-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, PQhFf6zpJz9ps0IVFq5qH++mVmj530Ffh+7KeOUp4xDlzhe0Hj6liZUvhGagIZ9s khFyOQAckmAsDLsVOxmUAg== 0000077242-94-000008.txt : 19940328 0000077242-94-000008.hdr.sgml : 19940328 ACCESSION NUMBER: 0000077242-94-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA GAS & WATER CO CENTRAL INDEX KEY: 0000077242 STANDARD INDUSTRIAL CLASSIFICATION: 4931 IRS NUMBER: 240717235 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-03490 FILM NUMBER: 94517528 BUSINESS ADDRESS: STREET 1: 39 PUBLIC SQ STREET 2: WILKES BARRE CTR CITY: WILKES-BARRE STATE: PA ZIP: 18711-0601 BUSINESS PHONE: 7178298843 FORMER COMPANY: FORMER CONFORMED NAME: SCRANTON SPRING BROOK WATER SERVICE CO DATE OF NAME CHANGE: 19660908 10-K 1 ANNUAL FILING 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, 1993, PG&W had approximately 137,200 gas customers and 131,400 water customers. PG&W has four small wholly-owned subsidiaries: Trucksville Water Company, Shavertown and Kingston Township Water Company, Hillcrest Water Co. and Homesite Water Company, which are engaged in the distribution of water, and 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. During recent years, PG&W's gas utility operations have generated about 75% of PG&W's operating revenues and slightly more than half its operating income. 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 to Pennsylvania produced gas. See "GAS BUSINESS-Transportation and Storage Service." During 1990 and 1991, PG&W's earnings from its gas utility operations were adversely affected by unseasonably warm weather. The number of heating degree days in 1990 and 1991 were 15.7% and 12.4%, respectively, below normal. However, the number of heating degree days for 1992 and 1993 were only 3.1% and 1.8%, respectively, below normal. Primarily as a result of the PPUC's approval since January 1, 1991, of rate increases designed to produce an aggregate of $35.8 million in additional annual water operating revenues, PG&W expects that its future water operating revenues and water operating income will represent a greater portion of its total operating revenues and operating income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K and "Industry Segments." As of December 31, 1993, PG&W employed approximately 975 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.
Year Ended December 31, 1991 1992 1993 (Thousands of Dollars) GAS UTILITY OPERATIONS Operating revenues $138,465 $143,227 $153,325 Operating expenses excluding income taxes: Cost of gas 77,801 77,720 86,557 Depreciation 5,545 6,087 6,388 Other operating expenses 32,760 34,031 34,927 Total 116,106 117,838 127,872 Operating income before income taxes 22,359 25,389 25,453 Income taxes 3,920 6,129 6,307 Operating income $ 18,439 $ 19,260 $ 19,146 Additions to utility plant $ 9,359 $ 12,669 $ 13,325 Identifiable assets at December 31 (a) $229,593 $238,017 $285,596 WATER UTILITY OPERATIONS Operating revenues $ 44,285 $ 48,651 $ 53,363 Operating expenses excluding income taxes: Depreciation 4,234 4,769 5,911 Other operating expenses 26,022 27,347 29,292 Deferred treatment plant costs, net (664) (294) (1,532) Total 29,592 31,822 33,671 Operating income before income taxes 14,693 16,829 19,692 Income taxes 1,439 2,176 2,682 Operating income $ 13,254 $ 14,653 $ 17,010 Additions to utility plant $ 19,155 $ 44,352 $ 32,575 Identifiable assets at December 31 (a) $310,374 $379,989 $426,389 TOTAL OPERATIONS Operating revenues $182,750 $191,878 $206,688 Operating expenses excluding income taxes: Cost of gas 77,801 77,720 86,557 Depreciation 9,779 10,856 12,299 Other operating expenses 58,782 61,378 64,219 Deferred treatment plant costs, net (664) (294) (1,532) Total 145,698 149,660 161,543 Operating income before income taxes 37,052 42,218 45,145 Income taxes 5,359 8,305 8,989 Operating income $ 31,693 $ 33,913 $ 36,156 Additions to utility plant $ 28,514 $ 57,021 $ 45,900 Identifiable assets at December 31 (a) $539,967 $618,006 $711,985 Other assets at December 31 (b) 24,550 11,866 14,323 Total assets $564,517 $629,872 $726,308 (a) Includes allocated common plant and is net of the respective accumulated depreciation. (b) Composed primarily of investments, cash and special deposits, a $15.0 million intercompany advance to PEI in 1991, which was repaid in January, 1992, prepayments and unallocated deferred charges.
-2- Operating income from gas utility operations increased $821,000 (4.5%) from $18.4 million in 1991 to $19.3 million in 1992, due primarily to a $4.8 million increase in gross margin (gas operating revenues less the cost of gas), the effect of which was largely offset by increases in other operating expenses, depreciation and income and gross receipts taxes. Operating income from gas utility operations decreased $113,000 (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 lower level of additions to gas utility plant in 1991 was principally the result of variations in the timing of expenditures for mains and services. Operating income from water utility operations increased $1.4 million (10.6%) from $13.3 million in 1991 to $14.7 million in 1992, due primarily to the rate increases which the PPUC allowed for customers in the Scranton Water Rate Area effective March 23, 1991, and for customers in the Spring Brook Water Rate Area served exclusively by the Nesbitt Water Treatment Plant effective January 30, 1992. These increased revenues were partially offset by increases in other operating expenses, depreciation, property 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 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, the effects of which were partially offset by increases in other operations and maintenance expenses, depreciation, and income and property taxes. Additions to water utility plant increased in 1992, and decreased in 1993, largely as 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 115 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, 1993, PG&W had approximately 137,200 natural gas customers, from which it derived total natural gas revenues of $153.3 million during 1993. The following chart shows a breakdown of the types of customers and the percentages of gas revenues generated by each type of customer in 1993: [CAPTION] Type of Customer % of Customers % of Revenues [S] [C] [C] Residential 91.7% 60.2% Commercial 7.9 22.0* Industrial 0.2 16.2* Other Users 0.2 1.6 Total 100.0% 100.0% * Includes the 4.9% of total gas revenues derived from interruptible customers. -3- During 1993, PG&W delivered an estimated total of 43,700,000 thousand cubic feet ("MCF") of natural gas to its customers, of which 62.8% was sold at normal tariff rates, 33.7% represented gas transported for customers and 3.5% 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 1993, a total of 1,729,000 MCF of natural gas was sold by PG&W to interruptible customers and 2,888,000 MCF was transported for such customers, which together represented 10.6% of the total deliveries of natural gas by PG&W to its customers during 1993. PG&W's largest natural gas customer accounted for approximately 4.5% of its total gas operating revenues in 1993. No other customer accounted for as much as 2.0% of such revenues. Transportation and Storage Service. Commencing in 1986, PG&W began providing transportation service to those natural gas customers, or groups of not more than three customers, who consumed at least 50,000 MCF of natural gas per year and executed a transportation agreement with PG&W. Pursuant to regulations adopted by the PPUC, PG&W amended its gas transportation regulations, effective March 25, 1993, to permit groups of up to ten customers, with a combined consumption of at least 5,000 MCF per year, to qualify for transportation service. 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 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. Set forth below is a summary of the gas transported by PG&W and the number of its customers using transportation service from 1991 to 1993: [CAPTION] Number Volume of Gas Transported (MCF) of Interstate Pennsylvania Year Customers Gas Gas Total [S] [C] [C] [C] [C] 1991 352 12,278,000 3,114,000 15,392,000 1992 457 9,084,000 3,843,000 12,927,000 1993 569 10,078,000 4,627,000 14,705,000 During 1994, PG&W expects to transport approximately 17,400,000 MCF of natural gas, of which it anticipates approximately 5,500,000 MCF will be Pennsylvania gas. 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 -4- 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, and it caused net income to decrease by approximately $402,000 or $.11 per share for the year ended December 31, 1991, by $578,000 or $.15 per share for the year ended December 31, 1992, and by $553,000 or $.13 per share for the year ended December 31, 1993, compared to the net income that would have been realized had the customers receiving Pennsylvania transportation gas taken their gas under the same tariffs as which they were supplied gas in the prior year. 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 $2.9 million in 1991, $3.4 million in 1992 and $4.6 million in 1993. These revenues reflected the sale of 900,000 MCF, 1,149,000 MCF and 1,541,000 MCF in 1991, 1992 and 1993, respectively. It is anticipated that approximately 1,530,000 MCF will be sold under the Alternate Fuel Rate in 1994. 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 are 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 existing 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- One of PG&W's interstate pipelines, Tennessee Gas Pipeline Company, commenced operating under the provisions of Order 636 as of September 1, 1993, and PG&W's two other interstate pipelines, Columbia Gas Transmission Corporation and Transcontinental Gas Pipe Line Corporation, began operating under the provisions of Order 636 as of November 1, 1993. PG&W entered into new transportation and storage agreements with each of its three interstate pipeline companies as of the respective date they commenced operating under Order 636, and all prior sales and transportation agreements and the majority of the prior storage agreements were concurrently terminated. It is currently estimated that the aggregate transition costs which PG&W will be billed by its three interstate pipelines pursuant to Order 636 will range between $11.0 million and $14.0 million, of which $1.0 million had been billed as of December 31, 1993. Such billings will generally be made by the three interstate pipelines over a three- year period extending through the fourth quarter of 1996. On October 15, 1993, the PPUC adopted an order (the "Order") regarding recovery of FERC Order 636 transition costs. The Order states the PPUC believes that the recovery of Account 191 and New Facility Costs are subject to recovery through the annual purchased gas cost ("PGC") rate filing made with the PPUC by PG&W and other similar local gas distribution companies. The Order also indicates that while Gas Supply Realignment Costs and Stranded 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 Order further states that all such filings will be evaluated on a case-by-case basis. As of February 1, 1994, PG&W began to recover the Account 191 and New Facility Costs that are being billed by its interstate pipelines through an increase in its PGC rate. Additionally, on January 14, 1994, PG&W filed tariffs pursuant to the surcharge provisions of the Code seeking the full recovery of the Gas Supply Realignment and Stranded Costs that it estimates it will be billed by its interstate pipelines. On February 24, 1994, the PPUC suspended the effectiveness of these proposed tariffs for six months (i.e., until August 28, 1994) in order to institute an investigation into the reasonableness of such tariffs. Although it cannot be certain, based on the provisions of the Order, PG&W believes it will be allowed the full recovery of all transition costs billed to it pursuant to Order 636. Sources of Supply. PG&W currently purchases natural gas both under the terms of monthly spot purchases and longer-term (i.e., one to five years) supply arrangements that provide for an adjustment each month in the price of gas purchased pursuant thereto (collectively referred to as "spot market purchases"). During 1993, PG&W also purchased a portion of its natural gas under long-term supply contracts with its interstate pipelines prior to the dates those contracts were terminated as a result of Order 636. Of the total volume of natural gas purchased by PG&W in 1993, 3,700,000 MCF (12.4%) was acquired from its interstate pipelines (of which 3,400,000 MCF was purchased under former long-term supply contracts) and 26,200,000 MCF (87.6%) was acquired from other sources, including marketers, producers, and integrated energy companies. The largest of these other sources, a Canadian marketer, accounted for 17.7% of PG&W's total purchases of natural gas in 1993. -6- The spot market purchases of natural gas by PG&W during each of the years 1991, 1992 and 1993 are summarized below: [CAPTION] Volume Average Percentage of Year Purchased (MCF) Cost per MCF Total Purchases [S] [C] [C] [C] 1991 17,762,000 $2.08 73.5% 1992 21,323,000 $2.61 71.0% 1993 26,200,000 $2.98 87.6% During 1994, PG&W expects to purchase a total of approximately 29,330,000 MCF of natural gas on the spot market under contracts ranging from one month to five years in duration at a currently projected average cost of $3.27 per MCF. These spot market purchases will constitute all of the natural gas that PG&W anticipates purchasing in 1994. PG&W presently has adequate supplies of natural gas to meet the demands of existing customers through April, 1994 (i.e., the end of the 1993/94 heating season), and believes that it will be able to obtain sufficient supplies in the future to meet the demands of its existing customers and to supply new customers, of which approximately 3,000 are expected to be added in 1994. Pipeline Transportation and Storage Entitlements. Pursuant to the terms of Order 636, PG&W entered into agreements with its former interstate pipeline suppliers during 1993 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) PG&W can transport an additional 3,300 MCF per day during the period December through February pursuant to an agreement with Transco that extends through 2011. -7- 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. 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 one year. The maximum capacity so released on any one day in 1993 was 27,942 MCF. Through March 23, 1994, 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. -8- 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 are currently estimated to be 288,396 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 303,295 MCF. PG&W's historic maximum daily sendout is 293,683 MCF, which occurred on January 19, 1994. 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 1993 totaled $13.3 million and are estimated to be $17.0 million for 1994. The higher level of expenditures estimated for 1994 reflects certain long-term pipeline improvement programs, as well as an increased emphasis on new business development. 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 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 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 considers 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." As a result, the PPUC staff indicated that it intends to initiate an informal investigation of the matter, including PG&W's responsibility for the incidents referred to in the Emergency Order. Although it is not presently possible to determine what action the PPUC will ultimately take with respect to possible violations of law and the matters raised by the Emergency Order, PG&W does not believe that compliance with, or any liability that might result from such violations or the Emergency Order will have a material adverse effect on its financial position or results of operations. Take-or-Pay Liabilities. FERC Order 500 issued in August, 1987, contains regulations for the sharing by customers of interstate pipeline companies, such as PG&W, of take-or-pay liabilities and associated contract renegotiation costs incurred by those pipeline companies. Take-or-pay liabilities represented amounts owed by pipeline companies to producers under the terms of contracts which required that the pipeline companies pay for specified quantities of gas, even though such gas was not actually taken. Order 500 provides that customers of the pipeline companies may be charged as much as 75% of the take-or-pay liabilities of the pipeline companies. In December, 1989, a Federal court ruled that certain provisions of Order 500 relating to the allocation of take-or-pay -9- costs were in violation of the Natural Gas Act. As a result, on November 1, 1990, the FERC issued Order 528 which includes guidelines for revised methods of allocating take-or-pay costs. It is currently estimated that the provisions of Orders 500 and 528 regarding the sharing of take-or-pay liabilities will result in PG&W being charged as much as $18.1 million over a six-year period from 1988 through 1994. This figure, however, is subject to change based upon changes in the take-or-pay obligations of PG&W's interstate pipeline suppliers and PG&W's levels of transportation services and purchases from its interstate pipelines. As of December 31, 1993, PG&W had been billed $17.2 million by its pipelines for take-or-pay liabilities. On April 27, 1990, PG&W filed an application with the PPUC seeking approval to recover 90% ($13.9 million based on then current estimates) of its total take-or-pay liabilities, and $250,000 of related carrying costs, through billings to customers generally over a four-year period beginning June 1, 1990. The PPUC approved this application, effective June 1, 1990. The surcharge by which PG&W bills its customers for take-or-pay costs is to be adjusted annually as of June 1, to reflect changes in PG&W's total estimated liability for take- or-pay costs (which is currently projected to be as much as $18.1 million) and the portion of such costs remaining to be recovered from its customers. In accordance with the PPUC's Order, PG&W has agreed to absorb a portion of its take-or-pay liabilities. The amount to be absorbed by PG&W and reflected as cost of gas is currently estimated to approximate $1.8 million, substantially all of which had been charged to expense as of December 31, 1993. As of December 31, 1993, PG&W had billed $14.8 million of take-or-pay costs to its customers, and as of such date had deferred $1.1 million of such costs, including related carrying charges, for future billing to customers. 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 procedures include a process for the reconciliation of actual gas costs incurred and actual revenues received and also provide 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 these procedures, PG&W placed a purchased gas cost rate of $3.74 per MCF in effect on December 1, 1993, and is required to file a proposed purchased gas cost rate on or before June 1, 1994, to be effective December 1, 1994. It is not presently possible to estimate how this proposed rate will compare to the current purchased gas cost rate of $3.74 per MCF, which is scheduled to remain in effect through November 30, 1994. 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 either PG&W's or PEI's financial position or results of operations. 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 -10- 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 satisfaction of the PPUC the prudence of its gas supply costs and, therefore, will be allowed to recover all such costs. 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 24, 1991, to reflect the effect of tax legislation enacted by the Commonwealth of Pennsylvania on August 4, 1991, increasing each of the above-referenced state taxes. Effective October 22, 1993, such state tax adjustment surcharge was rolled into PG&W's base gas rates, as ordered by the PPUC, and currently no state tax adjustment surcharge is applied to PG&W's bills for gas service. 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 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 is a subsidiary of PEI, which was formed in 1974 when PG&W restructured its operations by creating a parent company (PEI) with two groups of subsidiaries: one group, including PG&W and its water subsidiaries, is regulated by the PPUC; the other group is not so regulated. -11- PEI is a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), but it is exempt, pursuant to Section 3(a) of the PUHCA, from all the provisions of the PUHCA (except Section 9(a)(2) thereof) and the rules and regulations promulgated thereunder. PG&W's gas distribution and transportation activities are not subject to the Natural Gas Act, as amended. 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, 1993, PG&W had approximately 131,400 water customers from which it derived total water revenues of $53.4 million during 1993. The following chart shows a breakdown of the types of customers and the percentages of water revenues they generated in 1993: [CAPTION] Type of Customer % of Customers % of Revenues [S] [C] [C] Residential 91.6% 63.3% Commercial 7.1 16.9 Industrial 0.3 9.2 Municipal and Other Users 1.0 10.6 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 43 active and standby reservoirs and stream intakes located on extensive watershed lands. The water supply can also 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 1993 was approximately 65.9 million gallons. As of December 31, 1993, the quantity of water held in PG&W's reservoirs was approximately 18.1 billion gallons or 91.6% 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. -12- Filtration of Water Supplies. All of PG&W's water customers are supplied with filtered water 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 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 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. Main Replacement and Rehabilitation Program and Other Distribution System Improvements. PG&W distributes water to customers through approximately 1,675 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 as hereafter explained. To further assure that all of PG&W's water customers receive adequate quantities of aesthetically pleasing, palatable water, which meets all federal and state drinking water regulations, PG&W has initiated a program for the selective replacement and rehabilitation of water mains and services and the elimination of dead-end lines. This program involved the expenditure of $46.2 million during the period 1988 through 1993 and satisfied the terms of the settlement agreement between PG&W and the PPUC relating to the PPUC's October 23, 1986, Show Cause Order, pursuant to which PG&W agreed to install an average of 14 miles of mains per year during the period 1988 through 1992 (which was accomplished) and to remove all lead-lined services by the end of 1991 (which was accomplished). PG&W estimates that approximately 30% of the water introduced to its distribution system is lost through leakage or otherwise cannot be accounted for -13- 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. For the years 1994 through 1996, PG&W intends to expend an average of $9.8 million per year 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 by June, 1994, in accordance with the PPUC's June 23, 1993, Order allowing PG&W a conditional rate increase for the Scranton Water Rate Area. See "-Management's Discussion and Analysis of Financial Condition and Results of Operations-Rate Matters-Water Rate Filings." As part of the settlement resolving certain disputed issues relating to such Order, PG&W has 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. This additional expenditure is included in the $9.8 million that PG&W is planning to spend annually on distribution system improvements subsequent to 1993. 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, disinfected, and treated with chemicals to minimize corrosion of the distribution system and customers' piping. Water samples are taken at each of 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. -14- Construction Expenditures. PG&W's construction expenditures for water utility plant in 1993 totaled $32.6 million, and are estimated to be $29.8 million for 1994. The lower level of capital expenditures estimated for 1994 is primarily attributable to completion of the Ceasetown and Watres Water Treatment Plants in 1993. 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 23, 1994:
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 (1) 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 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", i.e., meeting federal and state primary (health-related) and 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 receiving filtered water as of March, 1994, is approximately $340. PG&W anticipates that this cost will increase to approximately $475 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 -15- 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 magnitude of future rate increases is such that the PPUC, to reduce consumer "rate shock," may require that any such rate increases be phased-in over a period of time. 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. 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 24, 1991, to reflect the effect of tax legislation enacted by the Commonwealth of Pennsylvania on August 4, 1991, increasing each of the above-referenced state taxes. Effective October 22, 1993, such state tax adjustment surcharge was rolled into PG&W's base water rates, as ordered by the PPUC, and currently no state tax adjustment surcharge is applied to PG&W's bills for gas service. 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. Interest of Luzerne County in Possible Purchase of Certain of PG&W's Water Operations. During 1993, Luzerne County, Pennsylvania (the "County"), expressed interest in the possible formation of an authority for the purpose of purchasing PG&W's water operations in the County, where approximately 55% of PG&W's water customers reside, and PG&W provided certain data to the County for a preliminary feasibility study. On February 4, 1994, the County announced that it was no longer considering the feasibility of purchasing such water operations and that it had dissolved the special committee formed for that purpose. -16- ITEM 2. PROPERTIES Gas. PG&W's gas system consists of approximately 2,159 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 mortgage liens securing certain funded debt. These 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-eight supplemental indentures (collectively, the "Indenture") from PG&W to Morgan Guaranty Trust Company of New York, as Trustee, and a second mortgage lien pursuant to a Subordinate Open End Mortgage, Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement and Fixture Filing, dated as of September 10, 1991 (the "Intercreditor Mortgage"), from PG&W to Swiss Bank Corporation, New York Branch ("SBC"), as Collateral Agent, which secures PG&W's obligations under the Letter of Credit Agreement dated as of December 1, 1987, as amended, between PG&W and SBC. Water. PG&W's water system consists principally of 43 active and standby reservoirs and stream intakes, ten water treatment plants, various distribution system storage tanks, approximately 1,675 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, approximately 70% of which is used in connection with its water utility operations. From time to time, PG&W engages in the sale of non-watershed land and other physical property. Proposed legislation in Pennsylvania, if enacted, would require water utilities to obtain the PPUC's prior approval for the transfer of any watershed land (as defined) and would require the PPUC to credit to ratepayers 50% of the net proceeds (as defined) of any sale, lease or other transfer of such land permitted by the PPUC. PG&W currently anticipates that it will realize average gross profits of approximately $600,000 per year through 1996 from sales of non-watershed land and other physical property. Sales on non-watershed lands and other physical property would not be subject to the proposed legislation; however, there can be no assurance that the proceeds ultimately received will inure exclusively to the benefits of PEI's shareholders. 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 mortgage liens securing certain funded debt. These 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, December 3, 1992, and April 5, 1993, between PG&W and the -17- Pennsylvania Infrastructure Investment Authority, which were primarily used to finance the construction of certain water facilities. These properties are also subject to a second or third mortgage lien (depending on whether they are subject to the PENNVEST Mortgage) pursuant to the Intercreditor Mortgage. -18- ITEM 3. LEGAL PROCEEDINGS Construction Litigation On April 22, 1992, a complaint was filed in the Court of Common Pleas of Lackawanna County, Pennsylvania, by the Quandel Group Inc. ("Quandel") against PG&W in connection with the construction of PG&W's Brownell Water Treatment Plant. In its complaint, Quandel, the general contractor for the project, made various allegations and sought approximately $1.3 million in damages, plus interest. PG&W answered the complaint and also filed a counterclaim against Quandel seeking approximately $1.6 million in damages and expenses for failure of Quandel to complete construction of the Brownell Water Treatment Plant in a timely and proper manner. Also, PG&W joined Gannett-Fleming Water Resources Engineers, Inc. (Gannett-Fleming), the designer of the project, as an additional defendant in this action. On January 25, 1994, Quandel and PG&W reached an agreement settling Quandel's claim against PG&W and PG&W's counterclaim against Quandel on terms that had no material impact on PG&W's results of operations or financial position. Additionally, as part of this settlement, Quandel agreed to indemnify PG&W for any liability arising out of Quandel's claim against Gannett-Fleming in this action, which is still pending, or otherwise relating to the construction of the Brownell Water Treatment Plant. -19- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1993, there were no matters submitted to a vote of security holders of the registrant through the solicitation of proxies or otherwise. -20- 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, 1992 and 1993, were as follows: [CAPTION] 1992 1993 [S] [C] [C] First quarter $ .705 $ .7100 Second quarter .670 .7100 Third quarter .705 .7100 Fourth quarter .460 .6925 Total $ 2.540 $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. -21- 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, 1991, 1992 and 1993.
