, and (B) no person, directly or indirectly, owns, controls or holds with power to vote 10% or more of the voting securities (as defined in the PUHCA) of PEI. With respect to paragraph (ii) of the foregoing opinion as it applies to certain financial covenants, we have relied only upon a certificate of John F. Kell, Jr., Vice President of Finance of the Company and PEI, relating to such financial covenants and have not undertaken any investigation and do not express any opinion as to the calculations required by such financial covenants. The opinion and beliefs expressed herein are for the sole benefit of the Underwriters in connection with the transactions referred to in the Bond Purchase Agreement and may not be relied upon for any other purpose. Very truly yours, HUGHES HUBBARD & REED HUGHES HUBBARD & REED OPINION RIDER _ [Date of Closing] [Addressees] Ladies and Gentlemen: This letter is being delivered to you pursuant to paragraph (9) of Section 6(c) of the Bond Purchase Agreement, dated November 1, 1994 (the "Bond Purchase Agreement") among Pennsylvania Gas and Water Company, Luzerne County Industrial Development Authority and Wheat First Butcher Singer, on behalf of itself and Legg Mason Wood Walker, Incorporated. All capitalized terms not otherwise defined herein shall have the same meaning as in the Bond Purchase Agreement. In connection with the issuance of the Bonds, as special counsel for the Company, we have assumed the truth of information furnished to us and have not independently verified and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Official Statement or the Official Statement except for and to the extent set forth in paragraph (i) of our opinion to you of even date herewith. We have participated in conferences with representatives of the Company, other counsel for the Company, the independent public accountants for the Company, your counsel and your representatives, and bond counsel, at which conferences the contents of the Preliminary Official Statement and the Official Statement were discussed. Our examination of the Preliminary Official Statement and the Official Statement and our participation in such conferences have not led us to believe that, as of their respective dates, the Preliminary Official Statement or the Official Statement (except we express no view as to (x) the financial statements and schedules and exhibits and other financial or statistical data contained therein or omitted therefrom, (y) documents incorporated therein by reference including but not limited to the documents specified under the heading "Incorporation of Certain Documents by Reference" in Appendix A to the Preliminary Official Statement and the Official Statement and (z) information relating to the Issuer, AMBAC or the Underwriters or information contained under the headings "Book-Entry Only System", "Municipal Bond Insurance" or "Tax Exemption" or in Appendix D or Appendix E to the Preliminary Official Statement and the Official Statement) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. We call your attention to the fact that we are not admitted to practice in the Commonwealth of Pennsylvania and we do not have a regulated utility practice. Further, we have not advised PEI, the Company or its subsidiary with respect to their business operations, including federal and state regulation of their gas and water businesses (other than the Public Utility Holding Company Act of 1935), litigation and agreements (other than the Agreements listed on Annex A hereto). This letter is furnished by us solely for the benefit of the Underwriters in connection with the transactions referred to in the Bond Purchase Agreement and may not be relied upon for any other purpose without our prior written consent in each instance. Very truly yours, HUGHES HUBBARD & REED ?? {page \* arabic} {page \* arabic} A-{page \* arabic} A-{page \* arabic} B-{page \* arabic} B-{page \* arabic} C-{page \* arabic} C-{page \* arabic} D-{page \* arabic} D-{page \* arabic} E-{page \* arabic} E-{page \* arabic} EX-10 5 AMENDED AND RESTATED PROJECT FACILITIES AGREEMENT, dated as of November 1, 1994 between LUZERNE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY (the "Authority") and PENNSYLVANIA GAS AND WATER COMPANY (the "Company"). RECITALS Pursuant to a Project Facilities Agreement dated as of December 1, 1987 (the "1987 Agreement"), the Authority issued an aggregate of $30,000,000 of its Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) (the "1987 Bonds") under a Trust Indenture dated as of December 1, 1987 between the Authority and Northeastern Bank of Pennsylvania (now PNC Bank, National Association), as trustee (the "1987 Indenture"). In order to provide for a portion of the costs of refunding the 1987 Bonds, the Company has requested the Authority to issue its Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) (the "1994 Series A Bonds") in the aggregate principal amount of $30,000,000 under the terms of a Trust Indenture (the "1994 Indenture") dated as of the date hereof between the Authority and PNC Bank, National Association, as trustee (the "Trustee"). The Authority will use the proceeds received from the sale of the 1994 Series A Bonds, together with other moneys available for such purpose, to provide for the refunding of the 1987 Bonds and the redemption thereof on December 1, 1994. In connection with the issuance of the 1994 Series A Bonds, the Authority and the Company desire to amend and restate the 1987 Agreement as hereinafter provided. NOW, THEREFORE, in consideration of the foregoing and the undertakings herein set forth and intending to be legally bound, the Authority and the Company hereby agree that, effective upon the defeasance of the 1987 Indenture, as provided for in the Refunding Trust Agreement (the "Refunding Agreement") dated as of November 1, 1994 between the Authority and PNC Bank, National Association, as escrow agent, the 1987 Agreement is amended and restated in full as follows (the 1987 Agreement, as hereby amended and restated, is referred to as the "Agreement"): I. BACKGROUND, REPRESENTATIONS AND FINDINGS 1.1Background. The Authority is a public instrumentality of the Commonwealth of Pennsylvania and a public body corporate and politic organized under the Pennsylvania Industrial and Commercial Development Authority Law (the "Act"). Under the Act, the Authority is authorized to enter into agreements providing for the financing of the acquisition, construction and equipment of development projects (including facilities for the furnishing by a public utility of water which is or will be made available on reasonable demand to members of the general public) and the sale thereof to occupants (including public utilities) for the public purposes of alleviating unemployment, maintaining employment at a high level, and creating and developing business opportunities by the construction, improvement, rehabilitation, revitalization and financing of industrial, specialized and commercial enterprises, including facilities for the furnishing by a public utility of water available on reasonable demand to members of the general public. The Company is a Pennsylvania corporation engaged in, among other things, furnishing water in the Pennsylvania Counties of Lackawanna and Luzerne; and the Company is engaged primarily in activities regulated by the Pennsylvania Public Utility Commission. The Company previously requested the Authority, and the Authority agreed, to issue the 1987 Bonds to finance a project (the "Project") consisting of the payment of a portion of the costs of the acquisition, construction, equipment and sale to the Company of a specialized enterprise project (as defined in the Act) consisting of facilities, located in the Pennsylvania Counties of Luzerne and Lackawanna for the