-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NfBYuof6NHHc3KERTV914X3tQullGAa3W4MtEogC6kguqpLBW26k6AMWalG89Cxk 96Bq9iK5ckIdeH9+sPd4Tg== 0000077242-96-000016.txt : 19960311 0000077242-96-000016.hdr.sgml : 19960311 ACCESSION NUMBER: 0000077242-96-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960308 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PG ENERGY INC CENTRAL INDEX KEY: 0000077242 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 240717235 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03490 FILM NUMBER: 96532592 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: PENNSYLVANIA GAS & WATER CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SCRANTON SPRING BROOK WATER SERVICE CO DATE OF NAME CHANGE: 19660908 10-K 1 PART I ITEM l. BUSINESS GENERAL PG Energy Inc. ("PGE"), formerly known as Pennsylvania Gas and Water Company, is a subsidiary of Pennsylvania Enterprises, Inc. ("PEI"). PGE, incorporated in Pennsylvania in 1867 as Dunmore Gas & Water Company, is engaged in the distribution of natural gas. Until February 16, 1996, when its water utility operations were sold, PGE was also engaged in the distribution of water (See "-Sale of Water Utility Operations."). PGE is regulated by the Pennsylvania Public Utility Commission ("PPUC"). As of December 31, 1995, PGE had approximately 141,800 gas customers and 133,400 water customers. PGE's gas operating revenues are highly seasonal and depend on certain factors that are beyond its control, such as the price of natural gas and the availability of markets for natural gas. Other factors include the weather, the effect of federal and state regulation, the effect of competition from other forms of energy, including electricity and oil, and the switching of customers from sales to transportation service. See "GAS BUSINESS-Transportation and Storage Service." As of December 31, 1995, PGE employed approximately 950 persons. However, as a result of the sale of its water operations on February 16, 1996 (See "-Sale of Water Utility Operations"), and the related transfer, early retirement and displacement of certain employees, PGE employed only approximately 550 persons as of March 1, 1996. Sale of Water Utility Operations On February 16, 1996, PGE sold its regulated water operations and certain related assets to Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American Water Works Company, Inc. ("American"), for approximately $413.5 million, consisting of $266.4 million in cash and the assumption of $147.1 million of PGE's liabilities, including $141.1 million of its long-term debt, subject to certain post-closing adjustments. (See Note 2, Discontinued Operations, of the Notes to Financial Statements in Item 8 of this Form 10-K). Until February 16, 1996, PGE continued to operate the water utility business. PEI and PGE are using the $209.1 million of cash proceeds from the sale, after the payment of an estimated $56.7 million of federal and state income taxes, to retire debt, to repurchase stock and for working capital purposes. (See "Management's Discussion and Analysis of Financial Conditions and Results of Operations-Liquidity and Capital Resources-Sale of Water Utility Operations" in Item 7 of this Form 10-K). With the sale of PGE's water utility operations, the principal assets of PGE now consist of its gas utility operations and approximately 46,000 acres of land. GAS BUSINESS PGE distributes natural gas to an area in northeastern Pennsylvania lying within the Counties of Lackawanna, Luzerne, Wyoming, Susquehanna, Columbia, Montour, Northumberland, Lycoming, Union and Snyder, a territory that includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and Williamsport. The total estimated population of PGE's natural gas service area, based on the 1990 U.S. Census, is 561,000. -1- Number and Type of Customers. At December 31, 1995, PGE had approximately 141,800 natural gas customers, from which it derived total natural gas revenues of $152.8 million during 1995. The following chart shows a breakdown of the types of customers and the percentages of gas revenues generated by each type of customer in 1995: [CAPTION] Type of Customer % of Customers % of Revenues [S] [C] [C] Residential 91.4% 63.0% Commercial 8.2 24.0* Industrial 0.2 11.6* Other Users 0.2 1.4 Total 100.0% 100.0% * Includes the 4.6% of total gas revenues derived from interruptible customers. During 1995, PGE delivered an estimated total of 44,800,000 thousand cubic feet ("MCF") of natural gas to its customers, of which 54.9% was sold at normal tariff rates, 43.8% represented gas transported for customers and 1.3% was sold under the Alternate Fuel Rate (as described below). PGE 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 PGE at any time under the conditions set forth in their contracts for gas service. In 1995, a total of 1,142,000 MCF of natural gas was sold by PGE to interruptible customers and 4,168,000 MCF was transported for such customers, which together represented 11.9% of the total deliveries of natural gas by PGE to its customers during 1995. PGE's largest natural gas customer accounted for approximately 2.0% of its operating revenues in 1995. No other customer accounted for as much as 2.0% of such revenues in 1995. Transportation and Storage Service. PGE provides transportation service to natural gas customers who consume at least 5,000 MCF of natural gas per year, meet certain other conditions and execute a transportation agreement. In addition, groups of up to ten customers, with a combined consumption of at least 5,000 MCF per year, are eligible for transportation service. Prior to March 25, 1993, transportation service was only provided to individual customers, or groups of not more than three customers, who consumed at least 50,000 MCF of natural gas per year. Transportation service is provided on both a firm and an interruptible basis and includes provisions regarding over and under deliveries of gas on behalf of the respective customer. In addition, PGE offers firm transportation customers a "storage service" pursuant to which such customers may have gas delivered to PGE during the period from April through October for storage and redelivery during the winter period. PGE also offers firm transportation customers a "standby service" under the terms of which PGE 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. -2- Since April, 1995, PGE has also offered a Market Sensitive Sales Service ("MSSS") in conjunction with its transportation service. The MSSS, which was approved by Order of the PPUC entered January 11, 1995, provides for the sale of natural gas at contracted rates based on market prices and other specified terms and conditions. The MSSS results in additional sales of natural gas by PGE and less transportation of natural gas by it on behalf of third parties. PGE sold 1,388,000 MCF under the MSSS during 1995, and expects to sell approximately 2,344,000 MCF under MSSS in 1996. Set forth below is a summary of the gas transported by PGE and the number of its customers using transportation service from 1993 to 1995: [CAPTION] Number Volume of Gas Transported (MCF) of Interstate Pennsylvania Year Customers Gas Gas Total [S] [C] [C] [C] [C] 1995 480 14,543,000 5,054,000 19,597,000 1994 574 13,411,000 4,744,000 18,155,000 1993 569 10,078,000 4,627,000 14,705,000 During 1996, PGE expects to transport approximately 20,000,000 MCF of natural gas, of which it anticipates approximately 5,100,000 MCF will be Pennsylvania gas. The decrease in 1995 in the number of customers using transportation service was the result of PGE requiring such customers to install telemetering equipment so that PGE could monitor the usage by those customers on a daily basis and thereby determine if the appropriate quantities of natural gas were being delivered for them. This requirement for telemetering equipment caused a number of customers, for whom relatively small quantities of natural gas were being transported, to revert to sales service. The rates charged by PGE for the transportation of interstate gas are essentially equal to its tariff rates for the sale of gas with all gas costs removed. As a result, the transportation of interstate gas has had no significant adverse effect on earnings. However, the rate charged for the transportation of gas produced in Pennsylvania yields considerably less revenue than the gross margin (gas operating revenues less the cost of gas) that would be realized from sales under normal tariff rates. This lower rate for the transportation of Pennsylvania gas is the result of regulations adopted by the PPUC to encourage the production of natural gas within the state. Alternate Fuel Sales. In order to be more competitive in terms of price with certain alternate fuels, PGE 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 PGE's normal tariff rates, PGE is permitted by the PPUC to lower its price to these customers so that PGE can remain competitive with the alternate fuel. However, in no instance may PGE sell gas under this special arrangement for less than its average commodity cost of gas purchased during the month. PGE's revenues under the Alternate Fuel Rate amounted to $2.0 million in 1995, $3.7 million in 1994 and $4.6 million in 1993. These revenues reflected the sale of 603,000 MCF, 1,223,000 MCF and 1,541,000 MCF in 1995, 1994 and 1993, respectively. It is anticipated that approximately 1,445,000 MCF will be sold under the Alternate Fuel Rate in 1996. The change in volumes sold under the Alternate Fuel Rate reflects the switching by certain customers between -3- alternate fuel service and transportation service as a result of periodic changes in the relative cost of natural gas and alternate fuels. FERC Order 636. On April 8, 1992, the Federal Energy Regulatory Commission ("FERC") issued Order No. 636 ("Order 636"), requiring interstate pipeline suppliers to restructure their services and operations in an attempt to enhance competition and maximize the benefits of wellhead price decontrol. The objectives of Order 636 were to be accomplished primarily by unbundling the services (i.e., the sale, transportation and storage of gas) provided by the interstate pipeline suppliers and by making those services available to end users on the same terms as local gas distribution companies, such as PGE. Pursuant to Order 636, the interstate pipelines have been required to: (1) unbundle transportation service from sales service; (2) allocate sufficient storage capacity, together with firm transportation, to replicate previous sales services; (3) provide a no-notice transportation service; (4) provide open access storage service; (5) reallocate upstream pipeline capacity and upstream storage for the benefit of downstream interstate pipeline suppliers; and (6) implement a straight fixed-variable rate design to replace all modified fixed- variable rate designs. The interstate pipelines have been granted a blanket sales certificate to make unbundled sales in competition with non-pipeline merchants and are being permitted recovery of all reasonable and prudent transition costs incurred in order to comply with Order 636. Such transition costs include: (1) the cost of renegotiating existing gas supply contracts with producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included in the interstate pipelines' purchased gas adjustment accounts at the time they adopted market-based pricing for gas sales ("Account 191 Costs"); (3) unrecovered costs of assets that cannot be assigned to customers of unbundled services ("Stranded Costs"); and (4) costs of new facilities to physically implement Order 636 ("New Facility Costs"). Additionally, the interstate pipelines have been allowed pre-granted abandonment of sales and transportation services to customers upon expiration of applicable contracts, subject to customers' rights of first refusal. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding the recovery of Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to recovery through the annual PGC rate filing made with the PPUC by PGE and other larger local gas distribution companies. As of February 1, 1994, PGE began to recover the Gas Transition Costs that are being billed to PGE by its interstate pipelines through an increase in its PGC rate. As of December 31, 1995, PGE had been billed a total of $1.3 million of Gas Transition Costs by its interstate pipelines, which is the entire amount of such billings that PGE expects. Of this amount, $858,000 was recovered by PGE over a twelve-month period ended January 31, 1995, through an increase in its PGC rate, $252,000 are being recovered by PGE in its annual PGC rate that the PPUC has approved effective December 1, 1995, and the recovery of the remaining $217,000 will be sought by PGE in its PGC rate that is effective December 1, 1996. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs are subject to full recovery by local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Pennsylvania Public Utility Code (the "Code"). By Order of the PPUC entered August 26, 1994, PGE began recovering the Non-Gas Transition Costs that it estimates it will -4- ultimately be billed pursuant to Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $9.6 million of Non-Gas Transition Costs will be billed to PGE, generally over a four-year period extending through the fourth quarter of 1997, of which $6.1 million had been billed to PGE and $4.4 million had been recovered from its customers as of December 31, 1995. PGE has recorded the estimated transition costs that remained to be billed to it and the amounts remaining to be recovered from its customers. Sources of Supply. PGE purchases natural gas from marketers, producers, and integrated energy companies, generally under the terms of supply arrangements that extend for the heating season (i.e., November through March) or for periods of one year or longer. These contracts typically provide for an adjustment each month in the cost of gas purchased pursuant thereto based on the then current market prices for natural gas. The largest individual supplier, an integrated energy company, accounted for 20.8% of PGE's total purchases of natural gas in 1995. Two other suppliers accounted for 17.2% and 15.7% of PGE's total purchases of natural gas in 1995. No other suppliers accounted for more than 7% of PGE's purchases during 1995. The purchases of natural gas by PGE during each of the years 1995, 1994 and 1993 are summarized below: [CAPTION] Volume Average Year Purchased (MCF) Cost per MCF [S] [C] [C] 1995 24,173,000 $2.62 1994 28,364,000 $2.82 1993 26,200,000 $2.98 During 1996, PGE expects to purchase a total of approximately 28,113,000 MCF of natural gas under seasonal or longer-term contracts at a currently projected average cost of $2.71 per MCF. PGE presently has adequate supplies of natural gas to meet the demands of existing customers through October, 1996, and PEI believes that PGE will be able to obtain sufficient supplies to meet the demands of its existing customers and to serve new customers (of which approximately 4,000 are expected to be added in 1996) beyond October, 1996. -5- Pipeline Transportation and Storage Entitlements. Pursuant to the terms of Order 636, PGE has entered into agreements with its former interstate pipeline suppliers providing for the firm transportation by those pipelines on a daily basis 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 PGE agrees to such termination. In no event may any of the agreements be unilaterally terminated by the pipelines without the approval of the FERC. (b) Includes 3,300 MCF per day that PGE can transport during the period December through February pursuant to an agreement with Transco that extends through 2011. PGE 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 PGE 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, PGE 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. -6- In accordance with the provisions of Order 636, PGE 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 PGE'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, PGE has released portions of its firm pipeline transportation capacity to certain of its customers and third parties for varying periods extending up to three years. The maximum capacity so released on any one day in 1995 was 65,213 MCF. Through March 1, 1996, PGE had not, however, released any of its storage capacity. PGE believes that it has sufficient firm pipeline transportation and storage entitlements to meet the demands of its existing customers and to supply new customers. Peak Day Requirements. PGE plans for peak day demand on the basis of a daily mean temperature of 0 degrees Fahrenheit. Requirements for such a design peak day, assuming the curtailment of service to interruptible customers, are currently estimated to be 302,906 MCF. Based upon present pipeline transportation and storage contracts, and assuming no curtailments by its suppliers, PGE could meet a peak day requirement of 303,479 MCF. PGE's historic maximum daily sendout is 293,683 MCF, which occurred on January 19, 1994, when service to interruptible customers and select industrial users was curtailed. The mean temperature in its gas service area on that day was -8 degrees Fahrenheit. Construction Expenditures. PGE's construction expenditures for gas utility plant in 1995 totaled $21.1 million and are estimated to be $28.9 million for 1996. The higher level of expenditures estimated for 1996 reflects various system improvements to permit PGE to meet future customer demands, as well as an increased emphasis on new business development. Regulation. PGE'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 PGE's pipeline facilities and various other matters associated with broad regulatory authority. In addition to those regulations promulgated by the PPUC, PGE 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 PGE's gas business. Although it cannot predict the future impact of these regulations, PGE believes that any additional expenditures and costs made necessary by them would be fully recoverable through rates. PGE, 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 PGE. Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), PGE 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 -7- 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, PGE 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. PGE's gas distribution and transportation activities are not subject to the Natural Gas Act, as amended. Valve Maintenance. On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring PGE to survey its gas distribution system to verify the location and spacing of its gas shut off valves, to add or repair valves where needed and to establish programs for the periodic inspection and maintenance of all such valves and the verification of all gas service line information. On March 31, 1995, the PPUC adopted an Order approving a plan submitted by PGE for complying with the Emergency Order. PGE does not believe that compliance with the terms of such Order will have a material adverse effect on its financial position or results of operations. Rates. As required by the Code, PGE files an annual purchased gas cost rate with the PPUC. This rate is designed to recover purchased gas costs for the period it will be in effect. The procedure includes a process for the reconciliation of actual gas costs incurred and actual revenues received and also provides for the refund of any overcollections, plus interest thereon, or the recoupment of any undercollections of gas costs. The procedure is limited to purchased gas costs, to the exclusion of other rate matters, and requires a formal evidentiary proceeding conducted by the PPUC, the submission of specific information regarding gas procurement practices and specific findings of fact by the PPUC regarding the "least cost fuel procurement" policies of the utility. In accordance with this procedure, PGE placed a purchased gas cost rate of $2.75 per MCF in effect on December 1, 1995, and is required to file a proposed annual purchased gas cost rate on or before June 1, 1996, to be effective December 1, 1996. It is not presently possible to estimate how this proposed rate will compare to the current purchased gas cost rate of $2.75 per MCF, which is scheduled to remain in effect through November 30, 1996. The annual changes in gas rates on account of purchased gas costs have no effect on PGE's earnings since the change in revenues is offset by a corresponding change in the cost of gas. Effective September 14, 1995, the PPUC adopted regulations that provide for the quarterly adjustment of the annual purchased gas cost rate of larger gas distribution companies, including PGE. Such adjustments are allowed when the actual costs vary from the costs reflected in the respective company's tariffs by 2% or more. Except for reducing the amount of any over or undercollections of gas costs, these regulations will not have any material effect on PGE's financial position or results of operations, and PGE will still be required to file an annual purchased gas cost rate. As of March 1, 1996, no such quarterly gas cost adjustments had been made to PGE's tariffs. FERC Order 636, among other matters, requires that PGE contract for sufficient gas supplies, pipeline capacity and storage for its annual needs. These added responsibilities may result in increased scrutiny by the PPUC as to the prudence of PGE's gas procurement and supply activities. Depending upon how the PPUC views the cost effectiveness of such activities, PGE may not be permitted to recover all of its gas supply costs in the rates charged to -8- customers. However, although it cannot be certain, PGE believes that it will be able to demonstrate to the PPUC the prudence of its gas supply costs and, therefore, will be allowed to recover all such costs in its purchased gas cost rate. Tax Surcharge Adjustments. Regulations of the PPUC provide for PGE to apply a state tax adjustment surcharge tariff to its bills for gas service to recoup any increased taxes or passthrough any decreased 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, PGE filed a revised state tax adjustment surcharge tariff with the PPUC which became effective August 1, 1995, to reflect the effect of tax legislation enacted by the Commonwealth of Pennsylvania on June 30, 1995, decreasing the Corporate Net Income Tax rate. WATER BUSINESS Prior to the sale of its water operations to Pennsylvania-American on February 16, 1996, PGE distributed water to an area lying within the Counties of Lackawanna, Luzerne, Susquehanna and Wayne, which included the Cities of Scranton and Wilkes-Barre and 63 other municipalities. The total estimated population of the water service area, based on the 1990 U.S. Census, was 373,000. Number and Type of Customers. At December 31, 1995, PGE had approximately 133,400 water customers from which it derived total water revenues of $66.3 million during 1995. The following chart shows a breakdown of the types of customers and the percentages of water revenues they generated in 1995: [CAPTION] Type of Customer % of Customers % of Revenues [S] [C] [C] Residential 91.5% 63.0% Commercial 7.2 18.6 Industrial 0.3 8.5 Municipal and Other Users 1.0 9.9 Total 100.0% 100.0% Filtration of Water Supplies. All of PGE's water customers were supplied with filtered water (except for several hundred who were supplied with ground water from wells) which met all federal and state drinking water regulations. The filtration of PGE's water supplies was performed at ten water treatment plants, located throughout PGE's water service area, which had an aggregate daily capacity of 101.1 million gallons. Treatment and Testing of Water. All water entering PGE's distribution system was filtered (except for the small quantity of ground water pumped from wells), disinfected, and treated with chemicals to minimize corrosion of the distribution system and customers' piping. Water samples were taken at each of the intake stations and at selected locations in PGE's service area, and turbidity was monitored at each location at which the water entered the distribution system. Construction Expenditures. PGE's construction expenditures for water utility plant in 1995 totaled $15.3 million. -9- ITEM 2. PROPERTIES Gas. PGE's gas system consists of approximately 2,221 miles of distribution lines, nine city gate and 67 major regulating stations and miscellaneous related and additional property. PGE 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 PGE's on-going valve maintenance program. See "Business-Gas Business-Valve Maintenance." Most of PGE's gas utility properties are subject to a first mortgage lien pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15, 1946, as supplemented by thirty supplemental indentures (collectively, the "Indenture") from PGE to First Trust of New York, National Association, as Trustee. Water. Prior to the sale of its water operations to Pennsylvania-American on February 16, 1996, PGE's water system consisted principally of 36 active and standby reservoirs and stream intakes, ten water treatment plants, five wells, various distribution system storage tanks, approximately 1,730 miles of aqueducts and pipelines, related watershed land and miscellaneous other property. Approximately 8,000 acres of land representing reservoir sites and land adjacent to such reservoirs, as well as the location of various water facilities, were also sold by PGE to Pennsylvania-American on February 16, 1996, as part of the sale of its water operations. Land. As of March 1, 1996, PGE owned approximately 46,000 acres of undeveloped land situated in northeastern Pennsylvania. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting held on October 11, 1995, PGE's preferred shareholders approved the Asset Purchase Agreement among PEI, PGE, Pennsylvania-American and American dated as of April 26, 1995, providing for the sale by PEI and PGE of PGE's regulated water operations and certain related assets to Pennsylvania- American for $413.5 million (including debt assumed), subject to certain post-closing adjustments. The preferred shareholders cast 188,508 votes for this proposal, 8,187 votes against it, and 5,541 abstained from voting on the proposal. PGE's common shareholder, PEI, by executing a consent in lieu of a special meeting, also approved the Asset Purchase Agreement on October 11, 1995. -10- 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 PGE during the years ended December 31, 1995 and 1994, were as follows: [CAPTION] 1995 1994 [S] [C] [C] First quarter $ .7050 $ .350 Second quarter .7075 .355 Third quarter .6400 .425 Fourth quarter .6900 .680 Total $2.7425 $ 1.810 Information relating to restriction on the payment of dividends by PGE is set forth in Note 8 of the Notes to Financial Statements in Item 8 of this Form 10-K. -11- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCONTINUED OPERATIONS On April 26, 1995, PEI and PGE signed a definitive agreement (the "Agreement") with American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American, providing for the sale to Pennsylvania-American of substantially all of the assets, properties and rights of PGE's water utility operations. Under the terms of the agreement, Pennsylvania-American paid approximately $413.5 million consisting of $266.4 million in cash and the assumption of $147.1 million of PGE's liabilities, including $141.1 million of its long-term debt, to PGE on the February 16, 1996, closing date for the sale. This price is subject to certain post-closing adjustments. PGE continued to operate the water utility business until the closing date. The sale price reflected a $6.5 million premium over the book value of the assets being sold. However, after transaction costs and the net effect of other items, principally the write-off of certain deferred regulatory assets and deferred credits and the impact of pension and other postretirement benefit expenses relative to the early retirement plan (see Note 10 of the Notes to Financial Statements in Item 8 of this Form 10-K), the sale resulted in an estimated after tax loss of $6.0 million, net of the expected income from the water operations during the phase-out period (which for financial reporting purposes was April 1, 1995, through February 15, 1996.) The net cash proceeds from the sale of approximately $209.1 million, net of an estimated $56.7 million payable for income taxes, are being used by PEI and PGE to retire debt, to repurchase stock and for working capital for their continuing operations. After the sale, the principal assets of PGE consist of its gas utility operations and approximately 46,000 acres of land. Operating revenues from water utility operations decreased $425,000 (0.6%) from $66.7 million for 1994 to $66.3 million for 1995, primarily as a result of a 1.2% decrease in consumption. Operating expenses related to the water utility operations, excluding income taxes, increased $2.4 million (6.4%) from $36.7 million for 1994 to $39.0 million for 1995. This increase was principally attributable to an increase in operation and maintenance expenses as a result of higher levels of leak repairs and sludge removal costs in 1995 compared to 1994. Income taxes with respect to the water utility operations decreased by $983,000 (14.4%) from $6.9 million in 1994 to $5.9 million in 1995 due to a lower level of income before income taxes (for this purpose, operating income net of interest charges) and a decrease in the Pennsylvania Corporate Net Income Tax rate. As a result of the foregoing, operating income of the water utility operations decreased $1.8 million (7.8%) from $23.2 million for 1994 to $21.4 million for 1995. After allocated interest and other charges (see Note 2 of the Notes to Financial Statements in Item 8 of this Form 10-K), the income from the water utility operations decreased $1.8 million (16.7%) from $10.5 million in 1994 to $8.7 million in 1995. Operating revenues from water utility operations increased by $13.4 million (25.1%) from $53.4 million in 1993 to $66.7 million in 1994. This increase in revenues was principally the result of various rate increases allowed by the PPUC during 1993. Operating expenses related to the water utility operations, excluding income taxes, increased $3.6 million (11.0%) from $33.1 million in -12- 1993 to $36.7 million in 1994. The major reasons for this increase were a $1.8 million (29.8%) increase in depreciation expense (primarily because of capital additions and the change in December, 1993, from a 4% compound interest to a straight-line method of depreciation with respect to certain water plant) and a $1.9 million increase in other operating expenses, largely as a result of increased payroll and other postemployment benefit costs, the effects of which were partially offset by a decrease in the amortization of rate case expense. Income taxes with respect to the water utility operations increased by $3.9 million from $2.9 million in 1993 to $6.9 million in 1994 due to a higher level of income before income taxes (for this purpose, operating income net of interest charges). As a result of the foregoing, operating income of the water utility operations increased $5.8 million (33.6%) from $17.4 million in 1993 to $23.2 million in 1994. After allocated interest charges (see Note 2 of the Notes to Financial Statements in Item 8 of this Form 10-K), the income from the water utility operations increased $2.6 million (32.8%) from $7.9 million in 1993 to $10.5 million in 1994. In accordance with generally accepted accounting principles, PGE's financial statements for the periods prior to 1995 were restated to reflect PGE's water utility operations as "discontinued operations" effective March 31, 1995, and the following sections of Management's Discussion and Analysis generally relate only to PGE's continuing gas utility operations. For additional information regarding the discontinued operations, see Note 2 of the Notes to Financial Statements in Item 8 of this Form 10-K. -13- RESULTS OF CONTINUING OPERATIONS The following table expresses certain items in PGE's statements of income as percentages of operating revenues for each of the calendar years ended December 31, 1995, 1994 and 1993:
Percentage of Operating Revenues Year Ended December 31, 1995 1994 1993 OPERATING REVENUES........................... 100.0% 100.0% 100.0% Cost of gas................................ 55.3 58.7 56.5 OPERATING MARGIN............................. 44.7 41.3 43.5 OTHER OPERATING EXPENSES: Operation.................................. 14.7 13.5 14.2 Maintenance................................ 3.2 2.6 2.4 Depreciation............................... 4.6 4.0 4.2 Income taxes............................... 3.4 3.4 3.9 Taxes other than income taxes.............. 6.5 6.4 6.5 Total other operating expenses........... 32.4 29.9 31.2 OPERATING INCOME............................. 12.3 11.4 12.3 OTHER INCOME (DEDUCTIONS), NET............... 0.2 - (0.4) INTEREST CHARGES............................. (7.0) (5.9) (6.4) INCOME FROM CONTINUING OPERATIONS............ 5.5 5.5 5.5 INCOME (LOSS) WITH RESPECT TO DISCONTINUED OPERATIONS................................. (2.5) 6.3 5.1 NET INCOME................................... 3.0 11.8 10.6 DIVIDENDS ON PREFERRED STOCK(1).............. 1.8 2.8 4.2 EARNINGS APPLICABLE TO COMMON STOCK.......... 1.2% 9.0% 6.4%