Percentage of Operating Revenues Year Ended December 31, 1991 1992 1993 Operating Revenues: Gas 75.8% 74.6% 74.2% Water 24.2 25.4 25.8 Total operating revenues 100.0 100.0 100.0 Operating Expenses: Cost of gas 42.6 40.5 41.9 Other operation expenses 19.9 19.8 18.8 Maintenance and depreciation 10.6 10.2 10.5 Deferred treatment plant costs, net (0.4) (0.1) (0.7) Income and other taxes 10.0 12.0 12.1 Total operating expenses 82.7 82.4 82.6 Operating Income 17.3 17.6 17.4 Other Income, Net 0.6 - 0.3 Interest Charges 11.8 10.9 9.9 Dividends on Preferred Stock 2.3 2.6 3.1 Earnings Applicable to Common Stock 3.8% 4.1% 4.7%
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% ($9.5 million on an annual basis) effective December 1, 1992, and 19.0% ($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. * 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. -22- 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 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 $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 $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 deferred treatment plant costs. 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 (gas operating revenues less the cost of gas) 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 net deferred treatment plant costs during 1993, as more fully discussed below. 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 are retroactive to January 1, 1993, increased PG&W's income tax expense by approximately $124,000 for the year 1993. -23- 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 allowance for funds used during construction ("AFUDC") and of the deferred treatment plant carrying charges that were recorded during 1993. See "-Other Income, Net." Deferred Treatment Plant Costs 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 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 $5.1 million of costs so 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. 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 July 28, 1993, PG&W has 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, 1993, a total of $4.6 million of costs, consisting of $424,000 of operating expenses and $745,000 of carrying charges relative to the Crystal Lake Water Treatment Plant and related facilities and $1.7 million of expenses and $1.7 million of carrying charges relative to the Ceasetown and Watres Water Treatment 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 the costs relative to the Crystal Lake, Ceasetown and Watres Water Treatment Plants and related facilities that have been deferred pursuant to such Orders 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 $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%) -24- 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 a $734,000 allowance for equity funds used during construction and an approximate $821,000 equity component of deferred treatment plant carrying charges. In prior years, PG&W had calculated both the AFUDC and deferred treatment plant carrying charges based on the interest rates of its bank borrowings and other relevant indebtedness. This increase 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 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 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. 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, -25- 1993, June 23, 1993, and December 16, 1993, and the increase in 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 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 Pennsylvania Enterprises, Inc. ("PEI"), the parent company of PG&W, on October 27, 1993. o Year ended December 31, 1992, compared with year ended December 31, 1991 Operating Revenues. Operating revenues of PG&W increased by $9.1 million (5.0%) from $182.8 million for 1991 to $191.9 million for 1992. Gas operating revenues increased by $4.7 million (3.4%) from $138.5 million for 1991 to $143.2 million for 1992, primarily as a result of increased sales to residential and commercial heating customers. The effect on revenues of these increased sales was partially offset by a price decrease averaging 14.8% ($20.8 million on an annual basis) effective December 1, 1991, due to decreased costs of purchased gas. Although heating degree days were 3.1% lower than normal during 1992, they were 10.7% higher than in 1991. Largely because of the colder weather and the addition of approximately 2,800 new customers, total gas deliveries for the year were 8.0% higher than in 1991. Water operating revenues increased by $4.4 million (9.9%) from $44.3 million for 1991 to $48.7 million for 1992. This increase was primarily the result of an approximate 110.0% rate increase which the PPUC allowed PG&W effective March 23, 1991, for customers in the Scranton Water Rate Area, and an approximate 46.0% rate increase which the PPUC allowed PG&W effective January 30, 1992, for customers in the Spring Brook Water Rate Area served exclusively by the Nesbitt Water Treatment Plant. These increases were designed to produce additional annual revenue of $16.9 million, as more fully explained below under "-Rate Matters-Water Rate Filings." Operating Expenses. Operating expenses, including depreciation and income taxes, increased $6.9 million (4.6%) from $151.1 million for 1991 to $158.0 million for 1992. As a percentage of operating revenues, total operating expenses decreased from 82.7% during 1991 to 82.4% during 1992. Operating expenses related to PG&W's gas utility operations increased by $3.9 million (3.3%) from $120.0 million in 1991 to $124.0 million in 1992, primarily as a result of increased operating costs, depreciation and income taxes. Operating expenses related to PG&W's water utility operations increased by $3.0 million (9.6%) from $31.0 million to $34.0 million in 1992, primarily as a result of increased operating costs, depreciation and income taxes. The cost of gas decreased by $81,000 (0.1%) from $77.8 million for 1991 to $77.7 million for 1992. This slight reduction was the result of significantly decreased costs for purchased gas, the effect of which was largely offset by a 21.6% increase (5.2 billion cubic feet) in the volume of gas sold during 1992, compared to 1991. This increased volume was attributable to colder weather, the switching of certain industrial customers from transportation to sales service and the addition of new customers. Exclusive of charges related to take-or-pay costs absorbed by PG&W, which totaled $554,000 in 1991 and $42,000 in 1992, the gross margin on gas operations increased $4.3 million or 7.1% in 1992. This -26- increase was primarily the result of increased sales to residential and commercial heating customers because of colder weather. Other than the cost of gas and income taxes, operating expenses increased by $4.0 million (6.0%) from $67.9 million for 1991 to $71.9 million for 1992. This increase was largely attributable to a $1.9 million increase in other taxes, principally as a result of tax rate increases enacted by the Commonwealth of Pennsylvania in August, 1991, an increase of $586,000 in the provisions for self-insurance relating to liability to third parties and for workers' compensation, and a $1.1 million increase in depreciation, primarily as a result of capital additions and the change in March, 1991, from a 4.0% compound interest to a straight-line method of depreciation with respect to certain water plant. Also contributing to the increase was a $370,000 decrease in deferred treatment plant costs during 1992. See "-Deferred Treatment Plant Costs and Carrying Charges." Income taxes increased by $2.9 million (55.0%) from $5.4 million in 1991 to $8.3 million in 1992 due to a higher level of income before income taxes (for this purpose, operating income net of interest charges) and an increase in the state income tax rate enacted by the Commonwealth of Pennsylvania in August, 1991. Deferred Treatment Plant Costs and Carrying Charges. As discussed above, PG&W deferred all operating expenses, including depreciation and property taxes, and the carrying charges relative to the four new Scranton Area water treatment plants and related facilities and the Crystal Lake Water Treatment Plant and related facilities. The deferral of such costs resulted in an increase in earnings for the years ended December 31, 1991 and 1992, of $923,000 and $437,000, respectively, net of related income taxes. As of December 31, 1992, a total of $5.9 million of costs, consisting of $2.3 million of operating expenses and $2.8 million of carrying charges relative to the Scranton Area water treatment plants and related facilities, and $294,000 of operating expenses and $461,000 of carrying charges relative to the Crystal Lake Water Treatment Plant and related facilities, had been so deferred pursuant to the PPUC's Orders permitting the deferral of these costs. Operating Income. As a result of the above, total operating income increased by $2.2 million (7.0%) from $31.7 million for 1991 to $33.9 million for 1992, and increased as a percentage of total operating revenues from 17.3% in 1991 to 17.6% in 1992. Operating income from gas utility operations increased $821,000 (4.5%) from $18.4 million in 1991 to $19.3 million in 1992, due primarily to a $4.8 million increase in gross margin, the effect of which was partially offset by increases in other operations expenses, depreciation, and income and gross receipts taxes. Operating income from water utility operations increased $1.4 million (10.6%) from $13.2 million in 1991 to $14.7 million in 1992, due primarily to the $15.0 million increase in annual revenue which the PPUC allowed for customers in PG&W's Scranton Water Rate Area effective March 23, 1991, and the $1.9 million increase in annual revenue which it allowed effective January 30, 1992, for customers in the Spring Brook Water Rate Area served exclusively by the Nesbitt Water Treatment Plant. These increased revenues were partially offset by increases in other operations expenses, depreciation, and property and income taxes. Other Income, Net and Interest Charges. Other income, net decreased from $1.1 million in 1991 to $30,000 in 1992, primarily because (in each case, net of the related income taxes if included in other income, net) of a $252,000 reduction in interest income from the temporary investment of funds by PG&W, $127,000 of interest expense associated with the defeasance on September 15, -27- 1992, of the Luzerne County Industrial Development Authority (the "Authority") Exempt Facilities Revenue Bonds, 1987 Series A (Pennsylvania Gas and Water Company Project) (the "1987 Series A Bonds") that were redeemed on October 1, 1992 (see "-Liquidity and Capital Resources-Long-Term Debt and Capital Stock Financings"), $151,000 in civil penalties relative to the extended completion dates of PG&W's Ceasetown and Watres Water Treatment Plants and a $59,000 reduction in income from the sale of non-watershed land and other physical property. Interest charges decreased by $710,000 (3.3%) from $21.7 million for 1991 to $21.0 million for 1992. This decrease was largely attributable to a $1.2 million (226.5%) increase in AFUDC in 1992 to $1.8 million from $543,000 in 1991. The increase in AFUDC was due to a greater amount of construction work- in-progress, primarily as a result of the Crystal Lake Water Treatment Plant, which was completed in July, 1992, the Ceasetown Water Treatment Plant which was completed in late March, 1993, and the Watres Water Treatment Plant, which was completed in late September, 1993. Partially offsetting the effect of the increased AFUDC was a lower level of deferred treatment plant interest in 1992. Dividends on Preferred Stock. Dividends on preferred stock increased $829,000 (19.6%) from $4.2 million in 1991, to $5.1 million in 1992, as a result of the issuance by PG&W of its 9% Cumulative Preferred Stock on August 18, 1992. See "-Liquidity and Capital Resources-Long-Term Debt and Capital Stock Financings." Earnings Applicable to Common Stock. Earnings applicable to common stock increased $1.0 million (14.5%) from $6.9 million ($1.87 per share) for the year ended December 31, 1991, to $7.9 million ($2.02 per share) for the year ended December 31, 1992. The increased earnings in 1992 were the result of the matters discussed above, primarily the increase in gross margin on gas operations resulting from higher levels of sales to residential and commercial heating customers, as well as the increase in water operating revenues resulting from the rate increases which the PPUC allowed PG&W effective March 23, 1991, and January 30, 1992. 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 1991, or which are currently pending. -28- 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 1991, 1992 and 1993 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, 1991 $3.20 $2.46 $(20,800,000) December 1, 1992 2.46 2.79 9,500,000 December 1, 1993 2.79 3.74 28,800,000 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 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 April 27, 1990, PG&W filed an application with the PPUC seeking approval to recover 90% ($13.9 million based on then current estimates) of its total take-or-pay liabilities, and $250,000 of related carrying costs, through billings to customers generally over a four-year period beginning June 1, 1990. The PPUC approved this application effective June 1, 1990. In connection with this approval, PG&W agreed to absorb a portion of its take-or-pay liabilities. The amount to be so absorbed by PG&W is currently estimated to be $1.8 million, substantially all of which had been charged to expense as of December 31, 1993. As of December 31, 1993, PG&W had billed $14.8 million of take-or-pay costs to its customers and had deferred $1.1 million of such costs, including related carrying charges, for future billing to customers. Under terms of the PPUC's Order in respect of take-or-pay obligations, the surcharge by which PG&W bills its customers for take-or-pay costs is adjusted annually as of June 1 to reflect changes in PG&W's total estimated liability for take-or-pay costs (which is currently projected to be as much as $18.1 million) and the portion of such costs remaining to be recovered from its customers. In accordance therewith, the PPUC approved an adjustment in PG&W's take-or-pay surcharge effective June 1, 1993, based on the estimated $3.5 million of take- or-pay costs that remained to be collected from PG&W's customers as of such date. On October 15, 1993, the PPUC adopted an annual purchased gas cost order (the "PGC Order") regarding recovery of FERC Order 636 transition costs. The PGC Order states the PPUC believes that the recovery of Account 191 and New Facility Costs are subject to recovery through the annual PGC rate filing made with the PPUC by PG&W and other similar local gas distribution companies. The PGC Order also indicates that while Gas Supply Realignment and Stranded 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 states that all such filings will be evaluated on a case-by-case basis. As of February -29- 1, 1994, PG&W began to recover the Account 191 and New Facility 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 twelve-month period extending through October 31, 1994, will aggregate $1.0 million, of which $290,000 had been billed to PG&W as of December 31, 1993. Additionally, PG&W is currently seeking the full recovery of the Gas Supply Realignment and Stranded Costs that it estimates it will be billed by its interstate pipelines through the filing of a tariff pursuant to the surcharge provisions of the Code. It is currently estimated that these costs, which will be billed to PG&W generally over a three-year period extending through the fourth quarter of 1996 will range between $11.0 million and $13.0 million, of which $730,000 had been billed to PG&W as of December 31, 1993. Based on the provisions of the PGC Order, PG&W believes it will be allowed the full recovery of all transition costs billed to it pursuant to Order 636. 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 notwithstanding 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 water service meeting or exceeding the PPUC's standards for quantity and quality of service to its customers receiving filtered water based on testing performed by PG&W and an independent laboratory of water at certain 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. 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 receiving filtered water as of March, 1994, is approximately $340. PG&W anticipates that this cost will increase to approximately $475 in the latter part of this decade, at which time PG&W expects -30- 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 magnitude of future rate increases is such that the PPUC, to reduce consumer "rate shock," may require that any such rate increases be phased-in over a period of time. 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. The denial of adequate rate relief in future applications would require PG&W to take various actions to restrict its capital expenditures and operating expenses and possibly reduce dividends on its common stock in order to conserve cash resources and minimize the reduction in earnings that such denial would otherwise cause. See "-Liquidity and Capital Resources-Failure to Obtain Adequate Rate Relief" for a discussion of the adverse effects on PG&W and PEI if adequate rate relief were denied. Scranton Area. On June 8, 1990, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $25.5 million in additional annual revenue. This rate increase request involved the approximately 54,700 customers at such date who would be furnished water from the one previously existing and the four new water treatment plants in the Scranton Water Rate Area. In December, 1990, PG&W and certain parties filing objections to the rate increase request reached a settlement that provided for an approximate 110% rate increase 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." The settlement provided that $10.2 million of the increased revenue (an approximate 75% increase in rates) was to be realized through an immediate rate increase and that the remaining $4.8 million of the increased revenue (an additional 35% increase in rates) was to be realized through another rate increase one year later (at the beginning of year two of the phase-in period). The settlement also specified that the $4.8 million in revenue that would be deferred during the first year of the phase-in period was to be collected from customers in the form of a surcharge in years two through ten of the phase-in period. Finally, PG&W also agreed that it would not file for another general rate increase for the Scranton Water Rate Area prior to six months after the effective date of the second phase of the rate increase. By Order adopted March 22, 1991, the PPUC approved the settlement. In accordance with the accounting requirements for a qualified phase-in plan as prescribed by FASB Statement 92, PG&W recorded a $1.2 million nonrecurring charge to earnings as of December 31, 1990, representing the estimated net present value of carrying charges with respect to the $4.8 million of revenue to be deferred in the first year of the phase-in period. This charge was required because the settlement did not provide for the billing of any carrying charges on such deferred revenue. Additionally, in accordance with the provisions of FASB Statement 92, PG&W commenced recording the entire $15.0 million increase in annual revenue allowed by the PPUC as additional revenue beginning March 23, 1991. However, pursuant to the terms of the settlement, PG&W deferred the billing of $4.7 million of the increased revenue recorded during the first year of the phase-in period (i.e., the period March 23, 1991, through March 22, 1992). The amount so deferred was $100,000 less than the $4.8 million originally estimated because of slightly lower than anticipated consumption. Effective March 23, 1992, PG&W began to bill the $4.7 million that had been so deferred by means of the surcharge that will be in effect in years two through -31- ten of the phase-in period, and as of December 31, 1993, $871,000 had been so billed to its Scranton Water Rate Area customers. Nesbitt Service Area. On April 30, 1991, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $2.6 million in additional annual revenue. This rate increase request involved the approximately 14,300 customers in the Spring Brook Water Rate Area at such date who were served exclusively by the Nesbitt Water Treatment Plant. PG&W and certain parties filing objections to the rate increase request reached a settlement that provided for a $1.9 million increase in annual revenue which the PPUC approved effective January 30, 1992. However, on February 27, 1992, the PPUC granted a petition of the Office of Consumer Advocate (the "OCA"), a complainant in the rate proceeding and a signatory to the settlement, for reconsideration and clarification of the PPUC Order which approved the settlement. As a result, the $1.9 million rate increase remains subject to further PPUC and possible appellate review. Although it cannot be certain, PG&W believes that the $1.9 million increase will not be rescinded in whole or in part or affected in any other way as a result of the OCA's petition, and as of March 23, 1994, no further action had been taken by the PPUC with respect to the OCA's petition. 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 a qualified phase-in plan pursuant to FASB Statement 92. The settlement further 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 the revenue deferred in accordance with the phase-in plan. 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, 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. On November 13, 1992, the PPUC suspended this rate increase for seven months (until June 24, 1993) in order to investigate the reasonableness of the proposed rates. 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] -32- 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 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 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, 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 June 3, 1993, the PPUC suspended this rate increase for seven months (until January 28, 1994) by operation of law in order to institute an investigation into the reasonableness of the proposed rates. 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 now 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 -33- accordance with the provisions of FASB 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. 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 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. See "-Construction Expenditures and Related Financing" and "-Failure to Obtain Adequate Rate Relief." 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. This is a problem faced by all regulated utilities, and one that had been particularly acute with respect to PG&W because of the denial by the PPUC in 1986 and again in 1988, as a result of water quality issues, of water rate increases requested by PG&W. Nonetheless, PG&W was able to generate and raise sufficient capital resources despite these denials, and 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 it has been granted by the PPUC since 1991 with respect to customers being supplied with filtered water. PG&W also believes that additional rate increases will be allowed by the PPUC for its approximately 131,400 water customers, all of whom are now receiving filtered water, 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." If PG&W is denied future rate relief, it would be necessary, depending upon the amount so denied, for PEI and PG&W to take various actions to reduce cash expenditures. For a discussion of the actions PEI and PG&W would take to reduce cash expenditures, see "-Failure to Obtain Adequate Rate Relief." Such measures would continue until PG&W was allowed sufficient rate relief to increase its earnings to a level that would permit it to raise additional debt and equity capital. Concurrently with taking actions to reduce cash expenditures, PG&W -34- would file appropriate appeals with the Commonwealth Court of Pennsylvania, alleging that, contrary to law, it had been denied an opportunity to earn a fair rate of return on its prudent investment in used and useful utility property devoted to public service. 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). The approximate amount of funds required for these purposes, net of the amounts provided to PEI by PG&W for use of PEI's federal income tax credits, are expected to total $14.5 million in 1994, $15.2 million in 1995 and $17.5 million in 1996. During 1994, $3.7 million of the funds required by PEI for these purposes will be provided through the repayment by PG&W of its $3.7 million demand loan from PEI. 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 $5.7 million of unsecured debt due on demand or within one year from issuance outstanding as of December 31, 1993, which included the $3.7 million demand loan from PEI. 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. PG&W presently has sufficient funding for its working capital needs, as well as its construction program, through at least the third quarter of 1994, and believes it will be able to raise such funds as are required for construction expenditures, refinancings and other working capital requirements beyond the third quarter of 1994. PG&W believes that based on its current financial projections, it will be able to achieve sufficient levels of earnings during 1994, as a result of various cost control measures and water rate increases which have already been granted, to enable it to meet its interest and fixed charge coverage requirements and to give it the borrowing and other financing capability necessary for its working capital needs and planned construction program. However, if PG&W is not granted additional water rate increases in future years, it may be necessary for PEI and PG&W to take various actions at such time to reduce expenditures in order to satisfy PG&W's interest and fixed charge coverage requirements and to maintain sufficient liquidity, and thereby lessen the amount of debt and equity capital which must be raised. See "-Failure to Obtain Adequate Rate Relief." 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 -35- 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 $67.0 million of unsecured revolving bank credit. Specifically, on April 19, 1993, PG&W 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 April 30, 1995, 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 3/8 of 1% per annum on the average daily amount of the unused portion of the available funds. As of March 23, 1994, $41.0 million of borrowings were outstanding under the Credit Agreement. PG&W also has three short-term bank lines of credit with an aggregate borrowing capacity of $7.0 million which provide for borrowings at interest rates generally less than prime and mature on April 30, 1994. As of March 23, 1994, PG&W had no borrowings outstanding under the short-term bank lines of credit. Prior to their maturity on April 30, 1994, PG&W will seek to renew the $7.0 million short-term bank lines of credit. PG&W believes that based on its present earnings and financing capabilities, capitalization and banking arrangements and relationships it will be successful in renewing the $7.0 million short-term bank lines of credit. Current Maturities of Long-Term Debt and Preferred Stock As of December 31, 1993, $38.7 million of PG&W preferred stock and long-term debt was required to be repaid within twelve months. Such amount included a note in the principal amount of $30.0 million, that is subject to repayment on December 1, 1994, issued in 1987 to PNC Bank (formerly Northeastern Bank of Pennsylvania) as trustee (the "IDA Trustee") in connection with the issuance by the Luzerne County Industrial Development Authority (the "Authority") of $30.0 million of its Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) due 2017 (the "1987 Series B Bonds"). Also, such amount included approximately $7.0 million of high interest rate water facility loans of PG&W having a weighted annual interest rate of 9.33% which were repaid by PG&W on January 31, 1994, with bank borrowings. 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 1992. On January 30, 1992, PG&W received a total of $22.0 million from PEI representing repayment of a $15.0 million intercompany advance made on September 12, 1991, and a $7.0 million contribution which was treated as an intercompany advance pending approval by the PPUC of the issuance of shares of common stock relative to such contribution. PG&W utilized such funds to repay a portion of -36- its bank borrowings which had been incurred primarily to finance construction expenditures. On June 19, 1992, PG&W issued to PEI 137,143 shares of its common stock for aggregate net proceeds of approximately $5.5 million. On the same date, PG&W also received $3.7 million from PEI in the form of a demand loan. PG&W utilized such funds, totaling approximately $9.2 million, to repay bank borrowings which had been incurred primarily to finance construction expenditures. The interest rate on this demand loan (which is to be repaid during 1994) is currently 3.41% (1% less than the interest rate PG&W is required to pay on borrowings under the Credit Agreement). On August 18, 1992, PG&W issued 250,000 shares of its 9% Cumulative Preferred Stock, par value $100 per share, the net proceeds of which (approximately $23.6 million) were used to repay $16.1 million of bank borrowings and for working capital purposes. On September 15, 1992, the Authority issued $50.0 million of its Exempt Facilities Revenue Refunding Bonds, 1992 Series A (Pennsylvania Gas and Water Company Project) (the "1992 Series A Bonds") and, in connection therewith, PG&W issued $50.0 million of its 7.20% First Mortgage Bonds to the IDA Trustee for the 1992 Series A Bonds as security for the 1992 Series A Bonds. PG&W will make payments to the IDA Trustee pursuant to the 7.20% First Mortgage Bonds in amounts sufficient and at the times necessary to pay the debt service requirements on the 1992 Series A Bonds. The proceeds from the issuance of the 1992 Series A Bonds, along with additional funds provided by PG&W, were deposited with the IDA Trustee for the Authority's $50.0 million Exempt Facilities Revenue Bonds, 1987 Series A (Pennsylvania Gas and Water Company Project) (the "1987 Series A Bonds") on September 15, 1992, for use in redeeming the 1987 Series A Bonds on October 1, 1992. The deposit of such funds acted to discharge all of PG&W's obligations with respect to its 8-1/2%, 1987 Series A Note in the principal amount of $50.0 million which had been issued to the IDA Trustee in connection with the 1987 Series A Bonds and which was subject to repayment on October 1, 1992. On December 14, 1992, PG&W issued $30.0 million of its 8.375% Series First Mortgage Bonds due 2002. The proceeds from the issuance of these bonds were used to repay approximately $28.7 million of bank borrowings, thereby providing PG&W with additional borrowing capacity for future capital expenditures and other working capital needs. On December 22, 1992, the Authority issued $30.0 million of its 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% First Mortgage Bonds to the IDA Trustee for the 1992 Series B Bonds, as security for the 1992 Series B Bonds. PG&W will make payments to the IDA Trustee pursuant to the 7.125% First Mortgage Bonds in amounts sufficient and at the times necessary to pay the debt service requirements on 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. During 1992 and 1993, $2.0 million and $15.9 million, respectively, of the proceeds from the 1992 Series A Bonds were so utilized. As of December 31, 1993, $12.9 million of the proceeds (including investment income of $731,000) was held by the IDA Trustee and was available to finance the future construction of qualified water facilities for PG&W. -37- 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 and also borrowed $1.6 million 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 $1.0 million remained available as of December 31, 1993, 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. 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 November 29, 1993, S&P said PG&W's outlook was "stable" and that "continued, though slow, improvements in PG&W's financial profile are expected as the last [water] treatment plant is completed in 1993 and adequate water rate relief is granted." However, S&P noted that "significant capital expenditures and an excessive dividend payout...will continue to challenge management over the short 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 either S&P or Moody's would result in the interest rate charged on borrowings under the Credit Agreement being increased by one half percent per annum (which increase could cost PG&W as much as $300,000 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 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. -38- During 1991, 1992 and 1993, PG&W realized $445,000, $385,000 and $465,000, respectively, from the issuance of common stock to PEI in connection with PEI's Dividend Reinvestment and Stock Purchase Plan. Construction Expenditures and Related Financing Expenditures for the construction of utility plant during the period 1991 through 1993 were as follows: [CAPTION] Water Gas Year Facilities Facilities Total (Thousands of Dollars) [S] [C] [C] [C] 1991 $ 19,155 $ 9,359 $ 28,514 1992 44,352 12,669 57,021 1993 32,575 13,325 45,900 $ 96,082 * $ 35,353 $131,435 * Includes $11.7 million, $30.5 million and $20.7 million expended in 1991, 1992 and 1993, 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. The construction of water facilities and gas facilities by PG&W during 1993 was largely 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 1994 through 1996 will total $136.3 million, of which $84.3 million will involve the construction of water facilities and $52.0 million will involve the construction of gas facilities. PG&W anticipates that a portion of such water facilities will be financed with the $12.9 million of proceeds from the issuance of the Authority's 1992 Series B Bonds held by the IDA Trustee as of December 31, 1993, for the benefit of PG&W and that the balance of its expenditures for water facilities, as well as its expenditures for gas facilities, will be financed with approximately $51.0 million from the issuance of another series of first mortgage bonds in 1995 and other loans in 1994, $32.0 million in late 1995 from the sale of common stock to PEI and $40.4 million of 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. 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, reducing or eliminating dividends on its common stock, thereby resulting in a reduction or elimination of PEI's common stock dividends, curtailing or deferring work on various capital projects, considering the sale of selected assets and reducing its operating expenses, all of which could negatively impact the quality and reliability of services rendered to the public by PG&W. -39- 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. 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 presently records a liability for benefits of this nature, and thus the provisions of FASB Statement 112, which PG&W adopted effective January 1, 1994, are not expected to have a material impact on its financial position or results of operations. -40- 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 42 through 71 of this Form 10-K. -41- 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, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 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 schedules listed in Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state 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 & CO. New York, N.Y. March 4, 1994 -42- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF INCOME
Year Ended December 31, 1991 1992 1993 (Thousands of Dollars) OPERATING REVENUES: Gas $ 138,465 $ 143,227 $ 153,325 Water 44,285 48,651 53,363 Total operating revenues 182,750 191,878 206,688 OPERATING EXPENSES: Cost of gas 77,801 77,720 86,557 Other operation expenses 36,334 37,971 38,859 Maintenance 9,634 8,677 9,341 Depreciation 9,779 10,856 12,299 Deferred treatment plant costs, net (Note 2) (664) (294) (1,532) Income taxes 5,359 8,305 8,989 Other taxes 12,814 14,730 16,019 Total operating expenses 151,057 157,965 170,532 OPERATING INCOME 31,693 33,913 36,156 OTHER INCOME, NET (Note 3) 1,134 30 560 INCOME BEFORE INTEREST CHARGES 32,827 33,943 36,716 INTEREST CHARGES: Interest on long-term debt 18,536 18,929 20,515 Other interest 4,633 4,292 2,589 Allowance for borrowed funds used during construction (543) (1,773) (1,482) Deferred treatment plant carrying charges (Note 2) (929) (461) (1,207) Total interest charges 21,697 20,987 20,415 NET INCOME 11,130 12,956 16,301 DIVIDENDS ON PREFERRED STOCK 4,236 5,065 6,462 EARNINGS APPLICABLE TO COMMON STOCK $ 6,894 $ 7,891 $ 9,839 EARNINGS PER SHARE OF COMMON STOCK $ 1.87 $ 2.02 $ 2.36 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,687,736 3,908,351 4,176,087 The accompanying notes are an integral part of the financial statements.
-43- PENNSYLVANIA GAS AND WATER COMPANY BALANCE SHEETS
December 31, 1992 1993 (Thousands of Dollars) ASSETS UTILITY PLANT: Gas plant, at original cost less acquisition adjustments of $386,000 $234,708 $245,969 Water plant, at original cost plus acquisition adjustments of $14,236,000, and $14,577,000, respectively 329,809 360,996 Common plant, at original cost 24,525 26,212 589,042 633,177 Accumulated depreciation (76,743) (86,287) 512,299 546,890 OTHER PROPERTY AND INVESTMENTS: Restricted funds held by trustee (Note 6) 28,020 12,853 Other 3,049 3,291 31,069 16,144 CURRENT ASSETS: Cash and cash equivalents 570 2,714 Accounts receivable - Customers 22,230 20,533 Others 716 1,258 Reserve for uncollectible accounts (1,475) (1,223) Accrued utility revenues 12,547 16,123 Materials and supplies, at average cost 3,520 3,549 Gas held by suppliers, at average cost 21,612 26,650 Deferred cost of gas & supplier refunds, net - 12,752 Prepaid expenses and other 1,963 2,026 61,683 84,382 DEFERRED CHARGES: Deferred taxes collectible - 51,382 Unamortized debt expense 5,580 5,745 Deferred treatment plant costs and interest (Note 2) 6,569 10,129 Deferred water utility billings (Note 2) 3,795 3,885 Other 8,877 7,751 24,821 78,892 TOTAL ASSETS $629,872 $726,308 The accompanying notes are an integral part of the financial statements.