furnishing of water which is available on reasonable demand to members of the general public in portions of the Pennsylvania Counties of Luzerne and Lackawanna which facilities and their costs are generally described in Schedule A to this Agreement (the "Project Facilities"). The Pennsylvania Secretary of Commerce, as required by the Act, approved the financing for the Project on August 26, 1986. The acquisition, construction and equipment of the Project Facilities has been completed prior to the date hereof and title to the Project Facilities has vested in the Company pursuant to the 1987 Agreement. The Company has requested the Authority to enter into this Agreement to provide for the refunding of the 1987 Bonds. The proceeds of the 1987 Bonds issued by the Authority pursuant to the 1987 Agreement were applied to making certain deposits in the funds and accounts created pursuant to the 1987 Indenture. The rates for the water furnished by the Project Facilities have been established or approved by the Pennsylvania Public Utility Commission, for purposes of Section 142(a)(4) of the Internal Revenue Code of 1986, as amended (the "Code"), so that the interest on the 1987 Bonds was not, and the interest on the 1994 Series A Bonds will not be, includible in gross income of the holders thereof for purposes of Federal income tax law. 1.2Company Representations. The Company represents that: (a)It is a corporation duly organized and existing in good standing under Pennsylvania law with full power and legal right to enter into this Agreement and perform its obligations hereunder, and is a corporation engaged primarily in activities regulated by the Pennsylvania Public Utility Commission. The making and performance of this Agreement on the Company's part have been duly authorized by all necessary corporate action in accordance with the provisions of the Restated Articles of Incorporation and By-Laws of the Company, and will not, as of the date of the delivery of the 1994 Series A Bonds, violate or conflict with any governmental rule or regulation applicable to the Company, or violate any instrument by which the Company is bound, other than such violations or conflicts as would not have a material adverse effect on the Company's business or financial position. (b)The Project Facilities constitute a specialized enterprise project consisting of facilities for the furnishing by a utility activity (as defined in the Act) of water available on reasonable demand to members of the general public. (c)The acquisition and construction of the Project Facilities did not commence prior to the approval of the Project by the Pennsylvania Secretary of Commerce. (d)The Project Facilities consist of land or property of a character subject to allowance for depreciation under Section 167 of the Code. (e)The proceeds of the 1987 Bonds did not exceed the Costs of the Project in respect of the Project Facilities as permitted under the Act. (f)The Company has acquired all permits and licenses and has satisfied all other requirements necessary for the acquisition, construction, equipment and operation by the Company of the Project Facilities. 1.3Authority Representations and Findings. The Authority hereby confirms the following representations and findings: (a)It is a public instrumentality of the Commonwealth of Pennsylvania and a public body corporate and politic duly organized under the Act with full power and legal right to enter into this Agreement and perform its obligations hereunder. (b)The making and performance of this Agreement on the Authority's part have been duly authorized by all necessary action, have been and will be done in full compliance with the provisions of the Act and will not violate any instrument to which the Authority is a party. (c)The Company is financially responsible to assume all obligations prescribed by the Authority in this Agreement and by the Act and is qualified to be an occupant for purposes of the Act and is engaged in activities in Pennsylvania requiring substantial capital, and its operations contribute to economic growth and the creation of employment opportunities. (d)The Project promotes the health, safety and general welfare of the people of Pennsylvania and the purposes of the Act by maintaining employment in Pennsylvania and by providing a specialized enterprise project consisting of facilities for the furnishing by a utility activity (as defined in the Act) of water available on reasonable demand to members of the general public. (e)The issuance of the 1987 Bonds was approved by publicly elected local officials as required by the Code, after public hearings held upon at least two weeks public notice. (f)The issuance of the 1994 Series A Bonds and the execution of this Agreement and the 1994 Indenture have been approved by the Authority at a duly constituted meeting. II.COMPLETION OF AND TITLE TO PROJECT FACILITIES 2.1Completion of and Title to Project Facilities. Prior to the date hereof, (i) those portions of the acquisition, construction and equipment of the Project Facilities financed with the proceeds of the 1987 Bonds have been completed, (ii) substantially all of the proceeds of the 1987 Bonds were spent for costs of the Project, and (iii) all of the Authority's right, title and interest in the Project Facilities, together with all of the Authority's rights to support, rights to occupy the ground and air space under and around the Project Facilities and rights of ingress and egress to the Project Facilities have vested in the Company. III. FINANCING THE PROJECT 3.1Issuance of 1994 Series A Bonds. In order to refund the 1987 Bonds, the Authority, at the request of the Company, will issue and sell the 1994 Series A Bonds under the 1994 Indenture. 3.2Deposit of 1994 Series A Bond Proceeds. The proceeds of the 1994 Series A Bonds shall be deposited in the Clearing Fund established under the 1994 Indenture; except that accrued interest on the 1994 Series A Bonds received by the Authority upon the sale of the 1994 Series A Bonds shall be deposited into the Bond Fund established under the 1994 Indenture, and shall be applied to the first interest payments due on the 1994 Series A Bonds. The proceeds of the 1994 Series A Bonds deposited in the Clearing Fund established under the 1994 Indenture shall be applied to the refunding of the 1987 Bonds as provided in and in accordance with the terms of the Refunding Agreement. 3.31994 Series A Bonds Not to Become Arbitrage Bonds. The Authority and the Company hereby covenant to each other and to the holders of the 1994 Series A Bonds that, notwithstanding any other provision of this Agreement or any other instrument, they will neither make nor instruct the Trustee to make any investment or other use of money in the Bond Fund or the Clearing Fund or other proceeds of the 1994 Series A Bonds which would cause the 1994 Series A Bonds to become arbitrage bonds under Section 148 of the Code and the regulations thereunder, and that they will comply with the requirements of such Section and regulations throughout the term of the 1994 Series A Bonds. The Company covenants that it will not knowingly take or authorize or permit, to the extent such action is within the control of the Company, any action to be taken with respect to the Project Facilities, or the proceeds of the 1994 Series A Bonds (including investment earnings on the 1994 Series A Bonds), or insurance, condemnation, or any other proceeds derived directly or indirectly in connection with the Project Facilities, which will result in the loss of the exclusion from gross income of interest on the 1994 Series A Bonds for purposes of Federal income taxation (except for any 1994 Series A Bond held by a person referred to in Section 147(a) of the Code); and the Company also covenants that it will not knowingly omit to take any action in its power which, if omitted, would cause such a result. 