(1) None of the dividends on preferred stock has been allocated to the discontinued operations. o Year Ended December 31, 1995, compared with year ended December 31, 1994 Operating Revenues. Operating revenues decreased $15.2 million (9.1%) from $168.0 million for 1994 to $152.8 million for 1995. This decrease was primarily the result of a reduction in the gas cost rate effective May 16, 1995. See "- Rate Matters." Also contributing to the decrease in revenues was the switching of certain commercial and industrial customers from sales to transportation service and a 179 million cubic feet (0.8%) decrease in sales to residential and commercial heating customers, caused by a 133 (2.2%) decrease in heating degree days. There were 6,029 heating degree days (95.8% of normal) during 1995 compared to 6,162 (97.9% of normal) during 1994. Cost of Gas. The cost of gas decreased $14.3 million (14.5%) from $98.7 million for 1994 to $84.4 million for 1995, primarily because of the aforementioned reduction in the gas cost rate effective May 16, 1995. See "- Rate Matters." Also contributing to the decrease was the reduced consumption by residential and commercial heating customers. -14- Operating Margin. The operating margin decreased $955,000 (1.4%) from $69.3 million in 1994 to $68.4 million in 1995, primarily because of the 179 million cubic feet (0.8%) decrease in consumption by residential and commercial heating customers. However, as a percentage of operating revenues, the margin increased from 41.3% in 1994 to 44.7% in 1995 primarily as a result of the higher average charge per cubic foot to residential and commercial heating customers because of their lower consumption due to the warmer weather. Other Operating Expenses. Other operating expenses decreased $749,000 (1.5%) from $50.2 million for 1994 to $49.5 million for 1995. This decrease was partially the result of a $481,000 (8.5%) decrease in income taxes from $5.6 million in 1994 to $5.2 million in 1995 due to a decrease in income before income taxes (for this purpose, operating income net of interest charges) and a reduction in the Pennsylvania corporate net income tax rate. Also contributing to the decrease in other operating expenses was a slightly lower level of operation expenses, which declined $214,000 (0.9%), and an $889,000 (8.2%) decrease in taxes other than income taxes, primarily because of a decrease in gross receipts tax as a result of the lower level of operating revenues. The effect of the decreases in taxes and operation expenses was partially offset by a $531,000 (12.0%) increase in maintenance expenses, principally as a result of charges relative to the maintenance of gas valves, and a $304,000 (4.6%) increase in depreciation expense as a result of additions to utility plant. Notwithstanding the decrease in other operating expenses, such expenses increased as a percentage of operating revenues from 29.9% during 1994 to 32.4% during 1995 because of the relatively greater decrease in revenues. Operating Income. As a result of the above, total operating income decreased $206,000 (1.1%) from $19.1 million for 1994 to $18.9 million for 1995. However, as a percentage of total operating revenues, operating income increased from 11.4% in 1994 to 12.3% in 1995, primarily because of the decrease in the cost of gas as a percentage of operating revenues. Other Income (Deductions), Net. Other income (deductions), net increased $229,000 from $72,000 in 1994 to $301,000 in 1995, primarily as a result of a $227,000 write-off of expired advances related to income taxes and a $226,000 decrease in amortization of preferred stock issuance costs. Interest Charges. Interest charges increased by $855,000 (8.6%) from $9.9 million for 1994 to $10.8 million for 1995. This increase was largely attributable to interest on overcollections of purchased gas costs and increased interest on long-term debt. Income From Continuing Operations. Income from continuing operations decreased $832,000 (8.9%) from $9.3 million for 1994 to $8.5 million for 1995. This decrease was largely the result of the matters discussed above, principally the decrease in operating margin resulting from the lower level of sales to residential and commercial heating customers. The effect of the decreased operating margin was partially offset by the lower levels of taxes. Net Income. The decrease in net income of $15.2 million (76.6%) from $19.8 million for 1994 to $4.6 million for 1995 was largely the result of the estimated loss (equivalent to $1.04 per share) on the disposal of PGE's water utility operations, as discussed above. Also contributing to the decrease in net income was the lower income from continuing operations. -15- Dividends on Preferred Stock. Dividends on preferred stock decreased $1.9 million (40.4%) from $4.6 million for 1994 to $2.8 million for 1995, as a result of the redemption by PGE on May 31, 1994, of 150,000 shares ($15.0 million) of its 9.50% cumulative preferred stock, $100 par value, and on December 16, 1994, of 150,000 shares ($15.0 million) of its 8.90% cumulative preferred stock, $100 par value. No dividends on preferred stock were allocated to the discontinued operations. Earnings Applicable to Common Stock. The decrease in earnings applicable to common stock of $13.3 million from $15.2 million for 1994 to $1.9 million for 1995, as well as the decrease in earnings per share of common stock of $2.40 from $2.73 per share for 1994 (after a $.19 per share charge for the premium on redemption of preferred stock) to $.33 per share for 1995, were largely the result of the estimated loss (equivalent to $1.04 per share) on the disposal of PGE's water utility operations, as discussed above. Also contributing to the decreases in earnings applicable to common stock and earnings per share for 1995 was the lower income from continuing operations. The effects of these factors were partially offset by the reduced dividends on preferred stock and, in the case of earnings per share, the absence of any premium on the redemption of subsidiary's preferred stock. o Year ended December 31, 1994, compared with year ended December 31, 1993 Operating Revenues. Operating revenues increased by $14.7 million (9.6%) from $153.3 million for 1993 to $168.0 million for 1994, primarily as a result of a price increase averaging 19.0% (designed to total $28.8 million on an annual basis) effective December 1, 1993, due to increased costs of purchased gas. See "-Rate Matters-Rate Filings." Also contributing to the increase in operating revenues in 1994 was a 224 million cubic feet (1.0%) increase in sales to residential and commercial heating customers. This increase was attributable to the addition of approximately 2,200 new customers and occurred despite heating degree days that were 2.1% lower than normal and 0.3% less than in 1993. Additionally, the implementation of surcharges to recover FERC Order 636 transition costs (as more fully discussed below under "-Rate Matters-Rate Filings") acted to increase gas operating revenues by $1.8 million in 1994. The effects of the price increase and the surcharges on operating revenues were partially offset by the switching of certain commercial and industrial customers from sales to transportation service and a price decrease averaging 1.1% (designed to total $1.8 million on an annual basis) effective December 1, 1994, due to decreased costs of purchased gas, see"-Rate Matters-Rate Filings." Cost of Gas. The cost of gas increased $12.1 million (14.0%) from $86.6 million for 1993 to $98.7 million for 1994. The effect of this increase, which was the result of higher costs for purchased gas and the implementation of surcharges to recover FERC Order 636 transition costs, see "-Rate Matters-Rate Filings", was partially offset by a 9.0% (2.6 billion cubic feet) decrease in the volume of gas sold during 1994 compared to 1993. This decreased volume was largely attributable to the aforementioned switching of certain customers from sales to transportation service. Operating Margin. The operating margin increased $2.6 million or 3.9% from $66.8 million in 1993 to $69.3 million in 1994, primarily as a result of the increased sales to residential and commercial heating customers. However, as a percentage of operating revenues, the margin decreased from 43.5% in 1993 to 41.3% in 1994 primarily because of the increased cost of purchased gas. -16- Other Operating Expenses. Other operating expenses increased $2.2 million (4.7%) from $48.0 million for 1993 to $50.2 million for 1994. This increase was largely attributable to a $729,000 increase in gross receipts tax as a result of the higher level of gas revenues, an $855,000 increase in operation expenses (primarily because of a $285,000 increase in payroll costs and increased provisions for uncollectible accounts of $603,000) and a $741,000 increase in maintenance expenses (principally as a result of a $319,000 increase in payroll costs and a $146,000 increase in maintenance of gas mains and services attributable to the extremely cold weather experienced in January and February, 1994). Income taxes decreased by $392,000 (6.5%) from $6.0 million in 1993 to $5.6 million in 1994 due to a lower level of income before income taxes (for this purpose, operating income net of interest charges). Notwithstanding the increase in other operating expenses, such expenses decreased as a percentage of operating revenues, from 31.2% during 1993 to 29.9% during 1994 because of the relatively greater increase in operating revenues. Operating Income. As a result of the above, total operating income increased by $336,000 (1.8%) from $18.8 million for 1993 to $19.1 million for 1994. However, as a percentage of operating revenues, operating income decreased from 12.3% in 1993 to 11.4% in 1994 primarily as a result of the increase in the cost of gas as a percentage of operating revenues. Other Income (Deductions), Net. Other income (deductions), net increased $657,000 from a deduction of $585,000 in 1993 to income of $72,000 in 1994, primarily as a result of a $409,000 gain ($268,000 net of related income taxes) on the sale of PGE's interest in an oil and gas joint venture, a $254,000 increase ($145,000 net of related income taxes) in gains on the sale of land and other property and a $239,000 decrease in the net interest expense associated with the unexpended portion of the proceeds from the issuance of certain debt held in a construction fund. Income from Continuing Operations. Income from continuing operations increased $910,000 (10.8%) from $8.4 million for 1993 to $9.3 million for 1994. This increase was the result of the matters discussed above, principally the increase in operating margin resulting from the higher level of sales to residential and commercial heating customers, the effect of which was partially offset by the increase in other operating expenses. Net Income. Net income increased $3.5 million (21.5%) from $16.3 million for 1993 to $19.8 million for 1994. The increased earnings in 1994 were the result of a $2.6 million increase in income from discontinued operations and the matters discussed above relating to the continuing operations, principally the increase in operating margin resulting primarily from the higher level of sales to residential and commercial heating customers and the increase in other income (deductions), net. The effects of these factors were partially offset by the increase in other operating expenses. Dividends on Preferred Stock. Dividends on preferred stock decreased $1.8 million (28.2%) from $6.5 million for 1993 to $4.6 million for 1994, primarily as a result of the redemption by PGE on December 23, 1993, of 100,000 shares ($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0 million), of its 9.50% Cumulative Preferred Stock, $100 par value. No dividends on preferred stock have been allocated to the discontinued operations. Earnings Applicable to Common Stock. Earnings applicable to common stock increased $5.3 million (54.2%) from $9.8 million for 1993 to $15.2 million for 1994. The increased earnings in 1994 were the result of a $2.6 million increase in income from discontinued operations and the matters discussed above relating -17- to the continuing operations, principally the increase in operating margin resulting primarily from the higher level of sales to residential and commercial heating customers, the increase in other income (deductions), net and the decrease in preferred stock dividends. The effects of these factors were partially offset by the increase in other operating expenses. Before the $534,000 premium paid on the redemption of 150,000 shares of PGE's 9.50% Cumulative Preferred Stock on May 31, 1994, and the $446,000 premium paid on the redemption of 150,000 shares of PGE's 8.90% Cumulative Preferred Stock on December 16, 1994, the earnings per share of common stock increased $.56 (23.7%) from $2.36 per share for 1993 to $2.92 per share for 1994. This improvement was the result of the 54.2% increase in earnings applicable to common stock and occurred despite a 24.3% increase in the weighted average number of shares outstanding during 1994 primarily as a result of PGE's sale of 834,000 shares of common stock to PEI on October 27, 1993. While premiums on the redemption of preferred stock are charged to retained earnings and are not a determinant of earnings applicable to common stock, the premiums associated with any redemptions occurring subsequent to January 20, 1994, must be taken into account in calculating the earnings per share of common stock. As a consequence, the premiums on the redemption of the 150,000 shares of PGE's 9.50% Cumulative Preferred Stock and the 150,000 shares of PGE's 8.90% Cumulative Preferred Stock acted to reduce PGE's earnings per share for 1994 by $.19 per share, resulting in earnings of $2.73 per share of common stock for the year, an increase of $.37 per share (15.7%) over the earnings of $2.36 per share for the year ended December 31, 1993. RATE MATTERS Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania Public Utility Code (the "Code") which require that the tariffs of larger gas distribution companies, such as PGE, be adjusted on an annual basis to reflect changes in their purchased gas costs, the PPUC, by Order adopted November 10, 1994, authorized PGE to decrease the gas costs contained in its tariffs from $3.74 to $3.68 per thousand cubic feet effective December 1, 1994. This change in gas rates on account of purchased gas costs was designed to produce a decrease in annual revenue of $1.8 million. In accordance with the same provisions of the Code, by Order adopted May 11, 1995, the PPUC authorized PGE to decrease the gas costs contained in its gas tariffs to $2.42 per thousand cubic feet effective May 15, 1995, in order to refund overcollections from customers caused by lower than anticipated purchased gas costs and the receipt of supplier refunds during 1995. This change in gas rates on account of purchased gas costs was designed to produce a decrease in revenue of $8.2 million from its effective date through December 1, 1995. Additionally, by Order adopted November 9, 1995, the PPUC authorized PGE to increase its gas cost rate to $2.75 per thousand cubic feet effective December 1, 1995. This change in gas rates on account of purchased gas costs is designed to produce a $9.6 million increase in annual revenue. The changes in gas rates on account of purchased gas costs have no effect on PGE's earnings since the changes in revenue are offset by corresponding changes in the cost of gas. Quarterly Gas Cost Adjustment. Effective September 14, 1995, the PPUC adopted regulations that provide for the quarterly adjustment of the annual purchased gas cost rate of larger gas distribution companies, including PGE. Such adjustments are allowed when the actual purchased gas costs vary from the estimated costs reflected in the respective company's tariffs by 2% or more. Except for reducing the amount of any over or undercollections of gas costs, these regulations will not have any material effect on PGE's financial position or results of operations, and PGE will still be required to file an annual -18- purchased gas cost rate with such regulations. As of March 1, 1996, no such quarterly gas cost adjustments had been made to PGE's tariffs. Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to recovery through the annual PGC rate filings made with the PPUC by PGE and other larger local gas distribution companies. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs are subject to full recovery by local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Code. The PGC Order further stated that all such filings would be evaluated on a case-by-case basis. PGE was billed a total of $1.3 million of Gas Transition Costs by its interstate pipelines. Of this amount, $858,000 was recovered by PGE over a twelve-month period ended January 31, 1995, through an increase in its PGC rate, $252,000 are being recovered by PGE in its annual PGC rate that the PPUC has approved effective December 1, 1995, and the recovery of the remaining $217,000 will be sought by PGE in its PGC rate that is effective December 1, 1996. By Order of the PPUC entered August 26, 1994, PGE began recovering the Non- Gas Transition Costs that it estimates it will ultimately be billed pursuant to FERC Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $9.6 million of Non-Gas Transition Costs will be billed to PGE, generally over a four-year period extending through the fourth quarter of 1997, of which $6.1 million had been billed to PGE and $4.4 million had been recovered from its customers as of December 31, 1995. PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed to it and the amounts remaining to be recovered from its customers. Effects of Inflation. When utility property reaches the end of its useful life and must be replaced, PGE 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 PGE's rate base, and PGE 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 Sale of Water Utility Operations On February 16, 1996, PGE sold its regulated water operations and certain related assets to Pennsylvania-American for approximately $413.5 million, consisting of $266.4 million in cash and the assumption of $147.1 million of PGE's liabilities, including $141.1 million of its long-term debt, subject to certain adjustments. -19- PGE is using the $209.1 million of cash proceeds from the sale, after the payment of an estimated $56.7 million of federal and state income taxes, to retire debt, to repurchase stock and for working capital purposes. In this regard, PGE repurchased 2,297,297 shares of its common stock from PEI for an aggregate consideration of $85.0 million, repaid its $50.0 million term loan due 1996 and repaid all of its outstanding bank borrowings on February 16, 1996. Additionally, PGE temporarily invested $67.0 million of the proceeds from the sale pending the use of such funds for (i) repayment on March 8, 1996, of PGE's $30.0 million principal amount 10.125% promissory note (the "10.125% Promissory Note") which was issued to PEI as a common stock dividend on February 16, 1996, (proceeds from the repayment of the 10.125% Promissory Note will be used by PEI for the defeasance of the $30.0 million principal amount of PEI's 10.125% Senior Notes on June 17, 1996), (ii) the repurchase of an estimated 225,000 shares of PGE's 9% cumulative preferred stock in April, 1996, for an estimated aggregate consideration of $25.0 million including related expenses, (iii) the repurchase of an estimated 80,000 shares of PGE's 4.10% cumulative preferred stock in April, 1996, for an estimated aggregate consideration of $4.2 million including related expenses and (iv) for other working capital purposes. Because the repurchases of PGE's 9% and 4.10% cumulative preferred stock will involve voluntary sales by the holders of the respective securities, the number and cost of the shares actually purchased may vary from that estimated depending on market conditions at the time of the repurchases. With the repayment of its term loan and all its bank borrowings on February 16, 1996, and the availability of the cash proceeds from the sale of its regulated water operations that have been temporarily invested, PGE terminated its $60.0 million bank credit agreement and one additional bank line of credit under which $3.0 million was available for borrowing by PGE. PGE has retained and currently has four bank lines of credit with an aggregate borrowing capacity of $17.5 million (See "-Liquidity"), which is deemed adequate for its immediate needs. However, PGE plans to arrange additional bank lines of credit as the proceeds from the sale of its water utility operations are fully utilized and as it requires further borrowing capacity. Liquidity The primary capital needs of PGE are the funding of its construction program and the seasonal funding of its gas purchases and increases in customer accounts receivable. PGE's revenues are highly seasonal and weather-sensitive, with approximately 75% of its revenues normally being realized in the first and fourth quarters of the calendar year when the temperatures in its service area are the coldest. The cash flow from PGE's operations is generally sufficient to fund a portion of its construction expenditures. However, to the extent external financing is required, it is the practice of PGE to use bank borrowings to fund such expenditures, pending the periodic issuance of stock and long-term debt. Bank borrowings are also used by PGE for the seasonal funding of its gas purchases and increases in customer accounts receivable. In order to so finance construction expenditures and to meet its seasonal borrowing requirements, PGE has made arrangements for a total of $17.5 million of unsecured revolving bank credit and plans to arrange additional bank lines of credit as its needs require (See "-Sale of Water Utility Operations"). Specifically, PGE currently has four bank lines of credit with an aggregate borrowing capacity of $17.5 million which provide for borrowings at interest rates generally less than prime. Borrowings outstanding under these bank lines of credit are due and payable at various dates during 1996, the earliest of -20- which is March 31, 1996. As of March 1, 1996, PGE had no borrowings outstanding under these bank lines of credit. -21- PGE believes that it will be able to raise in a timely manner such funds as are required for its future construction expenditures, refinancings and other working capital requirements. Long-Term Debt and Capital Stock Financings PGE 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, the 10.125% Promissory Note and indebtedness that was assumed by Pennsylvania-American in connection with its purchase of PGE's water utility operations, consummated by PGE since the beginning of 1994. On May 31, 1994, PGE issued 500,000 shares of its common stock to PEI for aggregate net proceeds of $20.0 million. PGE used a portion of the proceeds it so received to redeem $15.0 million of its 9.50% Cumulative Preferred Stock and to fund the $534,375 premium in connection with such redemption. The remaining $4.5 million of proceeds were used by PGE to repay a portion of its bank borrowings and for working capital purposes. On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the "Customer Plan") which provided the residential customers of PGE with a method of purchasing newly-issued shares of PEI's common stock at a 5% discount from the market price. The proceeds from the issuance of shares through the Customer Plan were used by PEI to purchase PGE common stock. PGE realized $2.4 million and $1.7 million from the issuance of common stock to PEI in connection with the Customer Plan during 1995 and 1994, respectively. Effective May 9, 1995, PEI suspended the Customer Plan because of the significant reduction in PEI's and PGE's capital requirements resulting from the sale of PGE's water utility operations to Pennsylvania-American. Through PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP"), holders of shares of PEI's common stock may reinvest cash dividends and/or make cash investments in common stock of PEI. The DRP was amended on May 5, 1994, to provide PEI's shareholders with a method of reinvesting cash dividends and making cash investments to purchase newly-issued shares of PEI's common stock at a 5% discount from the market price. Prior to such amendment, cash dividends were reinvested at 100% of the market price in newly-issued shares and cash investments were used to purchase shares of PEI's common stock on the open market. PEI uses the proceeds from the DRP to purchase PGE common stock. During 1995, 1994 and 1993, PGE realized $3.3 million, $1.8 million and $465,000, respectively, from the issuance of common stock to PEI in connection with the DRP. Effective May 9, 1995, PEI suspended the cash investment feature of the DRP and the 5% discount from the market price on the reinvestment of dividends under the DRP because of the significant reduction in PEI's and PGE's capital requirements resulting from the sale of PGE's water utility operations to Pennsylvania-American. On October 12, 1995, PGE borrowed $50.0 million under a term loan agreement. The proceeds from the term loan, along with other funds provided by PGE, were utilized on October 13, 1995, to redeem the $50.0 million principal amount of PGE's 9.57% Series First Mortgage Bonds due September 1, 1996, in connection with the then-pending sale of PGE's water utility operations to Pennsylvania- American. -22- Construction Expenditures and Related Financings Expenditures for the construction of utility plant totaled $21.1 million, $19.6 million and $15.1 million in 1995, 1994 and 1993, respectively. Such expenditures were financed with internally-generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. PGE currently estimates that its capital expenditures will total $28.9 million, $24.8 million and $25.3 million, respectively, for 1996, 1997 and 1998. It is anticipated that such expenditures will be financed with internally generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. Current Maturities of Long-Term Debt and Preferred Stock As of December 31, 1995, $115.8 million of PGE's long-term debt and preferred stock was required to be repaid within twelve months. The entire $115.8 million of PGE's long-term debt, which consisted of borrowings of $60.0 million under its revolving bank credit agreement, $5.8 million under three additional bank lines of credit and $50.0 under its term loan, had been repaid by February 16, 1996, primarily with proceeds from the sale of PGE's water utility operations (See "Sale of Water Utility Operations"). Forward-Looking Statements Certain statements made above relating to plans, conditions, objectives and economic performance go beyond historical information and may provide an indication of future results. To that extent, they are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and each is subject to factors that could cause actual results to differ from those in the forward-looking statement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of PGE and the report of independent public accountants thereon are presented on pages 23 through 47 of this Form 10-K. -23- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To PG Energy Inc.: We have audited the accompanying balance sheets and statements of capitalization of PG Energy Inc. ("PGE"), formerly known as Pennsylvania Gas and Water Company (a Pennsylvania corporation and a wholly-owned subsidiary of Pennsylvania Enterprises, Inc.) as of December 31, 1995 and 1994, 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, 1995. These financial statements are the responsibility of PGE'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 PG Energy Inc. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying Accounts for the three-year period ended December 31, 1995 (see index of financial statements) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subject to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, N.Y. February 23, 1996 -24- PG ENERGY INC. BALANCE SHEETS December 31, 1995* 1994* [CAPTION] (Thousands of Dollars) ASSETS [S] [C] [C] UTILITY PLANT: At original cost, less acquisition adjustments of $386,000 $295,895 $284,080 Accumulated depreciation (76,882) (74,408) 219,013 209,672 OTHER PROPERTY AND INVESTMENTS 5,089 2,872 CURRENT ASSETS: Cash 328 304 Accounts receivable - Customers 18,189 15,676 Others 815 1,474 Reserve for uncollectible accounts (781) (921) Accrued utility revenues 10,319 9,004 Materials and supplies, at average cost 2,609 2,743 Gas held by suppliers, at average cost 15,140 20,025 Natural gas transition costs collectible 4,612 4,708 Deferred cost of gas and supplier refunds, net - 3,767 Prepaid expenses and other 3,281 1,470 54,512 58,250 DEFERRED CHARGES: Regulatory assets Deferred taxes collectible 30,015 31,696 Natural gas transition costs collectible 497 4,099 Other 2,516 3,131 Unamortized debt expense 1,340 1,867 Other - 3,552 34,368 44,345 NET ASSETS OF DISCONTINUED OPERATIONS 204,250 203,196 TOTAL ASSETS $517,232 $518,335 * See Note 2 regarding discontinued operations and restatement of financial statements. The accompanying notes are an integral part of the financial statements. -25- PG ENERGY INC. BALANCE SHEETS [CAPTION] December 31, 1995* 1994* (Thousands of Dollars) CAPITALIZATION AND LIABILITIES [S] [C] [C] CAPITALIZATION (see accompanying statements): Common shareholder's investment (Notes 5 and 8) $208,356 $216,032 Preferred stock of PGE (Note 6) - Not subject to mandatory redemption, net 33,615 33,615 Subject to mandatory redemption 1,680 1,760 Long-term debt (Note 7) 55,000 170,825 298,651 422,232 CURRENT LIABILITIES: Current portion of long-term debt and preferred stock subject to mandatory redemption (Notes 6, 7 and 9) 115,881 3,290 Note payable (Note 9) 10,000 - Accounts payable - Suppliers 17,781 16,762 Affiliates, net 826 788 Deferred cost of gas and supplier refunds, net 434 - Accrued general business and realty taxes 1,542 3,381 Accrued income taxes 516 3,185 Accrued interest 2,062 2,713 Accrued natural gas transition costs (Note 3) 2,278 2,356 Other 3,162 2,395 154,482 34,870 DEFERRED CREDITS: Deferred income taxes 48,848 46,627 Accrued natural gas transition costs (Note 3) 1,144 3,250 Unamortized investment tax credits 4,938 5,110 Operating reserves 3,709 2,383 Other 5,460 3,863 64,099 61,233 COMMITMENTS AND CONTINGENCIES (Notes 11 and 12) TOTAL CAPITALIZATION AND LIABILITIES $517,232 $518,335 * See Note 2 regarding discontinued operations and restatement of financial statements. The accompanying notes are an integral part of the financial statements. -26- PG ENERGY INC. STATEMENTS OF INCOME
Year Ended December 31, 1995* 1994* 1993* (Thousands of Dollars) OPERATING REVENUES $ 152,756 $ 167,992 $ 153,325 Cost of gas 84,372 98,653 86,557 OPERATING MARGIN 68,384 69,339 66,768 OTHER OPERATING EXPENSES: Operation 22,438 22,652 21,797 Maintenance 4,967 4,436 3,695 Depreciation 6,971 6,667 6,388 Income taxes 5,168 5,649 6,041 Taxes other than income taxes 9,918 10,807 10,055 Total other operating expenses 49,462 50,211 47,976 OPERATING INCOME 18,922 19,128 18,792 OTHER INCOME (DEDUCTIONS), NET (Note 4) 301 72 (585) INCOME BEFORE INTEREST CHARGES 19,223 19,200 18,207 INTEREST CHARGES: Interest on long-term debt 9,304 8,914 8,615 Other interest 1,543 1,005 1,247 Allowance for borrowed funds used during construction (94) (21) (47) Total interest charges 10,753 9,898 9,815 INCOME FROM CONTINUING OPERATIONS 8,470 9,302 8,392 DISCONTINUED OPERATIONS (Note 2): Income from discontinued operations 2,127 10,504 7,909 Estimated loss on disposal of discontinued operations, net of anticipated income during the phase-out period of $7,409,000 (net of related income taxes of $4,800,000) (5,961) - - Income (loss) with respect to discontinued operations (3,834) 10,504 7,909 NET INCOME 4,636 19,806 16,301 DIVIDENDS ON PREFERRED STOCK 2,763 4,639 6,462 EARNINGS APPLICABLE TO COMMON STOCK $ 1,873 $ 15,167 $ 9,839 COMMON STOCK: Earnings (loss) per share of common stock: Continuing operations $ 1.02 $ .90 $ .46 Discontinued operations (.69) 2.02 1.90 Income before premium on redemption of preferred stock .33 2.92 2.36 Premium on redemption of preferred stock - (.19) - Earnings per share of common stock $ .33 $ 2.73 $ 2.36 -27-
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,569,765 5,189,108 4,176,087
* See Note 2 regarding discontinued operations and restatement of financial statements. The accompanying notes are an integral part of the financial statements. -28- PG ENERGY INC. STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995* 1994* 1993* (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Income from continuing operations $ 8,470 $ 9,302 $ 8,392 Effects of noncash charges to income - Depreciation 7,018 6,693 6,413 Deferred income taxes, net (265) 725 (2,492) Provisions for self insurance 2,652 1,030 1,510 Other, net 5,190 2,755 2,185 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and accrued utility revenues (3,309) 1,546 (1,495) Gas held by suppliers 4,885 6,625 (5,038) Accounts payable 839 (5,609) (515) Deferred cost of gas and supplier refunds, net 5,715 5,784 (13,307) Other current assets and liabilities, net (6,622) (658) 1,293 Other operating items, net 2,675 (4,020) (3,988) Net cash provided (used) by continuing operations 27,248 24,173 (7,042) Net cash provided (used) by discontinued operations 3,764 552 (837) Net cash provided (used) by operating activities 31,012 24,725 (7,879) CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (20,615) (16,960) (14,011) Other, net (4,934) 1,098 201 Net cash used for investing activities (25,549) (15,862) (13,810) CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock 5,720 23,439 32,366 Redemption of preferred stock (80) (30,080) (10,080) Dividends on common and preferred stock (18,032) (14,244) (18,398) Issuance of long-term debt 50,000 30,000 19,000 Repayment of long-term debt (53,535) (31,055) (30,678) Repayment of note payable to parent - (3,680) - Net increase in bank borrowings 10,519 15,370 32,247 Other, net (31) (1,023) (624) Net cash provided (used) for financing activities (5,439) (11,273) 23,833 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24 (2,410) 2,144 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 304 2,714 570 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 328 $ 304 $ 2,714 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) $ 23,802 $ 21,001 $ 21,092 Income taxes $ 8,694 $ 7,353 $ 6,790 * See Note 2 regarding discontinued operations and restatement of financial statements.