-44- PENNSYLVANIA GAS AND WATER COMPANY BALANCE SHEETS
December 31, 1992 1993 (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION (see accompanying statements on page 47): Common shareholder's investment (Notes 4 and 7) $158,098 $188,011 Preferred stock (Note 5) - Not subject to mandatory redemption, net 33,615 33,615 Subject to mandatory redemption 41,920 31,840 Long-term debt (Note 6) 245,877 266,259 479,510 519,725 CURRENT LIABILITIES: Current portion of long-term debt and preferred stock subject to mandatory redemption (Notes 5, 6 and 8) 39,085 38,664 Notes payable - Bank (Note 8) - 2,000 Parent 3,680 3,680 Accounts payable - Suppliers 23,944 22,401 Affiliates, net 613 1,888 Deferred cost of gas and supplier refunds, net 555 - Accrued general business and realty taxes 3,362 3,574 Accrued income taxes 4,007 4,984 Accrued interest 5,200 4,042 Other 1,620 2,440 82,066 83,673 DEFERRED CREDITS: Deferred income taxes 33,816 87,005 Unamortized investment tax credits 9,439 9,183 Advances for construction 10,747 10,985 Contributions in aid of construction 8,761 9,810 Operating reserves 1,565 1,863 Other 3,968 4,064 68,296 122,910 COMMITMENTS AND CONTINGENCIES (Notes 10 and 11) TOTAL CAPITALIZATION AND LIABILITIES $629,872 $726,308 The accompanying notes are an integral part of the financial statements.
-45- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 1991 1992 1993 (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 11,130 $ 12,956 $ 16,301 Effects of noncash charges (credits) to income - Depreciation 9,792 10,875 12,324 Deferred income taxes, net 2,693 2,048 1,678 Provisions for self insurance 622 1,196 1,800 Deferred treatment plant costs and carrying charges, net (1,593) (756) (3,560) Allowance for equity funds used during construction - - (734) Deferred water utility billings (3,706) (969) (582) Other, net 2,410 2,812 4,540 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and accrued utility revenues 938 (2,517) (2,159) Gas held by suppliers (626) (1,586) (5,038) Accounts payable 1,068 2,377 (515) Deferred cost of gas and supplier refunds, net 7,027 (11,429) (13,307) Other current assets and liabilities, net 835 2,794 754 Other operating items, net (1,578) (2,326) (3,251) Net cash provided by operating activities 29,012 15,475 8,251 CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (net of allowance for equity funds used during construction) (29,144) (58,324) (46,526) Other, net 1,984 2,030 1,493 Net cash used for investing activities (27,160) (56,294) (45,033) CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock 445 12,905 32,366 Issuance of preferred stock - 23,615 - Redemption of preferred stock (80) (80) (10,080) Dividends on common and preferred stock (13,085) (14,940) (18,398) Issuance of long-term debt 50,315 110,000 20,634 Repayment of long-term debt (7,929) (57,371) (31,485) Issuance of note payable to parent - 3,680 - Intercompany advance (15,000) 15,000 - Restricted funds held by trustee (Note 6) - (27,994) 15,868 Net increase (decrease) in bank borrowings (16,526) (20,167) 32,247 Other, net (1,347) (3,917) (2,226) Net cash provided by (used for) financing activities (3,207) 40,731 38,926 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,355) (88) 2,144 CASH AT BEGINNING OF YEAR 2,013 658 570 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 658 $ 570 $ 2,714 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) $ 17,845 $ 16,972 $ 21,092 Income taxes $ 1,475 $ 3,667 $ 6,790 -46-
The accompanying notes are an integral part of the financial statements. -47- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF CAPITALIZATION
December 31, 1992 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 - 4,018,730 shares and 4,868,718 shares, respectively $ 40,187 $ 48,687 Additional paid-in capital 48,776 72,642 Retained earnings 69,135 66,682 Total common shareholder's investment 158,098 33.0% 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 7.0% 33,615 6.5% Subject to mandatory redemption - 5.75% cumulative preferred, 20,000 and 19,200 shares outstanding, respectively 2,000 1,920 8.90% cumulative preferred, 150,000 shares outstanding 15,000 15,000 9.50% 1988 series cumulative preferred, 250,000 and 150,000 shares outstanding, respectively 25,000 15,000 Less current redemption requirements (80) (80) Total preferred stock subject to mandatory redemption 41,920 8.7% 31,840 6.1% LONG-TERM DEBT (Note 6): First mortgage bonds 200,015 207,745 Notes 67,253 77,845 Other 17,614 19,253 Less current maturities and sinking fund requirements (39,005) (38,584) Total long-term debt 245,877 51.3% 266,259 51.2% TOTAL CAPITALIZATION $479,510 100.0% $519,725 100.0% The accompanying notes are an integral part of the financial statements.
-48- PENNSYLVANIA GAS AND WATER COMPANY STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
Additional Common Paid-In Retained Stock Capital Earnings Total (Thousands of Dollars) Balance at December 31, 1990 $36,811 $ 39,288 $ 73,089 $149,188 Net income for 1991 - - 11,130 11,130 Issuance of common stock 146 299 - 445 Dividends on: Preferred stock (Note 5) - - (4,236) (4,236) Common stock ($2.40 per share) - - (8,849) (8,849) 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 The accompanying notes are an integral part of the financial statements.
-49- 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 five wholly-owned subsidiaries: Penn Gas Development Co. and four small water companies, which have not been consolidated since they are insignificant. The equity method is used to account for PG&W's investment in these subsidiaries. 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, 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 plant acquisition adjustments are not being amortized, consistent with PPUC Orders. The plant acquisition adjustments of approximately $340,000 recorded in 1993 will be amortized over a ten-year period commencing on January 1, 1994, in accordance with the PPUC's December 15, 1993, Order regarding the increase in water rates for customers in the Spring Brook Water Rate Area served by the Ceasetown and Watres Water Treatment Plants. 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 9% in 1991, 7% in 1992 and 8% in 1993. PG&W provides for depreciation on a straight-line basis for gas plant and all common plant. As of December 31, 1993, depreciation was provided on a straight-line basis for approximately 61% 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] 1991 1992 1993 [S] [C] [C] [C] Gas 2.33% 2.51% 2.49% Water 1.42 1.57 1.71 Common 7.22 6.76 8.06 -50- The increase in the annual rate of depreciation relative to water plant in both 1992 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 is generally being made as PG&W is allowed to initially increase its rates for customers receiving filtered water service. Under the terms of the settlement discussed in Note 2 relative to the water rate increase approved by the PPUC on December 15, 1993, for customers in the Spring Brook Water Rate Area served by the Ceasetown and Watres Water Treatment Plants, PG&W will begin depreciating all water facilities located in the areas served by those plants on a straight-line basis effective January 1, 1994. This change is expected to increase the annual provision for depreciation by approximately $1.5 million and to increase the overall annual rate of depreciation with respect to water plant to approximately 2.21%. 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 or quarterly on cycles that extend over the respective periods. 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. In accordance with an Order adopted by the PPUC on May 31, 1990, PG&W is recovering 90% of its total take-or-pay liabilities through the billing of a surcharge to customers generally over a four-year period beginning June 1, 1990. This surcharge is reflected as operating revenue and is offset by a corresponding charge to the cost of gas. The take-or-pay liabilities billed to PG&W, which will be recovered in future periods by means of such surcharge, are included in deferred cost of gas and supplier refunds, net. The cost of gas also includes that portion (i.e., 10%) of PG&W's take-or-pay liabilities which it has agreed to absorb in accordance with the PPUC's Order of May 31, 1990. Deferred Charges. 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 discussed in Note 2, certain pre-operating costs relative to PG&W's water treatment plants, costs associated with the Early Retirement Plan as discussed in Note 9, 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. -51- PG&W 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. The provision for income taxes consists of the following components: [CAPTION] 1991 1992 1993 (Thousands of Dollars) [S] [C] [C] [C] Included in operating expenses: Currently payable - Federal $ 2,328 $ 4,664 $ 5,644 State 570 1,888 1,917 Total currently payable 2,898 6,552 7,561 Deferred, net - Federal 2,454 2,512 2,535 State 263 (503) (851) Total deferred, net 2,717 2,009 1,684 Amortization of investment tax credits (256) (256) (256) Total included in operating expenses 5,359 8,305 8,989 Included in other income, net: Currently payable - Federal 104 (29) (44) State (24) (26) (28) Total currently payable 80 (55) (72) Deferred, net - Federal (31) 39 (6) State 7 - - Total deferred, net (24) 39 (6) Total included in other income, net 56 (16) (78) Total provision for income taxes $ 5,415 $ 8,289 $ 8,911 -52- Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes and, with respect to elements of operating income, are recorded consistent with the treatment allowed by the PPUC for ratemaking purposes. The source of these timing differences and the tax effect of each is as follows: [CAPTION] 1991 1992 1993 (Thousands of Dollars) [S] [C] [C] [C] Excess of tax depreciation over depreciation for accounting purposes $ 2,441 $ 2,502 $ 3,214 Deferred treatment plant costs, net 982 585 1,458 Take-or-pay costs, net (222) (446) (1,126) Other, net (508) (593) (1,868) Total deferred taxes, net $ 2,693 $ 2,048 $ 1,678 Included in: Operating expenses $ 2,717 $ 2,009 $ 1,684 Other income, net (24) 39 (6) Total deferred taxes, net $ 2,693 $ 2,048 $ 1,678 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: [CAPTION] 1991 1992 1993 (Thousands of Dollars) [S] [C] [C] [C] Income before income taxes $16,545 $21,245 $25,212 Tax expense at statutory federal income tax rate $ 5,625 $ 7,223 $ 8,824 Increases (reductions) in taxes resulting from - State income taxes, net of federal income tax benefit 795 1,161 935 Allowance for equity funds used during construction and equity component of deferred treatment plant carrying charges - - (545) Amortization of investment tax credits (256) (256) (256) Other, net (749) 161 (47) Total provision for income taxes $ 5,415 $ 8,289 $ 8,911 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. As of December 31, 1993, a total of $87.0 million in deferred income taxes, relating primarily to temporary differences involving utility plant and consisting of deferred tax liabilities of $95.6 million and deferred tax assets of $8.6 million, were so reflected in these financial statements in accordance with the requirements of FASB Statement 109. -53- (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 1991, 1992 and 1993 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, 1991 $3.20 $2.46 $(20,800,000) December 1, 1992 2.46 2.79 9,500,000 December 1, 1993 2.79 3.74 28,800,000 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 Take-or-Pay Costs. On April 27, 1990, PG&W filed an application with the PPUC seeking approval to recover 90% ($13.9 million based on then current estimates) of its total take-or-pay liabilities, and $250,000 of related carrying costs, through billings to customers generally over a four-year period beginning June 1, 1990. The PPUC approved this application, effective June 1, 1990. In connection with this approval, PG&W agreed to absorb a portion of its take-or-pay liabilities. The amount to be so absorbed by PG&W is currently estimated to be $1.8 million, substantially all of which had been charged to expense as of December 31, 1993. As of December 31, 1993, PG&W had billed $14.8 million of take-or-pay costs to its customers and had deferred $1.1 million of such costs, including related carrying charges, for future billing to customers. Under terms of the PPUC's Order in respect of take-or-pay obligations, the surcharge by which PG&W bills its customers for take-or-pay costs is to be adjusted annually as of June 1 to reflect changes in PG&W's total estimated liability for take-or-pay costs (which is currently projected to be as much as $18.1 million) and the portion of such costs remaining to be recovered from its customers. In accordance therewith, the PPUC approved an adjustment in PG&W's take-or-pay surcharge effective June 1, 1993, based on the estimated $3.5 million of take-or-pay costs that remained to be collected from its customers as of such date. Water Rate Filings Scranton Area Water Rate Increases. March, 1991, Increase. On June 8, 1990, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $25.5 million in additional annual revenue. This rate increase request involved the approximately 54,700 customers at such date who would be furnished water from the one previously existing and the four new water treatment plants in the Scranton Water Rate Area. In December, 1990, PG&W and certain parties filing objections to the rate increase request reached a settlement that provided for an approximate 110% rate increase 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 FASB Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in Plans." The settlement provided that $10.2 million of the increased revenue (an -54- approximate 75% increase in rates) was to be realized through an immediate rate increase and that the remaining $4.8 million of the increased revenue (an additional 35% increase in rates) was to be realized through another rate increase one year later (at the beginning of year two of the phase-in period). The settlement also specified that the $4.8 million in revenue that would be deferred during the first year of the phase-in period was to be collected from customers in the form of a surcharge in years two through ten of the phase-in period. By Order adopted March 22, 1991, the PPUC approved the settlement and permitted PG&W a water rate increase estimated to produce additional annual revenue of $15.0 million, effective March 23, 1991. In accordance with the accounting requirements for a qualified phase-in plan as prescribed by FASB Statement 92, PG&W recorded a $1.2 million nonrecurring charge to earnings as of December 31, 1990, representing the estimated net present value of carrying charges on the $4.8 million of revenue to be deferred in the first year of the phase-in period. This charge was required because the terms of the settlement did not provide for the billing of any carrying charges on such deferred revenue. Additionally, in accordance with the provisions of FASB Statement 92, PG&W commenced recording the entire $15.0 million increase in annual revenue allowed by the PPUC as additional revenue beginning March 23, 1991. However, pursuant to the terms of the settlement, PG&W deferred the billing of $4.7 million of the increased revenue recorded during the first year of the phase-in period (i.e., the period March 23, 1991, through March 22, 1992). The amount so deferred was $100,000 less than the $4.8 million originally estimated because of slightly lower than anticipated consumption. Effective March 23, 1992, PG&W began to bill the $4.7 million that had been so deferred by means of the surcharge that will be in effect in years two through ten of the phase-in period, and as of December 31, 1993, $871,000 had been so billed to its Scranton Water Rate Area customers. June, 1993, 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. On November 13, 1992, the PPUC suspended this rate increase for seven months (until June 24, 1993) in order to investigate the reasonableness of the proposed rates. 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 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 -55- 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. Nesbitt Service Area. On April 30, 1991, PG&W filed an application with the PPUC seeking a water rate increase, designed to produce $2.6 million in additional annual revenue. This rate increase request involved the approximately 14,300 customers in the Spring Brook Water Rate Area at such date who were served exclusively by the Nesbitt Water Treatment Plant. PG&W and certain parties filing objections to the rate increase request reached a settlement that provided for a $1.9 million increase in annual revenue which the PPUC approved effective January 30, 1992. However, on February 27, 1992, the PPUC granted a petition of the OCA, a complainant in the rate proceeding and a signatory to the settlement, for reconsideration and clarification of the PPUC Order which approved the settlement. As a result, the $1.9 million rate increase remains subject to further PPUC and possible appellate review. Although it cannot be certain, PG&W believes that the $1.9 million increase will not be rescinded in whole or in part or affected in any other way as a result of the OCA's petition and as of March 23, 1994, no further action had been taken by the PPUC with respect to the OCA's petition. 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, to be effective August 29, 1992. 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 a qualified phase-in plan, pursuant to FASB Statement 92. The settlement further 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 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 -56- June 3, 1993, the PPUC suspended this rate increase for seven months (until January 28, 1994) by operation of law in order to institute an investigation into the reasonableness of the proposed rates. 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, "Regulated Enterprises-Accounting for Phase-In Plans." 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 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. Deferred Treatment Plant Costs 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 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 $5.1 million of costs deferred relative to the Scranton Area water treatment plants and related facilities over a ten-year period beginning June 23, 1993. 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 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. As of December 31, 1993, a total of $4.6 million of costs, consisting of $424,000 of operating expenses and $745,000 of carrying charges relative to the Crystal Lake Water Treatment Plant and related facilities, and $1.7 million of -57- operating expenses and $1.7 million of carrying charges relative to the Ceasetown and Watres Water Treatment 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 the costs relative to the Crystal Lake, Ceasetown and Watres Water Treatment Plants that have been deferred pursuant to such Orders 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. (3) OTHER INCOME, NET Other income, net was comprised of the following elements: [CAPTION] 1991 1992 1993 (Thousands of Dollars) [S] [C] [C] [C] Equity component of deferred treatment plant carrying charges $ - $ - $ 821 Allowance for equity funds used during construction - - 734 Gain on sale of non-watershed land and other property, net of related income taxes 182 102 20 Interest income on repurchase agreements, net of related income taxes 254 2 16 Interest on note to affiliate 437 133 - Net interest expense on proceeds remaining in construction fund - (23) (785) Premium on retirement/defeasance of debt - (127) (81) Other 261 (57) (165) Total $ 1,134 $ 30 $ 560 (4) COMMON STOCK Since January 1, 1991, 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: [CAPTION] Purchase Price Date Purchased Number of Shares Per Share* Aggregate [S] [C] [C] [C] 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 Total 1,142,922 $44.4 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 -58- 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. These issuances of common stock by PG&W and the related reductions in its bank borrowings acted to improve PG&W's debt/equity ratio, as well as its interest and fixed charge coverages. (5) PREFERRED STOCK Preferred Stock of PG&W Subject to Mandatory Redemption On September 16, 1988, PG&W issued 250,000 shares of its 9.50% 1988 series cumulative preferred stock, $100 par value. 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). The remaining 150,000 shares of the 9.50% 1988 series cumulative preferred stock, which are currently outstanding, are subject to mandatory redemption on December 15, 1997, at a price of $100 per share, plus unpaid dividends accrued on such shares. On December 16, 1988, PG&W issued 150,000 shares of its 8.90% cumulative preferred stock, $100 par value. The 8.90% cumulative preferred stock is subject to mandatory redemption of 18,750 shares on each of December 15, 1997, March 15, 1998, June 15, 1998, and September 15, 1998, and 75,000 shares on December 15, 1998, in each instance, at a price of $100 per share, plus unpaid dividends accrued on such shares. 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, 1993, for an aggregate purchase price in each year of $80,000. As of December 31, 1993, the aggregate annual maturities and sinking fund requirements of PG&W's cumulative preferred stock subject to mandatory redemption for each of the next five years ending December 31, were as follows: [CAPTION] Year Amount [S] [C] 1994 $ 80,000 1995 $ 80,000 1996 $ 80,000 1997 $16,955,000 (a) 1998 $13,205,000 (b) (a) Includes the entire $15.0 million principal amount of the 9.50% 1988 series cumulative preferred stock currently outstanding and $1,875,000 of the 8.90% cumulative preferred stock, both of which are subject to redemption on December 15, 1997. (b) Includes the entire $13,125,000 principal amount of the 8.90% cumulative preferred stock that is subject to redemption during 1998. -59- At PG&W's option, the following series of cumulative preferred stock subject to mandatory redemption may currently be redeemed at the prices indicated: [CAPTION] Current Redemption Price Series Per Share Aggregate [S] [C] [C] 5.75% $ 102.00 $ 1,958,400 8.90% $ 103.96 $15,594,000 9.50% 1988 Series $ 103.56 $15,534,375 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, 1993, were as follows: [CAPTION] Series 1991 1992 1993 (Thousands of Dollars) [S] [C] [C] [C] 4.10% $ 405 $ 409 $ 410 5.75% 121 117 113 8.90% 1,335 1,335 1,335 9.00% - 829 2,250 9.50% 1988 series 2,375 2,375 2,354 Total $4,236 $5,065 $6,462 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. -60- (6) LONG-TERM DEBT Long-term debt consisted of the following components at December 31, 1992 and 1993:
1992 1993 (Thousands of Dollars) First mortgage bonds - 6.05 % Series, due 2019 $ - $ 19,000 7.125% Series, due 2022 30,000 30,000 7.20 % Series, due 2017 50,000 50,000 8 % Series, due 1997 3,955 3,745 8.375% Series, due 2002 30,000 30,000 9.23 % Series, due 1999 10,000 10,000 9-1/4% Series, due 1996 5,000 - 9.34 % Series, due 2019 15,000 15,000 9.57 % Series, due 1996 (a) 50,000 50,000 10 % Series, due 1995 6,060 - 200,015 207,745 Notes - 1%, due 1994 (Small Business Administration) 1,253 845 7%, 1989 Series A, due 2019, defeased on December 21, 1993 19,000 - 8%, 1987 Series B, due 2017, but subject to repayment in 1994 30,000 30,000 Bank borrowings, at weighted average interest rates of 6.19% and 4.31% respectively, due in 1995 (Note 8) 17,000 47,000 67,253 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 17,614 19,253 Less current maturities and sinking fund requirements (39,005) (38,584) Total long-term debt $245,877 $266,259 (a) The interest rate on the 9.57% Series First Mortgage Bonds, due 1996, was increased to 11.17% for the period January 1 through March 31, 1992, pursuant to the terms of those bonds, because PEI had not consummated the sale of at least $20.0 million in common stock and had not repaid the $15.0 million intercompany advance from PG&W made on September 12, 1991, by December 31, 1991.
8%, 1987 Series B Note. On December 23, 1987, the Luzerne County Industrial Development Authority (the "Authority") issued $30.0 million of its 8% Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) (the "1987 Series B Bonds") and in connection therewith, PG&W issued a promissory note in the principal amount of $30.0 million (its 8%, 1987 Series B Note) to PNC Bank (formerly Northeastern Bank of Pennsylvania), as trustee (the "IDA Trustee") for the 1987 Series B Bonds, as security for the 1987 Series B Bonds. The 1987 Series B Bonds mature on December 1, 2017; bear interest at an initial annual rate of 8% through November 30, 1994; are secured by a letter of credit issued by Swiss Bank Corporation, New York Branch expiring on December 20, 1994, for which the annual fee is $279,000; and on December 1, 1994, will be redeemed or, at the option of PG&W, purchased by PG&W for remarketing as of that date. Under the terms of the 1987 Series B Note, PG&W agreed to pay the debt service requirements on the 1987 Series B Bonds. -61- 7.20% Series First Mortgage Bonds. On September 15, 1992, the Authority issued $50.0 million of its Exempt Facilities Revenue Refunding Bonds, 1992 Series A (Pennsylvania Gas and Water Company Project) (the "1992 Series A Bonds") and, in connection therewith, PG&W issued $50.0 million of its 7.20% First Mortgage Bonds to the IDA Trustee for the 1992 Series A Bonds, as security for the 1992 Series A Bonds. The proceeds from the issuance of the 1992 Series A Bonds, along with additional funds provided by PG&W, were deposited with the IDA Trustee for the Authority's $50.0 million of 8-1/2% Exempt Facilities Revenue Bonds, 1987 Series A (Pennsylvania Gas and Water Company Project) (the "1987 Series A Bonds") on September 15, 1992, for use in redeeming the 1987 Series A Bonds on October 1, 1992. The deposit of such funds acted to discharge all of PG&W's obligations with respect to its 8-1/2%, 1987 Series A Note in the principal amount of $50.0 million which had been issued to the IDA Trustee in connection with the 1987 Series A Bonds and which was subject to repayment on October 1, 1992. Under the terms of the 7.20% 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 A Bonds. 8.375% Series First Mortgage Bonds. On December 14, 1992, PG&W issued $30.0 million of its 8.375% Series First Mortgage Bonds due 2002. The proceeds from the issuance of these bonds were used to repay approximately $28.7 million of bank borrowings, thereby providing PG&W with additional borrowing capacity for future capital expenditures and other working capital needs. 7.125% Series First Mortgage Bonds. On December 22, 1992, the Authority issued $30.0 million of its 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 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, 1993, $12.9 million 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. 10% and 9-1/4% Series First Mortgage Bonds. On May 1, 1993, PG&W redeemed the $5,700,000 of its 10% Series First Mortgage Bonds due 1995 and the $3,750,000 of its 9-1/4% Series First Mortgage Bonds due 1996 then outstanding, utilizing funds from bank borrowings. The 10% Series First Mortgage Bonds were redeemed at a price of 100.42% of principal (plus accrued interest to the redemption date), which included a voluntary redemption premium aggregating $23,940. The 9-1/4% Series First Mortgage Bonds were redeemed at a price of 100.98% of principal (plus accrued interest to the redemption date), which included a voluntary redemption premium aggregating $36,750. 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 -62- 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 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. As of December 31, 1993, the aggregate annual maturities and sinking fund requirements of long-term debt for each of the next five years ending December 31, were: [CAPTION] Year Amount [S] [C] 1994 $38,584,000 (a) 1995 $47,730,000 (b) 1996 $50,758,000 (c) 1997 $ 3,694,000 1998 $ 611,000 (a) Includes the 8%, 1987 Series B Note in the principal amount of $30.0 million due 2017, but subject to repayment or refinancing on December 1, 1994. Such amount also includes the aggregate principal amount of approximately $7.0 million relative to six water facility loans of PG&W having a weighted annual interest rate of 9.33% which were voluntarily repaid by PG&W on January 31, 1994, with bank borrowings. (b) Includes $47.0 million of bank borrowings outstanding as of December 31, 1993. (c) Includes the 9.57% Series First Mortgage Bonds in the principal amount of $50.0 million due 1996. 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 $19.3 million as of December 31, 1993, and $12.1 million as of March 23, 1994, subsequent to the prepayment of certain of such loans. (7) DIVIDEND RESTRICTIONS Several of PG&W's debt instruments contain restrictions on the payment by PG&W of dividends to PEI. Under the most restrictive of these provisions, which is contained in the letter of credit agreement relating to the 1987 Series B Bonds issued by the Luzerne County Industrial Development Authority with respect to which PG&W has issued its 1987 Series B Note in the principal amount of $30.0 million, PG&W may not pay dividends to PEI of more than $12.5 million in 1994 and thereafter. In addition, provisions of such agreement and also PG&W's revolving bank credit agreement (the "Credit Agreement" as defined in Note 8 to these financial statements) prohibit PG&W from paying any dividends to PEI in the event of any default under those agreements. These restrictions are not expected to prohibit PG&W from paying a sufficient amount of dividends to PEI to permit PEI to pay its current $2.20 per share annual dividend on its common stock. -63- In addition, the preferred stock provisions of PG&W's Restated Articles of Incorporation and the indenture of mortgage under which PG&W has issued first mortgage bonds provide for certain dividend restrictions. (8) BANK NOTES PAYABLE On April 25, 1991, PG&W entered into an agreement with the various banks with which it had previously arranged lines of credit. The purpose of the agreement was to consolidate PG&W's existing bank lines of credit to provide for uniform terms relative to its bank borrowings and to extend the due dates of such borrowings. As such, the agreement superseded PG&W's individual bank lines of credit. The aggregate amount available to PG&W in 1992 under this agreement was $45.0 million. On March 1, 1993, PG&W elected to reduce the amount so available to $35.0 million in order to reduce the commitment fee that would otherwise be payable and since no more than $35.0 million would be required by PG&W under the agreement prior to its expiration on April 30, 1993. The interest rate on borrowings under the agreement was prime. The agreement also required the payment of a commitment fee of 1/2 of 1% per annum on the average daily amount of the unused portion of the available funds. The commitment fees paid with respect to this agreement totaled $60,000 in 1991, $152,000 in 1992 and $43,000 in 1993. On April 19, 1993, PG&W 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 April 30, 1995, 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 3/8 of 1% per annum on the average daily amount of the unused portion of the available funds. As of March 23, 1994, $41.0 million of borrowings were outstanding under the Credit Agreement. PG&W also has three short-term bank lines of credit with an aggregate borrowing capacity of $7.0 million which provide for borrowings at interest rates generally less than prime and mature on April 30, 1994. As of March 23, 1994, PG&W had no borrowings outstanding under the short-term bank lines of credit. The commitment fees paid with respect to these agreements totaled $70,000 in 1993. 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 $5.7 million of unsecured debt due on demand or within one year from issuance outstanding as of December 31, 1993, which included a $3.7 million demand loan from PEI. -64- 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, 1991 1992 1993 (Thousands of Dollars) Borrowings under lines of credit Short-term $ - $ - $ 2,000 Long-term 37,000 17,000 47,000 $ 37,000 $ 17,000 $ 49,000 Unused lines of credit Short-term $ - $ - $ 5,000 Long-term 8,000 28,000 13,000 $ 8,000 $ 28,000 $ 18,000 Total lines of credit Prime rate $ 45,000 $ 45,000 $ 2,000 Other than prime rate - - 65,000 $ 45,000 $ 45,000 $ 67,000 Short-term bank borrowings (a) Maximum amount outstanding $ 12,000 $ - $ 5,666 Daily average amount outstanding $ 8,972 $ - $ 637 Weighted daily average interest rate 9.280% - 4.046% Weighted average interest rate at year-end - - 4.208% Range of interest rates 9.000- - 3.750- 10.000% - 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 at December 31, 1991 or 1992.