3.4Restriction on Use of Bond Fund and Clearing Fund. The Company shall not use or direct the use of moneys from the Bond Fund or the Clearing Fund in any way so as to cause the interest on any 1994 Series A Bonds to be included in gross income for purposes of Federal income tax and shall use the proceeds (including the proceeds of the investment thereof) of the 1994 Series A Bonds deposited in the Clearing Fund to refund the 1987 Bonds as provided in the Refunding Agreement. 3.5No "Same Issue" Bonds. Neither the Company nor any other principal user of the Project Facilities, nor any related person, within the meaning of Section 144(a)(3) of the Code, has participated, or will participate, in the offering for sale or sale of any issue of private activity bonds within the meaning of Section 141 of the Code, which are or will be required to be aggregated with the 1994 Series A Bonds as part of the "same issue" within the meaning of Revenue Ruling 81-216, 1981-2 C.B. 21. IV. FIRST MORTGAGE BONDS 4.1First Mortgage Bonds. As evidence of its obligations to pay the purchase price of the Project Facilities (such purchase price being an amount equal to the principal of and premium (if any) and interest payable on the 1994 Series A Bonds), the Company will, concurrently with the issuance and sale of the 1994 Series A Bonds, execute and deliver to the Trustee, as assignee of the Authority, $30,000,000 principal amount of the Company's First Mortgage Bonds 7.00% Series due 2017 (the "First Mortgage Bonds"), issued under the Company's Indenture of Mortgage and Deed of Trust dated March 15, 1946, as heretofore or hereafter amended or supplemented (the "Mortgage"), to First Trust of New York, National Association, as successor to Morgan Guaranty Trust Company of New York, as trustee (such trustee and its successors in trust being hereinafter referred to as the "Mortgage Trustee"). 4.2Acceleration of Payment to Redeem Bonds. The Authority will (subject to any applicable rights under the 1994 Indenture to purchase 1994 Series A Bonds in lieu of redemption) redeem any or all 1994 Series A Bonds or portions thereof upon the occurrence of an event which gives rise to any mandatory redemption specified in the 1994 Series A Bonds or in the 1994 Indenture. Whenever any of the 1994 Series A Bonds are subject to optional or extraordinary optional redemption, the Authority will, but only upon request of the Company, redeem the same in accordance with such request and the 1994 Indenture. In either event, the Company will pay an amount equal to the then applicable redemption price of such 1994 Series A Bonds as a prepayment on the First Mortgage Bonds, plus interest accrued to the redemption date, less any credits to which the Company may be entitled hereunder, under the 1994 Indenture or under the First Mortgage Bonds. 4.3No Defense or Set-Off. Except as set forth in any applicable provisions of the 1994 Indenture or the First Mortgage Bonds which are not inconsistent with the provisions of this Agreement, the obligation of the Company to make the payments required under the First Mortgage Bonds shall be absolute and unconditional without defense or set-off by reason of any default by the Authority under this Agreement or under any other agreement between the Company and the Authority or for any other reason, including, without limitation, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the Project Facilities, commercial frustration of purpose, or failure of the Authority to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with this Agreement, it being the intention of the parties that the payments required under this Agreement and the First Mortgage Bonds will be paid in full when due without any delay or diminution whatsoever. Nothing contained in this Section shall be construed to release the Authority from its obligation to perform any of the agreements on its part herein contained; and in the event the Authority should fail to perform any such agreement on its part, the Company may institute such action against the Authority as the Company may deem necessary to compel performance. 4.4Assignment of Authority's Rights. As the source of payment for the 1994 Series A Bonds, the Authority will assign to the Trustee all the Authority's rights under this Agreement with respect to the 1994 Series A Bonds, including its rights to receive all amounts due under the First Mortgage Bonds (except rights to receive payments under Section 5.2 or 5.4 hereof). The Company consents to such assignments and agrees to make payments required by the First Mortgage Bonds directly to the Trustee, without defense or set-off by reason of any dispute between the Company and any such Trustee. V. COVENANTS OF THE COMPANY 5.1Maintenance and Operation of Project Facilities. The Company agrees that it will cause the Project Facilities to be maintained and operated during their useful lives but this covenant shall not require the Company to operate any portion of the Project Facilities after the Company, in its sole discretion, determines that it is no longer practical, economic, or desirable to do so and shall not prevent the Company from selling all or any portion of its interest in any property or from merging or consolidating with another corporation, provided that (a)(i) in the case of any such merger or consolidation other than one in which the Company is the continuing corporation or (ii) in the case of the sale of all or substantially all of the property of the Company, the corporation formed by such consolidation, or into which the Company shall have been merged, or to which such property has been sold, shall be a solvent domestic corporation organized under the laws of the United States or a state thereof, shall be qualified to do business in the Commonwealth of Pennsylvania, and shall expressly assume, in a form reasonably satisfactory to the Trustee, all obligations of the Company hereunder and under the First Mortgage Bonds then outstanding; (b) after such merger, consolidation or sale, the Company or the surviving entity is not in default hereunder; and (c) such merger or consolidation is permitted under the provisions of the Mortgage. 5.2Payment of Authority's Expenses. At the time of the issuance of the 1994 Series A Bonds, the Company shall pay the Authority's financing fee related to such Bonds, as established at the time of initial application to the Authority, and from time to time shall reimburse the Authority for the Authority's reasonable expenses in respect of the 1994 Series A Bonds, including reasonable fees and expenses of counsel. 5.3Payment of Trustee's Compensation and Expenses. The Company will pay the reasonable compensation and reasonable expenses of the Trustee and any Paying Agent under the 1994 Indenture, including all costs of redeeming 1994 Series A Bonds thereunder. 5.4Indemnity Against Claims. The Company will indemnify the Authority and the Trustee against claims arising out of the construction or operation of the Project Facilities; provided, however, that the Company will not indemnify the Authority or the Trustee against such claims which result from the gross negligence or willful misconduct of the Authority, the Trustee, or their respective officers, employees or agents. If any such claim for which indemnification is sought is asserted, the Authority or the Trustee, as the case may be, will give prompt notice to the Company and the Company will assume the defense thereof, with full power to litigate, compromise or settle the same in its sole discretion. 