-29- The accompanying notes are an integral part of the financial statements. -30- PG ENERGY INC. STATEMENTS OF CAPITALIZATION
December 31, 1995* 1994* (Thousands of Dollars) COMMON SHAREHOLDER'S INVESTMENT (Notes 5 and 8): Common stock, no par value (stated value $10 per share) Authorized - 15,000,000 shares Outstanding - 5,602,480 shares and 5,456,665 shares, respectively $ 56,025 $ 54,567 Additional paid-in capital 94,463 90,201 Retained earnings 57,868 71,264 Total common shareholders' investment 208,356 69.8% 216,032 51.2% PREFERRED STOCK of PGE, par value $100 per share Authorized - 997,500 shares (Note 6): 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 11.2% 33,615 8.0% Subject to mandatory redemption - 5.75% cumulative preferred, 17,600 and 18,400 shares outstanding, respectively 1,760 1,840 Less current redemption requirements (80) (80) Total preferred stock subject to mandatory redemption 1,680 0.6% 1,760 0.4% LONG-TERM DEBT (Note 7): First mortgage bonds 55,000 108,535 Notes 115,801 65,500 Less current maturities and sinking fund requirements (115,801) (3,210) Total long-term debt 55,000 18.4% 170,825 40.4% TOTAL CAPITALIZATION $ 298,651 100.0% $ 422,232 100.0% * See Note 2 regarding discontinued operations and restatement of financial statements. The accompanying notes are an integral part of the financial statements. -31-
PG ENERGY INC. STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 [CAPTION] Additional Common Paid-In Retained Stock Capital Earnings Total (Thousands of Dollars) [S] [C] [C] [C] [C] 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 6) - - (6,462) (6,462) Common stock ($2.8225 per share) - - (11,936) (11,936) Balance at December 31, 1993 48,687 72,642 66,682 188,011 Net income for 1994 - - 19,806 19,806 Issuance of common stock 5,880 17,559 - 23,439 Premium on redemption of preferred stock - - (980) (980) Dividends on: Preferred stock (Note 6) - - (4,639) (4,639) Common stock ($1.81 per share) - - (9,605) (9,605) Balance at December 31, 1994 54,567 90,201 71,264 216,032 Net income for 1995 - - 4,636 4,636 Issuance of common stock 1,458 4,262 - 5,720 Dividends on: Preferred stock (Note 6) - - (2,763) (2,763) Common stock ($2.7425 per share) - - (15,269) (15,269) Balance at December 31, 1995 $56,025 $ 94,463 $ 57,868 $208,356 The accompanying notes are an integral part of the financial statements. -32- PG ENERGY INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business. PG Energy Inc. ("PGE"), formerly known as Pennsylvania Gas and Water Company, 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. PGE distributes natural gas to a ten-county area in northeastern Pennsylvania, a territory that includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and Williamsport. The financial statements of PGE have been prepared in accordance with generally accepted accounting principles, including the provisions of Financial Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of Certain Types of Regulation," which give recognition to the rate and accounting practices of regulatory agencies such as the PPUC. Use of Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors which are difficult to predict and are beyond the control of PEI. Therefore, actual amounts could differ from these estimates. Utility Plant and Depreciation. Utility plant is stated at cost, which represents the original cost of construction, including payroll, administrative and general costs, and an allowance for funds used during construction. 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 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 8% in 1995, 7% in 1994 and 8% in 1993. PGE provides for depreciation on a straight-line basis. Exclusive of transportation and work equipment, the annual provision for depreciation, as related to the average depreciable original cost of utility plant, was 2.75% in 1995, 2.77% in 1994 and 2.81% in 1993, respectively. 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. PGE bills its customers monthly based on estimated or actual meter readings on cycles that extend throughout the month. 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. -33- PGE generally passes on to its customers increases or decreases in gas costs from those reflected in its tariff charges. In accordance with this procedure, PGE defers any current under or over-recoveries of gas costs and collects or refunds such amounts in subsequent periods. Deferred Charges (Regulatory Assets). PGE 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. These amounts relate to previously-issued orders of the PPUC and are of a nature which, in the opinion of PEI, will be recoverable in future rates, based on such rate orders. In addition to deferred taxes collectible, which represent the probable future rate recovery of the previously unrecorded deferred taxes primarily relating to certain temporary differences in the basis of utility plant not previously recorded because of the regulatory rate practices of the PPUC, and natural gas transition costs collectible, the following deferred charges are included as "Other" regulatory assets: [CAPTION] 1995 1994 [S] [C] [C] Early retirement plan charges $ 710 $ 756 Low income usage reduction program 429 441 Computer software costs 415 1,006 Corrosion control costs 341 489 Customer assistance program 109 5 Other 512 434 Total $ 2,516 $ 3,131 PGE also records, as deferred charges, the direct financing costs incurred in connection with the issuance of long-term debt and redeemable preferred stock and equitably amortizes such amounts over the life of such securities. Cash and Cash Equivalents. For the purposes of the statements of cash flows, PGE 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. -34- Income Taxes. PGE provides for deferred taxes in accordance with the provisions of FASB Statement 109. The components of PGE's net deferred income tax liability relative to continuing operations as of December 31, 1995 and 1994, are shown below: [CAPTION] 1995 1994 (Thousands of Dollars) [S] [C] [C] Utility plant basis differences $51,822 $49,638 FERC Order 636 transition costs 700 1,371 Alternative minimum tax (1,947) (2,213) Operating reserves (1,300) (1,020) Other (427) (1,149) Net deferred income tax liability $48,848 $46,627 The provision for income taxes relative to continuing operations consists of the following components: [CAPTION] 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Included in operating expenses: Currently payable - Federal $ 4,457 $ 3,013 $ 5,641 State 1,169 1,128 2,021 Total currently payable 5,626 4,141 7,662 Deferred, net - Federal 198 1,785 (515) State (463) (105) (934) Total deferred, net (265) 1,680 (1,449) Amortization of investment tax credits (193) (172) (172) Total included in operating expenses 5,168 5,649 6,041 Included in other income, net: Currently payable - Federal 135 213 (44) State 43 85 (28) Total currently payable 178 298 (72) Deferred, net - Federal - (5) (6) State - - - Total deferred, net - (5) (6) Total included in other income, net 178 293 (78) Total provision for income taxes $ 5,346 $ 5,942 $ 5,963 -35- The components of deferred income taxes relative to continuing operations, which are recorded consistent with the treatment allowed by the PPUC for ratemaking purposes, are as follows: [CAPTION] 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Excess of tax depreciation over depreciation for accounting purposes $ 1,587 $ 1,197 $ 1,023 FERC Order 636 transition costs (670) 1,371 - Take-or-pay costs, net (281) (652) (1,126) Other, net (901) (241) (1,352) Total deferred taxes, net $ (265) $ 1,675 $(1,455) Included in: Operating expenses $ (265) $ 1,680 $(1,449) Other income, net - (5) (6) Total deferred taxes, net $ (265) $ 1,675 $(1,455) The total provision for income taxes relative to continuing operations 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] 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Income before income taxes $13,816 $15,293 $14,428 Tax expense at statutory federal income tax rate $ 4,836 $ 5,353 $ 5,050 Increases (reductions) in taxes resulting from - State income taxes, net of federal income tax benefit 487 879 878 Amortization of investment tax credits (193) (172) (172) Other, net 216 (118) 207 Total provision for income taxes $ 5,346 $ 5,942 $ 5,963 Long Lived Assets. In March 1995, FASB Statement 121, "Accounting for the Impairment of Long-Lived Assets", was issued. The provisions of this statement, which are effective for fiscal years beginning after September 15, 1995, require that long-lived assets, identifiable intangibles, capital leases and goodwill be reviewed for impairment whenever events occur or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In addition, FASB Statement 121 requires that regulatory assets meet the recovery criteria of FASB Statement 71, "Accounting for Effects of Certain Types of Regulation", on an ongoing basis in order to avoid a writedown. The implementation of FASB Statement 121 in 1996 is not expected to have any significant impact on PGE since the carrying amount of all assets, including regulatory assets, is considered recoverable. -36- (2) DISCONTINUED OPERATIONS On April 26, 1995, PEI and PGE signed a definitive agreement (the "Agreement") with American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American, providing for the sale to Pennsylvania-American of substantially all of the assets, properties and rights of PGE's water utility operations. Under the terms of the Agreement, Pennsylvania-American paid approximately $413.5 million consisting of $266.4 million in cash and the assumption of $147.1 million of PGE's liabilities, including $141.1 million of its long-term debt, to PGE on the February 16, 1996, closing date for the transaction. This price is subject to certain post-closing adjustments. PGE continued to operate the water utility business until the closing date. The sale price reflects a $6.5 million premium over the book value of the assets sold. However, after transaction costs and the net effect of other items, principally the write-off of certain deferred regulatory assets and deferred credits and the impact of pension and other postretirement benefit expenses relative to the early retirement plan (see Note 10 of the Notes to Financial Statements), the sale resulted in an estimated after tax loss of $6.0 million, net of the expected income from the water operations during the phase- out period (which for financial reporting purposes was April 1, 1995, through February 15, 1996). The sale involved a gain for income tax purposes, primarily because of the accelerated depreciation that had been claimed by PGE with respect to the water utility plant that was sold. It is estimated that the income taxes payable on the sale, for which deferred income taxes had previously been provided, will be approximately $56.7 million. The net cash proceeds from the sale of approximately $209.1 million, net of the estimated $56.7 million payable for income taxes, are being used by PEI and PGE to retire debt, to repurchase stock and for working capital for their continuing operations. With the sale of PGE's water utility operations, the principal assets of PGE consist of its gas utility operations and approximately 46,000 acres of land. The accompanying financial statements reflect PGE's water utility operations as "discontinued operations" effective March 31, 1995. Interest charges relating to indebtedness of PGE have been allocated to the discontinued operations based on the relationship of the gross water utility plant that was sold to the total of PGE's gross gas and water utility plant. This is the same method as was utilized by PGE and the PPUC in establishing the revenue requirements of both PGE's gas and water utility operations. None of the dividends on PGE's preferred stock nor any of PEI's interest expense has been allocated to the discontinued operations. -37- Selected financial information for the discontinued operations as of December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994 and 1993 is set forth below: Net Assets of Discontinued Operations [CAPTION] As of December 31, 1995 1994 (Thousands of Dollars) [S] [C] [C] Net utility plant $ 368,742 $ 359,399 Current assets (primarily accounts receivable and accrued revenues) 12,756 12,141 Deferred charges and other assets 25,752 31,103 Total assets being acquired by Pennsylvania-American 407,250 402,643 Liabilities being assumed by Pennsylvania-American Long-term debt 141,097 141,420 Other 5,983 13,168 147,080 154,588 Net assets being acquired by Pennsylvania-American 260,170 248,055 Estimated liability for income taxes on sale of discontinued operations (56,710) (55,542) Estimated net income of discontinued operations during the remainder of the phase-out period 790 - Other net assets of discontinued operations (written off as of March 31, 1995) - 10,683 Total net assets of discontinued operations $ 204,250 $ 203,196 Income From Discontinued Operations [CAPTION] Years ended December 31, 1995* 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Operating revenues $ 15,640 $ 66,731 $ 53,363 Operating expenses, excluding income taxes Depreciation 1,946 7,672 5,911 Other operating expenses 6,929 29,005 27,140 8,875 36,677 33,051 Operating income before income taxes 6,765 30,054 20,312 Income taxes 1,403 6,850 2,948 Operating income 5,362 23,204 17,364 Other income 9 49 71 Allocated interest charges (3,244) (12,749) (9,526) Income from discontinued operations $ 2,127 $ 10,504 $ 7,909 * Reflects amounts only through March 31, 1995, the effective date of the discontinuance of PGE's water utility operations for financial statement purposes. -38- Net Cash Provided (Used) by Discontinued Operations [CAPTION] Years ended December 31, 1995* 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Income from discontinued operations $ 2,127 $ 10,504 $ 7,909 Noncash charges (credits) to income: Depreciation 1,946 7,672 5,911 Deferred treatment plant costs, net 145 581 (3,560) Deferred income taxes 447 5,146 4,170 Deferred water utility billings - (5,574) (582) Changes in working capital, exclusive of long-term debt 1,648 353 (2,041) Additions to utility plant (2,276) (20,980) (32,515) Utilization of restricted funds - 9,753 15,868 Net increase (decrease) in long-term debt 1,010 (6,834) 1,640 Other, net (1,283) (69) 2,363 Net cash provided (used) for discontinued operations $ 3,764 $ 552 $ (837) * Reflects amounts only through March 31, 1995, the effective date of the discontinuance of PGE's water utility operations for financial statement purposes. (3) RATE MATTERS 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 PGE, be adjusted on an annual basis, and on an interim basis when circumstances dictate, to reflect changes in their purchased gas costs, the PPUC ordered PGE to make the following changes during 1995, 1994 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, 1995 $2.42 $2.75 $ 9,600,000 May 15, 1995 3.68 2.42 (8,200,000) December 1, 1994 3.74 3.68 (1,800,000) December 1, 1993 2.79 3.74 28,800,000 The changes in gas rates on account of purchased gas costs have no effect on PGE's earnings since the change in revenue is offset by a corresponding change in the cost of gas. Quarterly Gas Cost Adjustment. Effective September 14, 1995, the PPUC adopted regulations that provide for the quarterly adjustment of the annual purchased gas cost rate of larger gas distribution companies, including PGE. Such adjustments are allowed when the actual purchased gas costs vary from the estimated costs reflected in the respective company's tariffs by 2% or more. Except for reducing the amount of any over or undercollections of gas costs, these regulations will not have any material effect on PGE's financial position or results of operations, and PGE will still be required to file an annual purchased gas cost rate. As of March 1, 1996, no such quarterly gas cost adjustments had been made to PGE's tariffs. -39- Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to recovery through the annual PGC rate filing. PGE was billed a total of $1.3 million of Gas Transition Costs by its interstate pipelines. Of this amount, $858,000 was recovered by PGE over a twelve-month period ended January 31, 1995, through an increase in its PGC rate, $252,000 are being recovered by PGE in its annual PGC rate that the PPUC approved effective December 1, 1995, and the recovery of the remaining $217,000 will be sought by PGE in its PGC rate that is effective December 1, 1996. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs are subject to full recovery by local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Pennsylvania Public Utility Code. By Order of the PPUC entered August 26, 1994, PGE began recovering the Non-Gas Transition Costs that it estimates it will ultimately be billed pursuant to FERC Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $9.6 million of Non-Gas Transition Costs will be billed to PGE, generally over a four-year period extending through the fourth quarter of 1997, of which $6.1 million had been billed to PGE and $4.4 million had been recovered from its customers as of December 31, 1995. PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed to it and the amounts remaining to be recovered from its customers. (4) OTHER INCOME (DEDUCTIONS), NET Other income (deductions), net was comprised of the following elements: [CAPTION] 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Write-off of expired advances relating to income taxes, net of related income taxes $ 227 $ - $ - Net interest income (expense) with respect to proceeds from the issuance of debt held in a construction fund 30 (91) (330) Gain on sale of investment in joint venture, net of related income taxes - 268 - Gain on sale of land and other property, net of related income taxes - 165 20 Premium on retirement/defeasance of debt (7) (40) (81) Amortization of preferred stock issuance costs, net of related income tax benefits (1) (227) (126) Other 52 (3) (68) Total $ 301 $ 72 $ (585) -40- (5) COMMON STOCK Since January 1, 1993, PGE has issued the following amounts of common stock to PEI, its parent company, in addition to shares issued in connection with PEI's Dividend Reinvestment and Stock Purchase Plan and Customer Stock Purchase Plan: [CAPTION] Issuance Price Date Issued Number of Shares Per Share* Aggregate [S] [C] [C] [C] October 27, 1993 834,000 $ 38.25 $31.9 million May 31, 1994 500,000 $ 40.00 $20.0 Total 1,334,000 $51.9 million * Approximately equal to the book value of PGE's common stock at the date of issuance. The proceeds from the shares issued on October 27, 1993, were used to repay bank borrowings which had been incurred primarily to finance construction expenditures. The proceeds from the shares issued on May 31, 1994, were used by PGE to redeem $15.0 million of its 9.50% 1988 series cumulative preferred stock, to fund the $534,375 premium in connection with such redemption, to repay a portion of its bank borrowings and for working capital purposes. On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the "Customer Plan") which provides the residential customers of PGE with a method of purchasing newly-issued shares of PEI common stock at a 5% discount from the market price. PEI uses proceeds from the issuance of shares through the Customer Plan to purchase common stock of PGE. PGE realized $2.4 million and $1.7 million from the issuance of common stock to PEI in connection with the Customer Plan during 1995 and 1994, respectively. Effective May 9, 1995, the Customer Plan was suspended because of the significant reduction in PEI's and PGE's capital requirements resulting from the sale of PGE's water utility operations to Pennsylvania-American. Through PEI's Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders of shares of PEI common stock may reinvest cash dividends and/or make cash investments in the common stock of PEI. The DRP was amended on May 5, 1994, to provide PEI's shareholders with a method of reinvesting cash dividends and making cash investments to purchase newly-issued shares of PEI's common stock at a 5% discount from the market price. Prior to such amendment, cash dividends were reinvested at 100% of the market price in newly-issued shares and cash investments were used to purchase shares of PEI common stock on the open market. PEI uses the proceeds from the DRP to purchase common stock of PGE. During 1995, 1994 and 1993, PGE realized $3.3 million, $1.8 million and $465,000, respectively, from the issuance of common stock to PEI in connection with the DRP. Effective May 9, 1995, the cash investment feature of the DRP and the 5% discount from the market price on the reinvestment of dividends under the DRP were suspended because of the significant reduction in PEI's and PGE's capital requirements resulting from the sale of PGE's water utility operations to Pennsylvania-American. (6) PREFERRED STOCK Preferred Stock Subject to Mandatory Redemption On December 23, 1993, PGE redeemed 100,000 shares of its 9.50% 1988 series cumulative preferred stock at a price of $103.5625 per share (plus accrued -41- dividends to the redemption date), which included a voluntary redemption premium of $3.5625 per share ($356,250 in the aggregate). On May 31, 1994, PGE redeemed the remaining 150,000 outstanding shares of its 9.50% 1988 series cumulative preferred stock, $100 par value, at a price of $103.5625 per share, which included a voluntary redemption premium of $3.5625 per share ($534,375 in the aggregate), plus accrued dividends. On December 16, 1994, PGE redeemed all 150,000 shares of its 8.90% cumulative preferred stock at a price of $102.97 per share, which included a voluntary redemption premium of $2.97 per share ($445,500 in the aggregate). The holders of the 5.75% cumulative preferred stock have a noncumulative right each year to tender to PGE 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 PGE 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 PGE in each of the three years in the period ended December 31, 1995, for an aggregate purchase price in each year of $80,000. As of December 31, 1995, the sinking fund requirements relative to PGE's 5.75% cumulative preferred stock (the only series of preferred stock subject to mandatory redemption that was outstanding as of such date) were $80,000 for each of the years 1996 through 2000. At PGE's option, the 5.75% cumulative preferred stock may currently be redeemed at a price of $102.00 per share ($1,795,200 in the aggregate). Preferred Stock Not Subject to Mandatory Redemption On August 18, 1992, PGE 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 PGE prior to September 15, 1997. Thereafter, it is redeemable at the option of PGE, 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 PGE'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 PGE in each of the three years in the period ended December 31, 1995, were as follows: [CAPTION] Series 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] 4.10% $ 410 $ 410 $ 410 5.75% 103 108 113 8.90% - 1,280 1,335 9.00% 2,250 2,250 2,250 9.50% 1988 series - 591 2,354 Total $2,763 $4,639 $6,462 -42- Dividends on all series of PGE'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 PGE. Additionally, PGE may not declare dividends on its common stock if any dividends on shares of preferred stock then outstanding are in default. (7) LONG-TERM DEBT Long-term debt consisted of the following components at December 31, 1995 and 1994: [CAPTION] 1995 1994 (Thousands of Dollars) [S] [C] [C] First mortgage bonds - 8 % Series, due 1997 $ - $ 3,535 8.375% Series, due 2002 30,000 30,000 9.23 % Series, due 1999 10,000 10,000 9.34 % Series, due 2019 15,000 15,000 9.57 % Series, due 1996 - 50,000 55,000 108,535 Notes - Term loan, due 1996 50,000 - Bank borrowings, at weighted average interest rates of 6.62% and 5.28%, respectively (Note 9) 65,801 65,500 115,801 65,500 Less current maturities and sinking fund requirements (115,801) (3,210) Total long-term debt $ 55,000 $ 170,825 On October 12, 1995, PGE borrowed $50.0 million pursuant to a term loan agreement, which matures on November 1, 1996. Proceeds from the loan, along with other funds provided by PGE, were utilized on October 13, 1995, to redeem the $50.0 million principal amount of PGE's 9.57% Series First Mortgage Bonds due September 1, 1996. Maturities and Sinking Fund Requirements. As of December 31, 1995, 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] 1996 $115,801,000 (a) 1997 $ - 1998 $ - 1999 $ 10,000,000 (b) 2000 $ - (a) Includes $65.8 million of bank borrowings outstanding as of December 31, 1995, and PGE's term loan in the principal amount of $50.0 million. Such amounts were repaid by February 16, 1996, primarily with proceeds from the sale of PGE's water operations to Pennsylvania-American. (b) Includes PGE's 9.23% Series First Mortgage Bonds in the principal amount of $10.0 million due September 1, 1999. (8) DIVIDEND RESTRICTIONS The preferred stock provisions of PGE's Restated Articles of Incorporation and certain of the agreements under which PGE has issued long-term debt provide for certain dividend restrictions. As of December 31, 1995, $5,416,000 of the -43- retained earnings of PGE were restricted against the payment of cash dividends on common stock under the most restrictive of these covenants. -44- (9) BANK NOTES PAYABLE As of April 19, 1993, PGE entered into a revolving bank credit agreement, as subsequently amended (the "Credit Agreement") with a group of six banks under the terms of which $60.0 million was available for borrowing by PGE through May 31, 1996. The Credit Agreement was terminated on February 26, 1996, following the sale of PGE's water operations to Pennsylvania-American on February 16, 1996, and repayment of all borrowings outstanding under the Credit Agreement with proceeds from such sale. The interest rate on borrowings under the Credit Agreement was generally less than prime. The Credit Agreement also required the payment of a commitment fee of .195% per annum on the average daily amount of the unused portion of the available funds. PGE currently has four additional bank lines of credit with an aggregate borrowing capacity of $17.5 million which provide for borrowings at interest rates generally less than prime. Borrowings outstanding under two of these bank lines of credit with borrowing capacities of $2.5 million and $5.0 million mature on May 31, 1996, and June 30, 1996, respectively. Borrowings outstanding under the other two bank lines of credit with borrowing capacities of $3.0 million and $7.0 million mature on March 31, 1996, and May 31, 1996, respectively. As of March 1, 1996, PGE had no borrowings outstanding under these additional bank lines of credit. Additionally, PGE had one other bank line of credit outstanding as of December 31, 1995, with a borrowing capacity of $3.0 million, which was terminated following the sale of PGE's water operations. The commitment fees paid by PGE with respect to its revolving bank credit agreements totaled $26,000 in 1995, $97,000 in 1994 and $113,000 in 1993. Because of limitations imposed by the terms of its preferred stock, PGE 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. PGE had $10.0 million due on demand or within one year from issuance outstanding as of December 31, 1995. Information relating to PGE's bank lines of credit and borrowings under those lines of credit is set forth below: [CAPTION] As of December 31, 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Borrowings under lines of credit Short-term $ 10,000 $ - $ 2,000 Long-term 65,801 65,500 47,000 $ 75,801 $ 65,500 $ 49,000 Unused lines of credit Short-term $ - $ - $ 5,000 Long-term 4,699 2,000 13,000 $ 4,699 $ 2,000 $ 18,000 Total lines of credit Prime rate $ - $ - $ 2,000 Other than prime rate 80,500 67,500 65,000 $ 80,500 $ 67,500 $ 67,000 Short-term bank borrowings (a) Maximum amount outstanding $ 10,000 $ 5,692 $ 5,666 Daily average amount outstanding $ 2,581 $ 441 $ 637 Weighted daily average interest rate 6.513% 3.984% 4.046% Weighted average interest rate at year-end 6.334% - 4.208% -45- Range of interest rates 6.290- 3.700- 3.750- 6.660% 6.000% 6.000% (a) PGE had no short-term bank borrowings outstanding as of December 31, 1994. -46- (10) POSTEMPLOYMENT BENEFITS Pension Benefits Substantially all employees of PGE are covered by PEI's trusteed, noncontributory, defined benefit pension plan. Pension benefits are based on years of service and average final salary. PGE'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. Under the terms of the agreement regarding the sale of PGE's water utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American assumed the accumulated benefit obligations relating to employees of PGE who accepted employment with Pennsylvania-American (the "Transferred Employees"). In this regard, plan assets in an amount equal to the actuarial present value of accumulated plan benefits relative to the Transferred Employees will be transferred to the American pension plan. In February, 1996, PGE began terminating additional employees as a result of the sale of its water operations and the transfer of fewer employees to Pennsylvania-American than originally expected. As a result of these actions, PGE recognized an estimated settlement loss of $200,000 ($117,000 net of the related income tax benefit) and curtailment gain of $2.7 million ($1.6 million net of related income taxes) in its determination of the estimated loss on the disposal of water utility operations. In December, 1995, as a result of the agreement to transfer fewer employees to Pennsylvania-American in connection with the sale of PGE's water utility operations than originally expected, PGE offered an Early Retirement Plan ("ERP") to its employees who would be 59 years of age or older and have a minimum of five years of service as of December 31, 1995. Of the 63 eligible employees, 50 elected to accept this offer and retire as of December 31, 1995, resulting in the recording, as of December 31, 1995, of an additional pension liability of $1.6 million reflecting the increased costs associated with the ERP. Such amount was charged to the estimated loss on the disposal of water utility operations. Net pension costs relative to continuing operations, including amounts capitalized, were $353,000, $309,000 and $244,000 in 1995, 1994 and 1993, respectively. The following items were the components of such net pension costs: [CAPTION] 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Present value of benefits earned during the year $ 430 $ 549 $ 470 Interest cost on projected benefit obligations 1,459 1,400 1,321 Return on plan assets (1,502) 535 (1,720) Net amortization and deferral (34) (55) (53) Deferral of investment (loss) gain - (2,120) 226 Net pension cost $ 353 $ 309 $ 244 -47- The funded status of the plan as of December 31, 1995 and 1994, was as follows: [CAPTION] 1995 1994 (Thousands of Dollars) [S] [C] [C] Actuarial present value of the projected benefit obligations: Accumulated benefit obligations Vested $ 29,100 $ 21,592 Nonvested 47 77 Total 29,147 21,669 Provision for future salary increases 7,841 7,565 Projected benefit obligations 36,988 29,234 Market value of plan assets, primarily invested in equities and bonds 34,000 30,457 Plan assets in excess of (less than) projected benefit obligations (2,988) 1,223 Unrecognized net transition asset as of January 1, 1986, being amortized over 20 years (2,155) (2,528) Unrecognized prior service costs 1,507 2,150 Unrecognized net (gain) loss 2,155 (1,644) Accrued pension cost at year-end $ (1,481) $ (799) The assumptions used in determining pension obligations were: [CAPTION] 1995 1994 1993 [S] [C] [C] [C] Discount rate 7.00 % 8.75 % 8.00 % Expected long-term rate of return on plan assets 9.00 % 9.00 % 9.00 % Projected increase in future compensation levels 5.00 % 5.50 % 5.50 % Other Postretirement Benefits In addition to pension benefits, PGE provides certain health care and life insurance benefits for retired employees. Substantially all of PGE's employees may become eligible for those benefits if they reach retirement age while working for PGE. PGE records 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. Under the terms of the agreement regarding the sale of PGE's water utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American assumed the accumulated benefit obligation relating to the Transferred Employees, as well as 45% of PGE's retired employees as of that date. In this regard, plan assets in an amount equal to the actuarial present value of accumulated plan benefits relative to the Transferred Employees and 45% of the retired employees as of February 16, 1996, will be transferred to trusts established by Pennsylvania-American. In February, 1996, PGE began terminating additional employees as a result of the sale of its water operations and the transfer of fewer employees to Pennsylvania-American than originally expected. As a result of the transfer, early retirement and displacement of employees, PGE recognized an estimated settlement and curtailment loss of $385,000 ($225,000 net of the related income tax benefit) as part of the loss on the disposal of its water utility operations. -48- As a result of the ERP offered by PGE to certain of its employees, PGE recorded, as of December 31, 1995, an additional liability of $805,000, ($471,000 net of the related income tax benefit) reflecting the cost of future health care benefits required to be recognized under FASB Statement 88 in conjunction with the ERP. Such amount was charged to the estimated loss on disposal of water utility operations. The following items were the components of the net cost of postretirement benefits other than pensions relative to continuing operations for the years 1995, 1994 and 1993: [CAPTION] 1995 1994 1993 (Thousands of Dollars) [S] [C] [C] [C] Present value of benefits earned during the year $ 127 $ 148 $ 124 Interest cost on accumulated benefit obligation 577 532 532 Return on plan assets (69) (4) - Net amortization and deferral 391 360 339 Net cost of postretirement benefits other than pensions 1,026 1,036 995 Less disbursements for benefits (555) (543) (540) Increase in liability for postretirement benefits other than pensions $ 471 $ 493 $ 455 Reconciliations of the accumulated benefit obligation to the accrued liability for postretirement benefits other than pensions as of December 31, 1995 and 1994, follow: [CAPTION] 1995 1994 (Thousands of Dollars) [S] [C] [C] Accumulated benefit obligation: Retirees $ 6,514 $ 9,021 Fully eligible active employees 850 1,628 Other active employees 1,074 1,305 8,438 11,954 Plan assets at fair value - 839 Accumulated benefit obligation in excess of plan assets 8,438 11,115 Unrecognized transition obligation being amortized over 20 years (5,438) (11,108) Unrecognized net gain (loss) (703) 885 Accrued liability for postretirement benefits other than pensions $ 2,297 $ 892 The assumptions used in determining other postretirement benefit obligations were: [CAPTION] 1995 1994 1993 [S] [C] [C] [C] Discount rate 7.00 % 8.75 % 8.00 % Expected long-term rate of return on plan assets 9.00 % 9.00 % 9.00 % Projected increase in future compensation levels 5.00 % 5.50 % 5.50 % It was also assumed that the per capita cost of covered health care benefits would increase at an annual rate of 9% in 1996 and that this rate would decrease gradually to 5-1/2% for the year 2003 and remain at that level thereafter. The health care cost trend rate assumption had a significant effect on the amounts accrued. To illustrate, increasing the assumed health care cost trend rate by 1 percentage point in each year would increase the transition obligation as of -49- January 1, 1995, by approximately $394,000 and the aggregate of the service and interest cost components of the net cost of postretirement benefits other than pensions for the year 1995 by approximately $50,000. Since PGE has not sought to increase its base gas rates, the $441,000 ($258,000 net of related income taxes), $447,000 ($256,000 net of related income taxes) and $407,000 ($232,000 net of related income taxes) of additional cost incurred in 1995, 1994 and 1993, respectively, as a result of the adoption of the provisions of FASB Statement 106 were expensed without any adjustment being made to its gas rates. Other Postemployment Benefits In December, 1992, FASB Statement 112, "Employers' Accounting for Postemployment Benefits," was issued. The provisions of this statement require the recording of a liability for postemployment benefits (such as disability benefits, including workers' compensation, salary continuation and the continuation of benefits such as health care and life insurance) provided to former or inactive employees, their beneficiaries and covered dependents. PGE consistently recorded liabilities for benefits of this nature prior to the effectiveness of FASB Statement 112, and included liabilities for employees scheduled to be terminated in 1996 as a result of the sale of water operations in its estimate of accrued costs relative to such sale as of December 31, 1995. The provisions of FASB Statement 112, which PGE adopted effective January 1, 1994, did not have a material impact on its financial position or results of operations. (11) CONSTRUCTION EXPENDITURES PGE estimates the cost of its 1996 construction program will be $28.9 million. It is anticipated that such expenditures will be financed with internally generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. (12) 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 PGE to survey its gas distribution system to verify the location and spacing of its gas shut off valves, to add or repair valves where needed and to establish programs for the periodic inspection and maintenance of all such valves and the verification of all gas service line information. On March 31, 1995, the PPUC adopted an Order approving a plan submitted by PGE for complying with the Emergency Order. PGE does not believe that compliance with the terms of such Order will have a material adverse effect on its financial position or results of operations. Environmental Matters PGE, 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 PGE. Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), PGE 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 -50- 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, PGE 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. (13) QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED March 31, June 30, September 30, December 31, 1995 1995 1995 1995 (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 68,237 $ 25,184 $ 12,119 $ 47,216 Operating income 9,500 1,867 (3) 7,558 Income (loss) from continuing operations 6,413 (1,581) (3,520) 4,395 Loss with respect to discontinued operations (3,704) - - (130) Net income (loss) 2,709 (1,581) (3,520) 4,265 Earnings (loss) per share of common stock: (a) Continuing operations 1.16 (.28) (.63) .78 Discontinued operations (.67) - - (.02) Earnings (loss) per share of common stock (a) .49 (.28) (.63) .76 QUARTER ENDED March 31, June 30, September 30, December 31, 1994 1994 1994 1994 (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 80,233 $ 26,568 $ 14,356 $ 46,835 Operating income 10,606 1,881 134 6,395 Income (loss) from continuing operations 6,958 (1,875) (3,435) 2,903 Income from discontinued operations 2,079 2,757 2,915 2,865 Net income (loss) 9,037 882 (520) 5,768 Earnings (loss) per share of common stock: Continuing operations 1.43 (.37) (.64) .53 Discontinued operations .43 .54 .54 .53 Net income (loss) before premium on redemption of preferred stock 1.86 .17 (.10) 1.06 Premium on redemption of preferred stock - (.11) - (.08) Earnings (loss) per share of common stock 1.86 .06 (.10) .98 (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 the financial statements and supplementary data of this report, as a result of PGE's issuance of additional shares of common stock at various dates during the year.