(9) POSTRETIREMENT 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 $243,000, $333,000 and $443,000 in 1991, 1992 and 1993, respectively. -65- The following items were the components of the net pension cost for the years 1991, 1992 and 1993: [CAPTION] 1991 1992 1993 (Thousands of Dollars) [S] [C] [C] [C] Present value of benefits earned during the year $ 637 $ 789 $ 854 Interest cost on projected benefit obligations 2,120 2,262 2,402 Return on plan assets (3,824) (2,646) (3,127) Net amortization and deferral 1,310 (72) 314 Net pension cost $ 243 $ 333 $ 443 The discount rate used to determine the actuarial present value of the projected benefit obligations, the expected long-term rate of return on plan assets and the projected increase in future compensation levels assumed in determining the net pension cost for each of the years 1991, 1992 and 1993, were as follows: [CAPTION] [S] [C] Discount rate 8% Expected long-term rate of return on plan assets 9% Projected increase in future compensation levels 5-1/2% The funded status of the plan as of December 31, 1992 and 1993, was as follows: [CAPTION] 1992 1993 (Thousands of Dollars) [S] [C] [C] Actuarial present value of the projected benefit obligations: Accumulated benefit obligations Vested $ 21,813 $ 24,265 Nonvested 139 125 Total 21,952 24,390 Provision for future salary increases 7,746 9,769 Projected benefit obligations 29,698 34,159 Market value of plan assets, primarily invested in equities and bonds 30,963 32,471 Plan assets in excess of (less than) projected benefit obligations 1,265 (1,688) Unrecognized net transition asset as of January 1, 1986, being amortized over 20 years (2,988) (2,758) Unrecognized prior service costs 2,412 2,279 Unrecognized net (gain) loss (704) 1,710 Accrued pension cost at year-end $ (15) $ (457) -66- In March, 1991, as part of a cost reduction program, PG&W offered an Early Retirement Plan ("ERP") to its employees who would be 60 years of age or older and have a minimum of five years of service as of April 30, 1991. Of the 79 eligible employees, 73 elected to accept this offer and retired in 1991. In accordance with FASB Statement 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," PG&W recorded, as of April 30, 1991, an additional pension liability of $2.0 million, reflecting the increased costs associated with the ERP. This liability, which was included in "Other deferred credits" as of December 31, 1992 and 1993, partially offsets an asset included in "Other deferred charges," representing the probable future rate recovery of such liability. As a result, the provisions of FASB Statement 88 did not have a significant effect on PG&W's results of operations for 1991. During 1992, PG&W began amortizing the portion of the deferred charges relative to its gas operations over a 20-year period and will begin amortizing the portion relating to its water operations as such amounts are approved in rates. In addition, the deferred liability is being amortized as an offset against pension expense over a 20 year amortization period approximating the effect of including the additional pension costs related to the ERP in the present value of benefits earned during the year. 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 $800,000 in 1991 and $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. -67- The following items were the components of the net cost of postretirement benefits other than pensions for the year 1993: [CAPTION] (Thousands of Dollars) [S] [C] Present value of benefits earned during the year $ 226 Interest cost on accumulated benefit obligation 967 Return on plan assets (a) -0- Amortization of transition obligation over 20 years 617 Net cost of postretirement benefits other than pensions 1,810 Less disbursements for benefits (983) Increase in liability for postretirement benefits other than pensions $ 827 Reconciliations of the accumulated benefit obligation to the accrued liability for postretirement benefits other than pensions as of January 1, 1993, and December 31, 1993, follow: [CAPTION] January 1, December 31, 1993 1993 (Thousands of Dollars) [S] [C] [C] Accumulated benefit obligation: Retirees $ 9,878 $ 10,149 Fully eligible active employees 1,649 1,735 Other active employees 815 1,222 12,342 13,106 Plan assets at fair value (a) -0- -0- Accumulated benefit obligation in excess of plan assets 12,342 13,106 Unrecognized transition obligation (12,342) (11,725) Unrecognized net loss -0- (554) Accrued liability for postretirement benefits other than pensions $ -0- $ 827 For purposes of calculating the costs to be accrued by PG&W under FASB Statement 106, an 8% discount rate and a 5.5% projected annual increase in future compensation levels were assumed. It was also assumed that the per capita cost of covered health care benefits would increase at an annual rate of 12% in 1993 and that this rate would decrease gradually to 5.5% 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, 1993, by approximately $723,000 and the aggregate of the service and interest cost components of the net cost of postretirement benefits other than pensions for the year 1993 by approximately $60,000. (a) As of December 31, 1993, PG&W had segregated funds totaling $182,000, pending the establishment of a qualified trust fund for a portion of its liability for postretirement benefits other than pensions, as discussed in the paragraph immediately above. -68- The additional costs accrued pursuant to FASB Statement 106 are allocated between PG&W's gas utility and water utility operations. By Order entered June 23, 1993, relative to the rate increase request that PG&W had filed on September 25, 1992, with respect to the Scranton Water Rate Area, the PPUC allowed PG&W to recover in revenues the additional costs ($319,000 for the year 1993, based on then current estimates) that were required to be accrued pursuant to FASB Statement 106 and which were allocable to the Scranton Water Rate Area. Similarly, by Order entered December 15, 1993, relative to the rate increase request that PG&W had filed on April 29, 1993, relative to the Spring Brook Water Rate Area, the PPUC allowed PG&W to recover in revenues the additional costs ($322,000 for the year 1993 based on then current estimates) that were required to be accrued pursuant to FASB Statement 106 and which were allocable to the Spring Brook Water Rate Area. Since PG&W did not seek an increase in its base gas rates during 1993, the $407,000 ($232,000 net of related income taxes) of additional cost incurred with regard to its gas utility operations as a result of the adoption of the provisions of FASB Statement 106 was expensed. (10) CONSTRUCTION EXPENDITURES PG&W estimates the cost of its 1994 construction program will be $46.8 million. Construction of water facilities, estimated to cost $29.8 million, will be financed with the $12.9 million of proceeds from the issuance of the 1993 Series A Bonds held by the IDA Trustee as of December 31, 1993, for the benefit of PG&W, internally generated funds and borrowings under PG&W's revolving bank credit facilities, pending the periodic issuance of stock and long-term debt. Construction of gas facilities, estimated to cost $17.0 million, will be financed with internally generated funds and borrowings under PG&W's revolving bank credit facilities, pending the periodic issuance of stock and long-term debt. (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 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 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 considers 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." As a result, the PPUC staff -69- indicated that it intends to initiate an informal investigation of the matter, including PG&W's responsibility for the incidents referred to in the Emergency Order. Although it is not presently possible to determine what action the PPUC will ultimately take with respect to possible violations of law and the matters raised by the Emergency Order, PG&W does not believe that compliance with, or any liability that might result from such violations 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. On February 4, 1994, PG&W was requested by the Pennsylvania Department of Environmental Resources to perform an evaluation to determine if a pipeline owned by PG&W was the source of certain soil contamination discovered by the Pennsylvania Department of Transportation in late 1993 in an area adjacent to that pipeline at a road crossing in Jackson Township, Northumberland County, Pennsylvania. This pipeline was purchased by Scranton-Spring Brook Water Service Company ("Scranton-Spring Brook"), a predecessor of PG&W, in 1956, but was never operated by Scranton-Spring Brook or PG&W in the area in question. At this time, pending further environmental analysis and evaluation, neither the source nor the extent of the contamination is known. However, if the source of the contamination is determined to be PG&W's pipeline, PG&W would be required to perform such remediation work as is necessary and to dispose of the contaminated soil. While it cannot be certain, PG&W does not presently believe that any liability it might have with respect to such contamination would have a material adverse effect on either its financial position or results of operations. Further, if PG&W were determined to be the responsible party with respect to the subject contamination, it would seek to recover any liability it were to so incur from the former owner and operator of the pipeline and/or its successors. Additionally, to the extent it could not recover its costs from such parties, PG&W could seek authority of the PPUC to recover those costs in the rates charged to its natural gas customers. (12) INDUSTRY SEGMENTS Financial information with respect to PG&W's industry segments for the years ended December 31, 1991, 1992 and 1993 is included in Item 1 of this Form 10-K. Such industry segment information is incorporated herein as part of these Financial Statements. -70- (13) QUARTERLY FINANCIAL DATA (UNAUDITED) [CAPTION] QUARTER ENDED March 31, June 30, September 30, December 31, 1992 1992 1992 1992 (Thousands of Dollars, Except Per Share Amounts) [S] [C] [C] [C] [C] Operating revenues $ 70,673 $ 34,000 $ 25,440 $ 61,765 Operating income 12,620 6,270 4,160 10,863 Earnings (loss) applicable to common stock 5,763 (44) (2,704) 4,876 Earnings (loss) per share of common stock (a) 1.55 (.01) (.67) 1.21 [CAPTION] QUARTER ENDED March 31, June 30, September 30, December 31, 1993 1993 1993 1993 (Thousands of Dollars, Except Per Share Amounts) [S] [C] [C] [C] [C] 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. (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 trustee has been based on the current market values 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 current quoted market price 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 rates at December 31, 1993, 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 December 31, 1993, for preferred stock of comparable credit quality with similar terms and maturities. -71- The carrying amounts and estimated fair values of PG&W's financial instruments at December 31, 1992 and 1993, were as follows: [CAPTION] 1992 1993 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (Thousands of Dollars) [S] [C] [C] [C] [C] Restricted funds held by trustee $ 28,020 $ 28,016 $ 12,853 $ 12,857 Long-term debt (including current portion) 284,882 291,704 306,843 327,436 Preferred stock subject to mandatory redemption (including current portion) 42,000 43,929 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. -72- ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -73- 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 . . . . . . . . . . . . 42 Statements of Income for each of the three years in the period ended December 31, 1993 . . . . . . . . . . . . . . . . 43 Balance Sheets as of December 31, 1992 and 1993. . . . . . . . . 44 Statements of Cash Flows for each of the three years in the period ended December 31, 1993 . . . . . . . . . . . . . . . . 46 Statements of Capitalization as of December 31, 1992 and 1993. . 47 Statements of Common Shareholder's Investment for each of the three years in the period ended December 31, 1993. . . . . 48 Notes to Financial Statements. . . . . . . . . . . . . . . . . . 49 2. Financial Statement Schedules The following financial statement schedules for PG&W are 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 V Property, Plant and Equipment for the three-year period ended December 31, 1993. . . . . . . . . . . . . . . . . 75 VI Accumulated Depreciation of Property, Plant and Equipment for the three-year period ended December 31, 1993. . . . 76 VIII Valuation and Qualifying Accounts for the three-year period ended December 31, 1993 . . . . . . . . . . . . . 77 X Supplementary Income Statement Information for the three-year period ended December 31, 1993. . . . . . . . 78 3. Exhibits See "Index to Exhibits" located on page 80 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. -74-
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 1993. (c) Executive Compensation Plans and Arrangements The following listing includes PG&W's executive compensation plans and arrangements in effect as of December 31, 1993. Exhibit 10-41 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. 10-42 Agreement by and between PEI, PG&W and Robert L. Jones dated as of March 15, 1991 -- filed as Exhibit No. 10-38 to PG&W's Annual Report on Form 10-K for 1990, File No. 1-3490. 10-43 Employment Agreement dated August 30, 1991, between PEI and Dean T. Casaday -- filed as Exhibit 10-16 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-44 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. 10-45 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.
-75- Schedule V -76- Schedule VI -77- Schedule VIII -78- PENNSYLVANIA GAS AND WATER COMPANY SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993 [CAPTION] Year ended December 31, 1991 1992 1993 (Thousands of Dollars) [S] [C] [C] [C] Taxes other than income taxes were as follows: State gross receipts tax $ 5,993 $ 6,715 $ 7,212 State capital stock tax 1,773 1,936 1,961 Payroll taxes 2,224 2,276 2,444 Real estate and personal property taxes 2,777 2,951 3,717 Other taxes 710 772 888 $13,477 $14,650 $16,222 Charged to: Other taxes $12,814 $14,730 $16,019 Other accounts 663 (80) 203 $13,477 $14,650 $16,222 NOTE: The amounts of maintenance and repairs, depreciation and income taxes, which are charged to accounts other than those set forth in the statements of income, are not significant. PG&W did not incur any significant costs for royalties, rents, advertising or research and development during the three- year period ended December 31, 1993. -79- 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. [CAPTION] PENNSYLVANIA GAS AND WATER COMPANY (Registrant) [S] [C] [C] Date: March 23, 1994 By: /s/ Dean T. Casaday Dean T. Casaday President and Chief Executive Officer (Principal Executive Officer) Date: March 23, 1994 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. [CAPTION] Signature Capacity Date [S] [C] [C] /s/ Kenneth L. Pollock Chairman of the Board of March 23, 1994 Kenneth L. Pollock Directors /s/ William D. Davis Vice Chairman of the Board March 23, 1994 William D. Davis of Directors /s/ Dean T. Casaday Director, President and March 23, 1994 Dean T. Casaday Chief Executive Officer /s/ Robert J. Keating Director March 23, 1994 Robert J. Keating /s/ John D. McCarthy Director March 23, 1994 John D. McCarthy /s/ Kenneth M. Pollock Director March 23, 1994 /s/ Kenneth M. Pollock /s/ James A. Ross Director March 23, 1994 James A. Ross /s/ Ronald W. Simms Director March 23, 1994 Ronald W. Simms -80- 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 October 17, 1991 -- filed as Exhibit 3-2 to PG&W's Annual Report on Form 10-K for 1991, File No. 1-3490. (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. -81- 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. 0-7812. 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. 0-7812. 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 -- 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 herewith. NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth, Eleventh and Thirteenth Supplemental Indentures merely convey additional properties to the Trustee. 4-21 Statement Affecting Class or Series of Shares with respect to 9.50% 1988 Series Cumulative Preferred Stock of PG&W -- filed as Exhibit 4-18 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-3490. 4-22 Statement Affecting Class or Series of Shares with respect to 8.90% Cumulative Preferred Stock of PG&W -- filed as Exhibit 4-20 to PG&W's Annual Report on Form 10-K for 1988, File No. 1-3490. -82- 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 herewith. 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 herewith. 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 herewith. 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 herewith. 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 herewith. 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 herewith. -83- Exhibit Number 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 herewith. 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 herewith. 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. 10-20 Joint Venture Agreement, dated May 1, 1975, between Robert Mosbacher and Transco Exploration Company, et. al., and Exhibit "B," Ratification thereof by PG&W, dated July 11, 1975 -- filed as Exhibit 5(1) to PG&W's Bond Form S-7, Registration No. 2-55419. 10-21 Project Facilities Agreement, dated December 1, 1987, between Luzerne County Industrial Development Authority and PG&W -- filed as Exhibit 10-19 to PG&W's Annual Report on Form 10-K for 1987, File No. 1-3490. 10-22 Remarketing Agreement, dated December 1, 1987, among PG&W, Butcher & Singer Inc. and Dean Witter Reynolds Inc. -- filed as Exhibit 10-21 to PG&W's Annual Report on Form 10-K for 1987, File No. 1-3490. -84- Exhibit Number 10-23 8% Bond Purchase Agreement, dated December 15, 1987, among Luzerne County Industrial Development Authority, PG&W, Butcher & Singer Inc. and Dean Witter Reynolds Inc. -- filed as Exhibit 10-22 to PG&W's Annual Report on Form 10-K for 1987, File No. 1-3490. 10-24 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. 10-25 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. 10-26 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. 10-27 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. 10-28 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. 10-29 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. 10-30 Second Amended and Restated Project Facilities Agreement dated as of December 1, 1993, between PG&W and the Luzerne County Industrial Development Authority -- filed herewith. -85- Exhibit Number 10-31 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 herewith. 10-32 Letter of Credit Agreement, dated December 1, 1987, between PG&W and Swiss Bank Corporation, New York Branch -- filed as Exhibit 10-20 to PG&W's Annual Report on Form 10-K for 1987, File No. 1-3490. 10-33 Amendment No. 1, dated as of September 10, 1991, to December 1987 Reimbursement Agreement between PG&W and Swiss Bank Corporation, New York Branch -- filed as Exhibit 10-6 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-34 Amendment No. 2, dated as of December 13, 1991 to December 1987 Reimbursement Agreement between PG&W and Swiss Bank Corporation, New York Branch -- filed as Exhibit 10-15 to PEI's Common Stock Form S- 2, Registration No. 33-43382. 10-35 Amendment No. 3, dated as of May 11, 1992, to December 1987 Reimbursement Agreement between PG&W and Swiss Bank Corporation, New York Branch -- filed as Exhibit 10-2 to PG&W's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-3490. 10-36 Subordinate Open End Mortgage, Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement and Fixture Filing, dated as of September 10, 1991, made by PG&W, as Mortgagor, to Swiss Bank Corporation, as Collateral Agent and Mortgagee -- filed as Exhibit 10-1 to PEI's Common Stock Form S-2, Registration No. 33- 43382. 10-37 Collateral Agency and Intercreditor Agreement, dated as of September 10, 1991, among Manufacturers Hanover Trust Company (now Chemical Bank), as Bank Agency, Swiss Bank Corporation, New York Branch, First Eastern Bank, N.A., Hanover Bank, Meridian Bank, Northeastern Bank of Pennsylvania (now PNC Bank, Northeast PA), Philadelphia National Bank (now CoreStates Bank, N.A.), United Penn Bank (now Mellon Bank, N.A.), National Australia Bank, Limited, New York Branch, Swiss Bank Corporation, New York Branch, as Collateral Agent and PG&W -- filed as Exhibit 10-2 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-38 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. 10-39 9.50% Cumulative Preferred Stock Purchase Agreement, dated December 11, 1987, between PG&W and the purchasers named therein -- filed as Exhibit 10-23 to PG&W's Annual Report on Form 10-K for 1987, File No. 1-3490. -86- Exhibit Number 10-40 Recapitalization Agreement, dated September 16, 1988, between PG&W and the original purchasers of PG&W's 9.50% Cumulative Preferred Stock, pursuant to which shares of the 9.50% Cumulative Preferred Stock were exchanged for shares of PG&W's 9.50% 1988 Series Cumulative Preferred Stock -- filed as Exhibit 10-24 to PG&W's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-3490. 10-41 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. 10-42 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. 10-43 Employment Agreement, dated August 30, 1991, between PEI and Dean T. Casaday -- filed as Exhibit 10-16 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-44 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. 10-45 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. -87- TABLE OF CONTENTS
PART I PAGE Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 19 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 20 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 21 Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . * Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 22 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 41 Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 72 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 . . . . . . . . . . . . . . . . . . . . . . . 73** SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 79 ________________________ * 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 80.
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 23, 1994 By: Dean T. Casaday President and Chief Executive Officer (Principal Executive Officer) Date: March 23, 1994 By: 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 Chairman of the Board of March 23, 1994 Kenneth L. Pollock Directors Vice Chairman of the Board March 23, 1994 William D. Davis of Directors Director, President and March 23, 1994 Dean T. Casaday Chief Executive Officer Director March 23, 1994 Robert J. Keating Director March 23, 1994 John D. McCarthy Director March 23, 1994 Kenneth M. Pollock Director March 23, 1994 James A. Ross Director March 23, 1994 Ronald W. Simms
PENNSYLVANIA GAS AND WATER COMPANY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993 Balance at Additions Adjustments Balance at beginning at and end Classification of year cost Retirements transfers (a) of year (Thousands of Dollars) Year ended December 31, 1991 Gas plant (b) $ 213,957 $ 9,073 $ 1,188 $ 56 $ 221,898 Water plant (c) 269,040 6,895 672 85 275,348 Common plant 26,182 244 1,332 (64) 25,030 Total plant in service 509,179 16,212 3,192 77 522,276 Construction work in progress 3,908 12,302(d) - - 16,210(e) Total $ 513,087 $ 28,514 $ 3,192 $ 77 $ 538,486 Year ended December 31, 1992 Gas plant (b) $ 221,898 $ 12,487 $ 506 $ (3) $ 233,876 Water plant (c) 275,348 20,840 1,693 (1,079) 293,416 Common plant 25,030 2,600 3,077 (107) 24,446 Total plant in service 522,276 35,927 5,276 (1,189) 551,738 Construction work in progress 16,210 21,094(d) - - 37,304(e) Total $ 538,486 $ 57,021 $ 5,276 $ (1,189) $ 589,042 Year ended December 31, 1993 Gas plant (b) $ 233,876 $ 11,225 $ 793 $ 29 $ 244,337 Water plant (c) 293,416 61,471 988 1,397 355,296 Common plant 24,446 3,000 1,319 (91) 26,036 Total plant in service 551,738 75,696 3,100 1,335 625,669 Construction work in progress 37,304 (29,796)(d) - - 7,508 Total $ 589,042 $ 45,900 $ 3,100 $ 1,335 $ 633,177 NOTES: (a) Represents transfers to other physical property and transfers between gas, water and common plant. (b) At original cost less acquisition adjustments of $386,000. (c) At original cost plus acquisition adjustments of $14,236,000 at December 31, 1991 and 1992, and $14,577,000 at December 31, 1993. (d) Net of transfers to utility plant in service. (e) Includes $6,187,000, $4,856,000 and $628,000, respectively, for the construction of the Ceasetown, Crystal Lake and Watres Water Treatment Plants at December 31, 1991, and $21,998,000, and $10,119,000, respectively, for the construction of the Ceasetown and Watres Water Treatment Plants at December 31, 1992. PENNSYLVANIA GAS AND WATER COMPANY SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993 Additions charged to Deductions Balance at Balance beginning Other Salvage Removal at end Classification of year Income accounts(a) recoveries Retirements cost Transfers(b) of year (Thousands of Dollars) Year ended December 31, 1991 Gas plant $ 45,247 $ 5,034 $ 180 $ 43 $ 1,188 $ 166 $ 1 $49,151 Water plant 6,679 3,613 - 7 672 276 64 9,415 Common plant 11,932 1,137 729 33 1,332 25 4 12,478 Total $ 63,858 $ 9,784 $ 909 $ 83 $ 3,192 $ 467 $ 69 $71,044 Year ended December 31, 1992 Gas plant $ 49,151 $ 5,656 $ 111 $ 17 $ 506 $ 344 $ 1 $54,086 Water plant 9,415 4,202 - 8 1,693 312 (31) 11,589 Common plant 12,478 1,006 638 84 3,077 - (61) 11,068 Total $ 71,044 $10,864 $ 749 $ 109 $ 5,276 $ 656 $ (91) $76,743 Year ended December 31, 1993 Gas plant $ 54,086 $ 5,894 $ 121 $ 13 $ 793 $ 312 $ 10 $59,019 Water plant 11,589 5,230 - 52 988 708 158 15,333 Common plant 11,068 1,186 913 95 1,319 8 - 11,935 Total $ 76,743 $12,310 $ 1,034 $ 160 $ 3,100 $ 1,028 $ 168 $86,287 NOTES: (a) Represents depreciation of transportation and work equipment charged to clearing accounts, together with other equipment expenses, and apportioned therefrom to various operating, construction and other accounts on the basis of the use of such equipment. (b) Represents transfers to other physical property and transfers between gas, water and common plant. PENNSYLVANIA GAS AND WATER COMPANY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993 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, 1991 $ 1,626 $ 1,744 $ - $ 1,763(a) $ 1,607 Year ended December 31, 1992 $ 1,607 $ 1,806 $ - $ 1,938(a) $ 1,475 Year ended December 31, 1993 $ 1,475 $ 1,590 $ - $ 1,842(a) $ 1,223 Shown as operating reserves on the balance sheets: Insurance - Year ended December 31, 1991 $ 2,178 $ 635 $ - $ 966(b) $ 1,847 Year ended December 31, 1992 $ 1,847 $ 1,216 $ - $ 1,498(b) $ 1,565 Year ended December 31, 1993 $ 1,565 $ 1,823 $ 75 $ 1,600(b) $ 1,863 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-4.20 2 EXHIBIT 4.20 CONFORMED COPY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Twenty-Eighth Supplemental Indenture DATED AS OF DECEMBER 1, 1993 (SUPPLEMENTAL TO INDENTURE DATED AS OF MARCH 15, 1946) ------------------ PENNSYLVANIA GAS AND WATER COMPANY (FORMERLY SCRANTON-SPRING BROOK WATER SERVICE COMPANY) TO MORGAN GUARANTY TRUST COMPANY OF NEW YORK, TRUSTEE ------------------ FIRST MORTGAGE BONDS 6.05% SERIES DUE 2019 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 TWENTY-EIGHTH SUPPLEMENTAL INDENTURE, dated as of the first day of December 1993, 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 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a corporation organized and existing under the laws of the State of New York, and having its principal place of business at No. 60 Wall Street, 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 Guaranty Trust Company of New York, now Morgan Guaranty Trust Company of New York, to secure its First Mortgage Bonds and has executed and delivered twenty-seven 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; and as of December 1, 1992 (the Original Indenture as heretofore supplemented and to be supplemented by this Twenty-Eighth 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 at November 30, 1993 (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 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 2 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, $3,745,000 (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, and $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 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 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 3 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-Eighth 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 6.05% Series due 2019 (hereinafter sometimes called 'bonds of the Twentieth Series'); and WHEREAS, the Company proposes to execute and to request the Trustee to authenticate and deliver up to $19,000,000 principal amount of bonds of the Twentieth Series pursuant to the provisions of Sections 3.02 to 3.06, both inclusive, of the Original Indenture; and WHEREAS, the bonds of the Twentieth 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 TWENTIETH 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. PENNSYLVANIA GAS AND WATER COMPANY (Formerly Scranton-Spring Brook Water Service Company) First Mortgage Bond 6.05% Series due 2019 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 January 1, 2019 (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 July and the first day of January in each year commencing July 1, 1994, to pay interest thereon, at said office or agency, 4 at the rate of 6.05% 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 December 1, 1993), 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 July 1 or January 1 will be paid to the person in whose name this bond was registered at the close of business on the fifteenth day of June or the fifteenth day of December 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 December 1, 1993 (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) by, a certain mortgage and deed of trust, dated as of March 15, 1946 (hereinafter called the 'Original Indenture'), and by twenty-eight 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 Guaranty Trust Company of New York and, after the change of name of Guaranty Trust Company of New York to Morgan Guaranty Trust Company of New York, to Morgan Guaranty Trust Company of New York, as 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 5 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 6.05% Series due 2019 of the Company. 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, 1993 Series A (Pennsylvania Gas and Water Company Project) due January 1, 2019 (the '1993 Series A Bonds'). The principal amount of bonds of this series to be redeemed upon any redemption of the 1993 Series A Bonds shall be equal to 100% of the principal amount of 1993 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 1993 Series A Bonds at the option 6 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 January 1, 2004 and December 31, 2004, 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 January 1, 2005 and December 31, 2005, 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 1993 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. 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. 7 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 Morgan Guaranty Trust Company of New York, or its successor, as Trustee under the Indenture. 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 8 [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. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, 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-Eighth Supplemental Indenture have been complied with and observed, and all things necessary to make this Twenty-Eighth 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 Twentieth Series, hereinafter referred to, has been in all respects duly authorized; NOW, THEREFORE, THIS TWENTY-EIGHTH 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 Twentieth 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 Morgan Guaranty Trust Company of New York, as Trustee, and its successor or successors in the trust and its or their assigns forever, the following described property -- that is to say: 9 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 October 31, 1993, 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: 01. Parcel of land situate in the Township of Greenfield, Lackawanna County, from John Malinchak and Linda Malinchak, husband and wife, by Deed dated March 5, 1993 and recorded March 10, 1993 in Lackawanna 10 County Deed Book 1426 at Page 281. Containing Three (3.0) acres, more or less. 02. Partial interest in parcel of land situate in Borough of Jessup, Lackawanna County, from John L. Kemmerer, Jr. and Mary Elizabeth Kemmerer, his wife, by Deed dated October 8, 1993 and recorded October 22, 1993 in Lackawanna County Deed Book 1451 at Page 368. Containing Four Hundred Thirty-Nine (439.0) acres and allowances. 