5.5Limitation of Liability of the Authority; Authority Disclaimer. In the event of any default by the Authority hereunder, the liability of the Authority to the Company shall be enforceable only out of its interest under this Agreement and there shall be no other recourse by the Company against the Authority or any of the property now or hereafter owned by it. The Authority makes no warranty either express or implied as to the actual or designed capacity of the Project Facilities, as to the suitability of the Project Facilities for the purposes specified in this Agreement, as to the condition of the Project Facilities, or that the Project Facilities will be suitable for the Company's purposes or needs. 5.6Default, etc. In addition to all other rights of the Authority granted herein or otherwise by law, the Authority shall have the right to specifically enforce the performance and observation by the Company of any of its obligations, agreements or covenants under this Agreement and may take any actions at law or in equity to collect any payments due or to obtain other remedies. If the Company shall default under any provisions of this Agreement and the Authority shall employ attorneys or incur other expenses for the collection of payments due or for the enforcement of the performance or observance of any obligation or agreement on the part of the Company contained herein, the Company will on demand therefor reimburse the reasonable fees of such attorneys and such reasonable expenses so incurred. 5.7Deficiencies in Revenues. If for any reason, including the Company being required to withhold or pay any tax imposed by reason of its obligations evidenced by the First Mortgage Bonds, amounts paid to the Trustee on the First Mortgage Bonds, together with other moneys held by the Trustee and then available, would not be sufficient to make the corresponding payments of principal or redemption price of, and interest on, the 1994 Series A Bonds when such payments become due, the Company will pay the amounts required from time to time to make up any such deficiency. 5.8 Arbitrage Rebate. The Company expects that all of the proceeds of the 1994 Series A Bonds, other than amounts held in the Bond Fund established pursuant to the 1994 Indenture, will be expended within six months of the date of issuance of the 1994 Series A Bonds. The Company, therefore, does not expect to have any earnings subject to rebate with respect to the 1994 Series A Bonds. Notwithstanding the foregoing, the Company covenants to comply with the arbitrage rebate requirements of the Code, including without limitation Section 148(f) thereof. 5.9Notice and Certification with Respect to Bankruptcy Proceedings. The Company shall promptly notify the Trustee of the occurrence of any of the following events and shall keep the Trustee informed of the status of any petition in bankruptcy filed (or bankruptcy or similar proceeding otherwise commenced) against the Company: (i) application by the Company for or consent by the Company to the appointment of a receiver, trustee, liquidator or custodian or the like of itself or of its property, or (ii) admission by the Company in writing of its inability to pay its debts generally as they become due, or (iii) general assignment by the Company for the benefit of creditors, or (iv) adjudication of the Company as a bankrupt or insolvent, or (v) commencement by the Company of a voluntary case under the United States Bankruptcy Code or filing by the Company of a voluntary petition or answer seeking reorganization of the Company, an arrangement with creditors of the Company or an order for relief or seeking to take advantage of any insolvency law or filing by the Company of an answer admitting the material allegations of an insolvency proceeding against it, or action by the Company for the purpose of effecting any of the foregoing, or (vi) if without the application, approval or consent of the Company, a proceeding shall be instituted in any court of competent jurisdiction, under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking in respect of the Company an order for relief or an adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of debts, the appointment of a trustee, receiver, liquidator or custodian or the like of the Company or of all or any substantial part of its assets, or other relief in respect thereof under any bankruptcy or insolvency law. VI. COVENANTS OF THE AUTHORITY 6.1Maintenance of Its Existence. The Authority agrees that it will maintain its corporate existence and use its best efforts to maintain and renew all its material rights, powers, privileges and franchises. 6.2Compliance with Laws. The Authority shall comply in all material respects with all valid and applicable laws, acts, rules, regulations, permits, orders, requirements and directions of any legislative, executive, administrative or judicial body. 6.3Compliance with the Indenture. The Authority shall comply in all material respects with its covenants in Article VIII of the 1994 Indenture. VII. MISCELLANEOUS 7.1Notices. Notice hereunder shall be given to: The Authority - Luzerne County Industrial Development Authority 54 West Union Street Wilkes-Barre, Pennsylvania 18711 Attention: Chairman The Company - Pennsylvania Gas and Water Company 39 Public Square Wilkes-Barre, Pennsylvania 18711 Attention: Secretary 7.2Assignments. This Agreement may not be assigned by either party without the consent of the other, except that the Authority may assign its rights to the Trustee pursuant to Section 4.4 hereof. 7.3Illegal, etc. Provisions Disregarded. In case any provision of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, this Agreement shall be construed as if such provision had never been contained herein. 7.4Amendments. This Agreement may not be amended except by an instrument in writing signed by the parties and, if such amendment occurs after the issuance of the 1994 Series A Bonds and adversely affects the interests of holders of any 1994 Series A Bonds, consented to by the Trustee; provided that no such consent of the Trustee shall be necessary if and to the extent that such amendment pertains to the issuance of additional bonds by the Authority for the benefit of the Company. 7.5Controlling Law. This Agreement shall be deemed to be a contract made in the Commonwealth of Pennsylvania and governed by Pennsylvania law. 7.6Term of Agreement. This Agreement shall become effective upon its delivery and shall continue in effect until all 1994 Series A Bonds have been paid or provision for such payment has been made as provided in the 1994 Indenture. 7.7Counterparts.This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original; but such counterparts shall together constitute but one and the same instrument. WITNESS the due execution of this Amended and Restated Project Facilities Agreement as of the day and year first mentioned above. [SEAL] LUZERNE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY Attest: ___________________________ By:___________________________ Secretary Vice Chairman [SEAL] PENNSYLVANIA GAS AND WATER COMPANY Attest: ______________________________ By:___________________________ Secretary Vice President, Finance Schedule A Project Facilities BD36740.A(PF) Closing Item No. A-1 AMENDED AND RESTATED PROJECT FACILITIES AGREEMENT Between LUZERNE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY And PENNSYLVANIA GAS AND WATER COMPANY Dated as of November 1, 1994 TABLE OF CONTENTS Page I. BACKGROUND, REPRESENTATIONS AND FINDINGS 1 1.1 Background 1 1.2 Company Representations 3 1.3 Authority Representations and Findings 3 II. COMPLETION OF AND TITLE TO PROJECT FACILITIES 4 2.1 Completion of and Title to Project Facilities 4 III. FINANCING THE PROJECT 4 3.1 Issuance of 1994 Series A Bonds 4 3.2 Deposit of 1994 Series A Bond Proceeds 5 3.3 1994 Series A Bonds Not to Become Arbitrage Bonds 5 3.4 Restriction on Use of Bond Fund and Clearing Fund 5 3.5 No "Same Issue" Bonds 