-51- Because of the seasonal nature of PGE's gas heating business, there are substantial variations in operations reported on a quarterly basis. -52- (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 Long-term debt. The fair value of PGE's long-term debt has been estimated based on the quoted market price as of the respective dates for the portion of such debt which is publicly traded and, with respect to the portion of such debt which is not publicly traded, on the estimated borrowing rate as of the respective dates for long-term debt of comparable credit quality with similar terms and maturities. o Preferred stock subject to mandatory redemption. The fair value of PGE's preferred stock subject to mandatory redemption has been estimated based on the market value as of the respective dates for preferred stock of comparable credit quality with similar terms and maturities. The carrying amounts and estimated fair values of PGE's financial instruments at December 31, 1995 and 1994, were as follows: [CAPTION] 1995 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (Thousands of Dollars) [S] [C] [C] [C] [C] Long-term debt (including current portion) $170,801 $ 175,431 $174,035 $ 177,027 Preferred stock subject to mandatory redemption (including current portion) 1,760 1,795 1,840 1,877 PGE 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 PGE's financial position or the results of operations of either PEI or PGE. -53- ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -54- 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 PGE are presented in Item 8 of this Form 10-K. Page Report of Independent Public Accountants . . . . . . . . . . . . 23 Balance Sheets as of December 31, 1995 and 1994. . . . . . . . . 24 Statements of Income for each of the three years in the period ended December 31, 1995 . . . . . . . . . . . . . . . . 26 Statements of Cash Flows for each of the three years in the period ended December 31, 1995 . . . . . . . . . . . . . . . . 27 Statements of Capitalization as of December 31, 1995 and 1994. . 28 Statements of Common Shareholder's Investment for each of the three years in the period ended December 31, 1995. . . . . 29 Notes to Financial Statements. . . . . . . . . . . . . . . . . . 30 2. Financial Statement Schedules The following financial statement schedule for PGE is filed as a part of this Form 10-K. Schedules not included have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Schedule Number Page II Valuation and Qualifying Accounts for the three-year period ended December 31, 1995 . . . . . . . . . . . . . 51 3. Exhibits See "Index to Exhibits" located on page 53 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. -55-
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 1995. (c) Executive Compensation Plans and Arrangements The following listing includes PGE's executive compensation plans and arrangements in effect as of December 31, 1995. Exhibit 10-27 Form of Change in Control Agreement between PEI and certain of its Officers -- filed as Exhibit 10-34 to PGE's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-28 First Amendment to Form of Change in Control Agreement, dated as of May 24, 1995, between PEI and certain of its Officers -- filed as Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No. 0-7812. 10-29 Agreement dated as of March 15, 1991, by and between PEI, PGE and Robert L. Jones -- filed as Exhibit No. 10-38 to PGE's Annual Report on Form 10-K for 1990, File No. 1-3490. 10-30 Employment Agreement effective September 1, 1995, between PEI and Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-7812. 10-31 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. 10-32 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812. 10-33 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. -56- Schedule II -57- 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.
PG ENERGY INC. (Registrant) Date: March 8, 1996 By: /s/ Dean T. Casaday Dean T. Casaday President and Chief Executive Officer (Principal Executive Officer) Date: March 8, 1996 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity Date /s/ Kenneth L. Pollock Chairman of the Board of March 8, 1996 Kenneth L. Pollock Directors /s/ William D. Davis Vice Chairman of the Board March 8, 1996 William D. Davis of Directors /s/ Dean T. Casaday Director, President and March 8, 1996 Dean T. Casaday Chief Executive Officer /s/ Paul R. Freeman Director March 8, 1996 Paul R. Freeman Director March 8, 1996 Robert J. Keating /s/ John D. McCarthy Director March 8, 1996 John D. McCarthy /s/ John D. McCarthy, Jr. Director March 8, 1996 John D. McCarthy, Jr. Director March 8, 1996 Kenneth M. Pollock Director March 8, 1996 Richard A. Rose, Jr. /s/ James A. Ross Director March 8, 1996 James A. Ross /s/ Ronald W. Simms Director March 8, 1996 Ronald W. Simms -58- INDEX TO EXHIBITS Exhibit Number (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: 2-1 Asset Purchase Agreement dated as of April 26, 1995, among PEI, PGE, American Water Works Company, Inc., and Pennsylvania-American Water Company -- filed as Exhibit 2-1 to PGE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-3490. (3) Articles of Incorporation and By Laws: 3-1 Restated Articles of Incorporation -- filed herewith. 3-2 By-Laws of PGE, as amended and restated -- filed herewith. (4) Instruments Defining the Rights of Security Holders, Including Debentures: 4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946, between Scranton-Spring Brook Water Service Company (now PGE) and First Trust of New York, National Association, as Successor Trustee to Morgan Guaranty Trust Company of New York -- filed as Exhibit 2(c) to PGE'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 PGE'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 PGE'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 PGE'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 PGE'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 PGE'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 PGE'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 PGE'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 PGE'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 PGE's Bond Form S-7, Registration No. 2-55419. -59- Exhibit Number 4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed as Exhibit 2(m) to PGE's Bond Form S-7, Registration No. 2-55419. 4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed as Exhibit 2(n) to PGE'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 PGE'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 PGE's Annual Report on Form 10-K for 1989, File No. 1-3490. 4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 -- filed as Exhibit 4-23 to PGE's Annual Report on Form 10-K for 1989, File No. 1-3490. 4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991, -- 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, -- filed as Exhibit 4-1 to PGE'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, -- filed as Exhibit 4-20 to PGE's Bond Form S-2, Registration No. 33-54278. 4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992, -- filed as Exhibit 4-19 to PGE'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, -- filed as Exhibit 4-20 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994, -- filed as Exhibit 4-21 to PGE's Annual Report on Form 10-K for 1994, File No. 1-3490. 4-22 Thirtieth Supplemental Indenture, dated as of December 1, 1995, from PGE to First Trust of New York, National Association, as Successor Trustee to Morgan Guaranty Trust Company of New York -- filed herewith. NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth, Eleventh and Thirteenth Supplemental Indentures merely convey additional properties to the Trustee. -60- Exhibit Number (10) Material Contracts: 10-1 Service Agreement for storage service under Rate Schedule LGA, dated August 6, 1974, between PGE and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-3 to PGE'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 PGE and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-4 to PGE'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 PGE 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 PGE and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-6 to PGE'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 PGE 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 PGE and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-8 to PGE'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 PGE and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-7 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-8 Service Agreement for storage service under Rate Schedule GSS, dated October 1, 1993, by and between PGE and Transcontinental Gas Pipeline Corporation Company -- filed as Exhibit 10-8 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-9 Service Agreement for transportation service under Rate Schedule FTS, dated November 1, 1993, by and between PGE and Columbia Gas Transmission Corporation -- filed as Exhibit 10-9 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-10 Service Agreement for transportation service under Rate Schedule SST, dated November 1, 1993, by and between PGE and Columbia Gas Transmission Corporation -- filed as Exhibit 10-10 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. -61- Exhibit Number 10-11 Service Agreement for storage service under Rate Schedule FSS, dated November 1, 1993, by and between PGE and Columbia Gas Transmission Corporation -- filed as Exhibit 10-11 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-12 Service Agreement for transportation service under Rate Schedule FTS-1, dated November 1, 1993, by and between PGE and Columbia Gulf Transmission Company -- filed as Exhibit 10-12 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-13 Service Agreement for transportation service under Rate Schedule ITS-1, dated November 1, 1993, by and between PGE and Columbia Gulf Transmission Company -- filed as Exhibit 10-13 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-14 Service Agreement for transportation service under Rate Schedule ITS, dated November 1, 1993, by and between PGE and Columbia Gas Transmission Corporation -- filed as Exhibit 10-14 to PGE's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-15 Service Agreement (Contract No. 946) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PGE and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1 to PGE'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 PGE and Tennessee Gas Pipeline Company -- filed as Exhibit 10-2 to PGE'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 PGE and Tennessee Gas Pipeline Company -- filed as Exhibit 10-3 to PGE'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 PGE and Tennessee Gas Pipeline -- filed as Exhibit 10-4 to PGE'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 PGE and Tennessee Gas Pipeline -- filed as Exhibit 10-5 to PGE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-20 Service Agreement for transportation service under Rate Schedule FT, dated April 1, 1995, by and between PGE and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-1 to PGE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-3490. -62- Exhibit Number 10-21 Service Agreement for storage service dated October 13, 1995, by and between PGE and Avoca Natural Gas Storage -- filed as Exhibit 10-1 to PGE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-3490. 10-22 Bond Purchase Agreement, dated September 1, 1989, relating to PGE'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 PGE -- filed as Exhibit 10-33 to PGE's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-23 7% Bond Purchase Agreement, dated November 1, 1994, among the Luzerne County Industrial Development Authority, PGE and Wheat First Butcher Singer, as representative on behalf of itself and Legg Mason Wood Walker Incorporated -- filed as Exhibit 10-28 to PGE's Annual Report on Form 10-K for 1994, File No. 1-3490. 10-24 Amended and Restated Project Facilities Agreement, dated as of November 1, 1994, between PGE and the Luzerne County Industrial Development Authority -- filed as Exhibit 10-29 to PGE's Annual Report on Form 10-K for 1994, File No. 1-3490. 10-25 Credit Agreement, dated as of April 19, 1993, by and among PGE, 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 PGE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 1-3490. 10-26 First Amendment to Credit Agreement and Notes, dated as of December 16, 1994, by and among PGE, 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 10-31 to PGE's Annual Report on Form 10-K for 1994, File No. 1-3490. 10-27 Form of Change in Control Agreement between PEI and certain of its Officers -- filed as Exhibit 10-34 to PGE's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-28 First Amendment to Form of Change in Control Agreement, dated as of May 24, 1995, between PEI and certain of its Officers -- filed as Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No. 0-7812. 10-29 Agreement, dated as of March 15, 1991, by and between PEI, PGE and Robert L. Jones -- filed as Exhibit 10-38 to PGE's Annual Report on Form 10-K for 1990, File No. 1-3490. 10-30 Employment Agreement, effective September 1, 1995, between PEI and Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, File No. 0-7812. -63- Exhibit Number 10-31 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. 10-32 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812. 10-33 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. -64- TABLE OF CONTENTS PART I PAGE Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 10 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 10 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 11 Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . * Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 12 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 22 Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 48 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 . . . . . . . . . . . . . . . . . . . . . . . 49** SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 52 ________________________ * 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 53. 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. PG ENERGY INC. (Registrant) Date: March 8, 1996 By: Dean T. Casaday President and Chief Executive Officer (Principal Executive Officer) Date: March 8, 1996 By: John F. Kell, Jr. Vice President, Financial Services (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 8, 1996 Kenneth L. Pollock Directors Vice Chairman of the Board March 8, 1996 William D. Davis of Directors Director, President and March 8, 1996 Dean T. Casaday Chief Executive Officer Director March 8, 1996 Paul R. Freeman Director March 8, 1996 Robert J. Keating Director March 8, 1996 John D. McCarthy Director March 8, 1996 John D. McCarthy, Jr. Director March 8, 1996 Kenneth M. Pollock Director March 8, 1996 Richard A. Rose, Jr. Director March 8, 1996 James A. Ross Director March 8, 1996 Ronald W. Simms
PG ENERGY INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995 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, 1995 $ 921 $ 1,541 $ - $ 1,681(a) $ 781 Year ended December 31, 1994 $ 811 $ 1,756 $ - $ 1,646(a) $ 921 Year ended December 31, 1993 $ 1,098 $ 1,101 $ - $ 1,388(a) $ 811 Shown as operating reserves on the balance sheets: Insurance - Year ended December 31, 1995 $ 2,383 $ 2,652 $ - $ 1,326(b) $ 3,709 Year ended December 31, 1994 $ 1,863 $ 1,695 $ - $ 1,175(b) $ 2,383 Year ended December 31, 1993 $ 1,565 $ 1,823 $ 75 $ 1,600(b) $ 1,863 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-27 2
UT THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET, STATEMENT OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000077242 PG ENERGY INC. YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 219,013,000 5,089,000 54,512,000 34,368,000 0 517,232,000 56,025,000 94,463,000 57,868,000 208,356,000 1,680,000 33,615,000 55,000,000 10,000,000 0 0 115,801,000 80,000 0 0 92,700,000 517,232,000 152,756,000 5,168,000 128,666,000 133,834,000 18,922,000 301,000 19,223,000 10,753,000 4,636,000 2,763,000 1,873,000 15,249,000 13,824,000 31,012,000 .33 .33
EX-3 3 PG ENERGY INC. B Y L A W S ARTICLE I STOCKHOLDERS Section 1. Place of Holding Meetings. Meetings of stockholders shall be held within the State of Pennsylvania, and, unless otherwise determined by the Board of Directors, all meetings of the stockholders shall be held at the office of the Company. Section 2. Voting. (a) Voting Rights of Stockholders. - Unless otherwise provided in the articles, every stockholder of the Company shall be entitled to one vote for every share standing in the name of the stockholder on the books of the Company; provided, however, that in all elections for directors such stockholders may cast the whole number of his votes for one candidate or distribute them upon two or more candidates as he may prefer. (b) Voting and Other Action by Proxy. (1) Every stockholder entitled to vote at a meeting of stockholders may authorize another person to act for the stockholder by proxy. (2) The presence of, or vote or other action at a meeting of stockholders by a proxy of a stockholder shall constitute the presence of, or vote or action by the stockholder. (3) Where two or more proxies of a stockholder are present, the Company shall, unless otherwise expressly provided in the proxy, accept, as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (c) Execution and Filing. - Every proxy shall be executed in writing by the stockholder or by the duly authorized attorney-in-fact of stockholder and filed with the Secretary of the Company. A telegram, telex, cablegram, datagram or similar transmission from a stockholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a stockholder or attorney-in-fact: (1) may be treated as properly executed for purposes of this subsection; and (2) shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the Company to the stockholder for the purposes of a particular meeting or transaction. - 1 - (d) Revocation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the Company. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the Secretary of the Company. (e) Expenses. The Company shall pay the reasonable expenses of solicitation of votes, proxies or consents of stockholders by or on behalf of the Board of Directors or its nominees for election to the Board, including solicitation by professional proxy solicitors and otherwise. (f) Voting by Fiduciaries and Pledgees. Shares of the Company standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A stockholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee. (g) Voting by Joint Holders of Shares. Where shares of the Company are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise: (1) if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the Company shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and (2) if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves. (3) However, if there has been filed with the Secretary of the Company a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith. (h) Voting by Corporations. Any corporation that is a stockholder of the Company may vote at meetings of stockholders of this Company by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, by resolution of the Board of Directors of - 2 - the other corporation or a provision of its articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the Secretary of this Company, is appointed its general or special proxy in which case that person shall be entitled to vote the shares. Section 3. Quorum. Any number of stockholders together holding at least a majority of the stock issued and outstanding of the class or classes entitled to vote, who shall be present in person or represented by proxy at any meeting (other than an adjourned meeting as specified in Article I, Section 8, herein) duly called, shall constitute a quorum for the transaction of business, except as may be otherwise provided by law. The stockholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 4. Adjournment of Meetings. If less than a quorum shall be in attendance at the time for which the meeting shall have been called, the meeting may be adjourned from time to time by a majority vote of the stockholders present or represented, without any notice other than an announcement at the meeting, until a quorum shall attend. Any meeting at which a quorum is present may also be adjourned, in like manner, for such time, or upon such call, as may be determined by vote. Section 5. Annual Election of Directors. The Board of Directors may fix and designate the date and time of the Annual Meeting of Stockholders for the election of directors and the transaction of other business. If no such date and time is fixed and designated by the Board,the meeting for any calendar year shall be held on the second Wednesday in May at an hour to be named in the notice. At each Annual Meeting, the stockholders entitled to vote shall, as provided in Section 2 of this Article, by ballot, elect a Board of Directors, and they may transact such other corporate business as shall come before the meeting. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. If at any meeting of stockholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election. Section 6: Special Meetings. How Called. Special meetings of the stockholders for any purpose or purposes, may be called at any time by the Board, upon written request delivered to the Secretary of the Company. In addition, an "interested stockholder" (as defined in section 2553 of the Pennsylvania Business Corporation Law as it may from time to time be amended) may, upon written request delivered to the Secretary of the Company, call a special meeting for the purpose of approving a business combination under either subsection (3) or (4) of section 2555. Any request for a special meeting of stockholders shall state the purpose or purposes of the proposed meeting. Upon receipt of any such request, it shall be the duty of the Secretary to give notice, in a manner consistent with these Bylaws, of a special meeting of the stockholders to be held at such time as the Secretary may fix, which time may not be, if the meeting is called pursuant to a statutory right, more than sixty (60) days after receipt of the request. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the person or persons calling the meeting may do so. Business transacted at any special meeting shall be confined to the business stated in the notice. Section 7. Manner of Voting at Stockholders' Meetings. At all meetings of stockholders, all questions, except the question of an amendment to the Bylaws, and the election of directors, and all such other questions, the manner of deciding which is especially regulated by statute, shall be determined by a majority vote of the stockholders entitled to vote - 3 - present in person or represented by proxy; provided, however, that any qualified voter may demand a stock vote, and in that case, such stock vote shall immediately be taken. Section 8. Notice of Stockholders' Meetings. Written notice of every meeting of the stockholders stating the place, the date and hour thereof and the matters to be acted on at such meeting, shall be given in a manner consistent with the applicable provisions of section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, or any successor act or regulation (the "Exchange Act"), by, or at the direction of, the Secretary of the Company or, in the absence of the Secretary of the Company any Assistant Secretary of the Company, at least twenty (20) days prior to the day named for a meeting, to each stockholder entitled to vote thereat on the date fixed as a record date in accordance with these Bylaws or, if no record date be fixed, then of record at the close of business on the 50th day next preceding the day of the meeting, at such address as appears on the transfer books of the Company. Any notice of any meeting of stockholders shall state that, for purposes of any meeting that has been previously adjourned for one or more periods aggregating at least fifteen (15) days because of an absence of a quorum, the stockholders entitled to vote who attend such a meeting, although less than a quorum pursuant to Article 1, Section 3 of these Bylaws, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the original notice of the meeting that was so adjourned. Notice or other communications need not be sent to any stockholder with whom the Company has been unable to communicate for more than twenty-four (24) consecutive months because communications to the stockholder are returned unclaimed or the stockholder has otherwise failed to provide the Company with a current address. Whenever the stockholder provides the Company with a current address, the Company shall commence sending notices and other communications to the stockholder in the same manner as to the other stockholders. Section 9. Unanimous Written Consent. Any action required or permitted to be taken at a meeting of the stockholders or of a class of stockholders may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto in writing, setting forth the action so taken, shall be signed by all of the stockholders who would be entitled to vote at a meeting for such purpose and filed with the Secretary. Except as otherwise provided in Article V, Section 5 of these Bylaws, the record date for determining stockholders entitled to express consent or dissent to action in writing without a meeting, when prior action by the Board of Directors is not necessary, shall be at the close of business on the day on which the first written consent or dissent is filed with the Secretary. If prior action by the Board of Directors is necessary, the record date for determining such stockholders shall be at the close of business on the day on which the Board adopts the resolution relating to such action. ARTICLE II DIRECTORS Section 1. First Meeting. The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the Annual Meeting of Stockholders, or the time and place of such meeting may be fixed by consent in writing of all the directors. Section 2. Election of Officers. At such meeting the directors shall elect a President, one or more Vice Presidents, a Treasurer and a Secretary, who need not be directors. The directors may also elect such other officers as provided in Article III, Section 1. of these Bylaws. Such officers shall hold office until the next annual election of officers - 4 - and until their successors are elected and qualify, unless removed by the Board of Directors as provided in Section 8 of Article III of these Bylaws. Section 3. Regular Meetings. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Section 4. Special Meetings. How called. Notice. Special meetings of the Board may be called by either the President, the Secretary, the Chairman of the Executive Committee or by the Secretary pursuant to the written request of any two directors, upon forty-eight (48) hours' notice afforded by either telephone, telegraph, facsimile or personal notice, or upon three (3) days' notice afforded by mail. Section 5. Number and Quorum. The number of directors shall be not less than three (3) nor more than fifteen (15). Within such limits, the number of directors may be increased or decreased by the Board of Directors from time to time without a vote of the stockholders. The directors shall be elected by the stockholders, at the Annual Meeting of stockholders, in each year, to hold office for the term of one year and until their successors are chosen. A majority of the directors in office shall constitute a quorum for the transaction of business. Directors need not be stockholders. Section 6. Place of Meeting. The directors may hold their meetings and have one or more offices, and keep the books of the Company, outside the State of Pennsylvania, at any office or offices of the Company, or at any other place, as they may from time to time by resolution determine. Section 7. Powers of Directors. The Board of Directors shall have all the necessary powers for the management of the business of the Company, and subject to the restrictions imposed by law, or by these Bylaws, may exercise all the powers of the Corporation. Section 8. Vacancies. Vacancies occurring in the membership of the Board of Directors, from whatever cause arising, shall be filled by a majority vote of the remaining directors, and in case of any increase in the number of directors, the additional directors authorized by such increase shall be elected by a majority vote of the directors in office, although less than a quorum. Section 9. Removal of Directors. Any one or more of the directors may be removed, either with or without cause, at any time, by a majority vote of the stockholders entitled to vote at any regular or special meeting. The successor or successors of any director or directors so removed shall be elected by the remaining directors. Section 10. Compensation of Directors. Directors and members of any committee of the Board of Directors, except full-time officers and employees of the Company, shall be entitled to such reasonable compensation for their services as directors and members of any such committee as shall be fixed from time to time by resolution of the Board of Directors, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending such meetings. The compensation of directors may be paid on such basis as is determined in the resolution of the Board of Directors. Section 11. Executive Committee and Other Committees. How Appointed. The directors may by a resolution adopted by a majority of the directors in office appoint from their number an Executive Committee of three or more members and other Committees of one or more members. The Committees may make their own rules of procedure and shall meet where and as provided by such rules, or by a resolution of the directors. A majority shall constitute a quorum, but in every case the affirmative vote of a - 5 - majority of all the members of the committee shall be necessary to the adoption of any resolution. Section 12. Executive Committee. Powers. During the intervals between the meetings of the directors, the Executive Committee shall have and may exercise all the powers of the directors in the management of the business and affairs of the Company, including power to authorize the seal of the Company to be affixed to all papers which may require it, in such manner as such committee shall deem best for the interests of the Company, in all cases in which specific directions shall not have been given by the directors. Neither the Executive Committee or any other committee of the Board of Directors created by these Bylaws nor the Board of Directors shall have any power or authority as to the following: (i) the submission to stockholders of any action requiring approval of stockholders under the Pennsylvania Business Corporation Law. (ii) the creation or filling of vacancies in the Board of Directors. (iii) the adoption, amendment or repeal of the Bylaws. (iv) the amendment or repeal of any resolution of the Board that by its terms is amendable or repealable only by the Board. (v) action on matters committed by the Bylaws or resolution of the Board of Directors to another committee of the Board. Section 13. Meeting by Telephonic Conference. Any meeting of the Board of Directors or of a committee thereof, including the Executive Committee, may be held in which any one or more or all of the directors or participants may participate as if present in person, by means of conference telephone or similar communication equipment in a manner by which all persons participating in the meeting can hear each other. Section 14. Substitute Committee Members. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. Section 15. Personal Liability of Directors. To the fullest extent that the laws of the Commonwealth of Pennsylvania, as now in effect or as hereafter amended, permit elimination or limitation of the liability of directors, no director of the Company shall be personally liable for monetary damages as such for any action taken, or any failure to take any action, as a director. Further, any amendment or repeal of this Section 15 which has the effect of increasing director liability shall operate prospectively only, and shall not affect any action taken, or any failure to act, prior to its adoption. Section 16. Action by Consent of Directors. Any action required or permitted to be taken at a meeting of the Board or of a committee of the Board may be taken without a meeting if, prior or subsequent to the action, a consent or consents in writing setting forth the action so taken shall be signed by all of the directors in office or the members of the committee, as the case may be, and filed with the Secretary of the Company. ARTICLE III OFFICERS Section 1. Required Officers of the Company. The officers of the Company shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Secretary and a Treasurer, one or more Assistant Secretaries, and one or more Assistant Treasurers. One person may hold any two offices except the office of President and Vice President. The Board - 6 - of Directors may appoint such other officers as from time to time they may determine. All officers of the Company, as between themselves and the Company, shall have such authority and perform such duties in the management of the Company as may be provided by or pursuant to the Board of Directors, or as may be determined by or pursuant to these Bylaws. Section 1A. Chairman of the Board of Directors. The Chairman of the Board of Directors shall be a member of the Board of Directors. He shall preside as Chairman at all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as are specified in these Bylaws or as are usually performed by a Chairman of the Board of Directors, or as from time to time shall be assigned to him by the Board of Directors. In the absence of, or at the request of, the Chairman of the Board of Directors, the Board of Directors is authorized to designate a Chairman for the Annual Meeting or special meetings. Section 2. President. The President shall be the Chief Executive Officer of the Company and shall have general management and control of the business and affairs of the Company, subject to the direction of the Board of Directors, and he shall generally do and perform all acts incident to the office of the President, or which are authorized or required by law. The President shall have power to call special meetings of the stockholders or directors for any purpose or purposes, and when authorized by the Board of Directors or these Bylaws shall make and sign contracts and agreements in the name of and on behalf of the Company. Section 3. Vice Presidents. Each Vice President shall have such powers and shall perform such duties as may be assigned to him by the President or the Board of Directors. In case of the absence or disability of the President, the duties of the office of the President shall be performed by the Vice Presidents in the order of priority established by the Board, and unless and until the Board of Directors shall otherwise direct. Section 4. Secretary. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these Bylaws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the directors or stockholders upon whose request the meeting is called, as provided in these Bylaws. He shall record all the proceedings of the meetings of the stockholders and of the directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the directors or the President. He shall have custody of the seal of the Company and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. Section 5. Assistant Secretary. The Board of Directors may appoint an Assistant Secretary or more than one Assistant Secretary. Each Assistant Secretary shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors or the President. Section 6. Treasurer. The Treasurer shall have the custody of all funds, securities, evidences of indebtedness and other valuable documents of the Company; he shall receive and give or cause to be given receipts and acquittances for moneys paid in on account of the Company and shall pay out of the fund on hand all just debts of the Company, of whatever nature upon maturity of the same; he shall enter or cause to be entered in books of the Company to be kept for that purpose full and accurate accounts of all moneys received and paid out on account of the Company, and he shall perform all the other duties incident to the office of the Treasurer. If the Board of Directors so determine, he shall give the Company a bond for the faithful discharge of his duties in such amount and with such security as the Board shall prescribe. - 7 - Section 7. Assistant Treasurer. The Board of Directors may appoint an Assistant Treasurer or more than one Assistant Treasurer. Each Assistant Treasurer shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors or the President. Section 8. Removal of Officers and Agents. Any officer or agent of the Company may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. ARTICLE IV CAPITAL STOCK Section 1. Issue of Certificates of Stock. Certificates of the shares of the capital stock of the Company shall be in such form as shall be approved by the Board of Directors. Each stockholder shall be entitled to a certificate of his stock under the seal of the Company, executed, by facsimile or otherwise, by or on behalf of the Company, by the President or a Vice President, and also by the Treasurer or an Assistant Treasurer. In case any officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be such officer, because of death, resignation or otherwise, before the certificate is issued, it may be issued by the Company with the same effect as if the officer had not ceased to be such at the time of issue. No stock certificate shall be valid unless countersigned and registered in such manner, if any, as the directors shall by resolution prescribe. Section 2. Transfer of Shares. The shares of stock of the Company shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Company by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer, and a duplicate thereof mailed to the Pennsylvania office of the Company. Section 3. Dividends. The directors may declare dividends from the surplus or net profits arising from the business of the Company as and when they deem expedient. Before declaring any dividend, there may be reserved out of the accumulated profits such sum or sums as the directors from time to time, in their discretion, think proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends, or for such other purposes as the directors shall think conducive to the interest of the Company. Section 4. Lost Certificates. If the owner of a share certificate claims that it has been lost, destroyed, or wrongfully taken, the Company shall issue a new certificate in place of the original certificate if the owner so requests before the Company has notice that the certificate has been acquired by a bona fide purchaser and if the owner has filed with the Company an indemnity bond and an affidavit of facts satisfactory to the Board or its designated agent, and has complied with such other reasonable requirements, if any, as the Board may deem appropriate. Section 5. Rules as to Issue of Certificates. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock of the Company. - 8 - Each and every person accepting from the Company certificates of stock therein shall furnish the Corporation a written statement of his or her residence or post office address. Section 6. Holder of Record to be deemed Holder in Fact. The Company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by law or by Section 7 of this Article. Section 7. Shares of Stock Held for Account of Another. The Board of Directors is authorized to adopt a procedure whereby a stockholder of the Corporation may certify in writing that all or part of the shares of stock registered in the name of the stockholder are held for account of a specified person or persons. The resolution of the Board of Directors that adopts this certification procedure may include the following: (1) The class of stockholder who may qualify. (2) The purpose or purposes for which the certification may be made. (3) The form of certification and the information that it should contain. (4) The time after the record date within which the certification must be received by the Corporation, if the certification concerns a record date. (5) Any other provisions regarding the certification procedure that the Board of Directors deems necessary or desirable. On receipt by the Corporation of a certification that complies with the procedure adopted by the Board of Directors, the person specified in the certification is deemed, for the purpose set forth in the certification, to be the holder of record of the shares of stock indicated in the certification in place of the stockholder making the certification. ARTICLE V MISCELLANEOUS PROVISIONS Section 1. Fiscal Year. The fiscal year of the Company shall end on the 31st day of December of each year. Section 2. Checks, etc. All checks, drafts or orders for the payment of money shall be signed by such officer(s) or agent(s) as the directors may designate. Section 3. Notice and Waiver of Notice. Except as provided in Article 1 Section 8 of these Bylaws, whenever, under the provisions of the Pennsylvania Business Corporation Law or of the Articles or of these Bylaws or otherwise, written notice is required to be given to any person, it may be given to such person either personally or by sending a copy thereof by first class or express mail, postage prepaid, telegram (with messenger service specified), telex, TWX (with answerback received), courier service (with charges prepaid) or facsimile transmission to his or her address (or to his or her telex, TWX, or facsimile number) appearing on the books of the Company or, in the case of directors, supplied by the director to the Company for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person. A notice given by telex or TWX shall be deemed to have been given when dispatched. - 9 - If mailed at least twenty (20) days prior to the meeting or corporate action to be taken, notice may be sent by any class of postpaid mail (including bulk mail). Whenever any notice is required to be given by the Pennsylvania Business Corporation Law or by the Articles or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted nor the purpose of a meeting need be specified in the waiver of notice of the meeting. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting, except where any person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened, and the person so objects at the beginning of the meeting. Section 4. Inspection of Books. Every stockholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register books and records of account, and records of the proceedings of the incorporators, stockholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a stockholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand shall be directed to the Company at its registered office in the Commonwealth of Pennsylvania or at its principal place of business wherever situated. Section 5. Record date. The Board of Directors may fix a time prior to the date of any meeting of stockholders as a record date for the determination of the stockholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of stockholders. Only stockholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Company after any record date fixed as provided in this subsection. The Board of Directors may similarly fix a record date for the determination of stockholders of record for any other purpose. When a determination of stockholders for a record date has been made as provided in this Section for the purpose of a meeting, such determination shall apply to any adjournments thereof unless the Board fixes a new record date for the adjourned meeting. ARTICLE VI AMENDMENT AND REPEAL Section 1. Amendment and Repeal of Bylaws. The stockholders by the affirmative vote of the holders of a majority of the stock issued and outstanding of the class or classes entitled to vote, may at any meeting, provided the substance of the proposed amendment shall have been stated in the notice of the meeting, amend, alter or repeal any of these Bylaws. Section 2. Amendments By Directors. Except as prohibited by law, the directors, by the affirmative vote of a majority of the Board, may at any meeting amend, alter or repeal these Bylaws, in whole or in part. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Right to Indemnification. Except as prohibited by law, every director and officer of the Company shall be entitled as of right to be indemnified by the Company against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, - 10 - administrative, investigative or other, whether brought by or in the right of the Company or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director or officer of the Company or by reason of the fact that such person is or was serving at the request of the Company as a director, officer, employee, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as "Action"). Such indemnification shall include the right to have expenses incurred by such person in connection with an Action paid in advance by the Company prior to final disposition of such Action, subject to such conditions as may be prescribed by law. Persons who are not directors or officers of the Company may be similarly indemnified in respect of service to the Company or to another such entity at the request of the Company to the extent the Board of Directors at any time designates such person as entitled to the benefits of this Section. As used herein, "expense" shall include fees and expenses of counsel selected by such person; and "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement. Section 2. Right of Claimant to Bring Suit. If a claim for indemnification by any person eligible to be indemnified under Section 1 is not paid in full by the Company within 30 days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such suit that the conduct of the claimant was such that under Pennsylvania law the Company would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel and its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the suit or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. Section 3. Insurance and Funding. The Company may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any Action, whether or not the Company would have the power to indemnify such persons against such liability or expense by law or under the provisions of this Article VII. The Company may create a trust fund, grant a security interest, cause a letter of credit to be issued or use other means (whether or not similar to the foregoing) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. Section 4. Non-exclusivity; Nature and Extent of Rights. The right of indemnification provided for herein (1) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, by-law or charter provision, vote of stockholders or directors or otherwise, (2) shall be deemed to create contractual rights in favor of persons entitled to indemnification hereunder, (3) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were designated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder and (4) shall be applicable to Actions commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof. The right of - 11 - indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the effective date of any such amendment, modification or repeal. - 12 - EX-3 4 18 W6-NY960570.340 PG ENERGY INC. RESTATED ARTICLES OF INCORPORATION First: The name of the corporation is: PG Energy Inc. Second: The location and post office address of the corporation's registered office in this Commonwealth is: Wilkes-Barre Center 39 Public Square Wilkes-Barre, Pennsylvania 18711 Third: The purposes of the corporation, which has accepted the Pennsylvania Business Corporation Law, are as follows: (a) To divert, develop, transport, impound, pump, distribute, and furnish water to or for the public; (b) To produce, generate, manufacture, transmit, transport, store, distribute, or furnish natural or artificial gas to the public; (c) To furnish service subject to the jurisdiction of the Pennsylvania Public Utility Commission; (d) To manufacture, process, own, use, and deal in personal property of every class and description; (e) To acquire, own, use, and dispose of real property of every nature whatsoever; (f) To engage in and to do any lawful act concerning any and all lawful business for which corporations may be incorporated under the provisions of the Business Corporation Law. Fourth: The term for which the corporation is to exist is perpetual. Fifth: The aggregate number of shares which the corporation shall have authority to issue is (1) 10,000,000 shares of Common Stock without nominal or par value, with a stated value of $10.00 per share and (2) 997,500 shares of Preferred Stock with a par value of $100.00 per share. Sixth: The designations, rights, privileges, limitations, preferences, and voting powers, or prohibitions, restrictions, or modifications of the voting and other rights and powers, and the terms as to redemption of the Preferred Stock and the Common Stock, shall be in accordance with the following sections: 1. Subject to the restrictions and/or limitations hereinafter set forth, the number of shares of Preferred Stock which may be issued shall be such number thereof as shall from time to time be authorized in the manner provided by law and consented to, approved and adopted by a majority in interest of the stockholders of the Company having voting powers, or such other proportion in interest of such stockholders as may be required by law. 2. The shares of the Preferred Stock shall be issued from time to time in series, each of such series to be distinctively designated. 3. The initial series of Preferred Stock shall consist of 100,00 shares and shall be designated as 4.10% Cumulative Preferred Stock. The Board of Directors is hereby specifically authorized, in respect of said initial series of Preferred Stock, to fix and determine (a) the annual dividend rate (within such limits as shall be permitted by law); (b) the redemption price or prices, if any; (c) the amount or amounts per share payable to the holders thereof upon any voluntary or involuntary dissolution, liquidation or winding up of the Company, which may be different for voluntary and involuntary dissolution, liquidation or winding up and which shall include an amount equal to the accrued dividends on such shares to the date fixed for the payment of said amount. The second series of Preferred Stock shall consist of 40,000 shares and shall be designated as the 1966 Cumulative Preferred Stock. The Board of Directors is hereby specifically authorized, in respect of said 1966 Cumulative Preferred Stock, to fix and determine (a) the annual dividend rate (within such limits as shall be permitted by law); (b) the redemption price or prices, if any; (c) the amount or amounts per share payable to the holders thereof upon any voluntary or involuntary dissolution, liquidation or winding up of the Company, which may be different for voluntary or involuntary dissolution, liquidation or winding up and which shall include an amount equal to the accrued dividends on such shares to the date fixed for the payment of said amount. Subject to the provisions of section 6 hereof, holders of the 1966 Cumulative Preferred Stock shall have a non-cumulative right (commencing at such time and exercisable for such period and in such manner as the Board of Directors may determine) each year to tender to the Company and to require it to purchase, to the extent the Company shall have available funds which it may legally use for the purpose, at a per share price not exceeding $100, up to (a) that number of shares of the 1966 Cumulative Preferred Stock which can be acquired for an aggregate purchase price of $80,000, less (b) the number of such shares which the Company may already have purchased during the year at a per share price of not more than $100. The third series of Preferred Stock shall consist of 250,000 shares and shall be designated as 9% Cumulative Preferred Stock. The Board of Directors is hereby specifically authorized in respect of said 9% Cumulative Preferred Stock to fix and determine (a) the annual dividend rate (within such limits as shall be permitted by law); (b) the redemption price or prices, if any; (c) the amount or amounts per share payable to the holders thereof upon any voluntary or involuntary dissolution, liquidation or winding up and which shall include an amount equal to the accrued dividends on such shares to the date fixed for the payment of said amount. As to the balance of the authorized Preferred Stock, consisting of 607,500 shares, the Board of Directors is hereby specifically authorized (a) Subject to the provisions of section 11 hereof, to create and issue from time to time one or more additional series of the Preferred Stock consisting of such number or numbers of shares as it shall determine; (b) To distinctively designate each additional series so as to distinguish the shares thereof from the shares of all other series and classes; (c) To fix and determine, subject to those provisions hereinafter stated which are applicable to all Preferred Stock, the designations, rights and privileges of such additional series, including, without limitation, (1) the rate of dividend (within such limits as shall be permitted by law); (2) the price at and the terms and conditions on which shares may be redeemed; (3) the amounts payable upon shares in the event of voluntary or involuntary dissolution, liquidation or winding up of the Company, which may be different for voluntary or involuntary dissolution, liquidation or winding up and which may include an amount equal to the accrued dividends on such shares to the date fixed for the payment of said amount; (4) to the extent permitted by law, a Sinking Fund or Purchase Fund for the redemption or purchase of shares; and (5) the terms and conditions on which shares may be converted in the event shares of any series are issued with the privilege of conversion. 4. Subject to the provisions of section 11 hereof one or more additional series of Preferred Stock may be created and issued from time to time, when so determined and authorized by the Board of Directors and consented to, approved and adopted by a majority in interest of the stockholders having voting power, or such other proportion in interest of such stockholders as may be required by law. The Preferred Stock of any such additional series, subject to the provisions hereinafter stated as applicable to all Preferred Stock, shall have such designations, rights, privileges, limitations, preferences and voting powers, or prohibitions, restrictions, or qualifications of the voting and other rights and powers and shall be subject to redemption and shall be convertible into any other class of series of stock, common or preferred, and shall consist of such number of shares or of such number of shares not less than and not greater than numbers to be stated therefor, as may, in respect of any such series, be authorized by the Board of Directors of this Company and consented to, approved and adopted by a majority in interest of its stockholders having voting power, or such other proportion in interest as may be provided by law. All series of Preferred Stock shall be of equal rank, and all shares of Preferred Stock of any series shall be identical in all respects. 5. The holders of the Preferred Stock are entitled to receive, in respect of each share held, cash dividends at the annual rate specified in the designation thereof, payable quarter- yearly on March 15, June 15, September 15 and December 15 in each year, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends. Such dividends shall be cumulative from the first day of the dividend period in which such stock shall have been originally issued, and shall be paid, or declared and set apart for payment, before any dividends shall be declared or paid on or set apart for the Common Stock, so that if, for any past dividend period or the current dividend period, dividends on the Preferred Stock shall not have been paid, or declared and set apart for payment, the deficiency shall be fully paid or declared and funds set apart for the payment thereof before any dividends shall be declared or paid on or set apart for the Common Stock. Accruals of dividends shall not bear interest. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon other than dividends at the annual rate specified in the designation of such shares. When full cumulative dividends upon the Preferred Stock then outstanding for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment, the Board of Directors may declare dividends on the Common Stock of the Company. 6. The Company, on the sole authority of its Board of Directors, shall have the right at any time or from time to time to redeem and retire all or any part of any series of Preferred Stock which has been made redeemable, at the redemption price determined for such series, upon not less than thirty (30) days' previous notice mailed to the holders of record thereof upon the date of mailing or on such date within ten (10) days prior thereto as the Board of Directors may fix for the purpose, (and by such publication, if any, made in such manner and at such time or times, as the Board of Directors may prescribe). In case of the redemption of a part only of any series of Preferred Stock, the shares thereof so to be redeemed shall be selected by lot, in such manner as the Board of Directors shall determine, by a bank or trust company selected for that purpose by the Board of Directors. At any time after notice of redemption has been mailed to the holders of stock to be redeemed, the Company may deposit in trust, for the account of the holders of the shares to be redeemed, funds necessary for such redemption with a bank or trust company in good standing, organized under the laws of the United Stated of America or of the State of New York, doing business in the Borough of Manhattan the City of New York, or organized under the laws of the Commonwealth of Pennsylvania, having capital, surplus and undivided profits aggregating at least $5,000,000 and designated in such notice of redemption, and upon such deposit, or if no such deposit is made, upon the date fixed for redemption (unless the Company defaults in making payment of the redemption price), such holders shall cease to be stockholders with respect to said shares, and from and after the making of such deposit, or, if no such deposit is made, from and after the date fixed for redemption (the Company not having defaulted in making payment of the redemption price) said shares shall not be deemed to be outstanding and such holders shall have no interest in or claim against the Company with respect to the said shares, but shall be entitled only to receive said redemption price on the date fixed for redemption, without interest. Any interest accrued on any funds so deposited shall belong to the Company. Any moneys so deposited and remaining unclaimed at the end of six (6) years from the date fixed for redemption shall, if thereafter requested by resolution of the Board of Directors, be repaid to the Company, and in the event of such repayment, such holders of the shares so to be redeemed as shall not have made claim to such moneys prior to such repayment, shall be deemed to be unsecured creditors of the Company for an amount equivalent to the sum deposited as aforesaid for the redemption of such shares and so repaid to the Company but shall not be entitled to interest upon said amount. If at any time the Company has failed to pay dividends in full on any outstanding shares of Preferred Stock, thereafter and until dividends in full on all shares of outstanding Preferred Stock have been paid, or declared and set apart for payment, for all past dividend periods but without interest on accumulated dividends, and for the current quarter-yearly dividend period, the Company may not redeem any Preferred Stock unless all outstanding shares of Preferred Stock are redeemed and may not purchase or otherwise acquire for value any shares of Preferred Stock except in accordance with an offer (which may vary with respect to shares of different series) made to all holders of shares of Preferred Stock. Except as above set forth, nothing contained in these Articles limits any legal right of the Company to purchase any shares of the Preferred Stock. 7. Upon any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Preferred Stock of each and every series then outstanding shall be entitled to receive out of the net assets of the Company, the amounts per share fixed for the shares of the respective series and payable upon such dissolution, liquidation or winding up, plus an amount equal to the accrued dividends on such shares, before any distribution of the assets of the Company shall be made to the holders of the Common Stock. 8. If the assets distributable on such dissolution, liquidation or winding up shall be insufficient to permit the payment to the holders of Preferred Stock of the full amounts to which they are entitled as aforesaid, then said assets shall be distributed ratably among the holders of the respective series of Preferred Stock in proportion to the sums which would be payable on such dissolution, liquidation or winding up is all sums payable were discharged in full in preference and priority over the shares of the Common Stock. 9. The sale, lease, conveyance, exchange or transfer of all or substantially all of the property and/or franchises of the Company, or the merger or consolidation of the Company into or with any other corporation, are not to be deemed a dissolution, liquidation or winding up as such terms are used in this and the two preceding paragraphs. 10. No holder of the Preferred Stock shall be entitled to vote for the election of directors or in respect of any matter, except as otherwise provided in the following paragraphs of this section and in sections 11 and 12 hereof, or as may be required by law. In such excepted cases, each record holder of the Preferred Stock shall have one vote for each share of Preferred Stock held by him. (a) If and when dividends payable on the Preferred Stock shall be in default in an amount equivalent to four full quarter-yearly dividends on all shares of the Preferred Stock then outstanding and until all dividends then in default on the Preferred Stock shall have been paid, the record holders of the shares of the Preferred Stock, voting separately as one class, shall be entitled, at each meeting of the shareholders at which directors are elected, to elect the smallest number of directors necessary to constitute a majority of the full Board of Directors, and the record holders of the shares of the Common Stock, voting separately as a class, shall be entitled at any such meeting to elect the remaining directors of the Company. The term of office of each director of the Company shall terminate upon the election of his successor. At each election of directors by a class vote pursuant to the provisions of this paragraph, the class first electing the directors which it is entitled to elect shall name the directors who are to be succeeded by the directors then elected by such class, whereupon the term of office of the directors so named shall terminate. The term of office of the directors not so named shall terminate upon the election by the other class of the directors which it is entitled to elect. (b) If and when all dividends then in default on the Preferred Stock then outstanding shall be paid (and such dividends shall be paid, or declared and set apart for payment, out of funds legally available therefor, as soon as reasonably practicable), the holders of the shares of the Preferred Stock shall thereupon be divested of the special right with respect to the election of directors provided in the preceding paragraph (a), and the voting power of holders of shares of the Preferred Stock and the Common Stock shall revert to the status existing before the occurrence of such default, but always subject to the same provisions for vesting such special right in the Preferred Stock in case of further like default or defaults in dividends thereon. Dividends shall be deemed to have been paid, as that term is used in this paragraph (b), whenever such dividends shall have been declared and paid, or declared and set aside for payment. (c) In case of any vacancy in the Board of Directors occurring among the directors elected by the holders of the shares of the Preferred Stock, as a class, pursuant to the preceding paragraph (a), the remaining directors elected by the holders of the Preferred Stock, by affirmative vote of a majority thereof, or the remaining director so elected if there be but one, may elect a successor to hold office for the unexpired term of the director whose place shall be vacant. In case of a vacancy in the Board of Directors occurring among the directors elected by the holders of the shares of the Common Stock as a class, the remaining director elected by the holders of the Common Stock, by affirmative vote of a majority thereof, or the remaining director so elected if there be but one, may elect a successor to hold office for the unexpired term of the director whose place shall be vacant. In all other cases, any vacancy occurring among the directors shall be filled by the vote of a majority of the remaining directors. (d) Whenever the holders of the shares of the Preferred Stock, as a class, become entitled to elect directors of the Company pursuant to the preceding provisions, or whenever the holders of the shares of the Common Stock, as a class, become entitled to elect directors of the Company pursuant to such provisions, a special meeting of the holders of the shares of the Preferred Stock or of the holders of the shares of the Common Stock, as the case may be, for the election of such directors, shall be held at any time thereafter upon call by the holders of not less than 1,000 shares of the Preferred Stock or of the Common Stock, as the case may be, or upon call by the Secretary of the Company at the request in writing of holders of not less than 1,000 shares of the Preferred Stock or the Common Stock, as the case may be, addressed to him at the principal office of the Company. If no such special meeting be called or be requested to be called, the election of the directors to be elected by the holders of the shares of the Preferred Stock, voting as a class, and of those to be elected by the holders of the shares of the Common Stock, voting as a class, shall take place at the annual meeting of the stockholders of the Company next succeeding the accrual of such special voting right. At all meetings of stockholders at which director are elected during such times as the holders of shares of the Preferred Stock shall have the special right, voting separately as one class, to elect directors, the presence in person or by proxy of the holders of a majority of the outstanding shares of the Common Stock shall be required to constitute a quorum of such class for the election of directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of all series of the Preferred Stock shall be required to constitute a quorum of such class for the election of directors, provided, however, that the absence of a quorum of the holders of stock of either such class shall not prevent the election at any such meeting or adjournment thereof of directors by the other such class if the necessary quorum of the holders of stock of such class is present in person or by proxy at such meeting, and provided further that in the absence of a quorum of the holders of stock of either such class, a majority of those holders of the stock of such class who are present in person or by proxy shall have power to adjourn the election of the directors to be elected by such class from time to time without notice other than announcement at the meeting until the requitable amount of holders of such class shall be present in person or by proxy. (e) Every record holder of outstanding shares of the Common Stock shall, at all meetings of stockholders of the Company, have one vote for each share of the Common Stock held by him, except as otherwise provided in the preceding paragraphs of section 10 hereof or as may be provided by law. (f) In all elections for directors each stockholder may cast the whole number of his votes for one candidate or distribute them upon two or more candidates, as he may prefer. 