03. Parcel of land situate in the Borough of Archbald, Lackawanna County, from Pine Line, Inc., by Deed dated October 18, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 764. Containing Ninety-two One Hundredths (0.92) of an acre. II The following piece or parcel of land situate in the County of Luzerne and Commonwealth of Pennsylvania, to wit: 01. Four (4) parcels of land situate in the Township of Conyngham, Township of Salem and Borough of Shickshinny, Luzerne County, from Mocanaqua Water Company and Shickshinny Water Company, by Deed dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. Containing One Hundred Ten and Four-hundred Sixteen Thousandths (110.416) acres, more or less. III The following right-of-way and/or easements situate in the County of Columbia and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Ira S. Hauck, et ux, by Indenture dated February 9, 1993 and recorded March 8, 1993 in Columbia County Record Book 528 at Page 399. 02. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Harland H. Shoemaker, et ux, by Indenture dated February 9, 1993 and recorded March 8, 1993 in Columbia County Record Book 528 at Page 402. 03. Right-of-way for gas pipeline in the Borough of Berwick, Columbia County, from Berwick Hospital Center Foundation, by Indenture dated February 23, 1993 and recorded March 8, 1993 in Columbia County Record Book 528 at Page 405. 11 04. Right-of-way for gas pipeline in the Township of South Centre, Columbia County, from Star Kist Foods, Inc., et al, by Indenture dated July 22, 1993 and recorded August 24, 1993 in Columbia County Record Book 544 at Page 830. 05. Right-of-way for gas pipeline in the Township of South Centre, Columbia County, from Frank C. Baker, et al, by Indenture dated July 30, 1993 and recorded August 24, 1993 in Columbia County Record Book 544 at Page 839. 06. Right-of-way for gas pipeline in the Township of South Centre, Columbia County, from Frank C. Baker, et al, by Indenture dated July 30, 1993 and recorded August 24, 1993 in Columbia County Record Book 544 at Page 835. 07. Right-of-way for gas pipeline in the Town of Bloomsburg, Columbia County, from Kawneer Company, Inc., by Indenture dated August 4, 1993 and recorded August 24, 1993 in Columbia County Record Book 544 at Page 843. 08. Right-of-way for gas pipeline in the Town of Bloomsburg, Columbia County, from Michael A. Chyko, et ux, by Indenture dated October 25, 1993 and recorded October 29, 1993 in Columbia County Record Book 551 at Page 159. IV The following right-of-way and/or easements situate in the County of Lackawanna and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Scranton Mall Associates, by Indenture dated March 27, 1992 and recorded December 14, 1992 in Lackawanna County Deed Book 1417 at Page 461. 02. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Evelyn Bleiler Hammond, by Indenture dated October 2, 1992 and recorded December 14, 1992 in Lackawanna County Deed Book 1417 at Page 468. 03. Right-of-way for gas pipeline in the Borough of Olyphant, Lackawanna County, from WEA Manufacturing, Inc., by Indenture dated October 8, 1992 and recorded December 14, 1992 in Lackawanna County Deed Book 1417 at Page 472. 04. Right-of-way for gas pipeline in the Borough of Jessup, Lackawanna County, from Fastenal Company, Inc., by Indenture dated 12 October 13, 1992 and recorded December 14, 1992 in Lackawanna County Deed Book 1417 at Page 479. 05. Right-of-way for gas pipeline in the Borough of Olyphant, Lackawanna County, from Thomas C. McGowan, et ux, by Indenture dated October 27, 1992 and recorded December 14, 1992 in Lackawanna County Deed Book 1417 at Page 484. 06. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Joseph M. Harvilchuck, et ux, by Indenture dated November 2, 1992 and recorded December 14, 1992 in Lackawanna County Deed Book 1417 at Page 488. 07. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Samuel R. Ventura, et ux, by Indenture dated December 3, 1992 and recorded December 14, 1992 in Lackawanna County Deed Book 1417 at Page 492. 08. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from City of Scranton, by Indenture dated December 8, 1992 and recorded January 13, 1993 in Lackawanna County Deed Book 1420 at Page 448. 09. Right-of-way for water pipeline in the Borough of Jessup, Lackawanna County, from Martin C. Fischer, et al, by Indenture dated December 16, 1992 and recorded January 13, 1993 in Lackawanna County Deed Book 1420 at Page 444. 10. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Sandvik Steel Company, by Indenture dated December 18, 1992 and recorded January 13, 1993 in Lackawanna County Deed Book 1420 at Page 440. 11. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Lackawanna County Industrial Development Authority, et al, by Indenture dated December 23, 1992 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 364. 12. Right-of-way for gas pipeline in the Borough of Jessup, Lackawanna County, from Eric M. Spatt, et ux, by Indenture dated December 28, 1992 and recorded January 13, 1993 in Lackawanna County Deed Book 1420 at Page 435. 13. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Delbert P. Keisling, Jr., et ux, by Indenture dated December 30, 1992 and recorded January 13, 1993 in Lackawanna County Deed Book 1420 at Page 430. 13 14. Right-of-way for gas pipeline in the Borough of Mayfield, Lackawanna County, from Thomas Greene, et ux, by Indenture dated January 4, 1993 and recorded February 9, 1993 in Lackawanna County Deed Book 1423 at Page 230. 15. Right-of-way for gas pipeline in the City of Carbondale, Lackawanna County, from Cottage Hose Ambulance Corps, Inc., by Indenture dated January 27, 1993 and recorded February 9, 1993 in Lackawanna County Deed Book 1423 at Page 240. 16. Right-of-way for gas pipeline in the Borough of Blakely, Lackawanna County, from Edwin A. Abrahamsen, et al, by Indenture dated February 1, 1993 and recorded February 9, 1993 in Lackawanna County Deed Book 1423 at Page 235. 17. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from James Gress, et ux, by Indenture dated February 3, 1993 and recorded February 9, 1993 in Lackawanna County Deed Book 1423 at Page 245. 18. Right-of-way for gas pipeline in the Borough of Throop, Lackawanna County, from Joseph Quinlan, et ux, by Indenture dated February 11, 1993 and recorded March 8, 1993 in Lackawanna County Deed Book 1426 at Page 55. 19. Right-of-way for gas pipeline in the Borough of Archbald, Lackawanna County, from Borough of Archbald, by Indenture dated February 17, 1993 and recorded March 8, 1993 in Lackawanna County Deed Book 1426 at Page 46. 20. Right-of-way for gas pipeline in the Borough of Throop, Lackawanna County, from Robert J. Karlavige, et ux, by Indenture dated February 18, 1993 and recorded March 8, 1993 in Lackawanna County Deed Book 1426 at Page 51. 21. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from United Neighborhood Housing Corporation, by Indenture dated February 19, 1993 and recorded March 8, 1993 in Lackawanna County Deed Book 1426 at Page 41. 22. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Richard J. Matthews, et ux, by Indenture dated February 25, 1993 and recorded March 8, 1993 in Lackawanna County Deed Book 1426 at Page 37. 23. Right-of-way for gas pipeline in the Borough of Blakely, Lackawanna County, from Robert Polidori, et ux, by Indenture dated 14 February 25, 1993 and recorded March 8, 1993 in Lackawanna County Deed Book 1426 at Page 32. 24. Right-of-way for water pipeline in the Borough of Blakely, Lackawanna County, from Robert Polidori, et ux, by Indenture dated February 25, 1993 and recorded March 8, 1993 in Lackawanna County Deed Book 1426 at Page 27. 25. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Corporation of the Presiding Bishop of the Church of Jesus Christ of Latter Day Saints, by Indenture dated March 8, 1993 and recorded April 14, 1993 in Lackawanna County Deed Book 1429 at Page 436. 26. Right-of-way for water pipeline in the City of Carbondale, Lackawanna County, from Dr. Thomas H. Coleman, et al, by Indenture dated March 23, 1993 and recorded April 14, 1993 in Lackawanna County Deed Book 1429 at Page 441. 27. Right-of-way for gas pipeline in the City of Carbondale, Lackawanna County, from Dr. Thomas H. Coleman, et al, by Indenture dated March 23, 1993 and recorded April 14, 1993 in Lackawanna County Deed Book 1429 at Page 447. 28. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from James Granville, Sr., et ux, by Indenture dated March 26, 1993 and recorded April 14, 1993 in Lackawanna County Deed Book 1429 at Page 453. 29. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Gerald M. Borosky, et ux, by Indenture dated March 26, 1993 and recorded April 14, 1993 in Lackawanna County Deed Book 1429 at Page 457. 30. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Walter S. Chesar, et ux, by Indenture dated March 26, 1993 and recorded April 14, 1993 in Lackawanna County Deed Book 1429 at Page 461. 31. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Bruce Thomas Bevilacqua, et ux, by Indenture dated March 29, 1993 and recorded April 14, 1993 in Lackawanna County Deed Book 1429 at Page 465. 32. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Lena Lockett, by Indenture dated April 21, 1993 15 and recorded May 17, 1993 in Lackawanna County Deed Book 1432 at Page 239. 33. Right-of-way for gas pipeline in the Borough of Archbald, Lackawanna County, from Charles J. Passeri, et ux, by Indenture dated April 21, 1993 and recorded May 17, 1993 in Lackawanna County Deed Book 1432 at Page 243. 34. Right-of-way for water pipeline in the Borough of Archbald, Lackawanna County, from Charles J. Passeri, et ux, by Indenture dated April 21, 1993 and recorded May 17, 1993 in Lackawanna County Deed Book 1432 at Page 247. 35. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from James F. Eiden, et ux, by Indenture dated April 22, 1993 and recorded May 17, 1993 in Lackawanna County Deed Book 1432 at Page 251. 36. Right-of-way for gas pipeline in the City of Carbondale, Lackawanna County, from Wan Sanderson, by Indenture dated April 27, 1993 and recorded May 17, 1993 in Lackawanna County Deed Book 1432 at Page 255. 37. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Ann Killino, by Indenture dated April 29, 1993 and recorded May 17, 1993 in Lackawanna County Deed Book 1432 at Page 259. 38. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from School District of the City of Scranton, by Indenture dated May 7, 1993 and recorded May 17, 1993 in Lackawanna County Deed Book 1432 at Page 263. 39. Right-of-way for water pipeline in the Borough of Archbald, Lackawanna County, from Pennsylvania Power & Light Company, by Indenture dated May 4, 1993 and recorded June 30, 1993 in Lackawanna County Deed Book 1438 at Page 178. 40. Right-of-way for gas pipeline in the Borough of Taylor, Lackawanna County, from Trustees of the Church of God, Borough of Taylor, County of Lackawanna, by Indenture dated May 13, 1993 and recorded June 30, 1993 in Lackawanna County Deed Book 1438 at Page 185. 41. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Thomas George Bryan, et ux, by Indenture dated May 17, 16 1993 and recorded June 30, 1993 in Lackawanna County Deed Book 1438 at Page 190. 42. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Robert B. Brady, et ux, by Indenture dated June 9, 1993 and recorded June 30, 1993 in Lackawanna County Deed Book 1438 at Page 194. 43. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Paul Grado, Sr., by Indenture dated June 16, 1993 and recorded June 30, 1993 in Lackawanna County Deed Book 1438 at Page 198. 44. Right-of-way for gas pipeline in the Township of Carbondale, Lackawanna County, from Michael C. Figliomeni, by Indenture dated June 17, 1993 and recorded June 30, 1993 in Lackawanna County Deed Book 1438 at Page 202. 45. Right-of-way for water pipeline in the Borough of Archbald, Lackawanna County, from Northpoint Associates, Inc., by Indenture dated July 2, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 369. 46. Right-of-way for gas pipeline in the Borough of Archbald, Lackawanna County, from Northpoint Associates, Inc., by Indenture dated July 2, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 374. 47. Right-of-way for gas pipeline in the Borough of Dickson City, Lackawanna County, from Zigmund Enterprises, Inc., by Indenture dated July 14, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 379. 48. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Deerfield Village, by Indenture dated July 14, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 384. 49. Right-of-way for water pipeline in the Township of South Abington, Lackawanna County, from Deerfield Village, by Indenture dated July 14, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 388. 50. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Omoo Lamira Chase Shook, et vir, by Indenture dated August 13, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 392. 17 51. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Neil William Rogers, by Indenture dated August 13, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 396. 52. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Mary Alice Noldy, by Indenture dated August 13, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 400. 53. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Louise Zacker, by Indenture dated August 16, 1993 and recorded August 25, 1993 in Lackawanna County Deed Book 1444 at Page 404. 54. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Frank Decker, et ux, by Indenture dated August 31, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 543. 55. Right-of-way for gas pipeline in the Borough of Moosic and City of Scranton, Lackawanna County, from Hub Management, Inc., by Indenture dated August 31, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 561. 56. Right-of-way for water pipeline in the Borough of Moosic and City of Scranton, Lackawanna County, from Hub Management, Inc., by Indenture dated August 31, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 555. 57. Right-of-way for gas pipeline in the Township of Fell, Lackawanna County, from Gerald A. Gravine, by Indenture dated September 3, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 551. 58. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Charles J. Blazonis, et ux, by Indenture dated September 3, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 547. 59. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from James Baress, by Indenture dated September 3, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 567. 60. Right-of-way for gas pipeline in the Township of Carbondale, Lackawanna County, from Thomas V. Motts, et ux, by Indenture dated 18 September 8, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 571. 61. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from William Popovich, et ux, by Indenture dated September 13, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 575. 62. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Keyser Terrace, Inc., by Indenture dated September 15, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 584. 63. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Keyser Terrace, Inc., by Indenture dated September 15, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 579. 64. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from James Scantzos, et ux, by Indenture dated September 15, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 589. 65. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Scott Plaza, Ltd., by Indenture dated September 15, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 594. 66. Right-of-way for gas pipeline in the Borough of Blakely, Lackawanna County, from Magdalene Spegar, Single, by Indenture dated September 24, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 598. 67. Right-of-way for gas pipeline in the Borough of Throop, Lackawanna County, from Anthony A. Andrelchik, Single, by Indenture dated October 5, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 602. 68. Right-of-way for gas pipeline in the Borough of Throop, Lackawanna County, from John P. Yankowski, by Indenture dated October 5, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 606. 69. Right-of-way for gas pipeline in the Borough of Clarks Green, Lackawanna County, from Margo Portanova, by Indenture dated October 6, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 610. 19 70. Right-of-way for gas pipeline in the Borough of Clarks Green, Lackawanna County, from David T. Richards, et ux, by Indenture dated October 6, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 614. 71. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Vincent Piccolini, et al, by Indenture dated October 12, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 618. 72. Right-of-way for access and pipelines in the Borough of Archbald, Lackawanna County, from Pine Line, Inc., by Indenture dated October 18, 1993 and recorded October 19, 1993 in Lackawanna County Deed Book 1450 at Page 764. 73. Right-of-way for gas pipeline in the Borough of Dickson City, Lackawanna County, from Aldi, Inc., by Indenture dated October 18, 1993 and recorded October 29, 1993 in Lackawanna County Deed Book 1452 at Page 273. 74. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Rendon Corporation, by Indenture dated October 19, 1993 and recorded October 29, 1993 in Lackawanna County Deed Book 1452 at Page 277. 75. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Vincent Piazza, et ux, by Indenture dated October 20, 1993 and recorded October 29, 1993 in Lackawanna County Deed Book 1452 at Page 268. V The following right-of-way and/or easements situate in the County of Luzerne and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for ground bed for cathodic protection in the Township of Plains, Luzerne County, from Elizabeth Kuzemko, by Indenture dated October 16, 1992 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 827. 02. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from William H. Corgan, et al, by Indenture dated October 29, 1992 and recorded December 9, 1992 in Luzerne County Deed Book 2440 at Page 1135. 03. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Harry Yale, et ux, by Indenture dated November 11, 1992 and 20 recorded December 9, 1992 in Luzerne County Deed Book 2440 at Page 1131. 04. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Christ Methodist Church of Mountaintop, by Indenture dated November 12, 1992 and recorded December 9, 1992 in Luzerne County Deed Book 2440 at Page 1140. 05. Right-of-way for access road in the Township of Jenkins, Luzerne County, from Coolbaugh Sand and Stone, Inc., by Indenture dated November 25, 1992 and recorded December 9, 1992 in Luzerne County Deed Book 2440 at Page 1156. 06. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Luzerne County Industrial Development Authority, et al, by Indenture dated November 30, 1992 and recorded December 9, 1992 in Luzerne County Deed Book 2440 at Page 1161. 07. Right-of-way for gas pipeline in the Township of Jackson, Luzerne County, from Anthony S. Garbush, et ux, by Indenture dated December 2, 1992 and recorded December 9, 1992 in Luzerne County Deed Book 2440 at Page 1170. 08. Right-of-way for gas pipeline in the Borough of Duryea, Luzerne County, from Arnold J. Dommes, et ux, by Indenture dated December 8, 1992 and recorded December 9, 1992 in Luzerne County Deed Book 2440 at Page 1166. 09. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Edward S. Miscavage, et ux, by Indenture dated December 9, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 727. 10. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Daniel E. Rozanski, by Indenture dated December 9, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 731. 11. Right-of-way for gas pipeline in the Township of Fairview, Luzerne County, from Deborah S. Gabriel, by Indenture dated December 14, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 735. 12. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Frank J. Ciavarella, et ux, by Indenture dated December 14, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 739. 21 13. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Crescenzo G. Calise, et ux, by Indenture dated December 15, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 749. 14. Right-of-way for water pipeline in the Township of Plains, Luzerne County, from Blue Coal Corporation, by Indenture dated December 16, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 842. 15. Right-of-way for water pipeline in the Borough of Exeter, Luzerne County, from JEF Development Associates, Ltd, by Indenture dated December 21, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 848. 16. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from Henry P. Fricchione, et ux, by Indenture dated December 21, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 853. 17. Right-of-way for access in the Township of Jenkins and the Township of Pittston, Luzerne County, from IRECO, by Indenture dated December 22, 1992 and recorded March 5, 1993 in Luzerne County Deed Book 2449 at Page 802. 18. Right-of-way for water pipeline in the Borough of Courtdale, Luzerne County, from John A. Connolly, Jr., et al, by Indenture dated December 28, 1992 and recorded January 6, 1993 in Luzerne County Deed Book 2443 at Page 6. 19. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from Michael J. Kozich, et ux, by Indenture dated January 7, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 197. 20. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from David J. Blight, et ux, by Indenture dated January 11, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 193. 21. Right-of-way for gas pipeline in the Township of Lehman, Luzerne County, from Robert G. Root, et ux, by Indenture dated January 14, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 189. 22. Right-of-way for gas pipeline in the Township of Jackson, Luzerne County, from Ronald L. Hillard, et ux, by Indenture dated January 14, 1993 22 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 185. 23. Right-of-way for gas pipeline in the Township of Jackson, Luzerne County, from James Leo Dalkiewicz, et ux, by Indenture dated January 14, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 181. 24. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from Martin Mullen, et ux, by Indenture dated January 14, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 177. 25. Right-of-way for gas pipeline in the Borough of Sugar Notch, Luzerne County, from Gerald G. Decker, et al, by Indenture dated January 19, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 172. 26. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Mericle Development Corporation, by Indenture dated January 22, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 167. 27. Right-of-way for gas pipeline in the Borough of Sugar Notch, Luzerne County, from Greater Wilkes-Barre Industrial Fund, Inc., by Indenture dated January 25, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 162. 28. Right-of-way for gas pipeline in the Township of Exeter, Luzerne County, from Nathan Sands, by Indenture dated January 28, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 158. 29. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Rockville Fabrics Corporation, by Indenture dated January 28, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 153. 30. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Salim Elmir, et al, by Indenture dated January 28, 1993 and recorded February 8, 1993 in Luzerne County Deed Book 2447 at Page 149. 31. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from County of Luzerne, by Indenture dated February 8, 1993 and recorded March 5, 1993 in Luzerne County Deed Book 2449 at Page 796. 32. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from Anthony Scalzo, et al, by Indenture dated February 18, 1993 23 and recorded March 5, 1993 in Luzerne County Deed Book 2449 at Page 792. 33. Right-of-way for gas pipeline in the Township of Salem, Luzerne County, from Berwick Hospital Center Foundation, by Indenture dated February 23, 1993 and recorded March 5, 1993 in Luzerne County Deed Book 2449 at Page 787. 34. Right-of-way for gas pipeline in the Borough of Sugar Notch, Luzerne County, from Gerald G. Decker, et al, by Indenture dated February 26, 1993 and recorded March 5, 1993 in Luzerne County Deed Book 2449 at Page 783. 35. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from John J. Mutter, et ux, by Indenture dated February 26, 1993 and recorded March 5, 1993 in Luzerne County Deed Book 2449 at Page 779. 36. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from Michael Blandina, by Indenture dated March 9, 1993 and recorded March 31, 1993 in Luzerne County Deed Book 2452 at Page 916. 37. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Francis J. Marcinko, et ux, by Indenture dated March 11, 1993 and recorded March 31, 1993 in Luzerne County Deed Book 2452 at Page 912. 38. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Arnold K. Biscontini, by Indenture dated March 12, 1993 and recorded March 31, 1993 in Luzerne County Deed Book 2452 at Page 907. 39. Right-of-way for gas and water pipelines in the City of Wilkes- Barre, Luzerne County, from Mercy Hospital of Wilkes-Barre, Pa., by Indenture dated March 22, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 872. 40. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from Glad Tidings Assembly of God Church, by Indenture dated March 29, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 880. 41. Right-of-way for water pipeline in the Borough of Shickshinny, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 42. Right-of-way for access in the Borough of Shickshinny, Luzerne County, from Shickshinny Water Company and Mocanaqua Water 24 Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 43. Right-of-way for water pipeline in the Township of Salem, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 44. Right-of-way for water pipeline in the Township of Salem, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 45. Right-of-way for water pipeline in the Township of Salem, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 46. Right-of-way for water pipeline in the Township of Salem, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 47. Right-of-way for water pipeline in the Borough of Shickshinny, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 48. Right-of-way for water pipeline in the Borough of Shickshinny, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 49. Right-of-way for water pipeline in the Township of Salem, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 50. Right-of-way for water pipeline in the Township of Salem, Luzerne County, from Shickshinny Water Company and Mocanaqua Water Company, by Indenture dated April 5, 1993 and recorded April 6, 1993 in Luzerne County Deed Book 2453 at Page 517. 51. Right-of-way for water pipeline in the Borough of Exeter, Luzerne County, from Wildflower Village, Inc., by Indenture dated April 9, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 885. 25 52. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Carol E. Barney Cresko, by Indenture dated April 15, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 890. 53. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from Charles M. Reilly, et ux, by Indenture dated April 15, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 894. 54. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Thomas M. Jacobs, et ux, by Indenture dated April 19, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 823. 55. Right-of-way for gas pipeline in the Borough of Pringle, Luzerne County, from Anthony J. Kukosky, et ux, by Indenture dated April 30, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 803. 56. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Jean R. Hughes, by Indenture dated May 4, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 926. 57. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Terry Cadwalader, by Indenture dated May 19, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 982. 58. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Dorranceton United Methodist Church of Kingston, by Indenture dated May 19, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 930. 59. Right-of-way for gas pipeline in the Borough of Forty-Fort, Luzerne County, from Edward S. Kopec, et ux, by Indenture dated May 25, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 935. 60. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Housing Authority of the County of Luzerne, by Indenture dated May 25, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 939. 61. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Maple Hill Cemetery Association, by Indenture dated May 28, 26 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 944. 62. Right-of-way for water pipeline in the Township of Hunlock, Township of Union and Borough of Shickshinny, Luzerne County, from Pennsylvania Gas and Water Company, Trustee, by Indenture dated June 4, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 798. 63. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Jerome Stone, et ux, by Indenture dated June 17, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 954. 64. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Nellie H. Yenshuski, by Indenture dated June 17, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 959. 65. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Hill Brook Corporation, by Indenture dated June 17, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 963. 66. Right-of-way for water pipeline in the Township of Jenkins, Luzerne County, from County of Luzerne, by Indenture dated June 17, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 968. 67. Right-of-way for gas pipeline in the Township of Fairview, Luzerne County, from Township of Fairview, by Indenture dated June 17, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 949. 68. Right-of-way for water pipeline in the Townships of Jenkins and Plains, Luzerne County, from Harry S. Salavantis, by Indenture dated June 18, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 973. 69. Right-of-way for gas pipeline in the Borough of Courtdale, Luzerne County, from Stephen E. Sincavage, et ux, by Indenture dated June 24, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 978. 70. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Frederick H. Voelker, et ux, by Indenture dated June 25, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 868. 27 71. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from Wickes Lumber Company, by Indenture dated June 25, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 793. 72. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from Henry Litchkofski, et ux, et al, by Indenture dated June 28, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 858. 73. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from John E. Wilczynski, by Indenture dated June 28, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 865. 74. Right-of-way for gas pipeline in the West Wyoming Borough, Luzerne County, from Samuel A. Dimick, et ux, et al, by Indenture dated June 30, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 844. 75. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from Joseph Kryzanski, et ux, by Indenture dated June 30, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 850. 76. Right-of-way for gas pipeline in the City of Nanticoke, Luzerne County, from Joseph Latze, et ux, by Indenture dated June 30, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 854. 77. Right-of-way for ground bed for cathodic protection in the Township of Plains, Luzerne County, from Frank Dominick, et ux, by Indenture dated July 1, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 789. 78. Right-of-way for gas pipeline in the Borough of Courtdale, Luzerne County, from UGI Utilities, Inc., et al, by Indenture dated July 7, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 839. 79. Right-of-way for water pipeline in the Borough of Sugar Notch, Luzerne County, from Robert Kinney, et al, by Indenture dated July 26, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 835. 80. Right-of-way for water pipeline in the Township of Conyngham, Luzerne County, from Most Reverend James C. Timlin, Bishop, Trustee for St. Mary's Polish Roman Catholic Congregation of the Village of Mocanaqua, by Indenture dated July 27, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 898. 