6 IV. FIRST MORTGAGE BONDS 6 4.1 First Mortgage Bonds 6 4.2 Acceleration of Payment to Redeem Bonds 6 4.3 No Defense or Set-Off 6 4.4 Assignment of Authority's Rights 7 V. COVENANTS OF THE COMPANY 7 5.1 Maintenance and Operation of Project Facilities 7 5.2 Payment of Authority's Expenses 8 5.3 Payment of Trustee's Compensation and Expenses 8 5.4 Indemnity Against Claims 8 5.5 Limitation of Liability of the Authority; Authority Disclaimer 8 5.6 Default, etc 8 5.7 Deficiencies in Revenues 9 5.8 Arbitrage Rebate 9 5.9 Notice and Certification with Respect to Bankruptcy Proceedings 9 VI. COVENANTS OF THE AUTHORITY 10 6.1 Maintenance of Its Existence 10 6.2 Compliance with Laws 10 6.3 Compliance with the Indenture 10 VII. MISCELLANEOUS 10 7.1 Notices 10 7.2 Assignments 11 7.3 Illegal, etc. Provisions Disregarded 11 7.4 Amendments 11 7.5 Controlling Law 11 7.6 Term of Agreement 11 7.7 Counterparts 11 SCHEDULE A - Project Facilities EX-10 6 FIRST AMENDMENT TO CREDIT AGREEMENT AND NOTES THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND NOTES (the "First Amendment"), dated as of the 16th day of December, 1994 (the "First Amendment Effective Date"), is made and entered into by and among Pennsylvania Gas and Water Company, a Pennsylvania corporation (the "Borrower"), the Banks (as defined in the Credit Agreement, as such term is hereinafter defined) and PNC Bank, Northeast PA, in its capacity as agent for the Banks under the Credit Agreement (hereinafter referred to in such capacity as the "Agent") and CoreStates Bank, N.A., and NBD Bank, N.A., in their respective capacities as co-agents for the Banks under the Credit Agreement (hereinafter referred to in such capacity individually as the "Co-Agent" and collectively as the "Co-Agents"). WITNESSETH: WHEREAS, pursuant to a Credit Agreement (the "Credit Agreement") dated April 19, 1993 by and among the Borrower, the Banks, the Agent and the Co-Agents, the Banks agreed to extend Revolving Credit Loans to the Borrower not to exceed Sixty Million Dollars ($60,000,000) in the aggregate at any one time outstanding; and WHEREAS, pursuant to the Credit Agreement, the Borrower executed and delivered to each Bank a Revolving Credit Note (individually a "Revolving Credit Note" and collectively, the "Revolving Credit Notes") dated April 22, 1993 in the face amount of such Bank's Revolving Credit Commitment and made payable to the order of such Bank; and WHEREAS, the Borrower, the Banks, the Agent and the Co- Agents wish to amend the Credit Agreement and the Revolving Credit Notes as hereinafter set forth including (i) extending the Expiration Date to May 31, 1996, (ii) reducing the Commitment Fees, (iii) reducing the rates of interest under the Euro-Rate Option and the CD Rate Option and (iv) adjusting the Tangible Net Worth covenant. NOW THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, and with the intent to be legally bound hereby, the parties hereto agree as follows: A. 1. (a) Subject to paragraph H. hereof, the definition of Expiration Date set forth in Section 1.01 of the Credit Agreement is hereby deleted and there is substituted therefor the following: Expiration Date shall mean the earlier of (i) May 31, 1996 or (ii) the date on which the Revolving Credit Commitment is reduced to zero pursuant to Section 2.10. (b) Subject to paragraph H. hereof, the reference to the date of April 30, 1995 in the second paragraph of the Revolving Credit Notes is hereby deleted and there is substituted therefor the term "Expiration Date". 2. Subject to paragraph H. hereof, from and after the First Amendment Effective Date, the Commitment Fees set forth in Section 2.03 of the Credit Agreement, payable as consideration for each Bank's Revolving Credit Commitment under the Credit Agreement, shall be equal to (a) 28.5 basis points (285/1,000 of 1%) per annum for any day on which the long-term senior secured debt of the Borrower is rated by S&P at BB+ or lower or by Moody's at Ba1 or lower, or is not rated by either S&P or Moody's, (b) 19.5 basis points (195/1,000 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated by S&P at BBB- or by Moody's at Baa3 (c) 16 basis points (16/100) of 1%) for any day on which the long-term senior secured debt of the Borrower is rated by S&P at BBB or by Moody's at Baa2, (d) 13.5 basis points (135/1,000 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated by S&P at BBB+ or by Moody's at Baa1 and (e) 11 basis points (11/100 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated by S&P at A- or higher or by Moody's at A3 or higher (computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed) on the average daily unborrowed amount of such Bank's Revolving Credit Commitment as the same may be constituted from time to time; if the Borrower's long-term senior debt rating by S&P and Moody's are covered by different subsections set forth above, the Commitment Fee shall be based upon the lower number of basis points set forth in such subsections (for example, if the S&P rating is BBB and the Moody's rating is Baa3, the Commitment Fee shall be based upon 16 basis points). 3. Subject to paragraph H. hereof, from and after the First Amendment Effective Date, the rate of interest on the Revolving Credit Loans subject to the Euro-Rate Option set forth in Section 3.01(b)(ii) of the Credit Agreement shall be a rate per annum (computed on the basis of a year of 360 days and actual days elapsed) equal to the sum of (A) the Euro-Rate, plus (B)(I) 80 basis points (8/10 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BB+ or lower by S&P or (y) Ba1 or lower by Moody's, or is not rated by either S&P or Moody's, (II) 55 basis points (55/100 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BBB- by S&P or (y) Baa3 by Moody's, (III) 47.5 basis points (475/1,000 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BBB by S&P or (y) Baa2 by Moody's, (IV) 40 basis points (4/10 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BBB+ by S&P or (y) Baa1 by Moody's and (V) 32.5 basis points (325/1,000 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) A- or higher by S&P or (y) A3 or higher by Moody's; if the Borrower's long-term senior debt rating by S&P and Moody's are covered by different subsections set forth above, the interest rate under the Euro-Rate Option shall be based upon the lower number of basis points set forth in such subsections (for example, if the S&P rating is BBB and the Moody's rating is Baa3, the interest rate shall be equal to the Euro-Rate plus 47.5 basis points). 4. Subject to paragraph H. hereof, from and after the First Amendment Effective Date, the rate of interest on the Revolving Credit Loans subject to the CD Rate Option set forth in Section 3.01(b)(iii) of the Credit Agreement shall be a rate per annum (computed on the basis of a year of 360 days and actual days elapsed) equal to the sum of (A) the CD Rate plus (B) (I) 92.5 basis points (925/1,000 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BB+ or lower by S&P or (y) Ba1 or lower by Moody's, or is not rated by either S&P or Moody's, (II) 67.5 basis points (675/1,000 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BBB- by S&P or (y) Baa3 by Moody's, (III) 60 basis points (6/10 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BBB by S&P or (y) Baa2 by Moody's, (IV) 52.5 basis points (525/1,000 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) BBB+ by S&P or (y) Baa1 by Moody's and (V) 45 basis points (45/100 of 1%) for any day on which the long-term senior secured debt of the Borrower is rated (x) A- or higher by S&P or (y) A3 or higher by Moody's; if the Borrower's long-term senior debt rating by S&P and Moody's are covered by different subsections set forth above, the interest rate under the CD Rate Option shall be based upon the lower number of basis points set forth in such subsections (for example, if the S&P rating is BBB and the Moody's rating is Baa3, the interest rate shall be equal to the CD Rate plus 60 basis points). 