11. So long as any shares of the Preferred Stock of any series are outstanding, the Company shall not, without the affirmative vote or written consent of the record holders of at least two-thirds of the outstanding shares of Preferred Stock of all series, voting separately as one class: (a) Create or authorize any stock ranking prior in any respect to the Preferred Stock or any security convertible into shares of such stock, or issue any such stock or convertible security; or (b) Change the terms and provisions of the Preferred Stock so as to affect adversely the rights, preferences or privileges of the holders thereof; provided, however, that if any such change will affect adversely the rights, preferences or privileges of the holders of one or more, but less than all, of the series of Preferred Stock at the time outstanding, the vote or consent only of the record holders of at least two-thirds of the total number of shares of each series so adversely affected shall be required; or (c) Issue any shares of the Preferred Stock or shares of any stock ranking on a parity in any respect with the Preferred Stock, or any securities convertible into shares of such stock other than in exchange for, or for the purpose of effecting the redemption or other retirement of, not less than an equal number of shares of the Preferred Stock, or shares of any stock ranking on any such parity, at the time outstanding, unless (1) The gross income (determined in accordance with accepted accounting principles) of the Company available for the payment of interest charges shall, for a period of twelve consecutive calendar months within the fifteen calendar months next preceding the issue of such shares, have been at least one and one-half times the sum of (i) the interest for one year, adjusted by provision for amortization of debt discount and expense, or of premium, as the case may be, on all funded indebtedness, and on all notes payable of the Company maturing more than twelve months after the date of issue of such shares, which shall be outstanding at the date of the issue of such shares, and (ii) an amount equal to be the dividend requirement for one year on all shares of the Preferred Stock of all series and on all other shares of stock, if any, ranking in any respect prior to or on a parity with the Preferred Stock, which shall be outstanding after the issue of the shares or convertible securities proposed to be issued; and (2) The capital represented by the Common Stock and any other class of stock ranking junior to the Preferred Stock to be outstanding immediately after such issue, plus the surplus accounts of the Company, shall be not less than the aggregate amount payable on the involuntary dissolution, liquidation or winding up of the Company, in respect of all shares of the Preferred Stock and all shares of stock, if any, ranking in any respect prior thereto or on a parity therewith, which shall be outstanding after the issue of the shares or convertible securities proposed to be issued, and provided that no portion of the surplus of the Company utilized to satisfy the foregoing requirements shall be available for dividends on the Common Stock. In case, within or after the period for which the calculation of such gross income is made pursuant to the preceding clause (1), the Company shall have acquired, or will acquire concurrently with the issue of the shares or convertible securities proposed to be issued, all or substantially all of the properties of another corporation or any properties, the earnings of which during such period are separately ascertainable, then, in computing such gross income for such period, there shall be included, to the extent that the same may not have been otherwise included, the earnings or losses of such other corporation or of such properties for the whole of such period, and there shall be excluded the earnings or losses of any properties (except securities of the Company ) given by the Company in payment or part payment therefor. If, during the period for which any calculation of gross income is made pursuant to the preceding clause (1) or at the time of any calculation pursuant to the preceding clause (2), the Company has any subsidiary or subsidiaries whose accounts, in the ordinary practice of the Company, are consolidated with the Company's accounts, the gross income, interest charges, indebtedness and surplus accounts for the purposes of this paragraph (c) shall be the consolidated gross income, interest charges, indebtedness and surplus accounts of the Company and such subsidiary or subsidiaries, and the acquisition and/or disposition of any properties by each such subsidiary within or after the period for which the calculation of gross income is made shall be taken into account the same as in the case of the Company; or (d) Pay any dividends on its Common Stock (other than dividends payable in Common Stock) or make any distribution on, or purchase, or otherwise acquire for value any of its Common Stock (each and all of these actions being hereinafter embraced in the term "payment of common stock dividends"), except as follows: (i) If and so long as the ratio of the Common Stock equity to the total capital of the Company at the end of the second calendar month immediately preceding the date of the proposed payment of a Common Stock dividend, adjusted to reflect the proposed payment (which ratio is hereinafter referred to as "capitalization ratio") is 25% or more, then no restriction is imposed in this paragraph (d). (ii) If and so long as the capitalization ratio is less than 25% but not less than 20%, then the payment of Common Stock dividends, including the proposed payment, during the twelve months ending with and including the date of the proposed payment, shall not exceed 75% of the net income of the Company available for dividends on its Common Stock during the twelve calendar months ending with and including the second calendar month immediately preceding the date of the proposed payment. (iii) If and so long as the capitalization ratio is less than 20%, then the payment of Common Stock dividends, including the proposed payment, during the twelve months' period ending with and including the date of the proposed payment, shall not exceed 50% of the net income of the Company available for dividends on its Common Stock during the twelve calendar months, ending with and including the second calendar month immediately preceding the date of the proposed payment. For the purpose of this paragraph (d): "Common Stock equity" shall consist of the sum of (1) the capital represented by the issued and outstanding shares of Common Stock (including premiums on Common Stock) and (2) the surplus accounts of the Company, less any excess of the aggregate amount payable on the involuntary dissolution, liquidation, or winding up of the Company, in respect of all its outstanding shares of preferred stock over the aggregate par value of such preferred stock. "Total capital of the Company" shall consist of the sum of (1) the principal amount of all outstanding indebtedness of the Company maturing one year or more after the date of the issue thereof, exclusive of all such indebtedness owned by the Company, and (2) the par or stated value of all outstanding capital stock (including premiums on capital stock) of all classes of the Company, exclusive of all such stock owned by the Company, and (3) the surplus accounts of the Company. "Net income of the Company available for dividends on its Common Stock" shall be determined in accordance with accepted accounting practice, provided that there shall be included in operating expenses an amount for maintenance and repairs to, and as provision for reserves for renewals and replacements, retirements or depreciation of the Company's properties equivalent to the Standard of Expenditure as set forth in 4.10 of the Mortgage and Deed of Trust dated as of March 15, 1946 of the Company to Guaranty Trust Company of New York, Trustee. or (e) Make any payment or distribution out of capital or capital surplus (other than dividends payable in stock junior to the Preferred Stock) to any holder of any stock ranking junior to the Preferred Stock. No vote or consent of the holders of the Preferred Stock shall be required in respect of any transaction enumerated in the preceding paragraphs (a), (b), (c), (d) and (e) if at or prior to the time when such transaction is to take effect provision is made for the redemption or other retirement of all shares of the Preferred Stock at the time outstanding, the consent of which would otherwise be required. There shall be excluded from the calculations made pursuant to clauses (1) and (2) of the preceding paragraph (c) interest charges on all indebtedness and dividends and liquidation preferences on all stock which are to be retired in connection with the issue of the shares or convertible securities proposed to be issued. 12. So long as any shares of Preferred Stock of any series are outstanding , the Company shall not, without the affirmative vote or written consent of the record holders of a majority of the outstanding shares of Preferred Stock of all series, voting separately as one class: (a) Issue or assume any unsecured note, debenture or other security evidencing unsecured indebtedness for borrowed money which by its terms matures on demand or within one year from the date of the issue thereof, for any purpose other than the refunding of an equal or lesser principal amount of secured or unsecured indebtedness theretofore issued or assumed by the Company and then outstanding, or the retiring, by redemption or otherwise, of an equal or lesser amount of shares of the Preferred Stock or shares of any stock ranking prior thereto or on a parity therewith, if immediately after such issue or assumption, the principal amount of all such unsecured notes, debentures or other securities evidencing unsecured indebtedness for borrowed money issued or assumed by the Company and then outstanding and maturing on demand or within one year from the date of issue thereof would exceed $12,000,000, or (b) Issue or assume any secured debt, provided, however, that this restriction shall not prevent, or require any such vote or written consent of the holders of Preferred Stock for, (i) the issuance of bonds of any series under the Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946, from the Company to Guaranty Trust Company of New York, Trustee, or any indenture, supplemental thereto, or the issuance of bonds under any other mortgage providing for the refunding of bonds issued under said Indenture dated as of March 15, 1946, or (ii) the giving of purchase money mortgages or other purchase money liens or purchase money obligations in respect of property which may be acquired after March 15, 1946 by the Company or any subsidiary (including any mortgage given or lien created on such property to provide any part of the purchase price of such property) or the assumption of indebtedness secured by mortgages or other liens then existing on such after-acquired property, or the extension, renewal or refunding of any funded debt given, created, issued or assumed as permitted under the provisions of this subdivision (ii); or (iii) issue or assumption of secured debt which if unsecured would be permitted under the preceding paragraph (a); or (c) Merge or consolidate with any other corporation or corporations, or sell all or substantially all of the assets of the Company, provided that the provisions of this paragraph (c) shall not apply to a merger or consolidation with any subsidiary of the Company which is wholly-owned (except for directors' qualifying shares), or a purchase or other acquisition by the Company of the franchises (including franchises and rights granted by corporate charter) or assets of another corporation, or otherwise apply to any transaction which does not involve a merger or consolidation; or (d) Permit any subsidiary to merge or consolidate with or into any other corporation or corporations, except (i) with one or more wholly-owned subsidiaries of the Company or (ii) with the Company; or (e) Itself, or permit any subsidiary to, sell, transfer or dispose of any stock whatsoever issued by any subsidiary, except to the Company and/or one or more of its wholly-owned subsidiaries and except such number of shares as may be necessary to qualify persons to act as directors of any such subsidiary, unless prior thereto or at the same time all stock and all other securities and obligations of such subsidiary owned directly or indirectly by the Company and its subsidiaries are sole, transferred or disposed of; or (f) Permit any subsidiary to issue (except to the Company and/or one of its wholly-owned subsidiaries) any shares of stock ranking prior to the stock owned directly or indirectly by the Company or any stock or obligations convertible into or evidencing the right to purchase shares of such prior stock, or to issue shares of stock of any other class unless effective provisions shall be made that such additional stock (or such part thereof as shall be proportionate to the part of the entire stock of such class owned by the Company, directly or indirectly, immediately prior to the issue of such stock) shall forthwith upon the issuance thereof be acquired by the Company and/or one of its wholly-owned subsidiaries. No vote or consent of the holders of the Preferred Stock shall be required in respect of any transaction enumerated in the preceding paragraphs (a) to (f) both inclusive, if at or prior to the time when such transaction is to take effect provision is made for the redemption or other retirement of all shares of the Preferred Stock then outstanding, the consent of which would otherwise be required. 13. As used herein the term "subsidiary" or "subsidiaries" shall be deemed to mean and include any corporation substantially all of whose properties are located within the limits of the State of Pennsylvania, not less than a majority of the voting stock of which (not including stock having voting power only upon the happening of an event of default) is at any time owned directly or indirectly by the Company. 14. No provision set forth herein is intended or shall be construed to relieve the Company from compliance with any applicable constitutional or statutory provisions requiring the vote or written consent of a greater number of the outstanding shares of the Preferred Stock. 15. No holder of shares of Preferred Stock, of any series, has any preemptive, conversion or other subscription rights, and no holder of the Common Stock has any preemptive or other subscription rights. 16. The Company reserves the right to increase or decrease its authorized capital stock, or any class or series thereof, or to reclassify the same, and to amend, alter, change or repeal any provision contained in these Articles, or in any amendment thereto, in the manner now or hereafter prescribed by law, but subject to such conditions and limitations as are above prescribed and all rights conferred upon stockholders in these Articles, or in any amendment thereto, are granted subject to this reservation. 17. The Company may from time to time issue and dispose of its shares of Common Stock without nominal or par value, for such consideration payable in money, property or otherwise, and upon such terms and in such manner, or as dividends payable therein, as may be fixed or determined from time to time by the Board of Directors, and authority is hereby granted to the Board of Directors so to fix and determine such consideration, terms and manner. On May 1, 1946, at a special meeting held after due notice thereof, the Board of Directors of the Company duly adopted resolutions fixing the annual dividend rate, the redemption price or prices, and the amounts per share payable upon voluntary or involuntary dissolution, liquidation or winding up of the Company for the 4.10% Cumulative Preferred Stock as follows: "RESOLVED, that pursuant to authorization by the stockholders of the Company, the annual dividend rate for the 4.10% Cumulative Preferred Stock of the Company, the redemption price thereof, and the amounts per share payable to the holders thereof upon any voluntary or involuntary dissolution, liquidation or winding up of the Company, are as follows: (1) The annual dividend rate shall be 4.10%. (2) The redemption prices shall be $107.50 per share, if redeemed on or prior to January 1, 1951, and $105.50 per share if redeemed after January 1, 1951, together in each case with an amount equal to the accrued dividends on said shares to the date fixed for redemption. (3) The amount per share payable in the event of voluntary dissolution, liquidation or winding up, in case such event shall occur on or prior to January 1, 1951, shall be $107.50 per share, and no more, and in case such event shall occur after January 1, 1951, shall be $105.50 per share, and no more; and the amount per share payable in the event of involuntary dissolution, liquidation or winding up shall be $100, and no more, together in each case with an amount equal to the accrued dividends on said shares to the date fixed for the payment of said amount." On June 1, 1966, at a special meeting held after due notice thereof, the Board of Directors of the Company duly adopted resolutions fixing the annual dividend rate, the redemption price or prices, the amounts per share payable upon voluntary or involuntary dissolution, liquidation or winding up of the Company and the time, period and manner of the exercise of the annual non-cumulative tender right for the 1966 Cumulative Preferred Stock of the Company as follows: "RESOLVED, that the annual dividend rate for the 1966 Cumulative Preferred Stock of the Company, the redemption price or prices thereof, and the amount or amounts per share payable to holders thereof upon any voluntary or involuntary dissolution, liquidation or winding up of the Company, are hereby fixed and determined as follows: (1) The annual dividend rate shall be 5.75%. (2) The redemption price shall be $107.00 per share if redeemed on or prior to June 30, 1971, $105.75 per share if redeemed after June 30, 1971, but on or before June 30, 1976, and $102.00 per share if redeemed after June 30, 1976, together in each case with an amount equal to the accrued dividends on said shares to the date fixed for redemption. (3) The amount per share payable in the event of voluntary dissolution, liquidation or winding up of the Company, in case such event shall occur on or prior to June 30, 1971 shall be $107.00 per share, and no more, and in case such event shall occur after June 30, 1971, but on or before June 30, 1976, shall be $105.75 per share, and no more, and in case such event shall occur after June 30, 1976, shall be $102.00 per share, and no more, and the amount per share payable in the event of involuntary dissolution, liquidation or winding up of the Company shall be $100.00, and no more, together in each case with an amount equal to the accrued dividends on such shares to the date fixed for the payment of said amount. FURTHER RESOLVED, that, as provided in Section 3 of the Preferred Stock provisions of the Company's charter, the holders of the 1966 Cumulative Preferred Stock shall be entitled to an annual non-cumulative tender right, the time, period and manner of exercise of which shall be as follows: (1) On May 1, 1967 and each May 1 thereafter so long as any shares of the 1966 Cumulative Preferred Stock shall be outstanding, the Company will notify in writing each registered owner of shares of the 1966 Cumulative Preferred Stock that tenders of shares of the 1966 Cumulative Preferred Stock may be made to the Company during the next succeeding May 11 through May 31 (the "tender period") pursuant to the provisions of paragraphs (2) through (7) below. Such notice also shall state (a) the total number of shares of the 1966 Cumulative Preferred Stock outstanding on such May 1 and the (b) the aggregate number of shares of the 1966 Cumulative Preferred Stock which the Company has purchased (other than pursuant to the aforesaid tender right) during the 12 month period immediately preceding such May 1 at a per share price not exceeding $100 plus accrued dividends. (2) From and after May 11, 1967 each registered owner of the 1966 Cumulative Preferred Stock shall have a non-cumulative right each year to tender to the Company during the tender period and offer to sell to the Company on the next succeeding June 15, at a per share price not exceeding $100, shares of the 1966 Cumulative Preferred Stock. (3) To the extent it shall have available funds which it may legally use for the purpose and subject to the provisions of Section 6 of the Preferred Stock provisions of its charter, the Company shall on June 15, 1967 and each June 15 thereafter, purchase from each registered owner of the 1966 Cumulative Preferred stock shares of such stock which such Preferred Stockholder has properly tendered and offered for sale to the Company during the immediately preceding tender period in accordance with the preceding paragraph (2), at the per share price specified in the tender, provided, however, that in no event shall the Company be required on any June 15 to purchase from all tendering Preferred Stockholders a number of shares of the 1966 Cumulative Preferred Stock greater than the difference between (a) the whole number of shares of the 1966 Cumulative Preferred Stock which can be purchased by it on such June 15 for an aggregate purchase price of $50,000, less (b) the number of shares of the 1966 Cumulative Preferred Stock described in the Company's notice pursuant to paragraph (1) above as having been purchased by the Company during the preceding year (such difference hereinafter being referred to as "the maximum number of shares subject to the tender right"). In the event more than the maximum number of shares subject to the tender right are tendered and offered for sale to the Company during any tender period: (a) the Company shall first purchase from each tendering Preferred Stockholder the lesser of (i) that whole number of shares of the 1966 Cumulative Preferred Stock which bears the same proportion to the maximum number of shares subject to the tender right as the total number of shares of the 1966 Cumulative Preferred Stock registered in the name of that Preferred stockholder on the preceding May 1 bears by the total number of shares of the 1966 Cumulative Preferred Stock outstanding on such May 1 or (ii) the number of shares of the 1966 Cumulative Preferred Stock which such Preferred Stockholder has tendered and offered for sale during the preceding tender period; (b) If any of the maximum number of shares subject to the tender right remain unpurchased after the purchases described in preceding subparagraph (a), the Company shall then purchase from each tendering Preferred Stockholder whose total number of shares tendered during the preceding tender period has not already been purchased pursuant to subparagraph (a) above, the lesser of (i) that whole number of shares of the 1966 Cumulative Preferred Stock which bears the same proportion to the balance of the maximum number of shares subject to the tender right remaining unpurchased as the total number of shares of the 1966 Cumulative Preferred Stock registered in the name of that tendering Preferred Stockholder on the preceding May 1 bears to the total number of shares of the 1966 Cumulative Preferred Stock registered on such May 1 in the names of all tendering Preferred Stockholders whose total number of shares tendered during the preceding tender period has not already been purchased pursuant to subparagraph (a) above, or (ii) the number of shares of the 1966 Cumulative Preferred Stock which such tendering Preferred Stockholder has tendered and offered for sale during the preceding tender period and which remain unpurchased; and (c) if any of the maximum number of shares subject to the tender right remain unpurchased after the purchases described in preceding subparagraphs (a) and (b), the Company shall until the entire maximum number shares subject to the tender right has been purchased, purchase from each tendering Preferred Stockholder whose total number of shares tendered during the preceding tender period has not already been purchased, shares of the 1966 Cumulative Preferred Stock tendered during the preceding tender period on the basis described in subparagraph (b) above. (4) Any purchase by the Company of shares of the 1966 Cumulative Preferred Stock made pursuant to the provisions of the tender right as described above shall be effected as of the close of business on June 15 and the Preferred Stockholder which is the registered owner of the shares of the 1966 Cumulative Preferred Stock then purchased shall be entitled to receive the dividend payable on such date with respect to such shares. (5) The obligation of the Company to purchase shares of the 1966 Cumulative Preferred Stock tendered to it, although annual in nature, is non-cumulative and to the extent on any June 15 the Company is not required to purchase the maximum number of shares subject to the tender right, its obligation to purchase shares of the 1966 Cumulative Preferred Stock on any succeeding June 15 shall in no way be increased or otherwise affected. (6) All tenders of shares of the 1966 Cumulative Preferred Stock to the Company for purchase by it shall be on such form as the Company shall prescribe and shall furnish to registered owners of the 1966 Cumulative Preferred Stock, which form will provide, among other things, that the tender and offer to sell evidenced by the form shall be irrevocable until the Preferred Stockholder is notified by the Company that it has or has not accepted the tender) and shall be accompanied by a certificate or certificates evidencing the shares of the 1966 Cumulative Preferred Stock tendered for sale with accompanying stock powers executed in blank by an authorized signer, signatures appropriately guaranteed, and, where appropriate, by evidence of authorization of the sale of such shares. (7) On or before June 20, 1967, and each June 20 thereafter, the Company shall mail to each holder of the 1966 Cumulative Preferred Stock which tendered shares of such stock for sale to the Company during the preceding tender period (a) its check for an amount equal to the purchase price of any shares of the 1966 Cumulative Preferred Stock purchased by it in accordance with the foregoing terms and conditions from such Preferred Stockholder on the preceding June 15 less the amount of any sales or other transfer taxes payable with respect to such purchase, and (b) a certificate evidencing any shares of the 1966 Cumulative Preferred Stock tendered by such Preferred Stockholder for sale during the preceding tender period, but not purchased by the Company, together with a notice that the tender of such shares has not been accepted by the Company." On August 10, 1992 at a special meeting held after due notice thereof, the Pricing Committee of the Board of Directors of the Company duly adopted resolutions fixing the annual dividend rate, the redemption price or prices, the amounts per share payable upon voluntary or involuntary dissolution, a liquidation or winding up of the Company for the 9% Cumulative Preferred Stock as follows: "RESOLVED, that the terms and provisions of the 9% Cumulative Preferred Stock shall be as follows: (1) Holders of the outstanding shares of 9% Cumulative Preferred Stock shall be entitled to receive an annual cash dividend of 9% of the par value per share -- i.e., $9.00 per share per annum. (2) Upon any liquidation, dissolution or winding up of the Company, the holders of the outstanding shares of 9% Cumulative Preferred Stock shall be entitled to receive out of the net assets of the Company $100.00 per share of 9% Cumulative Preferred Stock, plus accrued and unpaid dividends to the date of such liquidation, dissolution or winding up. (3) (a) The 9% Cumulative Preferred Stock will not be entitled to the benefit of any sinking fund or any other mandatory redemption provision. (b) The 9% Cumulative Preferred Stock may not be redeemed at the option of the Company prior to September 15, 1997. Thereafter, the Company, at its option, may redeem all or any part of the 9% Cumulative Preferred Stock at any time or from time to time upon not less than 30 days' notice at $100.00 per share plus accrued dividends to the date of redemption, plus, in the case of redemptions occurring from September 15, 1997, to September 14, 1998, a premium of $8.00 per share, or in the case of redemptions occurring from September 15, 1998 to September 14, 1999, a premium of $4.00 per share. (4) The provisions of the 9% Cumulative Preferred Stock may be amended only with the approval by the vote or written consent or written waiver of the holders of all of the then outstanding shares of the 9% Cumulative Preferred Stock." Seventh: The Board of Directors, by a majority vote of its members, shall have the power to make, alter, amend and repeal the by-laws of the corporation not inconsistent with its Articles or with law, subject always to the power of the shareholders to change such action. EX-4 5 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Thirtieth Supplemental Indenture Dated as of December 1, 1995 (Supplemental to Indenture Dated as of March 15, 1946) ------------ PENNSYLVANIA GAS AND WATER COMPANY (formerly Scranton-Spring Brook Water Service Company) TO FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION Trustee ------------ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THIRTIETH SUPPLEMENTAL INDENTURE, dated as of the first day of December 1995, made by and between PENNSYLVANIA GAS AND WATER COMPANY (formerly Scranton-Spring Brook Water Service Company), a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (hereinafter sometimes called the "Company"), and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States, and having its principal place of business at No. 100 Wall Street, Suite 1600, in The City of New York, New York, as Trustee (hereinafter sometimes called the "Trustee"). WHEREAS, the Company executed and delivered its Indenture (hereinafter called the "Original Indenture") dated as of March 15, 1946, to Morgan Guaranty Trust Company of New York ("Morgan") (formerly Guaranty Trust Company of New York), to secure its First Mortgage Bonds and has executed and delivered twenty-nine indentures supplemental thereto dated respectively as of February 15, 1951; as of September 15, 1951; as of January 15, 1952; as of March 15, 1952; as of June 15, 1952; as of December 1, 1954; as of April 15, 1956; as of November 15, 1956; as of March 15, 1957; as of September 1, 1958; as of April 15, 1959; as of July 15, 1960; as of October 31, 1961; as of December 15, 1961; as of December 15, 1963; as of June 15, 1966; as of October 15, 1967; as of May 1, 1970; as of June 1, 1972; as of March 1, 1976; as of December 1, 1976; as of August 15, 1989; as of August 15, 1989; as of September 1, 1991; as of September 1, 1992; as of December 1, 1992; as of December 1, 1992; as of December 1, 1993; and as of November 1, 1994 (the Original Indenture as heretofore supplemented and to be supplemented by this Thirtieth Supplemental Indenture, and as the same may be further supplemented by additional indentures supplemental thereto, being hereinafter collectively called the "Indenture"); and WHEREAS, the Company, Morgan and the Trustee executed and delivered the Resignation, Successor Appointment and Acceptance Agreement dated as of September 2, 1994, pursuant to which the Trustee became successor trustee under the Indenture; and WHEREAS, the Company at November 1, 1995 (i) had retired all of the original issue of $24,500,000 principal amount of bonds of a series designated First Mortgage Bonds 27/8% 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 31/2% Series due 1982, all of the original issue of $1,000,000 principal amount of bonds of a series designated First Mortgage Bonds 47/8% Series due 1987, all of the original issue of $2,000,000 principal amount of bonds of a series designated First Mortgage Bonds 43/4% Series due 1983, all of the original issue of $3,000,000 principal amount of bonds of a series designated First Mortgage Bonds 51/2% 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 45/8% Series due 1988, all of the original issue of $4,000,000 principal amount of bonds of a series designated First Mortgage Bonds 57/8% Series due 1991, all of the original issue of $15,000,000 principal amount of bonds of a series designated First Mortgage Bonds 9% Series due 1991, all of the original issue of $10,000,000 principal amount of bonds of a series designated First Mortgage Bonds 67/8% 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, all of the original issue of $20,000,000 principal amount of bonds of a series designated First Mortgage Bonds 91/4% Series due 1996, all of the original issue of $7,000,000 principal amount of bonds of a series designated First Mortgage Bonds 8% Series due 1997 and all of the original issue of $50,000,000 principal amount of bonds of a series designated First Mortgage Bonds 9.57% Series due 1996 and (ii) had outstanding and secured by the Original Indenture, as so supplemented to the date hereof, $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 7.20% Series due 2017, $30,000,000 (of an original issue of $30,000,000) principal amount of bonds of a series designated First Mortgage Bonds 8.375% Series due 2002, $30,000,000 (of an original issue of $30,000,000) principal amount of bonds of a series designated First Mortgage Bonds 7.125% Series due 2022, $19,000,000 (of an original issue of $19,000,000) principal amount of bonds of a series designated First Mortgage Bonds 6.05% Series due 2019 and $30,000,000 (of an original issue of $30,000,000) principal amount of bonds of a series designated First Mortgage Bonds 7% Series due 2017; 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 the purpose of modifying any provisions of the Indenture provided that such modifications have been approved in accordance with Article 15 of the Original Indenture by the holders of bonds issued and outstanding under the Indenture; 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, 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 Thirtieth Supplemental Indenture have been complied with and observed, all approvals of holders of bonds issued and outstanding under the Indenture required pursuant to Article 15 2 of the Original Indenture in connection with this Thirtieth Supplemental Indenture have been obtained, and all things necessary to make this Thirtieth 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; NOW THEREFORE, THIS THIRTIETH 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, hath granted, bargained, sold, warranted, aliened, remised, released, conveyed, assigned, transferred, mortgaged, created a security interest in, pledged, set over and confirmed, and by these presents doth grant, bargain, sell, warrant, alien, remise, release, convey, assign, transfer, mortgage, create a security interest in, pledge, set over and confirm unto First Trust of New York, National Association, as Trustee, and its successor or successors in the trust and its or their assigns forever, the following described property-that is to say: 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. 