28 81. Right-of-way for water pipeline in the Borough of Sugar Notch, Luzerne County, from Charles Kinney, et ux, by Indenture dated July 30, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 831. 82. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from John D. Moran, et al, by Indenture dated August 5, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 905. 83. Right-of-way for gas pipeline in the Borough of Dallas, Luzerne County, from Nicholas Stredny, by Indenture dated August 13, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 909. 84. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from United States Postal Service, by Indenture dated August 17, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 913. 85. Right-of-way for gas pipeline in the Borough of West Wyoming, Luzerne County, from Bruno Ferretti, et al, by Indenture dated August 18, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 817. 86. Right-of-way for water pipeline in the Borough of West Wyoming, Luzerne County, from Bruno Ferretti, et al, by Indenture dated August 18, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 811. 87. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from Joseph Antellocy, et al, by Indenture dated August 19, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 918. 88. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from John A. Gulius, et ux, by Indenture dated August 23, 1993 and recorded August 25, 1993 in Luzerne County Deed Book 2466 at Page 922. 89. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from Cleveland Brothers Equipment Company, Inc., by Indenture dated August 24, 1993 and recorded October 20, 1993 in Luzerne County Deed Book 2472 at Page 660. 90. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Joseph Coccia, et ux, by Indenture dated August 31, 1993 and recorded October 20, 1993 in Luzerne County Deed Book 2472 at Page 675. 91. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from Raymond Wojtowicz, by Indenture dated September 29 27, 1993 and recorded October 20, 1993 in Luzerne County Deed Book 2472 at Page 665. 92. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Dr. Joseph M. Lombardo, et ux, by Indenture dated October 8, 1993 and recorded October 20, 1993 in Luzerne County Deed Book 2472 at Page 670. 93. Right-of-way for gas pipeline in the Township of Lehman, Luzerne County, from Maplemoor, Inc., by Indenture dated October 11, 1993 and recorded October 20, 1993 in Luzerne County Deed Book 2472 at Page 655. 94. Right-of-way for gas pipeline in the Township of Lehman, Luzerne County, from Henry M. Evans, et ux, by Indenture dated October 20, 1993 and recorded October 28, 1993 in Luzerne County Deed Book 2473 at Page 542. 95. Right-of-way for gas pipeline in the Borough of Sugar Notch, Luzerne County, from Robert L. Jones, et ux, by Indenture dated October 28, 1993 and recorded October 28, 1993 in Luzerne County Deed Book 2473 at Page 538. VI The following right-of-way and/or easements situate in the County of Lycoming and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Donald L. Emerick, Sr., by Indenture dated September 1, 1992 and recorded January 20, 1993 in Lycoming County Deed Book 1999 at Page 195. 02. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Wal-Mart (Stores), Inc., by Indenture dated September 15, 1992 and recorded January 20, 1993 in Lycoming County Deed Book 1999 at Page 198. 03. Right-of-way for gas pipeline in the Township of Old Lycoming, Lycoming County, from West End Christian and Missionary Alliance Church, by Indenture dated October 31, 1992 and recorded December 11, 1992 in Lycoming County Deed Book 1980 at Page 179. 04. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Rodney G. Ramin, et ux, by Indenture dated November 12, 1992 and recorded December 11, 1992 in Lycoming County Deed Book 1980 at Page 176. 30 05. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Williamsport Area School District, by Indenture dated November 17, 1992 and recorded December 11, 1992 in Lycoming County Deed Book 1980 at Page 183. 06. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Warrior Run Development Corporation, by Indenture dated November 30, 1992 and recorded January 20, 1993 in Lycoming County Deed Book 1999 at Page 203. 07. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Robert J. Kinley, by Indenture dated December 3, 1992 and recorded January 20, 1993 in Lycoming County Deed Book 1999 at Page 207. 08. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Ellis L. Wettlaufer, Jr., by Indenture dated December 9, 1992 and recorded January 20, 1993 in Lycoming County Deed Book 1999 at Page 210. 09. Right-of-way for gas pipeline in the Borough of South Williamsport, Lycoming County, from John W. Eck, et al, by Indenture dated December 9, 1992 and recorded January 20, 1993 in Lycoming County Deed Book 1999 at Page 213. 10. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Donald F. Bower, et ux, by Indenture dated December 23, 1992 and recorded January 20, 1993 in Lycoming County Deed Book 1999 at Page 216. 11. Right-of-way for gas pipeline in the Township of Loyalsock and City of Williamsport, Lycoming County, from C. A. Reed, Inc., by Indenture dated February 19, 1993 and recorded March 18, 1993 in Lycoming County Deed Book 2022 at Page 106. 12. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Industrial Piping Systems, Inc., by Indenture dated February 26, 1993 and recorded March 18, 1993 in Lycoming County Deed Book 2022 at Page 102. 13. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Barbara D. Schramm, by Indenture dated March 18, 1993 and recorded April 12, 1993 in Lycoming County Deed Book 2032 at Page 157. 14. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Julius Kaplan, et al, by Indenture dated March 22, 31 1993 and recorded April 12, 1993 in Lycoming County Deed Book 2032 at Page 160. 15. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from William A. Hodrick, Jr., by Indenture dated March 31, 1993 and recorded April 12, 1993 in Lycoming County Deed Book 2032 at Page 164. 16. Right-of-way for gas pipeline in the Township of Clinton, Lycoming County, from Laverne E. More, et ux, by Indenture dated April 14, 1993 and recorded May 14, 1993 in Lycoming County Deed Book 2052 at Page 016. 17. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Robert G. Shearer, et ux, by Indenture dated June 7, 1993 and recorded July 6, 1993 in Lycoming County Deed Book 2081 at Page 241. 18. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Montoursville Area School District, by Indenture dated June 8, 1993 and recorded July 6, 1993 in Lycoming County Deed Book 2081 at Page 244. 19. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Williamsport Municipal Airport Authority, by Indenture dated June 10, 1993 and recorded July 6, 1993 in Lycoming County Deed Book 2081 at Page 248. 20. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Warrior Run Development Corporation, by Indenture dated July 1, 1993 and recorded July 6, 1993 in Lycoming County Deed Book 2081 at Page 184. 21. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Loyalsock Township School District, by Indenture dated August 5, 1993 and recorded August 24, 1993 in Lycoming County Deed Book 2112 at Page 101. 22. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Williamsport Sanitary Authority, by Indenture dated August 9, 1993 and recorded August 24, 1993 in Lycoming County Deed Book 2112 at Page 105. 23. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Lee A. Viard, by Indenture dated August 19, 1993 and recorded August 24, 1993 in Lycoming County Deed Book 2112 at Page 108. 32 24. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Industrial Properties Corporation, et al, by Indenture dated August 19, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2146 at Page 337. 25. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Wendy's Old Fashioned Hamburgers of New York, Inc., by Indenture dated August 27, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2146 at Page 341. 26. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Cameo Estates, Inc., by Indenture dated September 21, 1993 and recorded October 29, 1993 in Lycoming County Deed Book 2153 at Page 45. 27. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Corporate Property Associates 4, by Indenture dated September 23, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2146 at Page 345. 28. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from David J. Eiswerth, et ux, by Indenture dated September 24, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2147 at Page 1. 29. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Grampian Boulevard Corporation, by Indenture dated September 29, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2147 at Page 5. 30. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Ronald D. Thomas, et ux, by Indenture dated September 30, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2147 at Page 9. 31. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from William S. Holmes, et ux, by Indenture dated September 30, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2147 at Page 12. 32. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from Borough of Montoursville, by Indenture dated October 4, 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2147 at Page 19. 33. Right-of-way for gas pipeline in the Borough of Montoursville, Lycoming County, from LC Realty, Inc., by Indenture dated October 14, 33 1993 and recorded October 19, 1993 in Lycoming County Deed Book 2147 at Page 15. 34. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Richard Caschera, Jr., et ux, by Indenture dated October 14, 1993 and recorded October 29, 1993 in Lycoming County Deed Book 2153 at Page 50. VII The following right-of-way and/or easements situate in the County of Montour and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the Borough of Danville, Montour County, from John A. Malcolm, Jr., et ux, by Indenture dated December 17, 1992 and recorded January 20, 1993 in Montour County Record Book 167 at Page 545. 02. Right-of-way for gas pipeline in the Borough of Danville, Montour County, from Thomas W. Harris, Jr., et ux, by Indenture dated June 29, 1993 and recorded July 6, 1993 in Montour County Record Book 170 at Page 652. VIII The following right-of-way and/or easements situate in the County of Northumberland and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Stephen G. Fassano, et ux, by Indenture dated November 5, 1992 and recorded December 11, 1992 in Northumberland County Record Book 886 at Page 317. 02. Right-of-way for gas pipeline in the Township of Delaware, Northumberland County, from Barry L. Ford, et ux, by Indenture dated November 30, 1992 and recorded January 20, 1993 in Northumberland County Record Book 891 at Page 556. 03. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Robert F. Roshon, et ux, by Indenture dated February 11, 1993 and recorded March 8, 1993 in Northumberland County Record Book 896 at Page 745. 04. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Lee D. Hopewell, et al, by Indenture dated 34 March 8, 1993 and recorded April 12, 1993 in Northumberland County Record Book 901 at Page 93. 05. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Clark's AG Center, Inc., by Indenture dated April 6, 1993 and recorded May 14, 1993 in Northumberland County Record Book 905 at Page 622. 06. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Clark's AG Center, Inc., by Indenture dated April 6, 1993 and recorded August 26, 1993 in Northumberland County Record Book 922 at Page 212. 07. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Turbotville Veterans' Home Association, by Indenture dated April 14, 1993 and recorded May 14, 1993 in Northumberland County Record Book 905 at Page 618. 08. Right-of-way for gas pipeline in the City of Sunbury, Northumberland County, from Sunbury Community Hospital, by Indenture dated May 5, 1993 and recorded May 14, 1993 in Northumberland County Record Book 905 at Page 626. 09. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Doris T. McDowell, et al, by Indenture dated May 14, 1993 and recorded July 6, 1993 in Northumberland County Record Book 914 at Page 142. 10. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Consolidated Rail Corporation, by Indenture dated April 21, 1993 and recorded August 26, 1993 in Northumberland County Record Book 922 at Page 216. 11. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Allen G. Stamm, et ux, by Indenture dated July 28, 1993 and recorded August 26, 1993 in Northumberland County Record Book 922 at Page 225. 12. Right-of-way for gas pipeline in the Borough of Milton, Northumberland County, from Randall D. Kramm, et ux, by Indenture dated August 4, 1993 and recorded August 26, 1993 in Northumberland County Record Book 922 at Page 228. 13. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Daniel P. Stuck, et al, by Indenture dated September 13, 1993 and recorded October 19, 1993 in Northumberland County Record Book 930 at Page 374. 35 14. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Arthur J. Stuck, et ux, by Indenture dated September 13, 1993 and recorded October 19, 1993 in Northumberland County Record Book 930 at Page 377. 15. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Dennis Tatar, et ux, by Indenture dated September 13, 1993 and recorded October 19, 1993 in Northumberland County Record Book 930 at Page 380. 16. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Thomas D. Stuck, et ux, by Indenture dated September 13, 1993 and recorded October 19, 1993 in Northumberland County Record Book 930 at Page 383. 17. Right-of-way for gas pipeline in the Township of Delaware, Northumberland County, from Layman Larve Phillips, et ux, by Indenture dated September 14, 1993 and recorded October 19, 1993 in Northumberland County Record Book 930 at Page 386. 18. Right-of-way for gas pipeline in the Township of Upper Augusta, Northumberland County, from George F. Keller, et ux, by Indenture dated October 11, 1993 and recorded October 19, 1993 in Northumberland County Record Book 930 at Page 389. 19. Right-of-way for gas regulator station in the Borough of Turbotville, Northumberland County, from Clark's AG Center, Inc., by Indenture dated October 19, 1993 and recorded October 29, 1993 in Northumberland County Record Book 932 at Page 145. 20. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Turbotville Development Corp., by Indenture dated October 27, 1993 and recorded October 29, 1993 in Northumberland County Record Book 932 at Page 141. 21. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Robert E. Weaver, by Indenture dated October 27, 1993 and recorded October 29, 1993 in Northumberland County Record Book 932 at Page 149. 22. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Northumberland Legion Home Association, by Indenture dated October 27, 1993 and recorded October 29, 1993 in Northumberland County Record Book 932 at Page 152. 23. Right-of-way for gas pipeline in the Borough of Northumberland, Northumberland County, from Paul R. Gemberling, et ux, by Indenture 36 dated October 29, 1993 and recorded October 29, 1993 in Northumberland County Record Book 932 at Page 156. IX The following right-of-way and/or easements situate in the County of Snyder and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the Township of Middle Creek, Snyder County, from Vince L. Shrawder, et al, by Indenture dated November 30, 1992 and recorded January 20, 1993 in Snyder County Record Book 304 at Page 805. 02. Right-of-way for gas pipeline in the Township of Monroe, Snyder County, from Paul C. Stine, by Indenture dated April 7, 1993 and recorded May 14, 1993 in Snyder County Record Book 310 at Page 560. 03. Right-of-way for gas pipeline in the Township of Monroe, Snyder County, from Susquehanna Valley Mall Associates, by Indenture dated July 23, 1993 and recorded August 24, 1993 in Snyder County Record Book 318 at Page 268. 04. Right-of-way for gas pipeline in the Borough of Shamokin Dam, Snyder County, from Nancy H. Pheasant, by Indenture dated August 4, 1993 and recorded August 24, 1993 in Snyder County Record Book 318 at Page 271. 05. Right-of-way for gas pipeline in the Borough of Shamokin Dam, Snyder County, from Warren M. Humphrey, et ux, by Indenture dated August 5, 1993 and recorded August 24, 1993 in Snyder County Record Book 318 at Page 274. 06. Right-of-way for gas pipeline in the Township of Penn, Snyder County, from Selinsgrove Post No. 6631, Veterans' of Foreign Wars of the United States, Inc., by Indenture dated September 22, 1993 and recorded October 19, 1993 in Snyder County Record Book 321 at Page 913. X The following right-of-way and/or easements situate in the County of Union and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the Township of Buffalo, Union County, from Noah A. Yoder, et ux, by Indenture dated November 5, 1992 and recorded December 11, 1992 in Union County Record Book 281 at Page 467. 37 02. Right-of-way for gas pipeline in the Township of White Deer, Union County, from White Deer Township Volunteer Fire Company, by Indenture dated September 30, 1993 and recorded October 19, 1993 in Union County Record Book 325 at Page 139. 03. Right-of-way for gas pipeline in the Township of White Deer, Union County, from Revival Tabernacle, by Indenture dated October 11, 1993 and recorded October 29, 1993 in Union County Record Book 327 at Page 127. XI The following right-of-way and/or easements situate in the County of Wyoming and Commonwealth of Pennsylvania, to wit: 01. Right-of-way for gas pipeline in the Township of Washington, Wyoming County, from David R. Evans, et ux, by Indenture dated January 22, 1993 and recorded February 8, 1993 in Wyoming County Record Book 294 at Page 616. 02. Right-of-way for gas pipeline in the Township of Washington, Wyoming County, from William S. Miner, et ux, by Indenture dated March 29, 1993 and recorded April 8, 1993 in Wyoming County Record Book 296 at Page 666. 03. Right-of-way for gas pipeline in the Township of Washington, Wyoming County, from William S. Miner, et ux, by Indenture dated July 29, 1993 and recorded August 27, 1993 in Wyoming County Record Book 303 at Page 463. 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; 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 38 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-Eighth 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 TWENTIETH 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 6.05% Series due 2019. 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 Twentieth Series shall be limited to $19,000,000. All bonds of the Twentieth Series shall mature January 1, 2019, and shall bear interest at the rate of 6.05% per annum, payable semi-annually on the first day of July and first day of January in each year, commencing July 1, 1994; provided, however, that the interest payable on the bonds of the Twentieth 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 December 1, 1993 (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 Twentieth 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 (16) days prior to any interest payment date on which the amount of interest payable on the bonds of the Twentieth Series shall be reduced pursuant to the preceding sentence of the amount by which the interest payable on the bonds of the Twentieth Series shall be reduced on such interest payment date. The principal of and interest on each 39 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 Twentieth 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 Twentieth 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 Twentieth Series is authenticated prior to the first interest payment date for bonds of the Twentieth Series it shall bear interest from December 1, 1993). So long as there is no existing default in the payment of interest on the bonds of the Twentieth Series, the person in whose name any bond of the Twentieth 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 June or the fifteenth day of December 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 Twentieth 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 Twentieth Series is registered five (5) days before the date of payment of the defaulted interest. Bonds of the Twentieth Series shall be issued as fully registered bonds without coupons, in such denominations as authorized by the Board of Directors. Bonds of the Twentieth 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 Twentieth 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. Section 1.02. (i) The bonds of the Twentieth 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 40 Bonds, 1993 Series A (Pennsylvania Gas and Water Company Project) due January 1, 2019 (the '1993 Series A Bonds'). The principal amount of bonds of the Twentieth Series to be redeemed upon any redemption of the 1993 Series A Bonds shall be equal to 100% of the principal amount of 1993 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 Twentieth Series of the principal amount of 1993 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 Twentieth 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 Twentieth Series to be redeemed plus interest accrued to the date fixed for redemption except (a) in the case of bonds of the Twentieth Series which are redeemed upon a redemption of the 1993 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 January 1, 2004 and December 31, 2004, inclusive, the redemption price shall be equal to 102% of the principal amount of the bonds of the Twentieth Series to be redeemed plus interest accrued to the date fixed for redemption and (ii) in the case of bonds of the Twentieth Series which are redeemed upon an Optional IDA Redemption which occurs between January 1, 2005 and December 31, 2005, inclusive, the redemption price shall be equal to 101% of the principal amount of the bonds of the Twentieth Series to be redeemed plus interest accrued to the date fixed for redemption. (ii) The bonds of the Twentieth Series are subject to mandatory redemption, in whole, if the IDA Trustee declares the 1993 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 Twentieth 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 Twentieth Series which are redeemed under the circumstances set forth in this subsection (ii) shall be equal to 100% of the principal amount of the bonds of the Twentieth Series to be redeemed plus interest accrued to the date fixed for redemption. (iii) The bonds of the Twentieth 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 41 then outstanding under the Indenture), pursuant to the provisions of Section 8.13 of the Indenture. The redemption price of the bonds of the Twentieth 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 Twentieth 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 Twentieth 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 TWENTIETH SERIES. Bonds of the Twentieth Series will not be entitled to the benefit of a Sinking Fund. ARTICLE 3. ISSUANCE OF BONDS OF THE TWENTIETH SERIES. Bonds of the Twentieth 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-Eighth 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 and Twenty-Seventh Supplemental Indentures, are hereby further amended by this Twenty-Eighth Supplemental Indenture by inserting in each such section the words 'or bonds of the 6.05% Series due 2019' 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% 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 42 7.20% Series due 2017 or bonds of the 8.375% Series due 2002 or bonds of the 7.125% Series due 2022' 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-Eighth 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-Eighth 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-seven supplemental indentures and as supplemented by this Twenty-Eighth Supplemental Indenture is in all respects ratified and confirmed, and the Original Indenture, together with the twenty-eight indentures supplemental thereto, shall be read, taken and construed as one and the same indenture. Section 4.03. This Twenty-Eighth 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-Eighth 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 Morgan Guaranty Trust Company of New York 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- Eighth 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. 44 IN WITNESS WHEREOF, said Pennsylvania Gas and Water Company and said Morgan Guaranty Trust Company of New York 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 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS TRUSTEE By:__________/s/_HELEN G. CHIN__________ Name: Helen G. Chin Title: Vice President [CORPORATE SEAL] Attest: /s/_CATHERINE F. DONOHUE____ Assistant Secretary COMMONWEALTH OF PENNSYLVANIA ss.: COUNTY OF LUZERNE } 45 BE IT REMEMBERED that on the 15th day of December, A.D., 1993, before me, JoAnne McHale, a 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, 1994 46 COMMONWEALTH OF PENNSYLVANIA ss.: COUNTY OF LUZERNE } I HEREBY CERTIFY that on this 15th day of December, A.D., 1993, before me, JoAnne McHale, 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 JOANNE MCHALE, NOTARY PUBLIC WILKES-BARRE, LUZERNE COUNTY MY COMMISSION EXPIRES SEPT. 6, 1994 [NOTARIAL SEAL] 47 STATE OF NEW YORK ss.: COUNTY OF NEW YORK } BE IT REMEMBERED that on the 14th day of December, A.D., 1993, before me, Alison M. Levchuck, a 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 common or corporate seal of the above-named MORGAN GUARANTY TRUST COMPANY OF NEW YORK affixed to the foregoing Supplemental Indenture; that the seal so affixed is the common or corporate seal of said MORGAN GUARANTY TRUST COMPANY OF NEW YORK 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/_ALISON M. LEVCHUCK_____ Notary Public ALISON M. LEVCHUCK Notary Public, State of New York No. 4997425 Qualified in Nassau County Commission Expires June 8, 1994 48 STATE OF NEW YORK ss.: COUNTY OF NEW YORK } I HEREBY CERTIFY that on this 14th day of December, A.D., 1993, before me, Alison M. Levchuck, 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 MORGAN GUARANTY TRUST COMPANY OF NEW YORK. Witness my hand and notarial seal the day and year aforesaid. /s/_ALISON M. LEVCHUCK________________________________________________ Notary Public ALISON M. LEVCHUCK Notary Public, State of New York No. 4997425 Qualified in Nassau County Commission Expires June 8, 1994 [NOTARIAL SEAL] CERTIFICATE OF RESIDENCE MORGAN GUARANTY TRUST COMPANY OF NEW YORK hereby certifies that its precise name and address as Trustee hereunder are: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, 60 Wall Street, New York, New York 10260. By:__________/s/_HELEN G. CHIN__________ Name: Helen G. Chin Title: Vice President 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. PENNSYLVANIA GAS AND WATER COMPANY (Formerly Scranton-Spring Brook Water Service Company) First Mortgage Bond 6.05% Series due 2019 No. 001 $19,000,000 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 PNC Bank, National Association, as trustee under the Trust Indenture dated as of December 1, 1993 from the Luzerne County Industrial Development Authority (the 'Authority') to PNC Bank, National Association, as trustee (the 'Trust Indenture') or registered assigns, on January 1, 2019 (unless this bond shall have been called for previous redemption and provision made for the payment of the redemption price thereof), Nineteen Million 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 July and the first day of January in each year commencing July 1, 1994, to pay interest thereon, at said office or agency, at the rate of 6.05% 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 December 1, 1993), 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 July 1 or January 1 will be paid to the person in whose name this bond was registered at the close of business on the fifteenth day of June or the fifteenth day of December 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, or any successor trustee (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 2 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) by, a certain mortgage and deed of trust, dated as of March 15, 1946 (hereinafter called the 'Original Indenture'), and by twenty-eight 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 Guaranty Trust Company of New York and, after the change of name of Guaranty Trust Company of New York to Morgan Guaranty Trust Company of New York, to Morgan Guaranty Trust Company of New York, as 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 3 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 6.05% Series due 2019 of the Company. 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, 1993 Series A (Pennsylvania Gas and Water Company Project) due January 1, 2019 (the '1993 Series A Bonds'). The principal amount of bonds of this series to be redeemed upon any redemption of the 1993 Series A Bonds shall be equal to 100% of the principal amount of 1993 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 1993 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 January 1, 2004 and December 31, 2004, 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 January 1, 2005 and December 31, 2005, 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 1993 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 4 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. 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 2 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 Morgan Guaranty Trust Company of New York, or its successor, as Trustee under the Indenture. 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: December , 1993 PENNSYLVANIA GAS AND WATER COMPANY By:______________________________________ Vice President Attest: Secretary This bond is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Trustee By:________________________________ Authorized Officer 3 [FORM OF BOND OF THE TWENTIETH 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. PENNSYLVANIA GAS AND WATER COMPANY (Formerly Scranton-Spring Brook Water Service Company) First Mortgage Bond 6.05% Series due 2019 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 January 1, 2019 (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 July and the first day of January in each year commencing July 1, 1994, to pay interest thereon, at said office or agency, at the rate of 6.05% 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 December 1, 1993), 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 July 1 or January 1 will be paid to the person in whose name this bond was registered at the close of business on the fifteenth day of June or the fifteenth day of December 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 December 1, 1993 (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 4 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) by, a certain mortgage and deed of trust, dated as of March 15, 1946 (hereinafter called the 'Original Indenture'), and by twenty-eight 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 Guaranty Trust Company of New York and, after the change of name of Guaranty Trust Company of New York to Morgan Guaranty Trust Company of New York, to Morgan Guaranty Trust Company of New York, as 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 5 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 6.05% Series due 2019 of the Company. 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, 1993 Series A (Pennsylvania Gas and Water Company Project) due January 1, 2019 (the '1993 Series A Bonds'). The principal amount of bonds of this series to be redeemed upon any redemption of the 1993 Series A Bonds shall be equal to 100% of the principal amount of 1993 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 1993 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 January 1, 2004 and December 31, 2004, 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 January 1, 2005 and December 31, 2005, 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 1993 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. 6 (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. 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 7 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 Morgan Guaranty Trust Company of New York, or its successor, as Trustee under the Indenture. 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 [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. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Trustee By:________________________________ Authorized Officer EX-10.07 3 EXHIBIT 10.7 SERVICE AGREEMENT between TRANSCONTINENTAL GAS PIPE LINE CORPORATION and PENNSYLVANIA GAS & WATER