5. (a) Subject to paragraph H. hereof, from and after the First Amendment Effective Date, the limitation of Five Hundred Thousand Dollars ($500,000) set forth in Section 7.01(m), PEI Capital Contribution, of the Credit Agreement shall be increased to One Million Dollars ($1,000,000) and Section 7.01(m) shall read as follows: (m) PEI Capital Contribution. The Borrower shall cause PEI to make capital contributions (including without limitation repayment of advances and stock purchases) to the Borrower in an amount equal to at least eighty percent (80%) of the net cash proceeds of all offerings of Capital Stock of PEI, other than proceeds [not exceeding One Million Dollars ($1,000,000) received during any fiscal year of PEI] from the issuance of shares of Capital Stock of PEI pursuant to PEI's Employees' Savings Plan [a Section 401(k) plan]. (b) Subject to paragraph H. hereof, from and after the First Amendment Effective Date, the amounts of Two Hundred Twenty Million Dollars ($220,000,000) and Five Hundred Thousand Dollars ($500,000) set forth in Section 7.02(r), Minimum Tangible Net Worth, of the Credit Agreement shall be increased to Two Hundred Thirty Million Dollars ($230,000,000) and One Million Dollars ($1,000,000), respectively, and the references to the term "the Closing Date" in such section shall be deleted and there shall be substituted therefor the date of September 30, 1994, and Section 7.02(r) shall read as follows: (r) Minimum Tangible Net Worth. At no time shall Tangible Net Worth be less than the sum of Two Hundred Thirty Million Dollars ($230,000,000) plus eighty percent (80%) of the net proceeds of the sale of any Capital Stock of PEI after the September 30, 1994 (other than proceeds [not exceeding One Million Dollars ($1,000,000) received during any fiscal year of PEI] from the issuance of shares of Capital Stock of PEI pursuant to PEI's Employees' Savings Plan [a section 401(k) plan]) plus one hundred percent (100%) of the net proceeds of the sale of any Preferred Stock of the Borrower after September 30, 1994. B. Borrower represents and warrants to the Agent, the Co-Agents and each of the Banks that no consent, approval, exemption, order or authorization of, or registration or filing with, any Official Body or any other Person is required to be obtained or made by Borrower under any Law or any agreement to which Borrower is a party in connection with the amendments to the Credit Agreement set forth in paragraph A. hereof, except the approval of such amendments by the Pennsylvania Public Utility Commission. C. On the First Amendment Effective Date: (a) The representations and warranties of the Borrower contained in Article V of the Credit Agreement shall be true in all material respects on and as of the First Amendment Effective Date with the same effect as though such representations and warranties have been made on and as of such date (except the representations and warranties set forth in the first sentence of Section 5.01(b), Section 5.01(k), the last sentence of Section 5.01(l), the portion of the last sentence of Section 5.01(n) following the semi-colon in such sentence, the last sentence of Section 5.01(o), Section 5.01(r), the last sentence of Section 5.01(s), the first sentence of Section 5.01(t)(i) and the last sentence of Section 5.01(t)(v) of the Credit Agreement, which representations and warranties shall be true and correct in all material respects on and as of the specific dates or times referred to therein or if no date or time is specified, as of the Closing Date, and with respect to the representations and warranties set forth in the last sentence of 5.01(s) and the first sentence of Section 5.01(t)(i) of the Credit Agreement, such representations and warranties as they may have been modified as set forth in one or more written notices from the Borrower to the Agent shall be true and correct in all material respects on and as of the First Amendment Effective Date and, provided, however, that with respect to Section 5.01(m), the amendments to the Credit Agreement set forth in paragraph A. hereof must be approved by the Pennsylvania Public Utility Commission, which approval has not yet been obtained) and the Borrower shall have performed and complied in all material respects with all covenants and conditions of the Credit Agreement and this First Amendment; and no Event of Default or Potential Default shall have occurred and be continuing or shall exist. (b) There shall be delivered to the Agent for the benefit of each Bank a certificate dated the First Amendment Effective Date and signed by the Secretary or an Assistant Secretary of the Borrower, certifying as appropriate as to: (i) all corporate action taken by the Borrower in connection with this First Amendment; and (ii) the names of the officer or officers authorized to sign this First Amendment and the true signatures of such officer or officers and the identities of the Authorized Officers permitted to act on behalf of the Borrower for purposes of this First Amendment and the Credit Agreement as amended hereby and the true signatures of such officers, on which the Agent and each Bank may conclusively rely. (c) This First Amendment shall have been duly executed and delivered by the Borrower to the Agent for the benefit of the Banks. (d) There shall be delivered to the Agent for the benefit of each Bank a written opinion of LeBoeuf, Lamb, Greene & MacRae, Pennsylvania counsel to the Borrower, dated the First Amendment Effective Date and in form and substance satisfactory to the Agent and its counsel as to the matters set forth in Exhibit "A" hereto. (e) All legal details and proceedings in connection with the transactions contemplated by this First Amendment shall be in form and substance reasonably satisfactory to the Agent and counsel for the Agent, and the Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance reasonably satisfactory to the Agent and said counsel, as the Agent or said counsel may reasonably request. (f) The Borrower shall pay or cause to be paid to the Agent for itself, to the extent not previously paid, all fees and expenses for which the Agent is entitled to be paid or reimbursed in connection with this First Amendment. (g) Neither the execution, delivery nor performance of this First Amendment shall contravene any Law applicable to the Borrower or any of the Banks. (h) No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, this First Amendment or the consummation of the transactions contemplated hereby or which, in the Agent's sole discretion, would make it inadvisable to consummate the transactions contemplated by this First Amendment. D. Except as expressly amended hereby, the terms, provisions, conditions and agreements of the Credit Agreement and the Revolving Credit Notes are hereby confirmed and ratified and shall remain in full force and effect. E. THIS FIRST AMENDMENT SHALL BE A CONTRACT MADE UNDER, AND GOVERNED BY, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PROVISIONS. F. This First Amendment shall be binding upon, and inure to the benefit of, the Borrower, the Banks, the Agent and the Co-Agents and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights and obligations hereunder or any interest herein. G. All defined terms used herein which are not defined herein but which are defined in the Credit Agreement shall have the meanings herein as are given to them in the Credit Agreement. H. This First Amendment shall be effective as of the First Amendment Effective Date, provided, however, that if the Pennsylvania Public Utility Commission has not approved the amendments to the Credit Agreement set forth in paragraph A. hereof on or before April 29, 1995, such amendments shall be void and shall have no force or effect and the terms and provisions of the Credit Agreement, as in effect prior to the First Amendment Effective Date, shall continue to apply and be in effect for all times on and after the First Amendment Effective Date. Subject to the preceding sentence,from and after the First Amendment Effective Date, all references to the Credit Agreement and the Revolving Credit Notes in the Credit Agreement and the Revolving Credit Notes shall be deemed to be references to the Credit Agreement and the Revolving Credit Notes as amended hereby. I. 1. Within five (5) days after the Pennsylvania Public Utility Commission approves, or fails to approve or disapproves of, the amendments to the Credit Agreement set forth in paragraph A. hereof, but in no event later than April 29, 1995, the Borrower shall notify the Agent of the action taken by the Pennsylvania Public Utility Commission and shall furnish the Agent with a copy of any writing issued by the Pennsylvania Public Utility Commission in connection therewith as soon as practicable. 