3 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, 1995, 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: (S) 01. Parcel of land situate in the Township of Carbondale, Lackawanna County, from Gary A. Gormley and Carol Gormley, his wife, by Deed dated November 28, 1994 and recorded December 8, 1994 in Lackawanna County Deed Book 1494 at Page 553. Containing Three and Two One-Hundredths (3.02) acres, more or less. II The following rights-of-way and/or easements situate in the County of Columbia and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the Borough of Berwick, Columbia County, from Thomas A. Bafile, et ux, by Indenture dated November 16, 1994 and recorded December 22, 1994 in Columbia County Record Book 587 at Page 77. (S) 02. Right-of-way for gas pipeline in the Township of Briar Creek, Columbia County, from Bennie E. Naunczek, et ux, by Indenture dated November 21, 1994 and recorded December 22, 1994 in Columbia County Record Book 587 at Page 80. (S) 03. Right-of-way for gas pipeline in the Township of Briar Creek, Columbia County, from Roman Catholic Congregation, et al, by Indenture dated November 30, 1994 and recorded December 22, 1994 in Columbia County Record Book 587 at Page 86. (S) 04. Right-of-way for gas pipeline in the Town of Bloomsburg, Columbia County, from Karl Henry Dildine, by Indenture dated January 25, 1995 and recorded February 6, 1995 in Columbia County Record Book 589 at Page 869. 4 (S) 05. Right-of-way for gas pipeline in the Town of Bloomsburg, Columbia County, from Shangrila Development Corporation, by Indenture dated February 1, 1995 and recorded February 6, 1995 in Columbia County Record Book 589 at Page 865. (S) 06. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Drue C. Hoffman, et ux, by Indenture dated February 9, 1995 and recorded March 2, 1995 in Columbia County Record Book 591 at Page 178. (S) 07. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Charles B. Pursel, et ux, et al, by Indenture dated February 22, 1995 and recorded March 10, 1995 in Columbia County Record Book 591 at Page 753. (S) 08. Right-of-way for gas pipeline in the Township of South Centre, Columbia County, from Star-Kist Foods, Inc., by Indenture dated March 11, 1995 and recorded April 18, 1995 in Columbia County Record Book 594 at Page 227. (S) 09. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Kenneth E. Carey, et ux, by Indenture dated March 21, 1995 and recorded April 18, 1995 in Columbia County Record Book 594 at Page 231. (S) 10. Right-of-way for gas pipeline in the Township of Scott, Columbia County, from Judith Ann Ernst, by Indenture dated April 12, 1995 and recorded April 18, 1995 in Columbia County Record Book 594 at Page 234. (S) 11. Right-of-way for gas pipeline in the Borough of Berwick, Columbia County, from Robert A. Pearson, et al, by Indenture dated June 20, 1995 and recorded July 25, 1995 in Columbia County Record Book 601 at Page 870. (S) 12. Right-of-way for gas pipeline in the Township of Montour, Columbia County, from Alan R. Behrent, et ux, by Indenture dated August 17, 1995 and recorded August 31, 1995 in Columbia County Record Book 604 at Page 968. (S) 13. Right-of-way for gas pipeline in the Township of Montour, Columbia County, from Robert H. Progansky, by Indenture dated August 17, 1995 and recorded August 31, 1995 in Columbia County Record Book 604 at Page 971. (S) 14. Right-of-way for gas pipeline in the Township of Montour, Columbia County, from H&C Realty Corporation, by Indenture dated August 25, 1995 and recorded August 31, 1995 in Columbia County Record Book 604 at Page 974. III The following rights-of-way and/or easements situate in the County of Lackawanna and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Ralph D. Noto, et al, by Indenture dated September 3, 1993 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 703. 5 (S) 02. Right-of-way for gas pipeline in the Borough of Dalton, Lackawanna County, from Richard J. Volz, et ux, et al, by Indenture dated October 15, 1993 and recorded October 20, 1993 in Lackawanna County Deed Book 1451 at Page 186. (S) 03. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Lewis Marcus, et ux, by Indenture dated April 25, 1994 and recorded December 22, 1994 in Lackawanna County Deed Book 1496 at Page 426. (S) 04. Right-of-way for water pipeline in the Borough of Archbald, Lackawanna County, from East Side Hose Company, No. 4, by Indenture dated June 15, 1994 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 690. (S) 05. Right-of-way for gas pipeline in the Borough of Archbald, Lackawanna County, from East Side Hose Company, No. 4, by Indenture dated June 15, 1994 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 694. (S) 06. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Paul Misiura, et ux, by Indenture dated June 30, 1994 and recorded February 17, 1995 in Lackawanna County Deed Book 1501 at Page 252. (S) 07. Right-of-way for gas pipeline in the Borough of Archbald, Lackawanna County, from Valley View School District, by Indenture dated July 28, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 732. (S) 08. Right-of-way for gas pipeline in the Borough of Blakely, Lackawanna County, from William Alaimo, et ux, by Indenture dated August 5, 1994 and recorded October 5, 1994 in Lackawanna County Deed Book 1487 at Page 414. (S) 09. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Hemingway Development Limited Partnership, by Indenture dated August 15, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 736. (S) 10. Right-of-way for water pipeline in the Borough of Moosic, Lackawanna County, from Hemingway Development Limited Partnership, by Indenture dated August 15, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 741. (S) 11. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Thomas A. Regula, et ux, by Indenture dated August 19, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 746. 6 (S) 12. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Eric A. Gerchman, et ux, by Indenture dated August 20, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 750. (S) 13. Right-of-way for gas pipeline in the Borough of Blakely, Lackawanna County, from Frank Antenori, et ux, by Indenture dated August 28, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 754. (S) 14. Right-of-way for gas pipeline in the Borough of Jessup, Lackawanna County, from Envirotest/Synterra Partners, by Indenture dated September 2, 1994 and recorded October 5, 1994 in Lackawanna County Deed Book 1487 at Page 418. (S) 15. Right-of-way for gas pipeline in the Township of South Abington, Lackawanna County, from Nikelle, Inc., by Indenture dated September 9, 1994 and recorded October 5, 1994 in Lackawanna County Deed Book 1487 at Page 423. (S) 16. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Evo C. Taffera, et ux, by Indenture dated September 22, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 770. (S) 17. Right-of-way for ground bed for cathodic protection in the Borough of Dickson City, Lackawanna County, from Borough of Dickson City, by Indenture dated September 26, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 774. (S) 18. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from David A. Fidati, et ux, by Indenture dated September 27, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 778. (S) 19. Right-of-way for gas pipeline in the Borough of Dickson City, Lackawanna County, from Wegmans Food Markets, Inc., by Indenture dated October 3, 1994 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 278. (S) 20. Right-of-way for water pipeline in the Borough of Dickson City, Lackawanna County, from Wegman's Food Markets, Inc., by Indenture dated October 3, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 758. (S) 21. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Joseph E. Cronkey, et ux, by Indenture dated October 5, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 766. 7 (S) 22. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from William J. Boston, et ux, by Indenture dated October 6, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 782. (S) 23. Right-of-way for gas pipeline in the Borough of Clarks Summit, Lackawanna County, from Timothy D. Rowland, et ux, by Indenture dated October 10, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 786. (S) 24. Right-of-way for gas pipeline in the Borough of Olyphant, Lackawanna County, from Sean Rist, by Indenture dated October 19, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 790. (S) 25. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Lawrence C. Duchnik, by Indenture dated October 21, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 794. (S) 26. Right-of-way for gas pipeline in the Borough of Clarks Summit, Lackawanna County, from Henry Jellock, et ux, by Indenture dated October 25, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1491 at Page 798. (S) 27. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Glenn J. Gress, et ux, by Indenture dated October 31, 1994 and recorded November 14, 1994 in Lackawanna County Deed Book 1492 at Page 1. (S) 28. Right-of-way for gas pipeline in the City of Carbondale, Lackawanna County, from Daniel M. McNabb, et ux, by Indenture dated November 8, 1994 and recorded December 22, 1994 in Lackawanna County Deed Book 1496 at Page 430. (S) 29. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Stanley J. Gurecki, by Indenture dated November 23, 1994 and recorded December 22, 1994 in Lackawanna County Deed Book 1496 at Page 434. (S) 30. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Charles V. Mesiti, et ux, by Indenture dated December 2, 1994 and recorded December 22, 1994 in Lackawanna County Deed Book 1496 at Page 438. (S) 31. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Sharon Marranca, et al, by Indenture dated December 14, 1994 and recorded February 8, 1995 in Lackawanna County Deed Book 1500 at Page 425. (S) 32. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Howard Seymour, et ux, by Indenture dated December 20, 1994 and recorded February 8, 1995 in Lackawanna County Deed Book 1500 at Page 429. 8 (S) 33. Right-of-way for gas pipeline in the City of Carbondale, Lackawanna County, from Charles J. Zazzera, et ux, by Indenture dated December 23, 1994 and recorded February 8, 1995 in Lackawanna County Deed Book 1500 at Page 433. (S) 34. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Leo C. Woelkers, et ux, by Indenture dated December 23, 1994 and recorded February 8, 1995 in Lackawanna County Deed Book 1500 at Page 437. (S) 35. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Lee T. Besen, et ux, by Indenture dated December 23, 1994 and recorded February 8, 1995 in Lackawanna County Deed Book 1500 at Page 441. (S) 36. Right-of-way for gas pipeline in the Borough of Clarks Summit, Lackawanna County, from Highland Associates II, et al, by Indenture dated January 4, 1994 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 285. (S) 37. Right-of-way for gas pipeline in the Borough of Clarks Summit, Lackawanna County, from Mack Bolus, et ux, by Indenture dated January 13, 1995 and recorded February 8, 1995 in Lackawanna County Deed Book 1500 at Page 445. (S) 38. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Robert C. Bolus, et ux, by Indenture dated January 31, 1995 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 290. (S) 39. Right-of-way for gas pipeline in the Borough of Clarks Summit, Lackawanna County, from Edwin R. Swarts, et ux, by Indenture dated February 2, 1995 and recorded February 8, 1995 in Lackawanna County Deed Book 1500 at Page 449. (S) 40. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Donald McGuire, et al, by Indenture dated February 10, 1995 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 294. (S) 41. Right-of-way for gas pipeline in the Borough of Taylor, Lackawanna County, from Lloyd Evans, et ux, by Indenture dated February 13, 1995 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 298. (S) 42. Right-of-way for gas pipeline in the Borough of Clarks Summit, Lackawanna County, from Allied Genevieve Hayes/McDade Apartments, by Indenture dated February 14, 1995 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 302. 9 (S) 43. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Jeffrey L. Frear, by Indenture dated February 17, 1995 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 307. (S) 44. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Paul G. Walsh, et ux, by Indenture dated February 20, 1995 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 311. (S) 45. Right-of-way for water pipeline in the Borough of Dunmore, Lackawanna County, from Paul G. Walsh, et ux, by Indenture dated February 20, 1995 and recorded March 13, 1995 in Lackawanna County Deed Book 1503 at Page 315. (S) 46. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Gerald J. Notarianni, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1506 at Page 785. (S) 47. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Gerald J. Notarianni, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1506 at Page 789. (S) 48. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Claire Notarianni, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1506 at Page 793. (S) 49. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Claire Notarianni, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1506 at Page 797. (S) 50. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Claire Utz, et al, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1506 at Page 801. (S) 51. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Claire Utz, et al, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1507 at Page 1. (S) 52. Right-of-way for gas pipeline in the City of Scranton, Lackawanna County, from Jerry Notarianni, et ux, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1507 at Page 5. (S) 53. Right-of-way for water pipeline in the City of Scranton, Lackawanna County, from Jerry Notarianni, et ux, by Indenture dated March 13, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1507 at Page 9. 10 (S) 54. Right-of-way for gas pipeline in the City of Carbondale, Lackawanna County, from Sandra Baumann Marsh, by Indenture dated March 14, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1507 at Page 13. (S) 55. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from County of Lackawanna, by Indenture dated March 24, 1995 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 698. (S) 56. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Joseph E. Mariotti Trustee, by Indenture dated April 6, 1995 and recorded April 20, 1995 in Lackawanna County Deed Book 1506 at Page 781. (S) 57. Right-of-way for water pipeline in the Borough of Dunmore, Lackawanna County, from Price Chopper Operating Co. of PA. Inc., by Indenture dated April 26, 1995 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 709. (S) 58. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from Price Chopper Operating Co. of PA. Inc., by Indenture dated April 26, 1995 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 719. (S) 59. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Scranton Lackawanna Industrial Building Company, by Indenture dated May 12, 1995 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 724. (S) 60. Right-of-way for gas pipeline in the Borough of Clarks Summit, Lackawanna County, from Richard C. Florey, et ux, by Indenture dated May 19, 1995 and recorded June 8, 1995 in Lackawanna County Deed Book 1511 at Page 714. (S) 61. Right-of-way for gas pipeline in the Township of Scott, Lackawanna County, from Robert J. Vail, et ux, by Indenture dated June 19, 1995 and recorded August 4, 1995 in Lackawanna County Deed Book 1517 at Page 744. (S) 62. Right-of-way for water pipeline in the Township of Scott, Lackawanna County, from Robert J. Vail, et ux, by Indenture dated June 19, 1995 and recorded August 4, 1995 in Lackawanna County Deed Book 1517 at Page 749. (S) 63. Right-of-way for gas pipeline in the Township of Abington, Lackawanna County, from Ronald Schack, et ux, by Indenture dated June 20, 1995 and recorded August 4, 1995 in Lackawanna County Deed Book 1517 at Page 754. (S) 64. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Joseph J. Gentile, et ux, by Indenture dated July 11, 1995 and recorded August 4, 1995 in Lackawanna County Deed Book 1517 at Page 759. 11 (S) 65. Right-of-way for gas pipeline in the Borough of Dunmore, Lackawanna County, from GNB Battery Technologies, Inc., by Indenture dated July 18, 1995 and recorded September 1, 1995 in Lackawanna County Deed Book 1520 at Page 630. (S) 66. Right-of-way for water pipeline in the Borough of Moosic, Lackawanna County, from Hemingway Development, by Indenture dated August 7, 1995 and recorded September 1, 1995 in Lackawanna County Deed Book 1520 at Page 647. (S) 67. Right-of-way for gas pipeline in the Borough of Moosic, Lackawanna County, from Hemingway Development, by Indenture dated August 7, 1995 and recorded September 1, 1995 in Lackawanna County Deed Book 1520 at Page 640. (S) 68. Right-of-way for gas pipeline in the Borough of Old Forge, Lackawanna County, from Mariotti Lumber Company, by Indenture dated August 7, 1995 and recorded September 1, 1995 in Lackawanna County Deed Book 1520 at Page 635. IV The following rights-of-way and/or easements situate in the County of Lancaster and Commonwealth of Pennsylvania, to wit: (S)01. Right-of-way for gas pipeline in the Township of Warwick, Lancaster County, from Ivan Z. Stauffer and Marie L. Stauffer (Stauffers) and Clyde Sauder, Arlene W. Sauder and Earl W. Hostetter, Partners, as tenants in co-partnership t/d/b/a Samuel N. Hostetter and Clyde Sauder, Partners, (Hostetter and Sauder) by Indenture dated February 22, 1995 and recorded March 27, 1995 in Lancaster County Deed Book 4593 at Page 0382. V The following rights-of-way and/or easements situate in the County of Luzerne and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from First Valley Bank, by Indenture dated September 28, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 449. (S) 02. Right-of-way for gas pipeline in the Township of Lehman, Luzerne County, from Bradly E. Bryant, et al, by Indenture dated October 4, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 445. (S) 03. Right-of-way for gas pipeline in the City of Wilkes-Barre and Township of Wilkes-Barre, Luzerne County, from Carol Ciavarella, widow, by Indenture dated October 5, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 441. 12 (S) 04. Right-of-way for water pipeline in the Borough of Exeter, Luzerne County, from The Greater Pittson Industrial & Commerical Development Authority, et al, by Indenture dated October 11, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 436. (S) 05. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Mark J. Luchi, et al, by Indenture dated October 12, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 431. (S) 06. Right-of-way for water pipeline in the Township of Wright, Luzerne County, from Mark J. Luchi, et al, by Indenture dated October 12, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 472. (S) 07. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from Borough of Luzerne, by Indenture dated October 13, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 468. (S) 08. Right-of-way for gas pipeline in the Borough of Harveys Lake, Luzerne County, from Joseph Paglianite, by Indenture dated October 14, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 464. (S) 09. Right-of-way for gas pipeline in the Township of Newport, Luzerne County, from Edward E. James, Jr., et ux, by Indenture dated October 17, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 460. (S) 10. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from Daniel Pieretti, by Indenture dated October 18, 1994 and recorded October 24, 1994 in Luzerne County Deed Book 2508 at Page 456. (S) 11. Right-of-way for gas pipeline in the Borough of Avoca, Luzerne County, from Leo Murphy, et ux, by Indenture dated October 24, 1994 and recorded November 4, 1994 in Luzerne County Deed Book 2509 at Page 1198. (S) 12. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Gregson Amos, et ux, by Indenture dated October 26, 1994 and recorded November 4, 1994 in Luzerne County Deed Book 2510 at Page 1. (S) 13. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Hampton Corners, by Indenture dated October 31, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 241. (S) 14. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Raymond M. Black, Sr., by Indenture dated November 9, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 246. (S) 15. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Paul V. Irzinski, et ux, by Indenture dated November 14, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 289. 13 (S) 16. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from Richard M. Uter, et al, by Indenture dated November 17, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 281. (S) 17. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from James Keller, et ux, by Indenture dated November 17, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 250. (S) 18. Right-of-way for gas pipeline in the Township of Lehman, Luzerne County, from Maplemoor, Inc., T/A Huntsville Golf Club, by Indenture dated November 17, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 275. (S) 19. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from James T. Reese, by Indenture dated November 18, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 271. (S) 20. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Nellie Fromel, by Indenture dated November 18, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 263. (S) 21. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Mary Pensieri, by Indenture dated December 1, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 254. (S) 22. Right-of-way for water pipeline in the Township of Plains, Luzerne County, from Michael J. Milkanin, Jr., et al, by Indenture dated December 5, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 258. (S) 23. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Michael J. Milkanin, Jr., et al, by Indenture dated December 5, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 297. (S) 24. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from Township of Dallas, by Indenture dated December 7, 1994 and recorded February 7, 1995 in Luzerne County Deed Book 2518 at Page 319. (S) 25. Right-of-way for gas pipeline in the Township of Dallas, Luzerne County, from Wilkes-Barre General Realty Corporation, by Indenture dated December 8, 1994 and recorded February 7, 1995 in Luzerne County Deed Book 2518 at Page 314. (S) 26. Right-of-way for gas pipeline in the Borough of Forty Fort, Luzerne County, from County of Luzerne, by Indenture dated December 8, 1994 and recorded July 26, 1995 in Luzerne County Deed Book 2534 at Page 562. (S) 27. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from John Giampietro, et al, by Indenture dated December 9, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 285. 14 (S) 28. Right-of-way for gas pipeline in the Borough of Plymouth, Luzerne County, from John A. Krasson, et ux, by Indenture dated December 12, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 267. (S) 29. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Robert K. Mericle, by Indenture dated December 13, 1994 and recorded December 21, 1994 in Luzerne County Deed Book 2514 at Page 293. (S) 30. Corrective Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from Raymond M. Black, Sr., by Indenture dated January 11, 1995 and recorded February 7, 1995 in Luzerne County Deed Book 2518 at Page 306. (S) 31. Right-of-way for water pipeline in the Borough of West Wyoming, Luzerne County, from Pagnotti Coal Company, by Indenture dated January 25, 1995 and recorded February 7, 1995 in Luzerne County Deed Book 2518 at Page 310. (S) 32. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Bernard Hudler, by Indenture dated January 31, 1995 and recorded March 9, 1995 in Luzerne County Deed Book 2520 at Page 913. (S) 33. Right-of-way for gas pipeline in the Borough of Nescopeck, Luzerne County, from Ruth Creveling, by Indenture dated February 1, 1995 and recorded February 7, 1995 in Luzerne County Deed Book 2518 at Page 302. (S) 34. Right-of-way for gas pipeline in the Borough of Nescopeck, Luzerne County, from Dale C. Knelly, et ux, by Indenture dated February 1, 1995 and recorded February 7, 1995 in Luzerne County Deed Book 2518 at Page 323. (S) 35. Right-of-way for water pipeline in the Township of Wright, Luzerne County, from Richard Ayre, et ux, by Indenture dated February 9, 1995 and recorded March 9, 1995 in Luzerne County Deed Book 2520 at Page 908. (S) 36. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Richard Ayre, et ux, by Indenture dated February 9, 1995 and recorded March 9, 1995 in Luzerne County Deed Book 2520 at Page 917. (S) 37. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from 315 Realty Corp., Inc. by Indenture dated February 13, 1995 and recorded March 9, 1995 in Luzerne County Deed Book 2520 at Page 900. (S) 38. Right-of-way for gas pipeline in the Township of Hanover, Luzerne County, from M. B. Investments, by Indenture dated February 15, 1995 and recorded March 9, 1995 in Luzerne County Deed Book 2520 at Page 904. (S) 39. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from Gerald Kolman, et ux, by Indenture dated March 23, 1995 and recorded April 19, 1995 in Luzerne County Deed Book 2524 at Page 588. 15 (S) 40. Right-of-way for gas pipeline in the Borough of Luzerne, Luzerne County, from James R. Shepherd, Sr., et al, by Indenture dated March 23, 1995 and recorded April 19, 1995 in Luzerne County Deed Book 2524 at Page 620. (S) 41. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from 315 Realty Corp., Inc., by Indenture dated March 28, 1995 and recorded April 19, 1995 in Luzerne County Deed Book 2524 at Page 592. (S) 42. Right-of-way for gas pipeline in the Township of Lehman, Luzerne County, from Maplemoor, Inc. T/A Huntsville Golf Club, by Indenture dated March 28, 1995 and recorded April 19, 1995 in Luzerne County Deed Book 2524 at Page 601. (S) 43. Right-of-way for water pipeline in the City of Wilkes-Barre, Luzerne County, from Housing Authority of The City of Wilkes-Barre, by Indenture dated April 3, 1995 and recorded April 19, 1995 in Luzerne County Deed Book 2524 at Page 606. (S) 44. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Eastern Consolidated Management Corp., by Indenture dated April 11, 1995 and recorded April 19, 1995 in Luzerne County Deed Book 2524 at Page 610. (S) 45. Right-of-way for water pipeline in the Township of Wright, Luzerne County, from Eastern Consolidated Management Corp., by Indenture dated April 11, 1995 and recorded April 19, 1995 in Luzerne County Deed Book 2524 at Page 615. (S) 46. Right-of-way for gas pipeline in the Township of Plains, Luzerne County, from Victoria Giovagnoli, widow, by Indenture dated April 24, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 207. (S) 47. Right-of-way for gas pipeline in the Borough of Dallas, Luzerne County, from M. Mercedes Kane, by Indenture dated May 5, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 199. (S) 48. Right-of-way for gas pipeline in the Borough of Dallas, Luzerne County, from Robert E. Post, et ux, by Indenture dated May 5, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 203. (S) 49. Right-of-way for water pipeline in the City of Nanticoke, Luzerne County, from Daniel Markowski Jr., et ux, by Indenture dated May 9, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 195. (S) 50. Right-of-way for gas pipeline in the Borough of Dallas, Luzerne County, from Frank R. Orloski, Sr., et ux, by Indenture dated May 9, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 191. 16 (S) 51. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Dorthy C. Alstein, widow, by Indenture dated May 12, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 220. (S) 52. Right-of-way for gas pipeline in the Borough of Duryea, Luzerne County, from Stephen James Scoda, by Indenture dated May 12, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 211. (S) 53. Right-of-way for gas pipeline in the Township of Wilkes-Barre, Luzerne County, from Cedar Associates, by Indenture dated May 16, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 183. (S) 54. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Joseph C. Flynn, Jr., et ux, et al, by Indenture dated May 18, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 187. (S) 55. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from William Lamoreux, III, et ux, by Indenture dated May 18, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 179. (S) 56. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Maple Crest-Phase II Development Company, by Indenture dated June 2, 1995 and recorded June 7, 1995 in Luzerne County Deed Book 2529 at Page 215. (S) 57. Right-of-way for gas pipeline in the Township of Fairview, Luzerne County, from Ruth Nobel, et vir, by Indenture dated June 15, 1995 and recorded July 26, 1995 in Luzerne County Deed Book 2534 at Page 567. (S) 58. Right-of-way for gas pipeline in the Borough of Plymouth, Luzerne County, from John C. Good, et ux, by Indenture dated June 21, 1995 and recorded July 26, 1995 in Luzerne County Deed Book 2534 at Page 571. (S) 59. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Greater Wilkes-Barre Industrial Fund, Inc. and Communication Microwave Corp., by Indenture dated June 28, 1995 and recorded July 26, 1995 in Luzerne County Deed Book 2534 at Page 579. (S) 60. Right-of-way for gas pipeline in the Township of Township, Luzerne County, from Robert K. Mericle, by Indenture dated June 30, 1995 and recorded July 26, 1995 in Luzerne County Deed Book 2534 at Page 575. (S) 61. Right-of-way for water pipeline in the Township of Fairview, Luzerne County, from Thomas A. Hollock, et ux, by Indenture dated July 7, 1995 and recorded July 26, 1995 in Luzerne County Deed Book 2534 at Page 548. 17 (S) 62. Right-of-way for gas pipeline in the Borough of Sugar Notch, Luzerne County, from Esther P. Munson, by Indenture dated July 13, 1995 and recorded July 26, 1995 in Luzerne County Deed Book 2534 at Page 558. (S) 63. Right-of-way for gas pipeline in the Township of Kingston, Luzerne County, from Echo Valley Estates, Inc., by Indenture dated July 27, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 477. (S) 64. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from McCarthy Tire Service Company, by Indenture dated July 27, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 455. (S) 65. Right-of-way for gas pipeline in the Borough of Kingston, Luzerne County, from William Barney Trustee, et al, by Indenture dated August 1, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 472. (S) 66. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from John J. Rygiel, Executor, by Indenture dated August 1, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 459. (S) 67. Right-of-way for gas pipeline in the Borough of Plymouth, Luzerne County, from Borough of Plymouth, by Indenture dated August 1, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 467. (S) 68. Right-of-way for water pipeline in the Township of Pittston, Luzerne County, from Joseph A. Milhalka, et ux, by Indenture dated August 5, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 482. (S) 69. Right-of-way for gas pipeline in the Borough of Wyoming, Luzerne County, from Jacob Vinitsker, et ux, by Indenture dated August 9, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 494. (S) 70. Right-of-way for gas pipeline in the City of Wilkes-Barre, Luzerne County, from Harish Joshi, et al, by Indenture dated August 14, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 503. (S) 71. Right-of-way for gas pipeline in the Township of Newport, Luzerne County, from Edward H. Kerbaugh, et ux, by Indenture dated August 21, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 512. (S) 72. Right-of-way for gas pipeline in the Township of Wright, Luzerne County, from Richard Ayre, et ux, by Indenture dated August 28, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 577. (S) 73. Right-of-way for gas pipeline in the Borough of Plymouth, Luzerne County, from Susan A. Stravinsky and Kurt Santayana, by Indenture dated August 29, 1995 and recorded September 1, 1995 in Luzerne County Deed Book 2538 at Page 521. 18 VI The following rights-of-way and/or easements situate in the County of Lycoming and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Industrial Properties Corporation, et al, by Indenture dated November 17, 1994 and recorded December 22, 1994 in Lycoming County Deed Book 2364 at Page 302. (S) 02. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Marguerite L. Thompson, by Indenture dated November 21, 1994 and recorded December 22, 1994 in Lycoming County Deed Book 2364 at Page 307. (S) 03. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from David W. Himmelreich, et ux, by Indenture dated November 21, 1994 and recorded December 22, 1994 in Lycoming County Deed Book 2364 at Page 310. (S) 04. Right-of-way for gas pipeline in the Township of Fairfield, Lycoming County, from Kevin P. Fenstermacher, et ux, by Indenture dated December 8, 1994 and recorded December 22, 1994 in Lycoming County Deed Book 2364 at Page 313. (S) 05. Right-of-way for gas pipeline in the Township of Fairfield, Lycoming County, from Byron A. Singer, et ux, by Indenture dated December 12, 1994 and recorded December 22, 1994 in Lycoming County Deed Book 2364 at Page 316. (S) 06. Right-of-way for gas pipeline in the Township of Fairfield, Lycoming County, from Robert D. Sitler, et ux, by Indenture dated December 12, 1994 and recorded December 22, 1994 in Lycoming County Deed Book 2364 at Page 319. (S) 07. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from J. K. Rishel Furniture Company, et al, by Indenture dated January 18, 1995 and recorded March 10, 1995 in Lycoming County Deed Book 2393 at Page 234. (S) 08. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from Jack E. Strouse, by Indenture dated May 5, 1995 and recorded June 13, 1995 in Lycoming County Deed Book 2433 at Page 187. (S) 09. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Warrior Run Development Corporation, by Indenture dated May 5, 1995 and recorded June 13, 1995 in Lycoming County Deed Book 2433 at Page 190. (S) 10. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Linn Street Manor Associates, by Indenture dated May 5, 1995 and recorded June 13, 1995 in Lycoming County Deed Book 2433 at Page 193. 19 (S) 11. Right-of-way for gas pipeline in the City of Williamsport, Lycoming County, from Wegmans Food Markets, Inc., by Indenture dated June 2, 1995 and recorded June 13, 1995 in Lycoming County Deed Book 2433 at Page 196. (S) 12. Right-of-way for gas pipeline in the Township of Muncy Creek, Lycoming County, from Muncy Valley Hospital, by Indenture dated June 27, 1995 and recorded July 28, 1995 in Lycoming County Deed Book 2457 at Page 20. (S) 13. Right-of-way for gas pipeline in the Township of Loyalsock, Lycoming County, from William L. Cuebas, et ux, by Indenture dated August 1, 1995 and recorded August 31, 1995 in Lycoming County Deed Book 2474 at Page 313. VII The following rights-of-way and/or easements situate in the County of Montour and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the Borough of Danville, Montour County, from Danville Municipal Authority, by Indenture dated September 14, 1994 and recorded November 7, 1994 in Montour County Record Book 179 at Page 1130. VIII The following rights-of-way and/or easements situate in the County of Northumberland and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the City of Sunbury, Northumberland County, from Sunbury Textile Mills, Inc., by Indenture dated December 6, 1993 and recorded November 7, 1994 in Northumberland County Record Book 982 at Page 032. (S) 02. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Susquehanna Valley School Authority, by Indenture dated August 24, 1994 and recorded February 6, 1995 in Northumberland County Record Book 991 at Page 663. (S) 03. Right-of-way for gas pipeline in the Township of Upper Augusta, Northumberland County, from Jeanne M. Broscious, by Indenture dated October 15, 1994 and recorded November 7, 1994 in Northumberland County Record Book 982 at Page 025. (S) 04. Right-of-way for gas pipeline in the City of Sunbury, Northumberland County, from Pennsylvania Power & Light Company, by Indenture dated October 17, 1994 and recorded November 7, 1994 in Northumberland County Record Book 982 at Page 028. 20 (S) 05. Right-of-way for gas pipeline in the Township of Lewis, Northumberland County, from John Sensenig, et ux, by Indenture dated October 25, 1994 and recorded November 7, 1994 in Northumberland County Record Book 982 at Page 013. (S) 06. Right-of-way for gas pipeline in the Township of Lewis, Northumberland County, from Leon H. Zimmerman, et ux, by Indenture dated October 25, 1994 and recorded November 7, 1994 in Northumberland County Record Book 982 at Page 016. (S) 07. Right-of-way for gas pipeline in the Borough of Watsontown, Northumberland County, from Kenneth W. Blessing, Jr., et al, by Indenture dated October 25, 1994 and recorded November 7, 1994 in Northumberland County Record Book 982 at Page 019. (S) 08. Right-of-way for gas pipeline in the Borough of Watsontown, Northumberland County, from Franklin L. Harmon, Sr., by Indenture dated October 28, 1994 and recorded November 7, 1994 in Northumberland County Record Book 982 at Page 022. (S) 09. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Michael R. Connelly, et ux, by Indenture dated November 21, 1994 and recorded December 22, 1994 in Northumberland County Record Book 987 at Page 404. (S) 10. Right-of-way for gas pipeline in the Borough of Milton, Northumberland County, from Albert A. Posseda, et ux, by Indenture dated November 28, 1994 and recorded February 6, 1995 in Northumberland County Record Book 991 at Page 670. (S) 11. Right-of-way for gas pipeline in the Borough of Milton, Northumberland County, from Brenda L. Reeder, by Indenture dated November 28, 1994 and recorded February 6, 1995 in Northumberland County Record Book 991 at Page 674. (S) 12. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Douglas W. Mertz, by Indenture dated November 30, 1994 and recorded February 6, 1995 in Northumberland County Record Book 991 at Page 660. (S) 13. Right-of-way for gas pipeline in the Borough of Watsontown, Northumberland County, from Lawrence S. Mattern, et al, by Indenture dated December 19, 1994 and recorded December 22, 1994 in Northumberland County Record Book 987 at Page 401. (S) 14. Right-of-way for gas pipeline in the Township of Delaware, Northumberland County, from Russell F. Yordy Jr., et ux, by Indenture dated January 5, 1995 and recorded February 6, 1995 in Northumberland County Record Book 991 at Page 677. 21 (S) 15. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Gun Rack, Inc., by Indenture dated January 5, 1995 and recorded February 6, 1995 in Northumberland County Record Book 991 at Page 680. (S) 16. Right-of-way for gas pipeline in the Borough of Turbotville, Northumberland County, from Florence M. Schell, widow, by Indenture dated January 18, 1995 and recorded February 6, 1995 in Northumberland County Record Book 991 at Page 684. (S) 17. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Steven L. Vankirk, by Indenture dated February 23, 1995 and recorded April 25, 1995 in Northumberland County Record Book 999 at Page 820. (S) 18. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Benedict Cerven, et ux, by Indenture dated March 16, 1995 and recorded April 25, 1995 in Northumberland County Record Book 999 at Page 823. (S) 19. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Benedict Cerven, et ux, by Indenture dated March 16, 1995 and recorded April 25, 1995 in Northumberland County Record Book 999 at Page 826. (S) 20. Right-of-way for gas pipeline in the Borough of Northumberland, Northumberland County, from Kenneth L. Young, et al, by Indenture dated March 24, 1995 and recorded April 25, 1995 in Northumberland County Record Book 999 at Page 829. (S) 21. Right-of-way for gas pipeline in the Borough of Northumberland, Northumberland County, from Branchview, Inc., by Indenture dated April 7, 1995 and recorded April 25, 1995 in Northumberland County Record Book 999 at Page 835. (S) 22. Right-of-way for gas pipeline in the Township of Lewis, Northumberland County, from Robert L. Kilgus, Jr., et ux, by Indenture dated April 11, 1995 and recorded April 25, 1995 in Northumberland County Record Book 999 at Page 832. (S) 23. Right-of-way for gas pipeline in the Township of Point, Northumberland County, from Kenneth Bollinger, et ux, by Indenture dated May 13, 1995 and recorded June 6, 1995 in Northumberland County Record Book 1005 at Page 472. (S) 24. Right-of-way for gas pipeline in the Township of West Chillisquaque, Northumberland County, from West Chillisquaque Post No. 84, American Legion Home Association, by Indenture dated June 13, 1995 and recorded July 25, 1995 in Northumberland County Record Book 1011 at Page 559. 22 (S) 25. Right-of-way for gas pipeline in the Township of West Chillisquaque, Northumberland County, from Crossroads Church of the Nazarene of Lewisburg, by Indenture dated June 14, 1995 and recorded July 25, 1995 in Northumberland County Record Book 1011 at Page 563. IX The following rights-of-way and/or easements situate in the County of Snyder and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the Township of Monroe, Snyder County, from Wal-Mart Stores, Inc., by Indenture dated October 3, 1994 and recorded November 7, 1994 in Snyder County Record Book 343 at Page 412. (S) 02. Right-of-way for gas pipeline in the Township of Monroe, Snyder County, from Lee C. Brouse, et ux, by Indenture dated October 28, 1994 and recorded November 7, 1994 in Snyder County Record Book 343 at Page 409. (S) 03. Right-of-way for gas pipeline in the Borough of Selinsgrove, Snyder County, from Gary L. Lenig, et ux, by Indenture dated November 14, 1994 and recorded December 22, 1994 in Snyder County Record Book 345 at Page 410. (S) 04. Right-of-way for gas pipeline in the Borough of Selinsgrove, Snyder County, from Susquehanna University of The Evangelical Lutheran Church, by Indenture dated July 26, 1995 and recorded August 31, 1995 in Snyder County Record Book 358 at Page 4. X The following rights-of-way and/or easements situate in the County of Susquehanna and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the Township of Clifford, Susquehanna County, from Kent D. Maxwell, et ux, by Indenture dated January 30, 1995 and recorded March 20, 1995 in Susquehanna County Deed Book 518 at Page 70. XI The following rights-of-way and/or easements situate in the County of Union and Commonwealth of Pennsylvania, to wit: (S) 01. Right-of-way for gas pipeline in the Township of Kelly, Union County, from Lewisburg Area School District, by Indenture dated September 12, 1994 and recorded November 7, 1994 in Union County Record Book 390 at Page 95. (S) 02. Right-of-way for gas pipeline in the Township of White Deer, Union County, from Clyde S. Showers, et ux, by Indenture dated May 31, 1995 and recorded June 6, 1995 in Union County Record Book 418 at Page 101. 23 (S) 03. Right-of-way for gas pipeline in the Township of White Deet, Union County, from Edward A. Doebler, Jr., et ux, by Indenture dated May 31, 1995 and recorded June 6, 1995 in Union County Record Book 418 at Page 105. (S) 04. Right-of-way for gas pipeline in the Township of Kelly, Union County, from Julia E. Sanders, Executrix, by Indenture dated July 12, 1995 and recorded August 31, 1995 in Union County Record Book 432 at Page 235. (S) 05. Right-of-way for gas pipeline in the Township of Kelly, Union County, from United Methodist Countinuing Care Services, by Indenture dated July 20, 1995 and recorded August 31, 1995 in Union County Record Book 432 at Page 240. 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 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 de scribed 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 Thirtieth Supplemental Indenture, in all respects as if said property was specifically 24 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. Miscellaneous (S) 1.01 The WITNESSETH granting clause of the Original Indenture is hereby amended by: (i) deleting the words "impounding, storing, transporting and selling" in the eighth line of the third paragraph thereof; (ii) deleting the words "water, or in its business of" in the ninth line of the third paragraph thereof; (iii) deleting the words "all buildings, improvements, standpipes, towers" in the first line of the fourth paragraph thereof; (iv) deleting the second through sixth lines of the fourth paragraph thereof; (v) deleting the words "ing, transmission or distribution of water;" in the seventh line of the fourth paragraph thereof; (vi) deleting the words "water or" in the fourteenth line of the fourth paragraph thereof; (vii) deleting the sixth paragraph thereof. (S) 1.02 Section 1.02(m) of the Original Indenture is hereby amended by deleting the words "water or" in the first and eighth lines thereof. (S) 1.03 Section 1.05 of the Original Indenture is hereby amended by (i) deleting the words "water or" in the seventh and thirteenth lines thereof and (ii) adding the words "except if not" immediately after the word "case" in the seventh and tenth lines thereof. (S) 1.04 Section 1.05(a)(2) of the Original Indenture is hereby amended by deleting the words "water or" in the fifth line thereof. (S) 1.05 Section 1.05(b)(4) of the Original Indenture is hereby amended by deleting the words "water or" in the fifth line thereof. (S) 1.06 Section 1.05(b)(5) of the Original Indenture is hereby amended by adding the word "and" immediately after the semi-colon in the fifth line thereof. (S) 1.07 Section 1.06(A)(1) of the Original Indenture is hereby amended by (i) deleting the words "water and gas businesses" in the second line thereof and (ii) substituting therefor the words "gas business." 25 (S) 1.08 Section 1.06(A)(2) of the Original Indenture is hereby amended by (i) deleting the word "businesses" in the second line thereof and substituting therefor the word "business" and (ii) deleting the words "the sum of twelve and one-half per centum (121/2%) of the gross water operating revenues and" in the fifteenth, sixteenth and seventeenth lines thereof. (S) 1.09 Section 1.06(A)(4) of the Original Indenture is hereby amended by deleting the words "water and gas businesses" in the second and third lines thereof and substituting therefor the words "gas business." (S) 1.10 The further proviso in Section 1.06 of the Original Indenture is hereby amended by deleting the words "water and gas businesses" in the second line of clause (b) thereof and substituting therefor the words "gas business" in the second line of clause (b) thereof. (S) 1.11 Section 3.06(3)(B)(h) of the Original Indenture is hereby amended by deleting the words "water or" in the second, fifth, and tenth lines thereof. (S) 1.12 Section 3.06(4) of the Original Indenture is hereby amended by deleting the words "water or" in the third and thirtieth lines thereof. (S) 1.13 Section 3.07 of the Original Indenture is hereby amended by adding the words "after the date of the consummation of the sale by Pennsylvania Enterprises, Inc. ("PEI") and the Company of the Company's regulated water utility operations and certain related assets (the "Sale of the Water Business") to Pennsylvania-American Water Company ("PAWC") pursuant to an Asset Purchase Agreement dated as of April 26, 1995 (the "Asset Purchase Agreement") among PEI, the Company, PAWC and American Water Works Company, Inc." immediately after the word "cancellation" in the eighth line thereof. (S) 1.14 Section 3.07(2) of the Original Indenture is hereby amended by adding the words "after the date of the consummation of the Sale of the Water Business" immediately after the word "cancellation" in the twelfth line thereof. (S) 1.15 Section 4.07 of the Original Indenture is hereby amended by deleting the words "water and" in the eighth line thereof. (S) 1.16 Section 4.10 of the Original Indenture is hereby amended by: (i) deleting the words "a sum equal to twelve and one-half per centum (121/2%) of the gross water operating revenues (as hereinafter defined) and" in the ninth, tenth and eleventh lines of the first paragraph thereof; (ii) by adding the words "after the date of the consummation of the Sale of the Water Business" immediately after the word "cancelled" in the fourth line of subdivision (3) of the first paragraph thereof; (iii) adding the words "and; provided, further, that with respect to the calendar year in which the Sale of the Water Business is consummated, there 26 shall be deemed to be two accounting periods for purposes of the calculations set forth in this Section, the first of which (the "Pre-Sale Period") shall commence on January 1 of that year and shall continue until the date immediately preceding the date of the consummation of the Sale of the Water Business and the second of which (the "Post-Sale Period") shall commence immediately following the consummation of the Sale of the Water Business and end on December 31 of that year; and provided, further, that all calculations made under this (S) 4.10 (x) with respect to the Pre-Sale Period shall be made in accordance with the provisions of this Section as in effect on the date prior to the date of the consummation of the Sale of the Water Business and (y) with respect to the Post-Sale Period shall be made in accordance with the provisions of this Section as in effect immediately following the consummation of the Sale of the Water Business." at the end of subdivision (4) of the first paragraph thereof; (iv) deleting the words "the amount of the gross water operating revenues of the mortgaged property during such accounting period; (b)" in the third, fourth and fifth lines of the second paragraph thereof; (v) deleting "(c)" in the seventh and fifteenth lines of the second paragraph thereof and substituting therefor "(b)"; (vi) deleting "(d)" in the eighth and sixteenth lines of the second paragraph thereof and substituting therefor "(c)"; (vii) deleting "(e)" in the eleventh and sixteenth lines of the second paragraph thereof and substituting therefor "(d)"; (viii) adding the words "; provided, however, that as of the date of the consummation of the Sale of the Water Business, the cumulative excess credit balance shown by the last preceding certificate of the Company (the certificate for the Pre-Sale Period) shall be deemed to be zero and the Company's calculation of excess credits for the Post-Sale Period and all subsequent periods shall include only the amount of excess credits after the date of the consummation of the Sale of the Water Business" immediately after the word "hereunder" in the thirteenth line of the second paragraph thereof; (ix) deleting "(f)" in the fourteenth line of the second paragraph thereof and the fourth line of the third paragraph thereof and substituting therefor "(e)"; (x) by deleting the word "If" in the first line of the sixth paragraph thereof and substituting therefor the words "Except as otherwise provided in this Section, if"; (xi) deleting the words "terms 'gross water operating revenues' and" in the first line of the seventh paragraph thereof and substituting therefor the word "term"; (xii) deleting the word "are" in the third line of the seventh paragraph thereof and substituting therefor the word "is"; 27 (viii) deleting the words "water or" in the fourth, sixth, seventh and eleventh lines of the seventh paragraph thereof; (xiv) deleting the words "(as the case may be)" in the fourth, fifth, sixth, eighth, eleventh and twelfth lines thereof; and (xv) deleting the words "water or" in the sixth line of the eighth paragraph thereof. (S) 1.17 Section 4.11 of the Original Indenture is hereby amended by (i) deleting the words "water and" in the sixteenth line thereof and (ii) adding the following proviso at the end thereof: "; provided, however, that the foregoing shall not restrict the Company from paying to PEI following the consummation of the Sale of the Water Business (i) an amount not to exceed $85 million to enable the Company to repurchase shares of its common stock, which funds would, in turn, be utilized by PEI to repurchase shares of PEI common stock and (ii) a one-time special dividend of a $30 million promissory note to reduce by $30 million PEI's common shareholder's investment in the Company, and that such payment and dividend shall not reduce the amount of the earned surplus of the Company for purposes of any determination thereof under this (S) 4.11." (S) 1.18 Section 8.03 of the Original Indenture is hereby amended by (i) deleting the words "water and" in the first and second lines of the second paragraph thereof and (ii) adding the following proviso at the end thereof: "Notwithstanding the foregoing, nothing in this Indenture shall prevent the Company from obtaining releases from the lien of this Indenture of (a) all real and personal property of the Company which are not used exclusively in the Company's gas utility operations and (b) all real property of the Company which is the subject of the operating and maintenance easement agreement to be executed by the Company and PAWC in connection with the Sale of the Water Business (the releases referenced in clauses (a) and (b) of this proviso are hereby collectively referred to herein as the "Special Release"). Notwithstanding anything set forth in (S) 8.03, the Company shall not be required to comply with the conditions set forth in subdivisions (C), (D), (E), (F), (G)(2), (G)(4), or (G)(5) of the first paragraph of (S) 8.03 or lines six through twelve (other than the word "requested" in line six) of subdivision (G)(1) of the first paragraph of (S)8.03 in connection with obtaining the Special Release and the Trustee shall execute and deliver the Special Release to the Company without receipt of items set forth in subdivisions (C), (D), (E), (F), (G)(2), (G)(4), or (G)(5) of the first paragraph of (S) 8.03 and lines six through twelve (except for the word "requested" in line six) of subdivision (G)(1) of the first paragraph of (S)8.03. In connection with obtaining the Special Release, the Company shall deliver to the Trustee (x) a certificate of the Company stating the book value of the remaining property viz: all real and personal property of the Company which are used exclusively in connection with the Company's gas utility operations, following the release of the real and personal property which are the subject of the Special Release and (y) a certificate of an independent engineer stating that based upon the results of an appraisal performed by such independent engineer, the aggregate fair value of 28 the remaining property following the release of the real and personal property which are the subject of the Special Release exceeds 1662/3% of the aggregate principal amount of the bonds issued under this Indenture which will be outstanding immediately following the consummation of the Sale of the Water Business." (S) 1.19 Section 8.11 of the Original Indenture is hereby amended by adding the following paragraph at the end thereof. "The provisions set forth in this (S) 8.11 shall not apply to any consideration to be received by the Company in connection with the properties which are the subject of the Special Release, the Company shall not be required to pay any such consideration to the Trustee and no part of any such consideration shall be deemed to be "trust moneys" for purposes of this Indenture." (S) 1.20 The amendments to the Original Indenture set forth in (S) 1.01-(S) 1.19 hereof shall take effect on the date of the consummation of the Sale of the Water Business and the Trustee may conclusively rely on the certificate of an officer of the Company that the Sale of the Water Business has been consummated. (S) 1.21 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 Thirtieth 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 Thirtieth 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-nine supplemental indentures and as supplemented by this Thirtieth Supplemental Indenture is in all respects ratified and confirmed, and the Original Indenture, together with the thirty indentures supplemental thereto, shall be read, taken and construed as one and the same indenture. (S) 1.21 This Thirtieth 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 Thirtieth Supplemental Indenture before any person having authority by the laws of the Commonwealth of Pennsylvania to take such acknowledgment, to the intent that the same may be duly recorded, and First Trust of New York, National Association, does hereby constitute and appoint Alfia Monastra to be its attorney for it, and in its name and as and for its corporate act and deed to acknowledge this Thirtieth 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. 29 IN WITNESS WHEREOF, said Pennsylvania Gas and Water Company and said First Trust of New York, National Association have caused this Supplemental Indenture to be signed in their respective corporate names, and their respective corporate seals to be hereunto affixed and attested by their respective officers thereunto duly authorized, all as of the day and year first above written. PENNSYLVANIA GAS AND WATER COMPANY /s/ John F. Kell, Jr. By: Name: John F. Kell, Jr. Title: Vice President, Finance [Corporate Seal] Attest: /s/ Thomas J. Ward Secretary FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION /s/ Catherine F. Donohue By: Name: Catherine F. Donohue Title: Vice President [Corporate Seal] Attest: /s/ Alfia Monastra Assistant Secretary 30 COMMONWEALTH OF PENNSYLVANIA COUNTY OF LUZERNE ss.: BE IT REMEMBERED that on the 12th day of December, A.D. 1995, before the undersigned Notary Public in and for said County and said Commonwealth, commissioned for and residing in the County of Luzerne, personally came Thomas J. Ward, who, being duly sworn according to law, doth depose and say that he was personally present and did see the common or corporate seal of the above-named PENNSYLVANIA GAS AND WATER COMPANY affixed to the foregoing Supplemental Indenture; that the seal so affixed is the common or corporate seal of said PENNSYLVANIA GAS AND WATER COMPANY and was so affixed by authority of said corporation as the act and deed thereof; that the above-named John F. Kell, Jr. is the Vice President, Finance of said corporation and did sign the said Supplemental Indenture as such in the presence of this deponent; that this deponent is the Secretary of the said corporation and that the name of this deponent, above signed in attestation of the due execution of the said Supplemental Indenture, is in this deponent's own proper handwriting. /s/ Thomas J. Ward Thomas J. Ward Sworn and subscribed before me the day and year aforesaid. /s/ JoAnne McHale Notary Public NOTARIAL SEAL JOANNE MCHALE, NOTARY PUBLIC WILKES-BARRE, LUZURNE COUNTY MY COMMISSION EXPIRES SEPT. 6, 1998 Member, Pennsylvania Association of Notaries 31 COMMONWEALTH OF PENNSYLVANIA COUNTY OF LUZERNE ss.: I HEREBY CERTIFY that on this 12th day of December, A.D. 1995, before me, a Notary Public in and for said County and said Commonwealth, commissioned for and residing in the County of Luzerne, personally appeared Thomas J. Ward, the attorney named in the foregoing Supplemental Indenture, and he, by virtue and in pursuance of the authority therein conferred upon him, acknowledged said Supplemental Indenture to be the act and deed of the said PENNSYLVANIA GAS AND WATER COMPANY. Witness my hand and notarial seal the day and year aforesaid. /s/ JoAnne McHale - ------------------------------------------------------------------------------- Notary Public NOTARIAL SEAL JOANNE MCHALE, NOTARY PUBLIC WILKES-BARRE, LUZURNE COUNTY MY COMMISSION EXPIRES SEPT. 6, 1998 Member, Pennsylvania Association of Notaries 32 STATE OF NEW YORK COUNTY OF NEW YORK ss.: BE IT REMEMBERED that on the 11th day of December, A.D. 1995, before the undersigned Notary Public in and for said County and State, commissioned for the County of New York, personally came Alfia Monastra who, being duly sworn according to law, doth depose and say that she was personally present and did see the corporate seal of the above-named FIRST TRUST OF NEW YORK, NATIONAL AS SOCIATION, affixed to the foregoing Supplemental Indenture; that the seal so affixed is the corporate seal of said FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, and was so affixed by authority of said corporation as the act and deed thereof; that the above-named Catherine F. Donohue 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/ Alfia Monastra Alfia Monastra Sworn and subscribed before me the day and year aforesaid. NOTARIAL SEAL JOANNE E. ILSE NOTARY PUBLIC, STATE OF NEW YORK NO. 01IL5018680 QUALIFIED IN QUEENS COUNTY COMMISSION EXPIRES OCTOBER 4, 1997 /s/ Joanne E. Ilse Notary Public 33 STATE OF NEW YORK COUNTY OF NEW YORK ss.: I HEREBY CERTIFY that on this 11th day of December, A.D. 1995, before me, a Notary Public in and for said County and State, commissioned for the County of New York, personally appeared Alfia Monastra, the attorney named in the foregoing Supplemental Indenture, and she, by virtue and in pursuance of the authority therein conferred upon her, acknowledged said Supplemental Indenture to be the act and deed of the said FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION. Witness my hand and notarial seal the day and year aforesaid. /s/ Joanne E. Isle Notary Public NOTARIAL SEAL JOANNE E. ILSE NOTARY PUBLIC, STATE OF NEW YORK NO. 01IL5018680 QUALIFIED IN QUEENS COUNTY COMMISSION EXPIRES OCTOBER 4, 1997 CERTIFICATE OF RESIDENCE FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION hereby certifies that its precise name and address as Trustee hereunder are: FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, 100 WALL STREET, SUITE 1600, NEW YORK, NEW YORK 10005. /s/ Catherine F. Donohue By: Name: Catherine F. Donohue Title: Vice President 34 -----END PRIVACY-ENHANCED MESSAGE-----