SERVICE AGREEMENT UNDER RATE SCHEDULE LSS THIS AGREEMENT entered into this first day of October, 1993, by and between TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware corporation, hereinafter referred to as "Seller", first party, and PENNSYLVANIA GAS & WATER, a Pennsylvania corporation, hereinafter referred to as "Buyer", second party, W I T N E S S E T H: WHEREAS, Buyer desires to purchase and Seller desires to sell natural gas storage service under Seller's Rate Schedule LSS as set forth herein; and WHEREAS, Seller and Penn York Energy Corporation ("Penn York") entered into an agreement dated October 3, 1984 providing for underground natural gas storage service by Penn York for Seller; and WHEREAS, Seller and Consolidated Natural Gas Transmission Corporation ("CNG") are extending the term of the agreement providing for underground natural gas storage service by CNG for Seller; and WHEREAS, pursuant to the terms of the Joint Stipulation approved by the Commission's Order dated July 16, 1993 in Docket Nos. RS92-86-003, RP92-108-000, and RP92-137-000 which amended Seller's certificate in Docket No. CP84-335, Seller and Buyer agree to a twenty year contract term extension; NOW THEREFORE, Seller and Buyer agree as follows: ARTICLE I SERVICE TO BE RENDERED Subject to the terms and provisions of this agreement and of Seller's Rate Schedule LSS, Seller agrees to receive from Buyer for storage, inject into storage for Buyer's account, store, withdraw from storage (or cause to be injected into storage for Buyer's account, stored, and withdrawn from storage) and deliver to Buyer, quantities of natural gas (less fuel allowance) as follows: To withdraw from storage or cause to be withdrawn from storage, transport and deliver to Buyer at the delivery points set forth below, the gas stored for Buyer's account up to a maximum quantity in any day of (a) 7,518 dt, for the period October 1, 1993 through March 31, 1994, and (b) 5,169 dt, for the period April 1, 1994 through March 31, 2013, which quantity shall be Buyer's Storage Demand. To receive and store or cause to be stored up to a total quantity at any one time of (a) 827,053 dt, for the period October l, 1993 through March 31, 1994, and (b) 551,369 dt, for the period April 1, 1994 through March 31, 2013, which quantity shall be Buyer's Storage Capacity Quantity. ARTICLE II POINT OF DELIVERY The Point or Points of Delivery for all natural gas delivered by Seller to Buyer under this agreement shall be at or near: SERVICE AGREEMENT UNDER RATE SCHEDULE LSS (Continued) ARTICLE II POINT OF DELIVERY (Continued) (1) Dallas Meter Station, located at the intersection of State Route #115 and Leidy Line on south side of road adjacent to Natona Mills--western edge of Dallas, Luzerne County, Pennsylvania. (2) Saylor Meter Station, located at junction of Saylor Avenue and Transco Pipeline, Plains Township, Luzerne County, Pennsylvania. (3) Wyoming Monument Meter Station, located on Seller's Leidy Line near Wyoming, Luzerne County, Pennsylvania. (4) Muncy Meter Station, located at a point of connection of Seller's Leidy Line and Buyer's facilities near Muncy, Lycoming County, Pennsylvania. (5) Old Lycoming Meter Station, located at a point of connection of Seller's Leidy Line and Buyer's facilities near the intersection of Legislative Route No. 41033 and Route 410 in Lycoming County, Pennsylvania. (6) Shickshinny Meter Station, located at a point of connection on Seller's Leidy Line and Buyer's facilities near Salem Township, Luzerne County, Pennsylvania. ARTICLE III DELIVERY PRESSURE Seller shall deliver natural gas to Buyer at the Point(s) of Delivery at a pressure(s) of: not less than fifty (50) pounds per square inch gauge, or at such other pressures as may be agreed upon in the day-to-day operations of Buyer and Seller. ARTICLE IV TERM OF AGREEMENT This agreement shall be effective October 1, 1993 and shall remain in force and effect until April 1, 2013. ARTICLE V RATE SCHEDULE AND PRICE Buyer shall pay Seller for natural gas service rendered hereunder in accordance with Seller's Rate Schedule LSS and the applicable provisions of the General Terms and Conditions of Seller's FERC Gas Tariff as filed with the Federal Energy Regulatory Commission, and as the same may be amended or superseded from time to time at the initiative of either party. Such rate schedule and General Terms and Conditions are by this reference made a part hereof. SERVICE AGREEMENT UNDER RATE SCHEDULE LSS (Continued) ARTICLE VI MISCELLANEOUS 1. The subject headings of the Articles of this agreement are inserted for the purpose of convenient reference and are not intended to be a part of this agreement nor to be considered in any interpretation of the same. 2. This agreement supersedes and cancels as of the effective date hereof the following contract: Service Agreement dated October 31, 1984. 3. No waiver by either party of any one or more defaults by the other in the performance of any provisions of this agreement shall operate or be construed as a waiver of any future default or defaults, whether of a like or different character. 4. This agreement shall be interpreted, performed and enforced in accordance with the laws of the State of Pennsylvania. 5. This agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be signed by their respective Presidents or Vice Presidents thereunto duly authorized and have caused their respective corporate seals to be hereunto affixed and attested by their respective Secretaries or Assistant Secretaries the day and year above written. ATTEST: TRANSCONTINENTAL GAS PIPE LINE CORPORATION [SEAL] /s/ Grace L. Hughes By /s/ Thomas E. Skains (seller) Asst., Secretary Senior Vice President Transportation and Customer Services ATTEST: PENNSYLVANIA GAS & WATER /s/ Sandra M. Stefanowicz By /s/ Joseph Perugino (Buyer) Asst Secretary Vice President Marketing & Gas Supply
EX-10.08 4 EXHIBIT 10.8 SERVICE AGREEMENT between TRANSCONTINENTAL GAS PIPE LINE CORPORATION and PENNSYLVANIA GAS & WATER
SERVICE AGREEMENT UNDER RATE SCHEDULE GSS THIS AGREEMENT entered into this first day of October, 1993, by and between TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware corporation, hereinafter referred to as "Seller", first party, and PENNSYLVANIA GAS & WATER, a Pennsylvania corporation, hereinafter referred to as "Buyer", second party, W I T N E S S E T H: WHEREAS, Buyer desires to purchase and Seller desires to sell natural gas storage service under Seller's Rate Schedule GSS as set forth herein; and WHEREAS, Seller and Consolidated Natural Gas Transmission Corporation ("CNG") have entered into an agreement providing for underground natural gas storage service by CNG for Seller; and WHEREAS, pursuant to the terms of the Joint Stipulation approved by the Commission's Order dated July 16, 1993 in Docket Nos. RS92-86-003, RP92-108-000, and RP92-137-000 which amended Seller's certificate in Docket No. CP61-194, Seller and Buyer agree to a twenty year contract term for the Storage Demand Quantity and Storage Capacity Quantity set forth in Article I hereof; NOW THEREFORE, Seller and Buyer agree as follows: ARTICLE I SERVICE TO BE RENDERED Subject to the terms and provisions of this agreement and of Seller's Rate Schedule GSS, Seller agrees to receive from Buyer for storage, inject into storage for Buyer's account, store, withdraw from storage (or cause to be injected into storage for Buyer's account, stored, and withdrawn from storage) and deliver to Buyer, quantities of natural gas as follows: To withdraw from storage or cause to be withdrawn from storage, the gas stored for Buyer's account up to a maximum quantity in any day of 29,693 Mcf, which quantity shall be Buyer's Storage Demand. To receive and store or cause to be stored up to a total quantity at any one time of 1,511,432 Mcf, which quantity shall be Buyer's Storage Capacity Quantity. ARTICLE II POINT OF DELIVERY The Point or Points of Delivery for all natural gas delivered by Seller to Buyer under this agreement shall be at or near: (1) Dallas Meter Station, located at the intersection of State Route #115 and Leidy Line on south side of road adjacent to Natona Mills--western edge of Dallas, Luzerne County, Pennsylvania. (2) Saylor Meter Station, located at junction of Saylor Avenue and Transco Pipeline, Plains Township, Luzerne County, Pennsylvania. SERVICE AGREEMENT UNDER RATE SCHEDULE GSS (Continued) ARTICLE II POINT OF DELIVERY (Continued) (3) Wyoming Monument Meter Station, located on Seller's Leidy Line near Wyoming, Luzerne County, Pennsylvania. (4) Muncy Meter Station, located at a point of connection of Seller's Leidy Line and Buyer's facilities near Muncy, Lycoming County, Pennsylvania. (5) Old Lycoming Meter Station, located at a point of connection of Seller's Leidy Line and Buyer's facilities near the intersection of Legislative Route No. 41033 and Route 410 in Lycoming County, Pennsylvania. (6) Shickshinny Meter Station, located at a point of connection on Seller's Leidy Line and Buyer's facilities near Salem Township, Luzerne County, Pennsylvania. ARTICLE III DELIVERY PRESSURE Seller shall deliver natural gas to Buyer at the Point(s) of Delivery at a pressure(s) of: not less than fifty (50) pounds per square inch gauge, or at such other pressures as may be agreed upon in the day-to-day operations of Buyer and Seller. ARTICLE IV TERM OF AGREEMENT This agreement shall be effective October 1, 1993 and shall remain in force and effect through March 31, 2013. ARTICLE V RATE SCHEDULE AND PRICE Buyer shall pay Seller for natural gas service rendered hereunder in accordance with Seller's Rate Schedule GSS and the applicable provisions of the General Terms and Conditions of Seller's FERC Gas Tariff as filed with the Federal Energy Regulatory Commission, and as the same may be amended or superseded from time to time at the initiative of either party. Such rate schedule and General Terms and Conditions are by this reference made a part hereof. ARTICLE VI MISCELLANEOUS 1. The subject headings of the Articles of this agreement are inserted for the purpose of convenient reference and are not intended to be a part of this agreement nor to be considered in any interpretation of the same. 2. This agreement supersedes and cancels as of the effective date hereof the following contract: None. Service Agreement dated April 13, 1972 expired on April 1, 1992. SERVICE AGREEMENT UNDER RATE SCHEDULE GSS (Continued) ARTICLE VI MISCELLANEOUS (Continued) 3. No waiver by either party of any one or more defaults by the other in the performance of any provisions of this agreement shall operate or be construed as a waiver of any future default or defaults, whether of a like or different character. 4. This agreement shall be interpreted, performed and enforced in accordance with the laws of the State of Pennsylvania. 5. This agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be signed by their respective Presidents or Vice Presidents thereunto duly authorized and have caused their respective corporate seals to be hereunto affixed and attested by their respective Secretaries or Assistant Secretaries the day and year above written. ATTEST: TRANSCONTINENTAL GAS PIPE LINE CORPORATION [SEAL] /s/ Grace L. Hughes /s/ Thomas E. Skains (Seller) Asst. Secretary Senior Vice President Transportation and Customer Services ATTEST: PENNSYLVANIA GAS & WATER /s/ Sandra M. Stefanowicz By /s/ Joseph Perugino (Buyer) Asst. Secretary Vice President Marketing & Gas Supply
EX-10.09 5 EXHIBIT 10.9 Service Agreement No. 37800 Control No. 930905-134
FTS SERVICE AGREEMENT THIS AGREEMENT, made and entered into this 1st day of November, 1993, by and between COLUMBIA GAS TRANSMISSION CORPORATION ("Seller") and PENNSYLVANIA GAS & WATER COMPANY ("Buyer") WITNESSETH: That in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Section 1. Service to be Rendered. Seller shall perform and Buyer shall receive service in accordance with the provisions of the effective FTS Rate Schedule and applicable General Terms and Conditions of Seller's FERC Gas Tariff, Second Revised Volume No. 1 (Tariff), on file with the Federal Energy Regulatory Commission (Commission), as the same may be amended or superseded in accordance with the rules and regulations of the Commission. The maximum obligation of Seller to deliver gas hereunder to or for Buyer, the designation of the points of delivery at which Seller shall deliver or cause gas to be delivered to or for Buyer, and the points of receipt at which Buyer shall deliver or cause gas to be delivered, are specified in Appendix A, as the same may be amended from time to time by agreement between Buyer and Seller, or in accordance with the rules and regulations of the Commission. Service hereunder shall be provided subject to the provisions of Part 284.102 of Subpart B of the Commission's regulations. Buyer warrants that service hereunder is being provided on behalf of PENNSYLVANIA GAS & WATER COMPANY, a local distribution company. Section 2. Term. Service under this Agreement shall commence as of November 1, 1993, and shall continue in full force and effect until October 31, 2004 and from year-to-year thereafter unless terminated by either party upon six (6) months' written notice to the other prior to the end of the initial term granted or any anniversary date thereafter. Pre-granted abandonment shall apply upon termination of this Agreement, subject to any right of first refusal Buyer may have under the Commission's regulations and Seller's Tariff. Section 3. Rates. Buyer shall pay Seller the charges and furnish Retainage as described in the above-referenced Rate Schedule, unless otherwise agreed to by the parties in writing and specified as an amendment to this Service Agreement. Section 4. Notices. Notices to Seller under this Agreement shall be addressed to it at Post Office Box 1273, Charleston, West Virginia 25325-1273, Attention: Director, Transportation and Exchange and notices to Buyer shall be addressed to it at 39 Public Square, Wilkes-Barre, PA 18711, Attention: Mr. William H. Eckert, until changed by either party by written notice. Service Agreement No. 37800 Control No. 930905-134 FTS SERVICE AGREEMENT (Cont'd) Section 5. Prior Service Agreements. This Agreement is being entered into by the parties hereto pursuant to the Commission's Order No. 636 and its order dated July 14, 1993 and September 29, 1993, with respect to Seller's Order No. 636 compliance filing and relates to the following existing Service Agreements: FTS Service Agreement No. 34554, effective November 1, 1989, as it may have been amended, providing for transportation service under the FTS Rate Schedule. CDS Service Agreement No. 36077, effective November 1, 1989, as it may have been amended, providing for a bundled sales, transportation and storage service under the CDS Rate Schedule. The terms of Service Agreement No. 37800 shall become effective as of the effective date hereof, however, the parties agree that neither the execution nor the performance of Service Agreement 37800 shall prejudice any recoupment or other rights that Buyer may have under or with respect to the above-referenced Service Agreements. PENNSYLVANIA GAS & WATER COMPANY COLUMBIA GAS TRANSMISSION CORPORATION By /s/ Joseph F. Perugino By /s/ George E. Shriver Title Vice President Title Dir. of Transp. & Exchange Revision No. Appendix A to Service Agreement No. Control No. 1993-09-~,5 - O1 3 4 Under Rate Schedule FTS Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO Transportation Demand 11,346 Dth/day Primary Receipt Points F t Scheduling Scheduling Measuring Measuring Maximum Daily Point No. Point Name Point No. Point Name Quantity (Dth/Day) A05 DELMONT AGG POINT A05 2,043 801 TCO-LEACH 801 9,303 Revision No. ControlNo. 1993-09-U6 - 0134 Appendix A to Service Agreement No. Under Rate Schedule FTS Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS L WATER CO Primary Delivery Points Maximum Daily Scheduling Scheduling Measuring Measuring Delivery Obligation Point No. Point Name Point No. Point Name (Dth/Day) 57 PA GAS WTR OP-08 57 5,531 57E PA GAS WTR OP-04 57E 11,346 Revision No. Control No. 1993-09-05 - 0134 Appendix A to Service Agreement No. Under Rate Schedule FTS Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO GFNT / ALL GAS SHALL BE DELIVERED AT EXISTING POINTS OF INTERCONNECTION WITHIN THE MDDO'S IN SELLER'S CURRENTLY EFFECTIVE SST SERVICE AGREEMENT WITH BUYER, WHICH FOR SUCH POINTS SET FORTH ARE INCORPORATED HEREIN BY REFERENCE. Revision No. Control No. 1993-09-05 - 0134 Appendix A to Service Agreement No. Undar Rata Schedula FTS Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer PENNSYLVANIA GAS & WATER CO The Master List of Interconnects (MLI) as defined in Section 1 of the General Terms and Conditions of Sellers Tariff is incorporated herein by reference for the purposes of listing valid secondary interruptible receipt points and delivery points. Service changes pursuant to this Appendix A shall become effective as of NOVEMBER 01, 1993 . This Appendix A shall cancel and supersede the previous Appendix A effective as of N/A, to the Service Agreement referenced above. With the exception of this Appendix A, all other terms and conditions of said Service Agreement shall remain in full force and effect. PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Its Vice President Date November 15, 1993 COLUMBIA GAS TRANSMISSION CORP0RATI0N By /s/ George E. Shriver Its Dir. of Transp. & Exchange Date November 18, 1993
EX-10.10 6 EXHIBIT 10.10 Service Agreement No. 38047 Contro1 No. 930905-073
SST SERVICE AGREEMENT THIS AGREEMENT, made and entered into this 1st day of November, 1993, by and between COLUMBIA GAS TRANSMISSION CORPORATION ("Seller") and PENNSYLVANIA GAS & WATER COMPANY ("Buyer"). WITNESSETH: That in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Section 1. Service to be Rendered. Seller shall perform and Buyer shall receive service in accordance with the provisions of the effective SST Rate Schedule and applicable General Terms and Conditions of Seller's FERC Gas Tariff, Second Revised Volume No. 1 (Tariff), on file with the Federal Energy Regulatory Commission (Commission), as the same may be amended or superseded in accordance with the rules and regulations of the Commission. The maximum obligation of Seller to deliver gas hereunder to or for Buyer, the designation of the points of delivery at which Seller shall deliver or cause gas to be delivered to or for Buyer, and the points of receipt at which Buyer shall deliver or cause gas to be delivered, are specified in Appendix A, as the same may be amended from time to time by agreement between Buyer and Seller, or in accordance with the rules and regulations of the Commission. Service hereunder shall be provided subject to the provisions of Part 284.223 of Subpart G of the Commission's regulations. Buyer warrants that service hereunder is being provided on behalf of Buyer. Section 2. Term. Service under this Agreement shall commence as of November 1, 1993, and shall continue in full force and effect until October 31, 2004 and from year-to-year thereafter unless terminated by either party upon six (6) months' written notice to the other prior to the end of the initial term granted or any anniversary date thereafter. Pre-granted abandonment shall apply upon termination of this Agreement, subject to any right of first refusal Buyer may have under the Commission's regulations and Seller's Tariff. Section 3. Rates. Buyer shall pay Seller the charges and furnish Retainage as described in the above-referenced Rate Schedule, unless otherwise agreed to by the parties in writing and specified as an amendment to this Service Agreement. Section 4. Notices. Notices to Seller under this Agreement shall be addressed to it at Post Office Box 1273, Charleston, West Virginia 25325-1273, Attention: Director, Transportation and Exchange and notices to Buyer shall be addressed to it at 39 Public Square, Wilkes-Barre, PA 18711, Attention: Mr. William H. Eckert, until changed by either party by written notice. Service Agreement No. 38047 Control No. 930905-073 SST SERVICE AGREEMENT (Cont'd) Section 5. Prior Service Agreements. This Agreement is being entered into by the parties hereto pursuant to the Commission's Order No. 636 and its orders dated July 14, 1993 and September 29, 1993, with respect to Seller's Order No. 636 compliance filing and relates to the following existing Service Agreements: FSS Service Agreement No. 34633, effective November 1, 1989, as it may have been amended, providing for storage and transportation service under the FSS Rate Schedule. CDS Service Agreement No. 36077, effective November 1, 1989, as it may have been amended, providing for a bundled sales, transportation and storage service under the CDS Rate Schedule. The terms of Service Agreement No. 38047 shall become effective as of the effective date hereof, however, the parties agree that neither the execution nor the performance of Service Agreement 38047 shall prejudice any recoupment or other rights that Buyer may have under or with respect to the above-referenced Service Agreements. PENNSYLVANIA GAS & WATER COMPANY COLUMBIA GAS TRANSMISSION CORPORATION By /s/ Joseph F. Perugino By /s/ George E. Shriver Title Vice President Title Direc. of Transp. & Exchange Revision No. Control No. 1993-09-05-0073 Appendix A to Service Agreement No. 38047 Under Rate Schedule SST Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO October through March Transportation Demand 16,517 Dth/day April through September Transportation Demand 8,258 Dth/day Primary Receipt Points Scheduling Scheduling Maximum Daily Point No. Point Name Quantity (Dth/Day) STOW STORAGE WITHDRAWALS 16,517 Revision No. Control No. 1993-09-05-0073 Appendix A to Service Agreement No. 38047 Under Rate Schedule SST Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO Primary Delivery Points Maximum Delivery S1/ Maximum Daily Pressure Scheduling Scheduling Measuring Measuring Delivery Obligation Obligation Point No. Point Name Point No. FN Point Name (Dth/Day) (PSIG) 57 PA GAS WTR OP-08 600039 RENOVO COMPRESSOR 7,000 450 57E PA GAS WTR OP-04 600040 01 MUNCY 22,600 600041 01 OLD LYCOMINO 22,600 604500 01 SAYLOR AVENUE 22,600 Revision No. Control No. 1993-09-05 - 0073 Appendix A to Service Agreement No. 38047 Under Rate Schedule SST Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and Buyer) PENNSYLVANIA GAS & WATER CO S1/ IF A MAXIMUM PRESSURE IS NOT SPECIFICALLY STATED, THEN SELLER'S OBLIGATION SHALL BE AS STATED IN SECTION 13 (DELIVERY PRESSURE) OF THE GENERAL TERMS AND CONDITIONS. FN01/ THIS STATION IS IN THE TRANSCO DIRECTS AGGREGATE AREA. SELLER'S OBLIGATION TO PROVIDE DELIVERIES FOR BUYER'S ACCOUNT AT THESE STATIONS IS LIMITED TO QUANTITIES UNDER SELLER'S RATE SCHEDULE X-103 WITH TRANSCO UP TO THE APPLICABLE MDDO AT THE POINT. UPON THE TERMINATION OF RATE SCHEDULE X-103, SELLER'S OBLIGATION TO MAKE DELIVERIES AT THESE STATIONS WILL ALSO BE TERMINATED. GFNT/ UNLESS STATION SPECIFIC MDDOS ARE SPECIFIED IN A SEPARATE FIRM SERVICE AGREEMENT BETWEEN SELLER AND BUYER, SELLER'S AGGREGATE MAXIMUM DAILY DELIVERY OBLIGATION, UNDER THIS AND ANY OTHER SERVICE AGREEMENT BETWEEN SELLER AND BUYER, AT THE STATIDNS LISTED ABOVE SHALL NOT EXCEED THE MDDD QUANTITIES SET FORTH ABOVE FOR EACH STATION. IN ADDITION, SELLER SHALL NOT BE OBLIGATED DN ANY DAY TO DELIVER MORE THAN THE AGGREGATE DAILY QUANTITY (ADQ) LISTED BELOW IN THE AGGREGATE AREA LISTED BELOW. THE STATIONS FOOTNOTED ABOVE WITH A 1 ARE IN THE AGGREGATE AREA SET FORTH IN GREATER DETAIL BELOW. ANY STATION SPECIFIC MDDOS IN IN A SEPARATE FIRM SERVICE AGREEMENT BETWEEN SELLER AND BUYER SHALL BE ADDITIVE BOTH TO THE INDIVIDUAL STATION MDDOS SET FORTH HEREIN AND TO ANY APPLICABLE AGGREGATE DAILY QUANTITY SET FORTH BELOW. THE MARKET AREA IN WHICH EACH STATION IS LOCATED IS POSTED ON SELLER'S EBB AND INCORPORATED BY REFERENCE. FOOTNOTE AGGREGATE NUMBER AGGREGATE AREA NAME DAILY QUANTITY 1 TRANSCO DIRECTS AGGREGATE AREA 22,600 DTH/D DELIVERIES AT STATIONS IN MARKET AREA 36, OLEAN, ARE CONTINGENT Revision No. Control No. 1993-09-05-0073 Appendix A to Service Agreement No. 38047 Under Rate Schedule SST Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO UPON BUYER OBTAINING GAS SUPPLIES AND ARRANGING FOR DELIVERY OF SUCH GAS SUPPLIES TO THIS MARKET AREA. SELLER'S OBLIGATlON TO DELIVER GAS ON ANY DAY SHALL BE LIMITED TO THE QUANTITIES ACTUALLY RECEIVED FOR BUYER'S ACCOUNT TO THIS MARKET AREA. Revision No. Control No. 1993-09-05-0073 Appendix A to Service Agreement No. 38047 Under Rate Schedule SST Between (Seller) COLUUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO The Master List of Interconnects (MLI) as defined in Section 1 of the General Terms and Conditions of Seller's Tariff is incorporated herein by reference for the purposes of listing valid secondary receipt and delivery points. Service changes pursuant to this Appendix A shall become effective as of NOVEMBER 01, 1993. This Appendix A shall cancel and supersede the previous Appendix A effective as of N/A, to the Service Agreement referenced above. With the exception of this Appendix A, all other terms and conditions of said Service Agreement shall remain in full force and effect. PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Its Vice President Date November 15, 1993 COLUMBIA GAS TRANSMISSION CORPORATION By /s/ George E. Shriver Its Direc. of Transp. & Exchange Date November 18, 1993
EX-10.11 7 EXHIBIT 10.11 Service Agreement No. 38012 Control No. 930905-0135
FSS SERVICE AGREEMENT THIS AGREEMENT, made and entered into this 1st day of November, 1993, by and between COLUMBIA GAS TRANSMISSION CORPORATION ("Seller") and PENNSYLVANIA GAS & WATER COMPANY ("Buyer"). WITNESSETH: That in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Section 1. Service to be Rendered. Seller shall perform and Buyer shall receive the service in accordance with the provisions of the effective FSS Rate Schedule and applicable General Terms and Conditions of Seller's FERC Gas Tariff, Second Revised Volume No. 1 (Tariff), on file with the Federal Energy Regulatory Commission (Commission), as the same may be amended or superseded in accordance with the rules and regulations of the Commission. Seller shall store quantities of gas for Buyer up to but not exceeding Buyer's Storage Contract Quantity as specified in Appendix A, as the same may be amended from time to time by agreement between Buyer and Seller, or in accordance with the rules and regulations of the Commission. Service hereunder shall be provided subject to the provisions of Part 284.223 of Subpart G of the Commission's regulations. Buyer warrants that service hereunder is being provided on behalf of Buyer Section 2. Term. Service under this Agreement shall commence as of November 1, 1993 and shall continue in full force and effect until October 31, 2004 and from year to year thereafter unless terminated by either party upon six months written notice to the other party prior to the end of the initial term granted or any anniversary date thereafter. Pre-granted abandonment shall apply upon termination of this Agreement, subject to any right of first refusal Buyer may have under the Commission's regulations and Seller's Tariff. Section 3. Rates. Buyer shall pay the charges and furnish the Betainage percentage set forth in the above-referenced Rate Schedule and specified in Seller's currently effective Tariff, unless otherwise agreed to by the parties in writing and specified as an amendment to this Service Agreement. Section 4. Notices. Notices to Seller under this Agreement shall be addressed to it at Post Office Box 1273, Charleston, West Virginia 25325-1273, Attention: Director, Transportation and Exchange, and notices to Buyer shall be addressed to it at Director of Gas Supply, 39 Public Square, Wilkes-Barre, Pennsylvania 18711, Attention: William Eckert, until changed by either party by written notice. Section 5. Prior Service Aqreements. This Agreement is being entered into by the parties hereto pursuan~ to the Commission's Order No. 636 and its orders dated July 14, 1993 and September 29, 1993, with respect to Seller's Order No. 636 compliance filing and relates to the following existing Service Agreements: FSS Service Agreement No. 34633, effective November 1, 1989, as it may have been amended, providing for storage and transportation service under the FSS Rate Schedule. Service Agreement No. 38012 Control No. 930905-0135 CDS Service Agreement No. 36077, effective November 1, 1989, as it may have been amended, providing for a bundled sales, transportation and storage service under the CDS Rate Schedule. The terms of Service Agreement No. 38012 shall become effective as of the effective date hereof, however, the parties agree that neither the execution nor the performance of Service Agreement No. 38012 shall prejudice any recoupment or other rights that Buyer may have under or with respect to the above-referenced Service Agreements. PENNSYLVANIA GAS & WATER COMPANY COLUMBIA GAS TRANSMISSION CORPORATION By /s/ Joseph F. Perugino By /s/ George E. Shriver Title Vice President Title Direc. of Transp. & Exchange Revision No. Control No. 1993-09-05-0135 Appendix A to Service Agreement No. 38012 Under Rate Schedule FSS Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO Storage Contract Quantity 1,168,143 Dth Maximum Daily Storage Quantity 16,517 Dth per day CANCELLATION OF PREVIOUS APPENDIX A Service changes pursuant to this Appendix A shall become effective as of NOVEMBER 01, 1993. This Appendix A shall cancel and supersede the previous Appendix A effective as of N/A , to the Service Agreement referenced above. With the exception of this Appendix A. all other terms and conditions of said Service Agreement shall remain in full force and effect PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Its Vice President Date November 15, 1993 COLUMBIA GAS TRANSMISSION CORPORATION By /s/ George E. Shriver Its Direc. of Transp. & Exchange Date November 18, 1993
EX-10.12 8 EXHIBIT 10.12 SERVICE AGREEMENT NO. 38020
CONTROL NO. 1993-10-02-1062 FTS1 SERVICE AGREEMENT THIS AGREEMENT, made and entered into this 01 day of NOVEMBER 1993, by and between: COLUMBIA GULF TRANSMISSION COMPANY ("TRANSPORTER") AND PENNSYLVANIA GAS & WATER CO ("SHIPPER") WITNESSETH: That in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Section 1. Service to be Rendered. Transporter shall perform and Shipper shall receive the service in accordance with the provisions of the effective FTS 1 Rate Schedule and applicable General Terms and Condi- tions of Transporter's FERC GasTraiff, First RevisedVolume No. 1 (Tariff), on file withthe Federal Energy RegulatoryCommission (Commission), asthesamemaybeamended or supersededin accordance withthe rules and regulations of the Commission herein contained. The maximum obligations of Transporter to deliver gas hereunderto orfor Shipper, the designation of the points of delivery atwhich Transporter shall deliver or cause gas to be delivered to or for Shipper, and the points of receipt at which the Shipper shall deliver or cause gas to be delivered, are specified in Appendix A, as the same may be amended from time to time by agreementbetween Shipper and Transporter, or in accordance with the rules and regulations of the Com- mission. Service hereunder shall be provided subject to the provisions of Part284.222 of Subpart G of the Commission's regulations. Shipper warrants that service hereunder is being provided on behalf of AN INTERSTATE PIPELINE COMPANY, COLUMBIA GAS TRANSMISSION. Section2. Term. Serviceunderthis Agreement shallcommenceasof NOVEMBER 01, 1993, and shall continue in full force and effect until OCTOBER 31, 2004, and from YEAR -to- YEAR thereafter unless terminated by eitherparty upon 6 MONTHS' written notice to the other prior to the end of the initial term granted or any anniversary date thereafter. Shipper and Transporter agree to avail themselves of the Commission's pre-granted abandonment authority upon termination of this Agreement, subject to any right of first refusal Shipper may have under the Commission's regulations and Transporter's Tariff. Section 3. Rates. Shipper shall pay the charges and furnish Retainage as described in the above-referenced Rate Schedule, unless otherwise agreed to by the parties in writing and specified as an amendment to this Service Agreement Section 4. Notices. Notices to Transporter under this Agreement shall be addressed to it at Post Office Box 683, Houston, Texas 77001, Anention: Director, Planning, Transportation and Exchange and notices to Shipper shall be addressed to it at PENNSYLVANIA GAS & WATER CO DIRECTOR OF GAS SUPPLY 39 PUBLIC SQUARE WILKES-BARRE, PA 18711 ATTN: WILLIAM ECKERT; until changed by either party by written notice. SERVICE AGREEMENT NO. 38020 CONTROL NO.1993-10-02-1062 FTS1 SERVICE AGREEMENT Section 5. Superseded Agreements. This Service Agreement supersedes and cancels, as of the effective date hereof, the following Service Agreements: FTS1 33059 PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Title Vice President COLUMBIA GULF TRANSMISSION COMPANY By /s/ Howard M. Melton, Jr. Title Vice President Revision No. Control No. 1993-10-02-1062 Appendix A to Service Agreement No. 38020 Under Rate Schedule FTS1 between (Transporter) COLUMBIA GULF TRANSMISSION COMPANY and (Shipper) PENNSYLVANIA GAS & WATER CO Transportation Demand 10,000 Dth/day Primary Receipt Points Measuring Measuring Maximum Daily Point No. Point Name Quantity (Dth/Day) 2700010 CGT - RAYNE 10,OOO Revision No, Control No, 1993-10-02-1062 Appendix A to Service Agreement No. 38020 under Rate Schedule FTS1 between (Transporter) COLUMBIA GULF TRANSMISSION COMPANY and (Shipper) PENNSYLVANIA GAS & WATER CO Primary Delivery Points Measuring Measuring Maximum Daily Point No. Point Name Quantity (Dth/Day) 801 TCO-LEACH 10,OOO Revision No. Control No. 1993-10-02-1062 Appendix A to Service Agreement No. 38020 Under Rate Schedule FTS1 Between (Transporter) COLUMBIA GULF TRANSMISSION COMPANY and (Shipper) PENNSYLVANIA GAS & WATER CO The Master List of Interconnects (MLI) as defined in Section 1 of the General Terms and Conditions is incorporated herein by reference for purposes of listing valid secondary interruptible receipt points and delivery points. CANCELLATION OF PREVIOUS APPENDIX A Service changes pursuant to this Appendix A shall become effective as of NOVEMBER 01, 1993. This Appendix A shall cancel and supersede the previous Appendix A effective as of N/A to the Service Agreement referenced above. With the exception of this Appendix A, all otherterms and conditions of said Service Agreement shall remain in full force and effect. PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Its Vice President Date October 20, 1993 COLUMBIA GULF TRANSMISSION COMPANY By /s/ Howard M. Melton, Jr Its Vice President Date November I5, 1993