2. If the Pennsylvania Public Utility Commission approves the amendments to the Credit Agreement set forth in paragraph A. hereof, within five (5) days after such action is taken, but in no event later than April 29, 1995, Borrower shall furnish to the Agent, for the benefit of each Bank, a written opinion of Pennsylvania counsel to the Borrower, dated the date such approval is obtained and in form and substance satisfactory to the Agent and its counsel, as to the matters set forth in Exhibit "B" hereto. J. This First Amendment may be executed in as many counterparts as shall be convenient and by the different parties hereto on separate counterparts, each of which when executed by the Borrower, the Banks, the Agent and the Co-Agents shall be regarded as an original. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this First Amendment as of the day and year first above written. ATTEST: (SEAL) PENNSYLVANIA GAS AND WATER COMPANY By_______________________ By_________________________________ Name_____________________ Name_______________________________ Title____________________ Title______________________________ PNC BANK, NORTHEAST PA, individually and as Agent By_________________________________ Name_______________________________ Title______________________________ CORESTATES BANK, N.A., individually and as a Co-Agent By_________________________________ Name_______________________________ Title______________________________ NBD BANK, N.A., individually and as a Co-Agent By_________________________________ Name_______________________________ Title______________________________ LTCB TRUST COMPANY By_________________________________ Name_______________________________ Title______________________________ MELLON BANK, N.A. By_________________________________ Name_______________________________ Title______________________________ FIRST FIDELITY BANK, N.A. formerly MERCHANTS BANK NORTH, N.A. By_________________________________ Name_______________________________ Title______________________________ BF-21739.5:3/1/95:0011-05284 [Final on Letterhead of LeBoeuf, Lamb, Greene & MacRae] December 16, 1994 PNC Bank, Northeast PA, as Agent for the Banks (as defined below) 69 Public Square Corporate Banking Wilkes-Barre, Pennsylvania 18711 Ladies and Gentlemen: We have acted as Pennsylvania counsel to Pennsylvania Gas and Water Company, a Pennsylvania corporation (the "Borrower"), in connection with the execution and delivery of the Credit Agreement dated as of April 19, 1993 (the "Credit Agreement"), as amended by a First Amendment to Credit Agreement and Notes dated as of December 16, 1994 (the "First Amendment"), among the Borrower, the banks parties thereto (the "Banks") and PNC Bank, Northeast PA, as agent for the Banks (the "Agent") and the execution and delivery of the Notes issued pursuant thereto; the Credit Agreement as amended by the First Amendment is hereinafter referred to as the "Amended Credit Agreement". This opinion is delivered to you pursuant to paragraph C.(d) of the First Amendment. All capitalized terms used herein and not otherwise defined herein have the respective meanings ascribed to them in the Amended Credit Agreement. In connection with the transactions contemplated by the Amended Credit Agreement, we have acted in a limited capacity as Pennsylvania corporate counsel, and in conjunction with said role have made such investigations of law, have examined the Amended Credit Agreement and Notes, and certificates of public officials and of the Borrower, and have examined and relied upon corporate documents and records of the Borrower and have made such examinations and inquiries as we deem necessary or appropriate in connection with our opinion hereinafter set forth. In rendering this opinion, we have also relied upon representations and certificates of officers and employees of the Borrower and other company counsel and certificates of Official Bodies including EXHIBIT "A" representations of the Borrower set forth in the Amended Credit Agreement and we have assumed the genuineness of signatures of all persons signing any documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of all such latter documents. In rendering this opinion, we have assumed that (x) the Amended Credit Agreement has been duly authorized, executed and delivered by each Bank and the Agent and (y) the Amended Credit Agreement constitutes the valid and binding obligation of each Bank and the Agent enforceable against them in accordance with its terms. The opinions expressed herein are subject to the following qualifications: (i) the enforceability of the Amended Credit Agreement and the Notes is subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally; (ii) the enforceability of the Amended Credit Agreement and the Notes is subject to the effect of general principles of equity (regardless of whether enforcement is considered in proceedings at law or in equity) and to the discretion of the court before which any proceeding therefor may be brought (including without limitation the discretion of a court to grant or limit the right of specific performance); (iii) the provisions of the Amended Credit Agreement that permit any Person to take action or make determinations, or to benefit from indemnities or similar undertakings, may be subject to requirements that such action be taken or such determinations be made, or that any action or inaction by such Person that may give rise to a request for payment under such an indemnity or similar undertaking be taken or not taken, on a reasonable basis and in good faith; (iv) the indemnities in the Amended Credit Agreement may be unenforceable or limited based upon public policy considerations or applicable law; (v) under certain circumstances the requirement that the provisions of the Amended Credit Agreement and the Notes may be modified or waived only in writing or only in a specific instance may be unenforceable to the extent that an oral agreement has been effected or a course of dealing has occurred modifying such provisions; (vi) a court may modify or limit contractual awards of attorneys' fees; and (vii) the use of the phrase (a) "to our knowledge" is intended to be limited to the actual knowledge of the attorneys in this Firm who have participated in our representation of the Borrower and (b) "after due inquiry" is intended to be limited to a review of the subject matter of the opinions so qualified with appropriate officers of Borrower and a review of such documents or agreements as may have been identified by such officers as being necessary to be reviewed in connection with the subject matter of such opinions. Based upon