EX-10.13 9 EXHIBIT 10.13 SERVICE AGREEMENT NO. 38942 CONTROL NO. 1993-10-02-0987 ITS1 SERVICE AGREEMENT
THIS AGREEMENT. made and entered into this 01 day of NOVEMBER 19 93, by and between: COLUMBIA GULF TRANSMISSION COMPANY ("TRANSPORTER") AND PENNSYLVANIA GAS & WATER CO ("SHIPPER") WITNESSETH: That in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Section 1-. Service to be Rendered. Transporter shall perform and Shipper shall receive the service in accordance with the provisions of the effective I TS 1 Rate Schedule and applicable General Terms and Condi- tions of Transporter's FERC GasTraiff, First Revised Volume No.1 (Tariff), on file with the Federal Energy Regulatory Commission (Commission), as the same may be amended or superseded in accordance with the rules and regulations of the Commission herein contained. The maximum obligations of Transporter to deliver gas hereunder to or for Shipper, the designation of the points of deliveryatwhich Transporter shall deliver or cause gas to be delivered to or for Shipper, and the points of receipt at which the Shipper shall deliver or cause gas to be delivered, are specified in Appendix A, as the same may be amended from time to time by agreement between Shipperand Transporter, or in accordance with the rules and regulations of the Com- mission. Service hereundershall be provided subject to the provisions of Part 284.222 of Subpart G of the Commission's regulations. Shipper warrants that service hereunder is being provided on behalf of AN INTERSTATE PIPELINE COMPANY, COLUMBIA GAS TRANSMISSION. Section 2. Term. Service underthis Agreement shall commence as of NOVEMBER 01, 1993 , and shall continue in full force and effect from month-to-month thereafter unless terminated by either party upon thirty(30) days written noticeto the otherprior to the end of the initialterm granted or on any anniversary date thereafter. Shipper and Transporter agree to avail themselves of the Commission's pre-granted abandon- ment authority upon termination of this Agreement, subject to any right of first refusal Shipper may have under the Commission's regulations and Transporter's Tariff. Section 3. Rates. Shipper shall pay the charges and furnish Retainage as described in the above-referenced Rate Schedule, unless otherwise agreed to by the parties in writing and specified as an amendment to this Service Agreement Section 4 Notices. Notices to Transporter under this Agreement shall be addressed to it at Post Office Box 683, Houston, Texas 77001, Attention: Director, Planning, Transportation and Exchange and notices to Shipper shall be addressed to it at: PENNSYLVANIA GAS & WATER CO DIRECTOR OF GAS SUPPLY 39 PUBLIC SQUARE WILKES-BARRE, PA 18711 ATTN: WILLIAM ECKERT; until changed by either party by written notice. SERVICE AGREEMENT NO. 38942 CONTROL NO. 1993-10-02-0987 ITS1 SERVICE AGREEMENT Section 5. Superseded Agreements. This Service Agreement supersedes and cancels, as of the effective date hereof, the following Service Agreements: SEE APPENDIX B. PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Title Vice President COLUMBIA GULF TRANSMISSION COMPANY By /s/ Howard M. Melton, Jr. Title Vice President Revision No. Control No. 1993-10-02-0987 Appendix A to Service Agreement No. 38942 Under Rate Schedule ITS1 Between (Transporter) COLUMBIA GULF TRANSMISSION COMPANY and (Shipper) PENNSYLVANIA GAS & WATER CO Transportation Quantity 22,916 Dth per day The Master List of Interconnects (MLI) as defined in Section 1 of the General Terms and Conditions is incorporated herein by reference for purposes of llsting valid interruptible receipt points and delivery points. CANCELLATION OF PREVIOUS APPENDIX A Service changes pursuant to this Appendix A shall become effective as of NOVEMBER 01, 1993. This Appendix A shall cancel and supersede the previous Appendix A effective as of N/A to the Service Agreement referenced above. With the exception of this Appendix A, all other terms and conditions of said Service Agreement shall remain in full force and effect. PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Its Vice President Date October 20, 1993 COLUMBIA GULF TRANSMISSION COMPANY By /s/ Howard M. Melton, Jr. Its Vice President Date December 17, 1993 Revision No. Control No. 1993-10-02-0987 Appendix B to Service Agreement No. 38942 Under Rate Schedule ITS1 Between (Transporter) COLUMBIA GULF TRANSMISSION COMPANY and (Shipper) PENNSYLVANIA GAS & WATER CO Superseded Agreements: ITS1 32539 ITS1 33059
EX-10.14 10 EXHIBIT 10.14 SERVICE AGREEMENT NO. 3 7 8 9 7 CONTROL NO. 1993-10-02 - 0158 I TS SERVICE AGREEMENT
THIS AGREEMENT, made and entered into this 01 day of NOVEMBER 1993 by and between: COLUMBIA GAS TRANSMISSION CORPORATION ("SELLER") AND PENNSYLVANIA GAS & WATER CO ("BUYER") WITNESSETH: That in consideration of the mutual covenants herein contained. the parties hereto agree as follows: Section 1. Service to be Rendered. Seller shall perform and Buyer shall receive service in accor- dance with the provisions of the effective ITS Rate Schedule and applicable General Terms and Conditions of Seller's FERC Gas Tariff, Second Revised Volume No. 1 (Tariff), on file with the Federal Energy Regulatory Commission (Commission), as the same may be amended or superseded in accor- dance with the rules and regulations of the Commission. The maximum obligation of Seller to deliver gas hereunder to or for Buyer, the designation of the points of delivery at which Seller shall deliver or cause gas to be delivered to or for Buyer, and the points of receipt at which Buyer shall deliver or cause gas to be delivered, are specified in Appendix A, as the same may be amended from time to time by agreement between Buyer and Seller, or in accordance with the rules and regulations of the Commission. Service hereunder shall be provided subject to the provisions of Part 284. 102 of Subpart B of the Commission's regulations. Buyer warrants that service hereunder is being provided on behalf of A LOCAL DISTRIBUTION COMPANY PENNSYLVANIA GAS & WATER CO. Section 2. Term. Service under this Agreement shall commence as of NOVEMBER 01, 1993, and shall continue in full force and effect from month-to-month thereafter unless terminate by either party upon 30 days written notice to the other prior to the end of the initial term granted or made on any anniversary date there- after. Pre-granted abandonment shall apply upon termination of this Agreement, subject to any right of first refusal Buyer may have under the Commission's regulations and Seller's Tariff. Section 3. Rates. Buyer shall pay Seller the charges and furnish Retainage as described in the above-referenced Rate Schedule, unless otherwise agreed to by the parties in writing and specified as an amendment to this Service Agreement. Section 4. Notices. Notices to Seller under this Agreement shall be addressed to it at Post Office Box 1273, Charleston, West Virginia 25325-1273, Attention: Director, Transportation and Exchange and notices to Buyer shall be addressed to it at: PENNSYLVANIA GAS & WATER CO DIRECTOR OF GAS SUPPLY 39 PUBLIC SQUARE WILKES-BARRE, PA 18711 ATTN: WILLIAM ECKERT; until changed by either party by written notice, SERVICE AGREEMENT NO. 37897 CONTROL NO. 1993-10-02-0158 ITS SERVICE AGREEMENT Section 5. Superseded Agreements. This Service Agreement supersedes and cancels, as of the effective date hereof, the following Service Agreements: ITS 33059 PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Title Vice President COLUMBIA GAS TRANSMISSION CORPORATION By /s/ Robert D. Stuart Title Manager Revision No. Control No. 1993-10-02-0158 Appendix A to Service Agreement No. 37897 Under Rate Schedule ITS Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION and (Buyer) PENNSYLVANIA GAS & WATER CO Transportation Quantity 15,000 Dth/day The Master List of Interconnects (MLI) as defined in Section 1 of the General Terms and Conditions is incorporated herein by reference for purposes of listing valid interruptible receipt points and delivery points. Service changes pursuant to this Appendix A shall become effective as of NOVEMBER 01, 1993. This Appendix A shall cancel and supersede the previous Appendix A effective as of N/A to the Service Agreement referenced above. With the exception of this Appendix A, all other terms and conditions of said Service Agreement shall remain in full force and effect. PENNSYLVANIA GAS & WATER CO By /s/ Joseph F. Perugino Its Vice President Date October 26, 1993 COLUMBIA GAS TRANSMISSION CORPORATION By /s/ Robert D. Stuart Its Mananger Date November 18, 1993
EX-10.30 11 EXHIBIT 10.30 SECOND AMENDED AND RESTATED PROJECT FACILITIES AGREEMENT, dated as of December 1, 1993 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 March 1, 1982 (the "1982 Agreement"), the Authority issued an aggregate of $19,000,000 of its Exempt Facilities Revenue Bonds, 1982 Series A (Pennsylvania Gas and Water Company Project) (the "1982 Bonds") under a Trust Indenture dated as of March 1, 1982 between the Authority and Northeastern Bank of Pennsylvania (now PNC Bank, National Association), as trustee (the "1982 Indenture"). In order to provide for a portion of the costs of refunding the 1982 Bonds and pursuant to an Amended and Restated Project Facilities Agreement dated as of January 1, 1989 (the "1989 Agreement"), the Authority issued an aggregate of $19,000,000 of its Exempt Facilities Revenue Bonds, 1989 Series A (Pennsylvania Gas and Water Company Project) (the "1989 Bonds") under a Trust Indenture dated as of January 1, 1989 between the Authority and Northeastern Bank of Pennsylvania (now PNC Bank, National Association), as trustee (the "1989 Indenture"). In order to provide for a portion of the costs of refunding the 1989 Bonds, the Company has requested the Authority to issue its Exempt Facilities Revenue Refunding Bonds, 1993 Series A (Pennsylvania Gas and Water Company Project) (the "1993 Series A Bonds") in the aggregate principal amount of $19,000,000 under the terms of a Trust Indenture (the "1993 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 1993 Series A Bonds, together with other moneys available for such purpose, to provide for the refunding of the 1989 Bonds and the redemption thereof on January 1, 1994. In connection with the issuance of the 1993 Series A Bonds, the Authority and the Company desire to amend and restate the 1989 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 1989 Indenture, as provided for in the Refunding Agreement (the "Refunding Agreement") dated as of December 1, 1993 between the Authority and PNC Bank, National Association, as escrow agent, the 1989 Agreement is amended and restated in full as follows (the 1989 Agreement, as hereby amended and restated, is referred to as the "Agreement"): I. BACKGROUND, REPRESENTATIONS AND FINDINGS 1.1 Background. 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, Luzerne, Wayne and Susquehanna; 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 1989 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, Lackawanna, Wayne and Susquehanna 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, Lackawanna, Wayne and Susquehanna 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 June 29, 1981, which approval was amended by letter dated March 5, 1982. 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 1989 Agreement. The Company has requested the Authority to enter into this Agreement to provide for the refunding of the 1989 Bonds. The proceeds of the 1989 Bonds issued by the Authority pursuant to the 1989 Agreement were applied to making certain deposits in the funds and accounts created pursuant to the 1989 Indenture. The rates for the water furnished by the Project Facilities have been established or approved by the Pennsylvania Public Utilities 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 1989 Bonds was not, and the interest on the 1993 Series A Bonds will not be, includible in gross income of the holders thereof for purposes of Federal income tax law. 1.2 Company 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 1993 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 1982 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. 1.3 Authority 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 1989 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 1993 Series A Bonds and the execution of this Agreement and the 1993 Indenture have been approved by the Authority at a duly constituted meeting. II. COMPLETION OF AND TITLE TO PROJECT FACILITIES 2.1 Completion 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 1982 Bonds have been completed, (ii) substantially all of the proceeds of the 1989 Bonds were used to redeem the 1982 Bonds and the proceeds of the 1982 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 3.1 Issuance of 1993 Series A Bonds. In order to refund the 1989 Bonds, the Authority, at the request of the Company, will issue and sell the 1993 Series A Bonds under the 1993 Indenture. 3.2 Deposit of 1993 Series A Bond Proceeds. The proceeds of the 1993 Series A Bonds shall be deposited in the Clearing Fund established under the 1993 Indenture; except that accrued interest on the 1993 Series A Bonds received by the Authority upon the sale of the 1993 Series A Bonds shall be deposited into the Bond Fund established under the 1993 Indenture, and shall be applied to the first interest payments due on the 1993 Series A Bonds. The proceeds of the 1993 Series A Bonds deposited in the Clearing Fund established under the 1993 Indenture shall be applied to the refunding of the 1989 Bonds as provided in and in accordance with the terms of the Refunding Agreement. 3.3 1993 Series A Bonds Not to Become Arbitrage Bonds. The Authority and the Company hereby covenant to each other and to the holders of the 1993 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 1993 Series A Bonds which would cause the 1993 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 1993 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 1993 Series A Bonds (including investment earnings on the 1993 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 1993 Series A Bonds for purposes of Federal income taxation (except for any 1993 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. 3.4 Restriction 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 1993 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 1993 Series A Bonds deposited in the Clearing Fund to refund the 1989 Bonds as provided in the Refunding Agreement. 3.5 No "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 1993 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 4.1 First 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 1993 Series A Bonds), the Company will, concurrently with the issuance and sale of the 1993 Series A Bonds, execute and deliver to the Trustee, as assignee of the Authority, $19,000,000 principal amount of the Company's First Mortgage Bonds 6.05% Series due 2019 (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 Morgan Guaranty Trust Company of New York, as trustee (such trustee and its successors in trust being hereinafter referred to as the "Mortgage Trustee"). 4.2 Acceleration of Payment to Redeem Bonds. The Authority will (subject to any applicable rights under the 1993 Indenture to purchase 1993 Series A Bonds in lieu of redemption) redeem any or all 1993 Series A Bonds or portions thereof upon the occurrence of an event which gives rise to any mandatory redemption specified in the 1993 Series A Bonds or in the 1993 Indenture. Whenever any of the 1993 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 1993 Indenture. In either event, the Company will pay an amount equal to the then applicable redemption price of such 1993 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 1993 Indenture or under the First Mortgage Bonds. 4.3 No Defense or Set-Off. Except as set forth in any applicable provisions of the 1993 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. 4.4 Assignment of Authority's Rights. As the source of payment for the 1993 Series A Bonds, the Authority will assign to the Trustee all the Authority's rights under this Agreement with respect to the 1993 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 5.1 Maintenance 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. 5.2 Payment of Authority's Expenses. At the time of the issuance of the 1993 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 1993 Series A Bonds, including reasonable fees and expenses of counsel. 5.3 Payment 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 1993 Indenture, including all costs of redeeming 1993 Series A Bonds thereunder. 5.4 Indemnity 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. 5.5 Limitation 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. 5.6 Default, 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. 5.7 Deficiencies 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 1993 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 1993 Series A Bonds, other than amounts held in the Bond Fund established pursuant to the 1993 Indenture, will be expended within six months of the date of issuance of the 1993 Series A Bonds. The Company, therefore, does not expect to have any earnings subject to rebate with respect to the 1993 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. 5.9 Notice 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 6.1 Maintenance 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. 6.2 Compliance 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. 6.3 Compliance with the Indenture. The Authority shall comply in all material respects with its covenants in Article VIII of the 1993 Indenture. VII. MISCELLANEOUS 7.1 Notices. 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 7.2 Assignments. 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. 7.3 Illegal, 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. 7.4 Amendments. 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 1993 Series A Bonds and adversely affects the interests of holders of any 1993 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. 7.5 Controlling Law. This Agreement shall be deemed to be a contract made in the Commonwealth of Pennsylvania and governed by Pennsylvania law. 7.6 Term of Agreement. This Agreement shall become effective upon its delivery and shall continue in effect until all 1993 Series A Bonds have been paid or provision for such payment has been made as provided in the 1993 Indenture. 7.7 Counterparts. 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 Second 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 BD31719.A(PF) Closing Item No. A-1 SECOND AMENDED AND RESTATED PROJECT FACILITIES AGREEMENT Between LUZERNE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY And PENNSYLVANIA GAS AND WATER COMPANY Dated as of December 1, 1993 TABLE OF CONTENTS Page I. BACKGROUND, REPRESENTATIONS AND FINDINGS. . . . . . . . . . 2 1.1 Background . . . . . . . . . . . . . . . . . . . . . 2 1.2 Company Representations. . . . . . . . . . . . . . . 3 1.3 Authority Representations and Findings . . . . . . . 4 II. COMPLETION OF AND TITLE TO PROJECT FACILITIES . . . . . . 4 2.1 Completion of and Title to Project Facilities. . . . 4 III. FINANCING THE PROJECT. . . . . . . . . . . . . . . . . . 5 3.1 Issuance of 1993 Series A Bonds. . . . . . . . . . . 5 3.2 Deposit of 1993 Series A Bond Proceeds . . . . . . . 5 3.3 1993 Series A Bonds Not to Become Arbitrage Bonds. . 5 3.4 Restriction on Use of Bond Fund and Clearing Fund. . 6 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. . . . . . . . . . . . . . . . 7 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 . . . . . . . . . . . . . . . . . . . . 9 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 EX-10.31 12 EXHIBIT 10.31 BOND PURCHASE AGREEMENT $19,000,000 Luzerne County Industrial Development Authority Exempt Facilities Revenue Refunding Bonds, 1993 Series A (Pennsylvania Gas and Water Company Project) December 2, 1993 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: Legg Mason Wood Walker, Incorporated, as representative (in such capacity, the "Representative"), on behalf of itself and Butcher & Singer, a division of Wheat, First Securities, Inc. (together, the "Underwriters"), offers to enter into this Bond Purchase Agreement (the "Purchase Agreement") relating to $19,000,000 aggregate principal amount of Luzerne County Industrial Development Authority Exempt Facilities Revenue Refunding Bonds, 1993 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 November 12, 1993 (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 1993 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 1993 First Mortgage Bonds in the principal amount of $19,000,000 issued under and secured by the Indenture of Mortgage, as to be further supplemented by the Twenty-Eighth Supplemental Indenture to be dated as of December 1, 1993, providing for the issuance of the 1993 First Mortgage Bonds. 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 National Australia Bank, Limited, New York Branch ("NAB") for drawings on a letter of credit (the "Letter of Credit") provided by NAB in connection with the issuance of the 1989 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 January 1, 1994, the Issuer's 1989 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 November 15, 1993 (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 $19,000,000, plus accrued interest on the Bonds from December 1, 1993, 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 December 21, 1993, 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 $19,000,000 maturing January 1, 2019. 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 $399,000 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, 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 subsidiaries 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 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 subsidiaries 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 any of its subsidiaries, other than transactions in the ordinary course of business and changes and transactions contemplated by the Preliminary Official Statement. None of the Company and its subsidiaries has any contingent obligations which are or are reasonably likely to be material to the Company and its subsidiaries 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 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 subsidiaries considered as a whole. (f) On August 26, 1993, a securities certificate was registered by the Pennsylvania Public Utility Commission with respect to the issuance of the 1993 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 1993 First Mortgage Bonds and the Bonds except for filings and applications pursuant to state securities or Blue Sky laws and regulations. (g) The 1993 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 1993 First Mortgage Bonds contained in the Preliminary Official Statement and the Official Statement, and the 1993 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 1993 First Mortgage Bonds are issued in accordance with the provisions of the Mortgage, such 1993 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-Eighth Supplemental Indenture has been duly authorized by the Company and each of the Agreement and the Twenty- Eighth 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 1993 First Mortgage Bonds and the Bonds, the execution and delivery of the Agreement, the Refunding Agreement and the Twenty-Eighth 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-Eighth 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 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 subsidiaries taken as a whole and that would not affect the validity of the 1993 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 subsidiaries considered as a whole, (i) the Company and its subsidiaries 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 subsidiaries 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 any of its subsidiaries 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 subsidiaries 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 1993 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 subsidiaries 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 subsidiaries taken as a whole. (p) The Company and its subsidiaries 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 subsidiaries considered as a whole. Neither the Company nor any of its subsidiaries 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 subsidiaries 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 subsidiaries considered as a whole, there are no past or present events, conditions, circumstances, activities, practices, incidents or actions of the Company or any of its subsidiaries 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 therein; 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 subsidiaries 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 subsidiaries 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 & Co., 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 1993 BONDS", "SECURITY FOR THE 1993 BONDS", and "APPENDIX C - Summary of Certain Provisions of the Indenture, the Agreement, The 1993 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 MATTERS" 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 1989 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, Leiby & 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 & Co. 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 "BBB- " by Standard and Poor's Corporation and "Baa3" by Moody's Investors Service have not been reduced. 13. Pennsylvania Public Utility Commission Securities Certificate and Order for the 1993 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 1989 Bonds on January 1, 1994. 17. Such additional opinions, certificates, or documentation as the Representative or Bond Counsel may reasonably request. 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- Eighth 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. 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, 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 the preceding 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 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 next to last 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: Legg Mason Wood Walker, Inc. Jordan Building 203 Franklin Avenue Scranton, PA 18503-1996 Attention: Thomas Karam 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 jurisdiction 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 1993 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, LEGG MASON WOOD WALKER, INCORPORATED 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: January 1, 2019 Interest Rate: 6.05% 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 January 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] January 1, 2004 through December 31, 2004 102% January 1, 2005 through December 31, 2005 101% January 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 & CO. Pursuant to Paragraph 5(d) of the Purchase Agreement, Arthur Andersen & Co. 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, LEIBY & 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 $19,000,000 aggregate principal amount of its Exempt Facilities Revenue Refunding Bonds, 1993 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 December 2, 1993 (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 December 2, 1993, 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 November 15, 1993 (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 Regulation ("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 1993 First Mortgage Bonds, to execute and deliver the Bond Purchase Agreement, the Agreement, the Refunding Agreement, the Twenty-Eighth 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-Eighth 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 1993 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 1993 First Mortgage Bonds, and such Securities Certificate has been registered by order of such Commission dated August 26, 1993, 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 1993 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 1993 First Mortgage Bonds and the execution and delivery of the Agreement, the Bond Purchase Agreement, the Refunding Agreement and the Twenty-Eighth 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-Eighth 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 October 31, 1993, 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 1993 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 October 31, 1993, 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 subsidiaries taken as a whole and that would not affect the validity of the Bond Purchase Agreement, the Agreement, the Twenty-Eighth Supplemental Mortgage Indenture, the 1993 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-Eighth Supplemental Mortgage Indenture and the Agreement did not and the issuance of the Bonds and the 1993 First Mortgage Bonds, the compliance by the Company with all of the terms and provisions of the Bond Purchase Agreement, the Agreement, the Twenty-Eighth 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 subsidiaries taken as a whole and that would not affect the validity of the Bond Purchase Agreement, the Agreement, the Twenty-Eighth Supplemental Mortgage Indenture, the 1993 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 1993 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 1993 First Mortgage Bonds does not violate any law, published rule, regulation administered or order issued by any Regulatory Authority or pursuant to any Filed Document. (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 1993 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 1993 First Mortgage Bonds, or our representation of the Company before the PPUC and in other regulatory matters, [and (ii) "after due inquiry" 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 omit to state any material fact required to be stated therein or necessary in order to make the statements therein 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. Very truly yours, LeBoeuf, Lamb, Leiby & 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 $19,000,000 aggregate principal amount of its Exempt Facilities Revenue Refunding Bonds, 1993 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 December 2, 1993 (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 November 15, 1993 (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 1993 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-Eighth Supplemental Mortgage Indenture, and the issuance and sale of the 1993 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 subsidiaries taken as a whole and that would not affect the validity of the 1993 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 December 2, 1993 (the "Bond Purchase Agreement") among Pennsylvania Gas and Water Company, Luzerne County Industrial Development Authority and Legg Mason Wood Walker, Incorporated, on behalf of itself and Butcher & Singer, a Division of Wheat, First Securities, Inc. 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 and (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) 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 any of its subsidiaries 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 -----END PRIVACY-ENHANCED MESSAGE-----