the foregoing, we are of the opinion that: 1. The Borrower has the corporate power and authority, and the legal right, to make, deliver and perform the Amended Credit Agreement and the Notes and to borrow thereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of the Amended Credit Agreement and the Notes and to authorize the execution, delivery and performance of the Amended Credit Agreement and the Notes. Other than the consent of the Pennsylvania Public Utility Commission, which has not yet been obtained but for which an application for registration of a Securities Certificate has been submitted to the Pennsylvania Public Utility Commission, no consent or authorization of, filing with or other act by or in respect of, any Official Body of the Commonwealth of Pennsylvania, is required in connection with the execution, delivery and performance by the Borrower of the provisions of paragraph A. to the First Amendment, which cover amendments to the Credit Agreement, or to make valid or enforceable the provisions of paragraph A. to the First Amendment as to or against the Borrower; no consent or authorization of, filing with or other act by or in respect of, any Official Body of the Commonwealth of Pennsylvania is required in connection with the execution, delivery and performance by the Borrower of the terms and provisions of the First Amendment (other than those set forth in paragraph A. thereof) including but not limited to paragraph H. thereof or to make valid or enforceable the terms and provisions of the First Amendment (other than those set forth in paragraph A. thereof) including but not limited to paragraph H. thereof; and if the Pennsylvania Public Utility Commission does not approve the amendments to the Credit Agreement set forth in paragraph A. of the First Amendment, such amendments shall be void and shall have no force or effect and the terms and provisions of the Credit Agreement, as in effect prior to the First Amendment Effective Date (as such term is defined in the First Amendment), including but not limited to such terms and provisions relating to borrowings under the Credit Agreement made after the First Amendment Effective Date, shall continue to apply and be valid and enforceable for all times on and after the First Amendment Effective Date. 2. The Amended Credit Agreement and each Note has been duly executed and delivered on behalf of the Borrower. Subject to the second sentence of paragraph 1 hereof, the Amended Credit Agreement and each Note constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms. 3. The execution, delivery and performance of the Amended Credit Agreement and the Notes, the borrowings thereunder, the use of the proceeds thereof and the other transactions contemplated by the Amended Credit Agreement and the Notes (i) will not violate, or conflict with, (with or without the giving of notice or the lapse of time, or both), (x) the Articles of Incorporation, the by-laws or the other organizational documents, if any, of the Borrower, (y) subject to the second sentence of paragraph 1 hereof, any law or administrative regulation of the Commonwealth of Pennsylvania applicable to the Borrower, or any order, writ, judgment, injunction or decree to which the Borrower is a party or by which it is bound or to which it is subject or (z) to our knowledge, after due inquiry, any material mortgage, deed of trust, lease, indenture, instrument, note or evidence of indebtedness or other agreement binding upon the Borrower and (ii) will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such law or administrative regulation or any such mortgage, deed of trust, lease, indenture, instrument, note or evidence of indebtedness or other agreement. 4. The Borrower is not subject to regulation under any State statute or regulation which limits its ability to incur Indebtedness except for the provisions of the Pennsylvania Public Utility Code. We are admitted to practice law in the Commonwealth of Pennsylvania and do not express any opinion herein concerning the law of any jurisdiction except the Commonwealth of Pennsylvania. All of the opinions expressed herein are rendered as of the date hereof. We assume no obligation to update such opinions to reflect any facts or circumstances that may hereafter come to our attention or any changes in the law that may hereafter occur. This letter is furnished by us solely in connection with the Amended Credit Agreement for your benefit and the benefit of each Bank a party to the Amended Credit Agreement and may not be relied upon for any other purpose, or furnished to, used by, circulated to, quoted to or referred to by, any other person without our prior written consent in each instance. Very truly yours, LeBoeuf, Lamb, Greene & MacRae BF-21799.6:3/1/95:0011-05284 [Final on Letterhead of LeBoeuf, Lamb, Greene & MacRae] ______________, 199_ PNC Bank, Northeast PA, as Agent for the Banks (as defined below) 69 Public Square Corporate Banking Wilkes-Barre, Pennsylvania 18711 Ladies and Gentlemen: We have acted as Pennsylvania counsel to Pennsylvania Gas and Water Company, a Pennsylvania corporation (the "Borrower"), in connection with the execution and delivery of the Credit Agreement dated as of April 19, 1993 (the "Credit Agreement"), as amended by a First Amendment to Credit Agreement and Notes dated as of December 16, 1994 (the "First Amendment"), among the Borrower, the banks parties thereto (the "Banks") and PNC Bank, Northeast PA, as agent for the Banks (the "Agent") and the execution and delivery of the Notes issued pursuant thereto; the Credit Agreement as amended by the First Amendment is hereinafter referred to as the "Amended Credit Agreement". This opinion is delivered to you pursuant to paragraph I.2 of the First Amendment. All capitalized terms used herein and not otherwise defined herein have the respective meanings ascribed to them in the Amended Credit Agreement. We have acted in a limited capacity as Pennsylvania corporate counsel, and in conjunction with said role have examined a copy of the Securities Certificate of the Pennsylvania Public Utility Commission adopted and registered on _________, 199_ relating to the First Amendment and hereby opine to you that the Pennsylvania Public Utility Commission has approved the amendments to the Credit Agreement set forth in paragraph A. of the First Amendment. We are admitted to practice law in the Commonwealth of Pennsylvania and do not express any opinion herein concerning the law of any jurisdiction except the Commonwealth of Pennsylvania. All of the opinions expressed herein are rendered as of the date hereof. We assume no obligation to update such opinions to reflect any facts or circumstances that may hereafter come to our attention or any changes in the law that may hereafter occur. EXHIBIT "B" This letter is furnished by us solely in connection with the Amended Credit Agreement for your benefit and the benefit of each Bank a party to the Amended Credit Agreement and may not be relied upon for any other purpose, or furnished to, used by, circulated to, quoted to or referred to by, any other person without our prior written consent in each instance. Very truly yours, LeBoeuf, Lamb, Greene & MacRae BF-22139.1:3/1/95:0011-05284 EX-27 7
UT THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET, STATEMENTS OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000077242 PENNSYLVANIA GAS AND WATER COMPANY YEAR DEC-31-1994 DEC-31-1994 PER-BOOK 569,071,000 6,273,000 71,184,000 92,752,000 0 739,280,000 54,567,000 90,201,000 71,264,000 216,032,000 1,760,000 33,615,000 311,725,000 0 0 0 3,730,000 80,000 0 0 173,338,000 739,280,000 234,723,000 12,499,000 179,892,000 192,391,000 42,332,000 16,000 42,348,000 22,542,000 19,806,000 4,639,000 15,167,000 9,605,000 18,891,000 44,094,000 2.17 2.17